[The exact date of this letter, which was addressed to the Bermuda Government, is unknown but it was written in or around April, 1998. The two instances where words are underlined are the author's style, not ours]

Foreign & Commonwealth Office

London SW1A 2AH

1. Thank you for sending us the Premier of Bermuda's letter on 20 January to you. It has been brought to the attention of the Secretary of State. As you know, I and James London, HM Treasury, visited Bermuda on 12 March to discuss in person the concerns set out in that letter, as well as those in Jan Spiering's letter of 5 March to the Premier. [OBNR Note: Jan Spiering is a partner in Ernst & Young (Bermuda)]
2. At the end of the discussions with both the Bermuda Government and the business community, it was agreed that I would reply to the Premier's letter setting out HM Government's policy in more detail and clarifying one or two particular points raised during the meetings. I am grateful to you, the Premier and her colleagues and to the representatives of the private business sector for the time devoted to discussing this issue on 12 March. I fully share their concern to ensure that the outcome is in the long term best interests of Bermuda and its prosperity as well as those of HM.
3. The discussions covered two broad areas: the extent of all crimes money laundering legislation and in particular whether it should be extended to cover fiscal offences; and the process for taking forward consultations on the Foreign Secretary's proposals for financial regulation to be incorporated in the forthcoming White Paper on the Overseas Territories. I confirmed that HMG's over-riding objective was to establish legislation in all Overseas Territories that would effectively prevent the laundering of the proceeds of serious crime. We believe that for this money laundering legislation to be fully effective it needs to cover all serious offences, including fiscal, and to be based on the principle of dual criminality. As well as introducing equivalent legislation in all other Overseas Territories with significant financial sectors, it was our aim to work with other members of the FATF to build an international consensus to introduce legislation on these lines, representing best practice, in all jurisdictions. This would establish a level playing field not only between Overseas Territories but internationally.
4. We were able to clarify a number of specific queries:

1. existing provisions for international co-operation in Bermuda's Criminal Justice (International Co-operation) (Bermuda) Act of 1994 and for foreign confiscation in Sections 53-55 of the 1997 Proceeds of Crime Act in our view provide fully adequate safeguards as they stand. Our conclusion is that Bermuda would be no more liable to 'fishing expeditions' as a result of the inclusion of fiscal offences in the 1997 Act than they are at present. I understand the objective of clause 37 of the Proceeds of Crime Act is to require the Attorney General to approve any application for investigation where this relates to proceeds of criminal conduct outside Bermuda. We have no objection to this, and it should satisfactorily allay the fears of both the Bermudian Government and private sector. The only question is how best to do this. The existing cross reference to the 1994 Act does have this effect, but also a number of drawbacks (as set out in Camilla Blair's letter of 17/10 to Peter Willis). It would therefore be simpler and more effective, if the legislation is being amended, to replace it by spelling out the request for the Attorney General's approval.
2. while in all other respects the Proceeds of Crime Act 1997 meets the international standards set by the UK, the exclusion of fiscal offences foes create a gap which needs to be plugged. We emphasised that HMG, and other governments concerned in setting the international standards, regarded fiscal offences such as tax evasion or tax fraud as serious crimes within the meaning of Recommendation 4 of the FATF. These should therefore be covered in money laundering legislation in all jurisdictions. Including fiscal offences in the Bermudian legislation will be fully effective and avoid creating a loophole which may inadvertently or deliberately be used to avoid the provisions applying to the proceeds of certain serious crimes; and secondly, to avoid setting a bad precedent for other jurisdictions which might then demand an exclusion for fiscal (or other) offences, on the grounds that the UK was willing to allow Territories to pick and choose the areas the legislation applied to. This would significantly undermine the effectiveness of international action against money laundering. To retain a fiscal exclusion might also give Bermuda an unwarranted competitive advantage over jurisdictions that include it;
3. in relation to suspicious transaction reporting, we explained that our understanding of the principle of dual criminality and the test of 'reasonableness' that a court would apply to personal judgements of what signified a suspicious transaction, would not require the staff of Bermudian financial institutions to become experts in, for example, all foreign tax laws in order to avoid becoming criminally liable under the Act. What was primarily needed was a reasonable knowledge of Bermudian law so that they could judge in deciding whether a transaction was suspicious, whether it seemed to come from conduct that would contravene Bermuda's tax provisions.

5. This, I believe, left two outstanding problems which gave concern to some members of the business community:

1. an awareness that suspicious transaction reporting would now apply also to suspected fiscal offences might discourage some clients from remaining in Bermuda. The Premier asked whether the interpretation of dual criminality could be clarified in the legislation by referring specifically to fiscal offences as defined under Bermudian law (either by specifying the fiscal crimes that exist or by a cross reference to the relevant sections of Bermudian legislation). We agree that (if the Schedule is retained, see para 7 below) a reference to the relevant Bermudian legislation and the crime itself would be necessary.
2. that this left Bermuda potentially disadvantaged in relation to other jurisdictions where no fiscal offences existed

We explained that the only way to create a level playing field was to establish common principles, not to specify that those principles should have an identical effect in different jurisdictions, given the freedom of Overseas Territories to set their own tax rates. We could not accept a system of anti-money laundering legislation that reduced its application everywhere to the lowest common denominator. Many fiscal offences were also offences under other elements of the penal code (falsification of documents, fraudulent signature). This also applied in other jurisdictions, even where there were no explicitly fiscal offences. This serves to minimise any apparent competitive disadvantage. Secondly, Bermuda's financial services industry was built largely on its reputation as an exemplary jurisdiction. The exclusion of fiscal offences fromt heir money laundering legislation could weaken this reputation as much as comfort certain clients. Thirdly, we confirmed that if the existing legislation was amended to cover fiscal offences, it would only become an offence to launder fiscal proceeds, like any other, when the amended money laundering legislation entered into force. There would be no retroactive effect.

6. On these grounds we believe that, although the private sector might have some residual nervousness about the insertion of fiscal offences into the Proceeds of Crime Act, the balance of advantage - both for them and for Bermuda - lay in completing the legislation as we suggested. We believe it is in Bermuda's interest as much as that of the UK and the rest of the world to have effective and comprehensive legislation in place to combat the laundering of proceeds of all serious crimes in order to inhibit the international laundering of acts of criminals.
7. We discussed briefly how to amend the legislation to cover fiscal offences. I can confirm that, on reflection, we would much prefer to replace the schedules (which we believe have significant weaknesses in what should be clearly 'all-crime' money laundering legislation) with a general provision in the body of the legislation establishing the principle that the Act applies to all serious crime (normally defined as all indictable offences). Amending the schedules to insert fiscal offences would be very much a second best solution.
8. In relation to consultation on the White Paper, I can confirm that we will be writing shortly on the procedure we envisage on all the points in the Foreign Secretary's speech. We anticipate setting out in due course specific steps tailored to the needs of each individual territory within that framework.

Yours ever,

Nicholas

N J Westcott

Economic Relations Department

071 270 2671