Up until recently, it was far more difficult to show the value of international finance centers (IFCs) to global economies and much easier to levy criticism at them by selective use of unsubstantiated data and sweeping generalizations.
It was not enough to point to the high quality of regulation or the general endorsement IFCs obtained on a consistent basis from the global bodies that monitor regulation such as the IMF and the OECD. In more mainstream media, the wild, but high profile claims of the NGOs and pressure groups with vested interests in blaming offshore jurisdictions for illicit capital flows and the problems of tax evasion were drowning out the messages of probity and sound regulation that IFCs were promulgating.
But that situation is changing significantly as a result of an array of rigorous academic studies and specially commissioned research which is putting into context the important role the leading IFCs play in facilitating capital into markets around the world and thereby encouraging investment.
For example, research has shown that the amount of tax evaded through the British Crown Dependencies is far less than the NGOs have claimed. The Capital Economics study we commissioned estimated that tax evasion in Jersey in the year the study was undertaken, 2011, was estimated to be no more than £150 million and was probably much less and that it was set to fall substantially, following the information sharing agreements Jersey had signed up to.
More significantly, the amount was dwarfed by the overall tax contribution by Jersey catalyzed activity to the U.K. exchequer, which according to the study was in the region of £2.5 billion per annum.
Since the release of this data, we have been able to respond with hard evidence to counter bogus arguments from opponents about the high levels of so called “tax leakage” from jurisdictions, such as Jersey, having a detrimental effect on the U.K. economy.
Foreign direct investment
The latest study to be completed is the findings of a report published recently by global management advisory firm Investment Consulting Associates and commissioned by Jersey Finance entitled “Jersey’s Contribution to FDI.” It sought to identify the appeal of IFCs in supporting cross-border investment and specifically the strengths of Jersey’s finance industry in facilitating foreign direct investment.
IFCs have proven increasingly attractive to foreign direct investors with the growth of globalization in the world economy and the increasing use of financial services in its operations.
These trends have led to the emergence of specialised investment vehicles and associated services to facilitate the flow of capital around the world and IFCs have been at the centre of some of that investment.
The total value of global FDI by corporate investors increased from US$1.33 trillion in 2012 to US$1.41 trillion in 2013, whilst such investments routed through international finance centers are at historically high levels, accounting for a 6 percent share of global FDI flows or amounting to almost US$80 billion in 2012.
Within the report, FDI was defined as investment by corporate investors in a company or entity based in another country, investment by individuals to optimise their international investment revenues, and ‘Greenfield’ investment, which creates new physical operations such as factories, distribution centres, service centres and regional headquarters.
With a growing amount of capital flowing across borders, the report concluded that IFCs provide investors with essential services that facilitate FDI, attracting, pooling and directing flows of FDI between source and destination jurisdictions, increasing the global volume of and returns on FDI.
The report suggested that investors continue to find IFCs like Jersey attractive for FDI because of the strengths of their financial markets and the quality of the services they offer, as well as the suitability of their vehicles and the stable institutional, tax and regulatory environment they provide for cross-border transactions.
The stock of outbound FDI distributed globally by Jersey in 2012 was US$75.8 billion, with FDI originating from Jersey flowing to a diverse range of countries including many emerging markets. Countries in the island’s top 20 for both capital invested and jobs created abroad through FDI included Poland, Turkey and Netherlands, whilst several African developing markets including Uganda, Mozambique, Mali, Guinea, Egypt and Senegal have also benefited directly and indirectly from FDI originating from Jersey.
Assessing Jersey’s specific role in facilitating “greenfield” projects, the report highlighted that Jersey-originated FDI supported 94 projects between 2003 and 2014, with an aggregated value of US$13.34 billion and creating over 39,000 foreign jobs.
These were mainly in the construction and natural resources sectors in emerging and developing markets, and in service industries such as financial, business and software services in developed countries and other IFCs. Overall, it’s clear that, as an IFC, Jersey has substance and critical mass in the breadth and depth of its financial services which is enabling it to act as a major player in the global FDI market and offer significant value-added financial and support services.
Value of IFCs
Although the survey was focused on the figures available from Jersey, they serve as a fine illustration of how many of the leading IFCs are making a telling contribution to global investment. Over the years it has been shown that IFCs such as the Crown dependencies and the British Overseas Territories are among the major cogs that drive capital around the globe.
Furthermore, the annual surveys of wealth management trends are depicting a world in which there are increasing numbers of high net worth individuals (HNWI), especially in the developing markets in the Far East, the Gulf and Africa.
According to the RBC/WMCap Gemini World Wealth Report 2015, global HNWI wealth is forecast to surpass US$70 trillion by 2017, whilst globalization and population growth are having a transformational effect on international wealth patterns and corporate investment strategies. In such an environment, the demand for infrastructure investment around the world is certainly set to increase.
The Investment Consulting Associates study has brought into sharper context how global financial integration has been a catalyst for the further development of cross border investment vehicles which make it easier for companies to invest around the world in pursuit of their FDI objectives. IFCs are key providers of these investment vehicles and related financial services, all of which serve to increase not just the scope and flexibility of capital, but also make it safer, more secure and more efficient.
It’s evident that companies that use IFCs to manage their FDI can reduce the risks of transferring assets across borders, particularly in countries which are less stable and less well regulated. Without the IFCs and their favourable fiscal and regulatory regimes, these flows of FDI to developing economies might not have happened since the risks of such investments could outweigh the returns.
More widely, in highlighting the role IFCs play in the global economy by channelling FDI, this new report provides compelling evidence of their positive role internationally in both developed and developing markets, and in their ability to add considerable value for investors.
As practitioners in leading IFCs, I am sure many of us felt there was injustice in the unsubstantiated claims that were peddled by our opponents and which deserved to be questioned. Since 2013, we have commissioned studies to quantify our value to the U.K. economy, examined the role of IFCs in moving money cross border, produced data to illustrate how jurisdictions such as Jersey can make a positive contribution to the economic prosperity of African nations and highlighted the role of IFCs in foreign direct investment.
As a much clearer picture emerges of how IFCs benefit economies as a result of this evidence based research, we can reduce the noise generated by our opponents with data that fails to stack up when properly investigated. It is our intention to continue commissioning relevant studies to add to the armory of research that we can call upon.