Why fiction is clouding fact: Efforts taken by offshore centres to tackle financial crime

Onshore’s Greatest Hits – Pressure on OFC’s Nothing New

In December 2008, the British newspaper The Observer ran a story that pointed the finger of blame at offshore lawyers and accountants. It claimed that the collapse of the structured investment vehicles they had created had started the financial crisis which, in my opinion, is an utterly misconceived assertion.

The article continued, rather brazenly, to state that “transparency and openness” are “virtues that the offshore banking industry hates with a passion” – statements made without reference to any sort of empirical evidence.

Such hostility has intensified as a result of the global financial crisis. Politicians on both sides of the Atlantic have applied pressure: the Stop Tax Haven Abuse Bill in the US Senate and, in the UK, the announcement in the pre-budget report of a review of the Crown Dependencies and Overseas Territories. Add to this the EU’s indirectly discriminatory White list1, President Sarkozy’s recent call for a crackdown on tax havens2 and the call from Joseph Stiglitz for them to be shut down3.

The roots of the financial crisis, however, “lie not in Grand Cayman or the Isle of Man but in New York and London”, as two professors recently put it, and in “the inadequacies of the US and EU oversight of their financial systems”4. In fact, offshore centres create intra-jurisdictional competition by facilitating the efficient allocation of capital thereby encouraging better tax law in the rest of the world.

Perhaps, major onshore centres are worried, as a result of the credit crisis, by the competition in a free market from offshore centres. A recent US Treasury Report on corporate inversions, for example, commented that “our overarching goal must be to maintain the position of the US as the most desirable location in the world for place of incorporation, location of headquarters and transaction of business”5, suggestive of the US desire to keep business onshore.

Such anti-competitive arguments, however, do not stand up to scrutiny. Rather, the argument against offshore centres typically focuses on how pressure should be applied to counter money laundering, promote transparency to enhance onshore tax enforcement and improve regulation to limit global financial risks.

Offshore Compliance

A well-regulated financial market is undoubtedly important to the global economy. The difficulty for those who argue that offshore equals poor regulation is that numerous supranational organisations find, that time and again, offshore jurisdictions outperform their onshore counterparts in complying with international standards of regulation and anti-money laundering.

More significantly, those who make the anti-offshore argument do so without drawing any distinction between different offshore jurisdictions. Each jurisdiction should be judged on its merits. Indeed, the terms offshore and onshore are becoming increasingly redundant. The focus should simply be on compliant and non-compliant.

A reputation for integrity is one of the most important assets an offshore centre can have. Offshore centres need to participate in foreign markets for business and they, therefore, comply, in spite of the increased burden and resources that compliance brings. Isolation is not an option and poor regulation, harbouring terrorist finance or laundering money is the quickest way to become isolated. Yet, despite achieving high levels of compliance with international standards, offshore centres continue to be blacklisted and labelled tax havens.

A comprehensive review

BakerPlatt carried out its own review to analyse whether there are grounds for concern relating to offshore centres, concentrating on the exchange of information in tax-related matters and on compliance with international standards of financial regulation and anti-money laundering. Whether the term offshore, when intended to convey levels of compliance, regulation and co-operation, could meaningfully be applied to a diverse range of jurisdictions, was also considered.

The review sampled the Cayman Islands, Hong Kong, Jersey, Liechtenstein, Luxembourg, Panama, Singapore, Switzerland, the United Arab Emirates and the US. All of these jurisdictions, except for the UAE and the US, are listed in the “Stop Tax Haven Abuse Act” as “offshore secrecy jurisdictions.”

The review took into account a wide range of sources. Table 1 includes how the jurisdictions performed in the Organisation for Economic Cooperation and Development and Society of Trust and Estate Practitioners assessments and whether the jurisdictions were members of the Egmont group. It should be noted that the STEP report does not cover all of the jurisdictions in the review and focused on Delaware rather than the US as a whole. Table 2 then examines how the jurisdictions performed in the International Monetary Fund Financial System Stability Reports and Financial Action Task Force assessments.

The findings of the review, some of which are outlined here, are conclusive. It found that all of the countries examined are members of the Egmont Group, an association of anti-money laundering authorities.

In addition, all countries reviewed, including the US, had some form of bank secrecy. More significant, though, are the provisions for confidentiality relating to the disclosure of ownership, identity or accounting information. While many of the jurisdictions examined did have such secrecy rules, Jersey, Hong Kong, Luxembourg and the US did not, appearing to undermine the label “offshore secrecy jurisdiction” applied in the “Stop Tax Haven Abuse Act”.

The findings also show that in Jersey and Singapore, bearer shares – a mechanism that can be used to obscure identity – are not issued. In Delaware, however, the relevant governmental authority does not hold identity information in respect of the legal ownership of companies. The STEP report, meanwhile, shows that only Jersey and the Cayman Islands were regulating corporate service providers as well as trustees at the time of their report.

Furthermore, Jersey and the Cayman Islands are the only “offshore secrecy jurisdictions” with the ability to obtain bank information for exchange purposes in all tax matters (not simply those that involve a domestic tax issue or an alleged criminal offence).

The Cayman Islands also achieve a high level of compliance with the FATF recommendations on anti-money laundering and combatting the funding of terrorism. The results of the latest evaluation for Jersey are yet to be published and are not included in this analysis.

Finally, the Basel core principles on Banking Supervision were examined. Whilst all the countries reviewed had undergone IMF Financial System Stability Assessments, only Jersey, Cayman and Panama had undergone a detailed assessment, enabling the results to be expressed in percentage terms – Cayman and the other two offshore centres scored well. The other jurisdictions only underwent summary assessments.

The tables go beyond the normal rhetoric of labelling. It would be foolish and dangerous to use offshore as shorthand for poor regulation and the harbouring of illicit money. The danger is that attacking and blacklisting legitimate centres not only reduces the incentive of those jurisdictions, it undermines the international standards on compliance and regulation themselves.

If the real argument is about unwelcome competition in difficult times, then, not only is it an unattractive one, it is intellectually dishonest to pretend it is about poor regulation or money laundering, especially in light of the available evidence.

The full review can be found at www.bakerplatt.com