Ladies and Gentlemen, 

Good morning.

1. Thank you for inviting me to speak at this international business law conference. It is a great pleasure for me to be here amongst distinguished members of the legal fraternity.

2. In articulating the topic on “cross border investments and the role of Labuan IBFC”, today I would like to share several key international developments in this rapidly changing financial landscape that are defining the roles of regulators and businesses. Within this context, I like to touch on how Labuan International Business and Financial Centre (IBFC) responded to the effects of worldwide transformation, to remain relevant and competitive.

Ladies and Gentlemen,

Profound Changes in Financial Landscape

3. In recent decades, we have witnessed the acceleration and deceleration of globalisation, at least in the political context, financial market integration and recalibration due to the financial crises, and technology advancement and disruptions that have been foremost in driving the changes in the financial world. This has fostered change in the way and manner the international financial community is interacting and transacting. Intuitively, this has also been driven largely by the changing regulatory landscape that has evolved to match the greater complexity of the financial system, in keeping pace with the shifting sources of risks.

4. In identifying vulnerabilities in a global world, many were critical of the IFCs. This is largely due to the appealing feature of IFCs that provide conducive and pro-business environment that is often misunderstood as providing avenue for regulatory arbitrage that affects the world’s economy and financial stability. This perception become more pronounced after the global financial crisis in 2008/2009. IFCs were criticised for lack of transparency and partly blamed as the roots of the crisis. Since then, IFCs worldwide faced intense demand from multilateral bodies and standards setting organisations to enhance transparency and promote prudential requirements to foster greater financial soundness and stability. Additionally, September 11 and the rising terrorism threats give rise to more demands to impose regulatory measures to curb money laundering and terrorism financing. Inadvertently, the seamless financial market environment have brought forth new risk instruments that include more complex trade-based money laundering, cyber fraud and data leak.

Ladies and Gentlemen,

5. Given this quick glimpse of the challenges we faced as an IFC and the unfolding of events in recent years, let me further elaborate on three main key international drivers that affects cross border investments and financial intermediation in IFCs. First is the regulatory landscape, second is the international tax developments and thirdly, the developments of the anti-money laundering and countering financing of terrorism.

Changes in the regulatory landscape

6. The evolution of today’s regulatory landscape is to strengthen the financial system as the pillar to intermediate a well functioning economy. In the same vein, it is also ultimately aimed at avoiding the use of public’s money to assist ailing but important financial institutions. Supranational organisations such as the Bank of International Settlements, the standard setting body for the banking system played a vital role by introducing several major initiatives to address the concerns faced by the governments in the aspects of governance, supervision and prudential requirements of financial institutions. Among the many measures undertaken includes implementing a more intensive and proactive regulatory framework for market entry policies, address capital requirements, systemic risk implications, liquidity management and coverage, overseeing systemically important financial institution (SIFI) and strengthening resolution and shadow banking oversight. The Basel III is one of the more defining regulation that sets capital and liquidity requirements, besides enhancements to the capital and money market regulations on financial market instruments e.g. asset backed instruments and financial derivatives, which entail among others, more disclosures. The unintended consequences of these regulatory developments are the associated regulatory costs in putting in place the appropriate level of sufficient capital and the systems to manage the risk raising the operational cost of financial institutions. This leads to the de-risking activities of banks causing difficulties in opening of bank accounts and the reduction of correspondent banking relationships of riskier customers. Those associated with dealings in the IFCs are unfortunately often targeted as riskier customers.

The tide has turned against offshore tax evasion

7. Secondly, the international tax policy developments have largely impacted IFCs. As regulators proceeded with their financial reforms agenda, the spotlight was shifted to global tax changes to curtail tax evasion and preserve tax base. The call for global anti-tax evasion was further triggered by the publication of the Panama Papers in 2016. Though its one year on, the waves of regulatory reforms generated by this cyber-attack is enormous. It has brought about a renewed focus on implementing standards around beneficiary ownership and the emergence of new transparency agenda which ultimately brought to the fore enhancement needed to further boost corporate tax transparency and improve client’s due diligence requirements.

8. The disclosure requirements and new reporting standards at international levels have left the regulatory design permanently in catch-up mode. Initially, the focus was on compliance with international standards on exchange of information (EOI) on request. Subsequently the emphasis shifted to a global standard for the automatic exchange of information (AEOI). Of late, new fiscal initiatives are at the forefront to further enhance transparency on beneficial ownership and address harmful tax practices globally.

9. The growing concerns across multiple jurisdictions on cross-border tax evasion have led to a global commitment towards implementing international tax information exchange. The movement started in 2010 with the United States proceeding with the unilateral implementation of the Foreign Account Tax Compliance Act (FATCA). The law presents significant structural changes in governments’ efforts to improve cross-border information sharing on tax compliance by implementing an international standard for the exchange of information (EOI) related to US taxpayers, by compelling all foreign financial institutions to report on U.S. citizens who held accounts and report their assets to the U.S. Treasury.

10. In the course of implementation, FATCA poses challenges to the banking and financial services industry as compliance requires enhanced due diligence. Many banks and firms closed accounts for Americans abroad or declined to open new ones, in order to avoid increasing their compliance costs. Apparently, more than 4,000 individuals have renounced their US citizenship or long-term residency in 2015 and the number is in the rising trend, according to the US Treasury.

11. Despite the complexity of the FATCA regulations, to-date 113 countries around the world have signed the Inter-Governmental Agreement (GIA) with the US authority to stay ahead of the reporting requirements. Malaysia has also agreed in substance to adopt the agreement to effect the implementation of FATCA in the country.

12. After the enactment of FATCA, the G20 and other world leaders advocated for the EOI to be adopted as the new international standard of multi-lateral automatic exchange of information (AEOI). Subsequently, the OECD has developed the model in 2014, to enable countries to automatic exchange information on an annual basis, through the promulgation of the “Common Standard on Reporting and Due Diligence for Financial Account Information” (CRS). As at to-date, more than 100 jurisdictions have already committed to its swift implementation. Of these, over 50 are committed as ”early adopters” to first exchange information on financial accounts automatically in 2017. The rest of the jurisdictions have committed to automatically exchange information starting in 2018.

Ladies and Gentlemen,

13. As I have mentioned earlier, one of the factors driving changes in financial world is technology advancement. The evolution of technology and new global patterns in trade have dispersed the commercial operations and pushed investment alliances flow across borders. While benefiting the economy, this has also given rise to other forms of challenges in the tax revenue collection.

14. One of the primary concern is preferential regimes which offers some form of tax preference in comparison with the general tax rules and be used for artificial profit shifting. The regime imposes low effective tax rates on income from geographically mobile financial activities and is ring-fenced from the domestic economy. “Ring-Fencing” may take a number of forms among others regime excludes resident taxpayers, enterprises which benefit from the regime may be explicitly or implicitly prohibited from operating in the domestic market and regimes does not permit transactions in the domestic currency.

15. Following intensified scrutiny by the multi-lateral organisations against non-sustainable activities such as illicit capital flight, corruption and tax evasion, the Base Erosion and Profit Shifting (BEPS) Action Plans was developed by OECD to curb international tax avoidance and promote greater compliance among global multinational enterprise (MNEs). There are 15 major actions designed to reshape the entire international tax landscape and currently the focus is very much on the implementation of four minimum standards identified, that is - to fight harmful tax practices (Action 5); to prevent tax treaty abuses, including treaty shopping (Action 6); to improve transparency with Country-by-Country Reporting (Action 13), and to enhance the effectiveness of dispute resolution (Action 14).

16. Malaysia, together with more than 100 countries have committed to implement the BEPs Action Plans and was also admitted as Associate of the Inclusive Framework of Forum on Harmful Tax Practices (FHTP). As a commitment to support the FHTP, the FHTP members undergo a voluntary peer review assessment of the regimes in the country. In view of assessments by the FHTP, majority of the countries including Malaysia have taken steps to review their regimes and provided commitment to FHTP that they will implement the global standards as promulgated by the FHTP.

Ladies and Gentlemen,

17. That leads me to the third key developments which I wish to elaborate. With the respond to fiscal pressures with the pursuit of individual and corporate taxation, the demand for increased transparency for the purpose of combating money laundering and counter terrorism financing has never been higher. International bodies, including the Financial Action Task Force (FATF), is also taking action to eradicate abuses of the formal and informal financial system by launderers of illicit gains or for those with criminal objectives. The intent is to close loopholes, that includes tax evasion as countries place tax evasion on an equal footing to other money laundering offences. Amongst the recommendations of the FATF, constructive and timely exchange of information is a key requirement and formed one of the cornerstones to an effective anti-money laundering and counter financing terrorism (AML/CFT) regime. However, of particular relevance, one of its key action plans articulated in the FATF is for countries to increase transparency on beneficial ownership (BO) of legal person to strengthen governance and the transparency of company ownership. This obligates financial institutions to identify the true ownership of all assets by providing names of beneficial owners who ultimately own or control the legal entity, either directly or indirectly.

18. Following the same thoughts, the possibility of allowing public access to such information is also being hotly debated. Some of the concerns are:

i. companies have undergone several due diligence exercise by the banks and intermediaries such as lawyers, accountants and secretarial companies or trust companies. These institutions are regulated entities obligated to ensure money laundering is not perpetrated by the BOs. Hence enabling the public access of BOs would not improve the due diligence process but adds additional cost;

ii. it is challenging to accurately identify the ultimately beneficial owners as the information is often not readily available on corporate filings. Moreover, the use of proxy or nominee shareholders can confuse the matter as this information would not be provided anyway by these rogue companies to the registrar; and

iii. Another argument is that the unrestricted access to the BOs information is against constitutional rights of the individuals, and possibly facilitate criminal activities such as kidnapping and identity theft.

19. Despite the differences in views, several countries, including IFCs have already put in place laws that require the information to be kept by companies or at the public registrar. Malaysia has also taken the same stance with the amendments to the Companies Act 2016, to include provisions to compel companies to obtain and keep BO record, as well as to issue regulation for the disclosure of nominee shareholding information to a central registrar.

20. In Labuan IBFC, we are emulating the same amendments. Labuan FSA is in the midst of amending its Labuan Companies Act 1990 to meet the international standards. The BO information acquired arising from the implementation of the amended provisions will be kept by Labuan FSA and only accessible to other law enforcement agencies upon requests. In addition, Labuan FSA had in 2012 and 2014, issued directives on “Accounts and Record keeping Requirement for Labuan Entities” to require all Labuan trust companies to keep records of the BO information and to ensure sufficient due-diligence and security vetting are conducted on the BO.  

Labuan IBFC: Riding the Wave of Regulatory Change

Ladies and Gentlemen,

21. Despite the disruptive “regulatory pendulum” that affects the IFCs thus far, one fact that becomes increasingly clear for Labuan IBFC is that it has to be agile. To remain an important connecting node in the global financial system, it must match the rapidly evolving trend and catch up with the latest global developments. Observations on capital flows and the reduced use of corporate vehicles in IFCs indicate imminent contractions and cautious approaches by many global investors, signalling the negative effect of these regulatory changes to the IFCs.

22. Labuan FSA as a co-operative member of the larger international community, over the past few years, has been actively engaged in global forum among international standard-setting organisations on key issues related to financial reform agenda. We also subscribed to international best practices and is a member of the fraternity of regulators in various international organisations such as IAIS, GIICS, GIFCS, APG, FATF and IOSCO. This has enabled us to establish different channels of cooperating with overseas regulators in supervising the activities of Labuan entities. Another important channel is through memorandum of understanding that we signed with our international counterparties. Currently, Labuan FSA is a full signatory to the IOSCO multilateral MOU. It has also signed numerous bi-lateral cooperative framework with regulators in Europe, Middle Eastern region and our Asian-Pacific neighbours to strength its supervisory cooperation.

23 More importantly, we have put in place relevant legislation to allow the exchange of information with the double-tax treaty partners as well as the tax information exchange agreements (TIEAs) signed by Malaysia through amendments in the Labuan Business Activity Tax Act 1990 that were gazetted on Dec 30, 2015. These were in line with Labuan IBFC’s efforts to continuously conform to the global tax transparency initiatives and international standards. Operationally, we have also have in place stringent regulatory compliance where guidelines and directives are regularly reviewed and issued to assist our investors and industry players in ensuring compliance.

Moving Ahead: Re-Assess, Re-think & Re-position

24. These developments have covered the entire regulatory and data spectrum, from implementation of common reporting standards (CRS) to facilitate effective cross-border monitoring, the introduction of national beneficial ownership registries to the imposition of more stringent anti-money laundering and counter financing of terrorism (AML/CFT) rules. Adapting to these changes highlighted the need for cross border financial connectivities to be accompanied by international cooperation through a stronger collective effort and enforcement of the international prudential standards promulgated by the international bodies, to prevent regulatory arbitrage across borders and the risk of implications for contagion. Labuan IBFC have indeed progressed significantly over the last decade, by putting in place long term reforms needed to make the IBFC a well regulated centre, a prerequisite for international business. These reforms have also strengthened and sustained the financial ability to support orderly financial intermediation and the increasing cross-border trade flows.

25. With the expansion of global agreement and coordination in areas of tax harmonisation and regulatory upscaling, privileges such as tax incentives and secrecy will eventually cease to be competitive differentiators. IFCs needs to metamorphose into “new environment relevancy” in order to survive these changes. Value propositions need to be reassessed, rethought and repositioned. To its credit, Labuan IBFC has already embarked on this journey in 2013 by repositioning itself from an “offshore centre” to a “midshore centre”. By being a “midshore centre’, it offers both the ease of doing business found typically in offshore centres, combined with high international standards of regulation and supervision found onshore. With the global advocacy for better transparency complemented by the stricter anti-money laundering regulations, some may argue that IFCs had embraced this compliance wave better than their onshore counterparts. This reflects IFCs’ determination to conform to the prudential rules and regulations as part of their obligation being part of the international community. For Labuan IBFC, the legitimate purpose of business activities has always been assured by the strong regulatory requirements and surveillance by the Labuan FSA.

26. Not resting on our laurels, Labuan FSA continues to enhance its legal framework to better reflect its regulatory and supervisory policy intentions, as well as to ensure the legal requirements remain relevant and current. For 2017, the main focus of the review is enhancing compliance with the relevant international standards and best practices; facilitating the supervisory, regulatory and enforcement functions of the Labuan FSA; facilitating business development and streamlining them with the relevant domestic laws. This reflects the ongoing commitment of the centre to be a leading jurisdiction in advocating strong prudential, transparency, anti-money laundering and counter terrorism financing standards. With the expanded legal framework, there is a need to complement it with strengthened prudential regulations to be on par with the international standards which will support the orderly development and stability of the financial sector. The intensity of the policy requirements needs to commensurate with the risk materiality and significance posed by the different types of financial institutions in order for it to be facilitative.

27. As Labuan IBFC is very much Asia-focused, it is always our aspiration to expand the role of Labuan IBFC to further facilitate cross-border investment and financial flows. Hence, there is a need to elevate the level of connectivity to levels comparable to the world’s leading international financial centres to better facilitate economic and financial linkages. More specifically, given the establishment of the ASEAN Economic Community, there is significant potential for Labuan IBFC to tap into greater regional financial flows for economic development in the region.

28. Undeniably, the evolving trends are also forcing the industry to fundamentally reassess their business models and operating practices. As a result of greater expectations from the regulator, it is imperative for service providers, including the international lawyers, to be able to respond swiftly and effectively adopting to the new rules of the game.

Ladies and Gentlemen,

Conclusion

29. Notwithstanding the challenges ahead, I believe there are also more exciting times that lie ahead of all of us. I hope this conference do serve as a platform for us to reflect on the actions that we need to take individually and collectively to continuously reinvent and re-anchor ourselves in the new way of conducting business. On this note, I wish you fruitful discussions and a successful conference.

Thank you.