By Samantha Sheen, AML Director Europe, ACAMS
4 May 2017

Can You Tell the Difference Between Them?

The month of April saw a number of publications produced for the European Parliament’s PANA Committee about various financial crime (“FC”) concerns identified by the Panama Paper disclosures last year. From my review of these publications, the following was one of the topics I found to be of particular interest.

You say Tax Haven, I say Offshore (International) Finance Centre (“OFC”)

I’ve noticed how some people use the terms “tax haven” and “OFC” as if the two were interchangeable. Add to this the use of the term “secrecy jurisdiction” and it seems that all three are used to try and describe a jurisdiction as being “bad” from an FC perspective.

But when trying to develop a risk-based approach to assess whether a jurisdiction has high risk characteristics for FC purposes, using these terms interchangeably is not particularly helpful. In order to understand what controls to apply where a customer may have a connection to a “tax haven” or a country which still endorses “bank secrecy”, one needs to understand the actual FC risks associated with those terms. This can then allow for a more effective identification of appropriate controls by which to mitigate those risks.

A Valiant Effort

The authors of one of the papers I reviewed actually make the effort, in fairly clear and cogent manner, to try and define and distinguish between the 3 terms I’ve mentioned above.

The authors review various definitions for these terms developed by organisations such as the Financial Stability Forum, the IMF, OECD and the Tax Justice Network, and then look at what jurisdictions have the characteristics identified by each of the definitions.

And the Verdict is…

The authors’ review found that it was not easy to find three separate definitions because there is “considerable overlap between the concepts of tax havens and [OFCs]”. Further, a study by the OECD in 2009, showed that OFCs are not necessarily perceived as tax havens and vice versa.

So, in an effort to try and simplify things, the authors offer up a list of key characteristics for jurisdictions described by the 3 terms:

Concept Key Characteristics
Tax Havens
  • No or low taxation
  • Laws or measures preventing exchange of information
  • Lack of transparency
  • Favourable regulatory environment (low supervision, minimal information disclosure)
  • No or low taxation
  • Favourable regulatory environment (low supervision, minimal information disclosure)
  • Financial services provision is disproportionate with domestic economy
Secrecy Jurisdictions
  • Laws or measures preventing exchange of information
  • Lack of tax transparency
  • Favourable regulatory environment (low supervision, minimal information disclosure)
  • Banking secrecy

Although I am sure there will be ongoing discussions about the definitions for these terms, this review reflects the challenges encountered when trying to explain what they are intended to mean and how they can be differentiated from one another.

Choose Your Words Carefully

AML compliance professionals need to be careful when using terminology in anti-FC policies, procedures and internal communications when explaining why a jurisdiction has been rated high risk. Calling a country a “tax haven”, for example, does not make it clear what are the risks that could arise from doing business with customers with a connection to those jurisdictions. It also does not make it sufficiently clear for staff whether those FC risks relate to poor national AML regulations or known misuse of the jurisdiction by those involved in serious and organised crime.

Know the Risks and Assess Them

There needs to be a clear understanding about the risks that could arise from dealing with a jurisdiction with the types of characteristics listed in the table above. Exactly what it is about dealing with a jurisdiction that advocates “banking secrecy” that increases the level FC risk for the business? What sorts of controls should be applied to mitigate those risks?

Here’s real-life scenario to consider. Some jurisdictions allow financial institutions to rely on a third party to have undertaken the CDD on a mutual customer (these are sometimes called intermediaries or introducers). In general, an agreement (usually called a certificate) is entered into whereby the introducer promises they have the CDD and will provide it to the party relying on the certificate, upon their request and without delay.

In one of the places I worked many years ago, we relied on introducer certificates rather than collect the CDD on each and every customer. We were required to having a testing program to show that the introducers we relied on would give us the CDD if we requested it.

During testing, we discovered that we had accepted a certificate from a bank in a country where bank secrecy was in force. The result? The bank refused to provide us with a sample of the CDD on the grounds of bank secrecy and then refused to confirm they even had the CDD on the same grounds. We spent several frustrating weeks of phone calls and threatening to end business relationships until the bank eventually convinced the customer give their permission to provide us with a copy of the CDD to us. And of course, that the customer indemnify the bank from any liability under the country’s bank secrecy requirements.

Now imagine if instead of testing, the request for the CDD had been because there had been a suspicion of money laundering and time was of the essence to verify those suspicions and ensure that a SAR was filed in a timely way.

So, while this may sound like an extreme example, it illustrates my point: the jurisdiction with bank secrecy exposed our business to the risk that we could not be confident that we knew who the underlying customer was. We couldn’t verify that the customer we thought we were dealing with was actually the same person identified on the introducer certificate. We could very well have unknowingly being doing business with someone who was involved with serious or organised crime. Lesson learned the hard way.


For me, the review undertaken by the authors brings home the importance about the terminology we use as AML compliance professionals and ensuring that staff understand the FC risks intended to be reflected in the use of those terms. While most people understand that being called a tax haven is a “bad thing”, the nature of the FC risks presumed to be associated with them need to be clearly explained, both in policies and procedure and staff AML training. From an FC perspective, these three terms, if used, should act as a means to differentiate different types of FC-jurisdictional risks so that appropriate risk classifications can be assigned and effective controls can be applied.

For more information on the PANA Committee report referenced in this article see: The Impact of Schemes revealed by the Panama Papers on the Economy and Finance of a Sample of Member States.