Grey matters

Read our article in the Cayman Financial Review Magazine, eversion 

Michael Barzuza, Market segmentation: The rise of Nevada as a liability-free jurisdiction
Virginia Law and Economics Research Paper No. 2011-07

available at 

This paper exposes and analyses the rise of Nevada as an almost liability-free jurisdiction. Contrary to conventional wisdom – that Nevada imitates Delaware law but does not make any profits from competing with it – Nevada has embarked on a lucrative strategy of market segmentation with a differentiated product – a shockingly lax corporate law.

Market segmentation with lax law has allowed Nevada to overcome significant barriers to entry. By tailoring its product to a particular subset of the market, Nevada gained market power in a segment that is not served by Delaware. Nevada’s clear, no-liability law makes Delaware’s competitive advantages less significant and leaves it unable to effectively respond. Firms may incorporate in Nevada for a variety of reasons that include extracting private benefits, saving on incorporation taxes, and minimising litigation costs.

The data, however, suggest that at least some firms choose Nevada for the first, less benign reason. Normatively, policy makers should find it worrisome if high agency costs firms, which would benefit the most from regulation, disproportionally choose Nevada’s lax law. Another reason for concern is that Nevada, by creating a competitive pressure towards the bottom, may be dragging Delaware down.

CFR comment: 

The Delaware story is well known; the Nevada story not so much. This paper not only provides some useful talking points for discussing the relative merits of offshore and onshore jurisdictions with American officials, but raises some interesting issues offshore policy makers may wish to consider to maintain their position as high quality jurisdictions.


Dariusz Wojcik, Where governance fails: Advanced business services and the offshore world
available at 

Twenty years ago the Soviet Union was dismantled and the Cold War ended. With enlarged markets and peaceful economic cooperation the world seemed to be embarking on a path of uninterrupted development. In reality, however, we experienced two worst decades in the post WWII history in terms of world GDP growth rate, combined with the highest levels of domestic income inequalities, economic instability, and the highest greenhouse gas emissions. The 2000s was the worst decade on all of these counts, the 1990s the second worst. Why did the world economy perform so badly?

The paper revisits some key concepts used in economic and social sciences to explain economic transformations of the last 20-40 years, and points to the development of the advanced business services – offshore world nexus as an area of major governance failure. Advanced business services hold considerable power, which they exercise by operating legal and financial vehicles designed to escape the control of governmental or inter-governmental organisations through the use of offshore jurisdictions. This nexus of advanced business services and the offshore world contributed to the recent global financial crisis, and has negative consequences for stability, equity and sustainability.

CFR comment: 

Know your opponent! This paper is a call for geographers (not the kind that make maps, but the academic kind) to attack offshore jurisdictions’ legitimacy. It includes a call for geographers to support the Tax Justice Network’s proposal for compulsory country-by-country reporting of data since “new standards could be used to correct otherwise distorted data on foreign trade and cross-border financial flows, mapping hitherto hidden circuits of capital and producing research that informs policy makers and citizens.” If you want a forecast of the next round of attacks on OFCs, read this.


Harvey Gilmore, This is not a symposium on how to commit fraud – but, if it were…
Journal of Business & Securities Law, Vol. 11, No. 2, 2011

available at 

We know the names: Bernard Madoff, Kenneth Lay, Jeffrey Skilling, Andrew Fastow, Dennis Kozlowski, Phillip R Bennett and Bernard Ebbers. These are but a few of the biggest corporate thieves in recent memory. Similarly, the names of certain corporations will also conjure up lasting images of massive corporate frauds: Enron, World-Com, Tyco, Adelphia, Refco, Global Crossing and Sunbeam, again, to name just a few.

The most disquieting aspect of all these financial frauds really isn‘t the massive amounts of money that was looted from the victimised companies. Instead, the truly unnerving fact regarding most financial frauds is that they are deceptively easy to formulate and sometimes even easier to implement. In this piece, I will first give several definitions as to what constitutes fraud. I will next argue how and why committing certain types of financial fraud is in fact fairly simple. In doing so, I must point out that I am not deliberately giving a clinic on how to commit fraud (title notwithstanding) and live happily ever after in a nice offshore tax shelter.

That said, keep in mind that in order for forensic accountants and fraud investigators to successfully detect and prevent fraud, they necessarily need to have some idea of how a financial crime might be perpetrated. This knowledge is essential in order to beat the bad guys at their own game. Or, to put it another way, in order to catch a criminal, one has to think like a criminal. Finally, I will give my take on several factors that enable people to commit financial fraud, including weak internal controls, corporate cronyism and negligent audits, to name a few.

CFR comment: 

A clever summary of how to commit fraud that compliance offices can use to assess their internal controls. Easy enough to read that it can be given to new employees as a guide to what to watch for (assuming the employer is clear that this is not a “how to”guide)!


Shafik Hebous, Money at the docks of tax havens: a guide, CESifo Working Paper Series No. 3587
available at

This essay critically revisits the roles and influences of tax havens in the world economy. It combines various massages of available studies in one scheme, documents a number of observations and proposes several issues for future research.

CFR comment: 

A useful, relatively neutral survey by a professor at Goethe University in Germany that suggests the future directions of academic research.

Eiichi Sekine, Renminbi trade settlement as a catalyst to Hong Kong’s development as an offshore renminbi center
Nomura Journal of Capital Markets, Vol. 3, No. 1, 2011

available at

Renminbi settlement has become the preferred mode of settlement for mainland Chinese imports, with most of the imports settled this way coming from Hong Kong. As a result, renminbi deposits in Hong Kong have increased sharply, as has the issuance of dim sum bonds.

It will be interesting to see what routes are opened up to enable this money to find its way back from Hong Kong’s offshore renminbi market to the mainland and whether Japanese companies take advantage of the market to issue dim sum bonds.

CFR comment: 

A useful summary of RMB settlement developments with commentary on implications for Hong Kong by an analyst at Nomura.


Karandeep Makkar, Regulation of venture capital funds in India
available at

Venture Capital is one of the innovative financing resource for a company in which the investor has to give up some level of ownership and control of business in exchange for capital for a limited period, say, three to five years. Venture capital is generally equity investments made by venture capital funds, at an early stage in privately held companies, having potential to provide a high rate of return on their investments.

It is a resource for supporting innovation, knowledge based ideas and technology and human capital intensive enterprises. Venture capitalists operating in India are subjected to considerable inaction and oversight by regulatory authorities. This project discusses the regulatory and legal issues confronting Indian and offshore venture capitalists. It also describes in brief, the different sets of guidelines governing VC funds and companies in India issued by the Securities and Exchange Board of India (the SEBI).

Finally, the business models by which this industry operates currently are also discussed. The net FII investment in Indian markets is increasing and the flows for the last few years have generally been positive. With enhanced interest in India as compared to some of the other emerging and Asian markets, given the right environment good amount of money would flow as venture capital investment.

This is more so because India has already acquired credibility particularly in the area of information technology and sectors like media, pharmaceuticals etc. With this background India is rightly poised for a big leap. Given the right environment and the mind set to understand global forces, large flows of risk finance and venture capital can flow into the country.

CFR comment: 

This paper by a professor at Hidayatullah National Law University, provides a short summary of India’s regulation of venture capital funds that may be of interest to those contemplating investments there.

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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