Consequences for regulatory breaches still vary widely between jurisdictions, particularly when it comes to offshore financial centers. For businesses with a global footprint, this makes a strong case for global standards to manage this unpredictability.
Despite cross-border cooperation between regulators and global regulatory trends, substantial differences in standards persist, which opens the door to regulatory arbitrage. These differences exist not only between offshore and onshore jurisdictions, but between offshore jurisdictions themselves. Some, such as those in the Channel Islands, have regulatory regimes that match and, arguably, surpass in many cases, the standards of the major onshore centers. Others, not so much.
Frequently, these differences come down to the level and extent of supervision and enforcement activity, rather than the legislation and regulations themselves. Certainly, for areas such as AML, regulatory requirements across jurisdictions are consistent; the key is how they are applied. It is not simply a case of looking at the number of fines or penalties imposed, either; the first civil penalty in Jersey is yet to be levied, for example, but the other enforcement tools which the regulator uses also carry significant weight. In the British Virgin Islands, meanwhile, while fines are common, they are often viewed as being for administrative failings.
For those firms with international operations that poses a question: Should they implement global standards across their operations, meeting the highest standards even in those jurisdictions where the consequences for failure are lower?
The case for global standards
On the one hand, there might seem little benefit in doing so, in the current situation. Where an office has operated to lower regulatory expectations for years, the cost of bringing it up to a higher, global standard will be significant – with the risk of enforcement action seemingly low if the local regulator is not known to take such steps. It could even cause the business to be uncompetitive against others continuing to operate to a lower requirement.
For those with investors and finance providers in Europe and the U.S., however, global standards make sense, as the impact of failures is increasingly global: Regardless of where money laundering or sanctions breaches occur, the damage to a group's reputation remains. In many cases this will outweigh the cost of any regulatory fine. It is often the investors and providers of finance, as well as the local regulators, who determine the true expectations firms must meet.
Two other factors also offset the costs for international businesses which raise standards in jurisdictions with weaker enforcement regimes. The first is that global standards provide some opportunity for economies of scale, enabling groups to centralize aspects of compliance policy and control. Though not eliminating the need for local regulatory expertise, firms' local offices can avoid having to reinvent the wheel every time they seek to respond to changing regulations and enforcement priorities.
The second consolation they can take, meanwhile, is that those failing to apply higher standards are unlikely to be avoiding the cost, just postponing it. Opportunities for regulatory arbitrage continue to exist, but they also continue to shrink; and enforcement regimes, while at different stages of development, are largely trending the same way. The savings from taking advantage of remaining disparities will, in most cases, prove short-lived.
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