Thanks for pointing that out, a chief financial officer said to me after I’d written about it for the Jersey Evening Post. At the same time, he pointed out the piece omitted any discussion about the economic levers available to mitigate an ageing population, rising healthcare costs, labour shortages and the productivity/GDP issues caused by more people being needed in lower-paid roles.
For both islands, the only game in town is finance, which is already under a bit of stress. Increasing emphasis on tax transparency, America’s push for a universal tax rate, a future Labour government sounding serious about paying the UK’s bills by limiting offshore holdings and the growing populist view that international tax management is A Very Bad Thing.
All true, but it got me thinking. What if there’s a more immediate and far more serious threat to the wellbeing of the industry? Well there is, and it’s called Moneyval, the permanent monitoring body of the Council of Europe.
It assesses compliance with the main international standards to counter money laundering and the financing of terrorism and the effectiveness of jurisdictions like Guernsey in implementing those standards.
I’ll spare you the details, but this is a fearsome review process. Jersey’s up next year, with Guernsey shortly after – and there’s no guarantee either island will get a clean bill of health. Newly-elected Jersey Treasury minister Ian Gorst went so far a couple of weeks ago as to warn that passing the review couldn’t be taken for granted.
This follows Gibraltar being ‘grey-listed’ in June by Europe’s Financial Action Task Force after finding that the jurisdiction’s regulators were not fining offenders in line with prescribed penalties or focusing hard enough on intermediaries, including lawyers. Having the right legislation and regulation in place is one thing – how it’s applied is quite another.
To give an idea of the pressure this places on jurisdictions like these islands, the Guernsey Financial Services Commission (GFSC) has not only made preparing for Moneyval its core task over a three-year business plan, it has employed an external expert to see if what it’s doing is aligned with the latest Financial Action Task Force standards.
My reading of GFSC director general William Mason’s latest annual report is that he’s setting the scene for a fail. ‘The commission is not, alone, responsible for the outcome of the Moneyval inspection as industry, various other public sector bodies and the States of Guernsey are also involved, with the Bailiwick as a whole needing to demonstrate competence across 11 immediate outcomes,’ he says.
That emphasis on ‘as a whole’ is revealing. Guernsey’s joined-up approach could, for instance, come unstuck if the island’s courts or prosecution service is unable to process enforcement issues fast enough or in sufficient numbers for the Moneyval inspectors. A bit like what happened to Gib.
To underscore this, Mr Mason adds:
‘We are, however, determined to play our part in helping the Bailiwick achieve a positive outcome against the markedly higher standards to which Moneyval will work, relative to those it used during the 2015/16 inspection.’
The odds here are high. If – and we hope it is a big if – Guernsey is grey-listed, then the economic consequences are high, widespread and immediate. As GFSC director Katherine Jane says, ‘With the cost of living in Guernsey increasing significantly in 2021… it suggests a key method for the island to be sustainable is to employ more people in financial services.’
That meant growth in this key economic sector, something that was seen through an increasing number of applications in 2021 to carry out regulated activities within the Bailiwick.
So far, so obvious I suppose.
But that’s what makes the forthcoming review so important. Grey-listing would turn off that flow of new business overnight. To make it more serious, I’m told by highly-placed sources that existing business tends to disappear (for benign reasons) at a rate of about 20% a year. In other words, to prosper, finance needs to expand at more than 21% a year – and that’s probably impossible after an adverse Moneyval report.
There’s added pressure, too, to ensure finance is sustainable – in the ‘green’ sense as well as in preventing money laundering and terrorist financing within the Bailiwick. As Ms Jane says, ‘If we do not get this right now, we might grow our financial services business currently but it will not be without compromising the ability of financial services in the future to meet ongoing international requirements. This would significantly impact our ability to have a strong and robust financial services sector that is able to support the growth and development of the Bailiwick of Guernsey.’
In short, a successful Moneyval next year is essential to ensuring the sustainability of financial services in the Bailiwick for the next decade, she says. The stakes really are that high, with no automatic guarantee of success.
Put this in the context of Guernsey’s delayed tax review – aimed at removing an £85m. a year shortfall in government revenues – and you can see what a profound shock this would be to the Guernsey economy.
Obviously, we have to hope sinews are collectively strained and Guernsey sails through the evaluation. If it doesn’t, the election in 2025 won’t be on party political issues but purely and simply on the economy and the size and cost of the States itself and the public services it provides.
One final thought. ‘Guernsey is an international finance centre with an inherently higher risk [for money laundering] offering private banking, asset and wealth management services to an international client base,’ says the GFSC. ‘The Bailiwick will be assessed by Moneyval… on its ability to manage that higher risk effectively; this will include the industry.’
You’ve been warned.