Sun, sea, sand and suspicion

Jersey is fighting to protect its reputation against an increasing influx of money launderers. David Callaway reports

For Detective Inspector Peter Hopper, it began as a routine bank report about a suspicious money transfer of pounds 20,000.

But by the end of the Jersey police probe, it had led to the arrest of a couple in Australia with two kilos of heroin, the unexplained murder of a third person in Holland, and the discovery of marijuana resin at the couple's Jersey home.

While extreme in degree, the case is a good example of the international scope of the drug trade and how Detective Hopper and the Jersey police are fighting daily to prevent this five-by-nine-mile offshore tax haven from becoming a way-station for foreign drug money.

"The more successful you are, the more people are going to try it," Detective Hopper says. "There's a trial here every month where we seize something. It might be thousands, it might be hundreds, but we're stopping it."

Jersey's reputation as a clean, profitable place for offshore business is more important now than ever, as funds under management and deposits in off-shore bank accounts have surged to record levels in the past year.

A rising tide of fund assets around the world, combined with the soaring wealth of "high net worth" individuals, pushed retail and institutional funds under management above pounds 50bn last year and deposits to almost pounds 90bn.

In Guernsey, a separate domiciled island just a few miles from Jersey, funds under management ended last year at about pounds 13.4bn, with emerging markets funds representing about a third of all funds on the island.

These amounts are small compared to Luxembourg, the largest of the so- called offshore centres, with about pounds 350bn in fund assets. But Luxembourg funds under management rose only 13 per cent in the year ending September 1996, compared to 44 per cent for Jersey and 16 per cent for Guernsey, according to London consultant Fitzrovia International.

Paul Moulton, managing director of Fitzrovia, says both islands are benefiting from marketing their strengths. Jersey specialises in trusts and global banking; Guernsey in emerging markets funds and as an off-shore home for more than 300 insurance companies.

"Their strategy of attracting business that doesn't necessarily have to go to Luxembourg or Dublin has been a good one," says Mr Moulton. "I think what they'll do is continue expanding in niche markets."

Jersey, which began attracting financial assets and financial companies in the 1970s during the high tax years of the last Labour government, now hosts offices of about 40 fund managers and 80 banks.

Three new names have joined this year: Schroders, Merck Finck, a German private bank owned by Barclays, and two weeks ago, Societe Generale Investment Management.

Tim Brocklebank-Fowler, executive director of SGIM, says Jersey was chosen in part because of historical connections between the company and the island, but also because of its regulatory environment.

"Reputation is important, and clients must feel that they're operating in an environment that is safe and that they are comfortable with," Mr Brocklebank-Fowler says.

Both Jersey and Guernsey operate as independently-governed entities, each with their own forms of parliament making their own laws and their own banknotes but choosing to be aligned with the British Crown and its currency.

Neither island is part of the European Union, although they enjoy EU trade status and could easily align their currencies with the euro.

The benefits to depositors and investors of having their money offshore is that interest is accumulated tax free, although it must be paid if, for example, a UK depositor brought the money back into Britain.

Jersey bankers say their services are particularly attractive to wealthy individuals who shift money around several countries because they can set up multi-currency accounts. Each bank has its own regulations for how much a depositor needs to set up an account, with amounts ranging from as little as pounds 1,500 to an average of about pounds 25,000.

Residents of Jersey pay 20 per cent income tax. Wealthy foreigners can become residents at the government's discretion if they can prove they have enough income to benefit the island through taxes. Non-resident companies, such as trusts, can operate tax free, paying only a small annual fee.

Jersey officials wince at any stroke of bad publicity. Currently, two former executives of Cantrade Private Bank Switzerland, a unit of Union Bank of Switzerland, are being charged with causing losses of about $27m to investors in foreign exchange dealings.

Jersey police, regulators and politicians are working to combat what they say are inevitable attempts by money launderers to exploit its offshore status. Law enforcement agencies say an estimated $500bn in dirty money is circulating the globe at any one time.

Detective Hopper says his department receives about 420 disclosures from banks each year, of which only about 10 to 20 turn into investigations. The National Criminal Intelligence Service, by comparison, says it received 16,125 disclosures throughout the UK last year, of which about 25 per cent turn into investigations.

The investigations can be quite large, however. Detective Hopper says his office is currently working on five probes involving funds worth more than pounds 1m.

Senator Frank Walker, head of the Finance and Economics Committee of the States of Jersey, the parliament, is spearheading a drive this year to adopt new laws and regulations to tighten supervision of the investment industry, which represents more than half of Jersey's gross domestic product and employs 12,000 of its 85,000 population.

The principal change will be the expansion of Jersey's laws on drug money and terrorism funds to include all crimes. This will allow banks to break their client confidentiality promises to customers if they believe certain funds are the results of a crime. Currently, the banks can disclose suspicions about funds from drugs or terrorism, but not from other potential crimes, such as tax evasion.

Another new law will turn Jersey's Financial Services Department, which currently reports to the finance committee, into an independent Financial Services Commission.

Gordon Pollock, deputy director of financial business at the Financial Services Department, says changing to an independent commission will give it more clout internationally.

A third law will give regulators the power to license the trust industry, and to pull licences of certain trusts that don't follow the regulators' "know your customer" rules to the letter.

As Jersey's reputation is bolstered, Detective Hopper expects the money laundering investigations to continue apace.

"Any successful offshore area is going to attract a money launderer," he says. "If you can get the money in the system, then you're laughing because once it is in, then the reputation of the system guards it."