Archive for August 25th, 2009

Milestone in transparency

The recent rhetoric of the G20, OECD and other international bodies includes official corruption as a critical global problem. This is then tied back to “tax havens” and “bank secrecy”, i.e. offshore financial services centres (OFC’s) are active participants in processing the proceeds of official corruption, particularly corruption in the impoverished third world.

Such a sweeping generalisation is for the most part misdirected. And the track record of some major countries in fighting corruption has been patchy. In 2008, the UK received a very poor review from the OECD criticising the UK’s commitment to effectively combating corrupt practices.

There are clear signs that the climate has been and is changing. In 2007, the World Bank launched its Stolen Assets Recovery (StAR) Initiative to assist poor countries recover stolen state assets (the World Bank report highlights the 2001 Peruvian Montesinos corruption case where the Cayman Islands assisted, froze and repatriated US$33 million in short order).

Even the UK has been shamed into action (arresting some of the minor players in the infamous Bae Al Yamamah Saudi fighter contract) and introducing a new Bribery Bill in March 2009. Recently, the US (which has always been more active than most through enforcement of its Foreign Corrupt Practices Act) has significantly increased its assault on international corruption. Media reports indicate that there are between 93 and 120 investigations underway, the great majority of which involve US companies but some involving companies domiciled in the UK (whom the US considers weak on foreign corruption), Bermuda and also (a tiny number) in the Cayman Islands. Interestingly, there appear to be no cases directly involving companies in China, India or Russia which suggests perhaps a “political” component to the selection process.

Clearly, reputable OFC’s do not condone or wish to be party to such illegal activities (whether local or cross border) as they are unsupportable for a myriad of very good reasons that speak for themselves. So it is essential to ensure that the defences and structures are in place to deter, detect and punish those involved in public corruption, whether local or overseas.

The Cayman Islands are no exception. The 2008 Anti-Corruption Law (AC Law) is to be brought into effect on 1stJanuary 2010. This action is part of the commitment of the Cayman Islands to enhancing and encouraging good governance and transparency in government. It is a commitment that is matched by actual implementation in the public sector. The AC Law complements the Complaints Commissioner Law (now 5 years in operation) and the Freedom of Information Law (that went live in January 2009).

The AC Law gives effect to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the United Nations Convention against Corruption. It draws on a wide range of legislative precedents (from Australia, Canada, the United States and various African and Asian countries, but interestingly not the United Kingdom). The result is something of a smorgasbord.

Anti-corruption commissions (and their equivalents) elsewhere do not have a uniformly strong and successful track record. The success stories most often cited are the Independent Commission Against Corruption (ICAC) in Hong Kong, the Corrupt Practices Investigation Bureau (CPIB) in Singapore and the ICAC in New South Wales (Australia). The many failures are in places such as Tanzania, Zambia and Zimbabwe (to list but a few). The conclusion is that such commissions will fail in countries that do not have other state institutions that function properly, where the rule of law is weak and where the political and civil society support and commitment are lacking.

Applying these tests, the commission should be effective in Cayman, given the open and strong democratic framework and the expanding institutional infrastructure to support it. But the devil is in the details so a closer look at the legislation is warranted.

The AC Law sets out extensive local (replacing and expanding the existing offences in the Penal Code) and international corruption offences (with various penalties up to 14 years imprisonment) and provides for the establishment of an Anti-Corruption Commission (Commission). The range of local offences (covered in 10 sections) includes:
*bribery of public officials (which is very broadly defined and includes for instance a jury member and his family)
*fraud, breaches of trust, abuse of office, non-disclosure of conflicts of interest, failure to report offers of bribes to or solicitations of bribes by public officials and members of the Legislative Assembly (LA)
*frauds on the Government
*selling of and dealing in public offices
*illegal secret commissions and
*making false statements to the Commission

Bribery of a foreign public official (which is also very widely defined and includes those with international organizations) is also made a specific offence but with safe harbour provisions to permit normal commercial practices to continue provided proper records of any payments are kept.

Importantly, where an offence is committed by a body corporate with the consent or connivance of or due to the neglect of a director or officer (including a shadow director or officer) or member, in the case of a member managed company, both the body corporate and that person are guilty of the offence. Conspiracy, attempts and incitement to commit an offence and aiding, abetting, counseling and procuring the commission of an offence under the AC Law are themselves also crimes.

The Cayman Islands are a British Overseas Territory and thus (even under the new Constitution approved at the 2009 referendum, but not yet in force at the time of writing) considerable powers are reserved to the Governor (a career Foreign and Commonwealth Office diplomat who traditionally serves for four or so years) under the constitutional arrangements. In particular, he (and thus the UK) is responsible for defence, internal security and foreign relations. He also appoints the Police Commissioner, Complaints Commissioner, Auditor General, Attorney General (AG), the judiciary and certain other senior public officials. Consistent with this approach, theGovernor has responsibility for appointing the Commissioners under the AC Law.

The Commission will consist of five members – the Police Commissioner (who is also the chairman), the Complaints Commissioner and the Auditor General all ex officio and two other persons appointed by the Governor and who must be retired judges of the Grand Court or Court of Appeal, retired policemen, retired justices of the peace of magistrates or retired attorneys-at-law. These appointed members hold office for five years and may be removed by the Governor at any time after consultation with the AG.

The Governor has the power to give directions to the Commission as to the policy to be followed in the performance of its functions in matters that concern the public interest. He is also responsible for:
*general oversight of the anti-corruption policy of the Government
*overseeing and inspecting the work of the Commission
*appointing the officers and employees of the Commission and setting the terms, conditions and remuneration of their appointments
*seconding public officers or senior police officers to hold office with the Commission
*reviewing the Commission’s annual reports
*promoting effective collaboration between regulators and law enforcement agencies (vital to ensure efficient cooperation between the Commission, the Monetary Authority (CIMA), the Financial Reporting Authority (FRA) and the Police)
*monitoring interaction and co-operation with overseas anti-corruption authorities (OCA’s)

The Commission has the following specific functions and duties:

*to receive reports regarding suspected corruption offences and to investigate the same
*to receive and request, analyse and disseminate disclosures of information concerning suspected corruption offences
*to detect and investigate suspected corruption offences (including attempts and conspiracies related thereto)
*to receive from OCA’s disclosures of information regarding corruption offences
*to publish annual statistical information regarding disclosures made to and by it
*to advise the Governor on the work related to the AC Law, particularly matters affecting public policy or the priorities to be set by the Commission
*to submit an annual report to the Governor reviewing the work related to the AC Law (it is noteworthy that the AG and the Chief Secretary are also mandated to make an annual report to the Legislative Assembly (LA) on the enforcement of the AC Law)

It also has the power

• with the consent of the Grand Court to issue freezing orders regarding bank accounts and other property for not more than 21 days at the request of an OCA or where it receives information under the AC law and is satisfied there is reasonable cause to believe that the request or information relates to the proceeds of corruption
• after consultation with the AG, to issue guidelines with respect to operational procedures regarding disclosures made to the Commission
• after consultation with the AG, CIMA and the private sector, to issue guidelines and precautionary procedures to assist in the practical application of the safe harbour provisions regarding bribery of foreign public officers
• to disclose information received by it with respect to corruption to CIMA and to such other institutions or persons in the Cayman Islands as may be designated by the AG (presumably to include the FRA)
• to disclose to any OCA information relating to conduct that constitutes a corruption offence or would constitute such an offence if it had occurred within the Islands in order to report the possible commission of an offence, to initiate a criminal investigation regarding the matter or to assist with any investigation or criminal proceedings with respect to the matter
• with the consent of the AG, to enter into arrangements with OCA’s for the purposes of performing its functions and duties

It is important to note that the Commission does not have prosecutorial powers. If it concludes from its investigation that a person has committed an offence, it must refer the matter to the AG for action as he thinks fit. Any proceedings for a corruption offence must have the consent of the AG; however, a person may be arrested, charged, remanded in custody or released on bail before that consent has been given.

Offences are extraditable and the Proceeds of Criminal Conduct Law (2007 Revision) (now the Proceeds of Crime Law) applies to the proceeds of corruption offences in the same way as other serious crimes, such as money laundering. There are some interesting provisions covering agent provocateurs, protection of informers and witnesses/accomplices and persons living beyond their means. There are the expected provisions for arrest without warrant, orders for production of materials and information and search warrants, with protections for legal privilege and specific overrides of the Confidential Relationships (Preservation) Law.

The AC Law has an important extraterritorial component. A person commits an offence not only if the conduct constituting the alleged offence occurs wholly or partly in the Islands but also

• if it occurs on board a Cayman Islands registered ship or aircraft wherever located
• where the conduct occurs wholly outside the Islands, if the person holds Caymanian status or is resident in the Islands or is a body corporate incorporated under Cayman Islands law

Regrettably, the AC Law has certain weaknesses that may affect the Commission’s independence and effectiveness, and thus its credibility locally and internationally. The primary ones are

• the Commission is not a separate statutory body (c.f. CIMA). This is out of step with current international thinking (e.g. in Australia), although the much older equivalent bodies in Hong Kong (ICAC) and Singapore (CPIB) are also not separate bodies
• the 3 ex officio members are all public officers appointed by the Governor and are already part of the government infrastructure in their capacities as Police Commissioner, Complaints Commissioner and Auditor General. And the Police Commissioner is the chairman of the Commission. The AC law is to deal with official corruption that could occur (and with no disrespect to the holders of the offices) in the very government institutions headed by these officials. The Commissioners should all be independent, and ideally some of them should be from outside the Cayman Islands
• the conflict of interest provisions with respect to the Commissioners are far too narrowly drafted and refer only to pecuniary interests
• the power to appoint the officers and employees of the Commission is vested in the Governor and not the Commissioners themselves. At first glance, that may seem unobjectionable, but it may result in a dysfunctional institution with a lack of normal internal controls, enforceable performance standards and accountability as the Commissioners cannot select or fire the staff of the Commission
• there is no provision for participation in policy formulation, independent oversight or accountability of the Commission other than by and to the Governor, i.e. there are no checks and balances involving the LA (except the annual report to the LA) or broader civil society in Cayman (other than possible and indirectly through the two “independent” Commissioners appointed by the Governor)
• there is no specific educational or advisory component, i.e. that the Commission should improve community (both public and private sectors) awareness and understanding of corruption, transparency and good governance through education, advice, codes of conduct, training, conferences, media campaigns and the like
• there is too much deference to the AG throughout the AC Law. He is an appointed memberof the executive branch of Government (and is currently a voting member of the Cabinet). His role thus reduces the independence of the Commission
• the Governor’s general powers under the AC Law are very extensive and perhaps unnecessarily so. For the AC Law and the Commission to be fully effective much depends on the level and manner of his attention and proactiveness. So much reliance on one individual seems inappropriate
• there is no express provision for funding of the Commission

It is to be hoped that the new Government and the Governor will revisit these issues (and some other technical points) at an early date.

Overall, and despite the deficiencies outlined above, the AC Law represents a very significant and welcome development for the Cayman Islands. Curiously, it has to date received little attention locally or internationally. That will surely change on 1st January 2010, if not before. The public sector (including the political wing), the private sector (particularly political parties and those with business relationships with Government departments and entities) and the community as a whole should pay careful heed to the extent of the local offences (some detailed training of both sectors is highly desirable). Those in the financial services industry should review carefully the overseas offence (bribing a foreign public officer), the business practices of their clients and their own internal policies and procedures to ensure compliance.

This commentary was first published in the July 2009 issue of the Cayman Financial Review

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