The future of international financial centers

International financial centers like the Cayman Islands have experienced over two decades of increased international pressure in the form of new regulation and greater demand for transparency. 

Since the 2008 crisis, this constant pressure has intensified, as politicians in cash-strapped countries look for a scapegoat and useful target for their campaigns, bureaucrats (domestic and internal) seek political support to grow their empires, and some sectors of the media see a story that is likely to sell.
Despite all this and the effect the 2008 crisis had on these IFC’s domestic economies, the prediction of the end of this industry has failed to materialize.

Instead, the reality is an increased, globalized world economy will continue to generate a growing demand for the services provided by IFCs; and while the demand for more transparency will add cost and reshape parts of the industry, it is unlikely in itself to damage the IFCs and might, in fact, help certain sectors of it.

The role of technology

Technology has sped up the trends and allowed for proposals that would have sounded like science fiction only a few years ago.

The automatic exchange of information as required by FATCA (and to be somehow followed in a multilateral way for several countries, including Cayman) is still a stretch on today’s systems and technology that will require a significant investment, but it is a possibility that would not have been attainable even in the nineties.

Is there an option for IFCs?

Not engaging with the global trends and international initiatives is not an option. The blacklists of 2009 and the recent developments in Switzerland have clearly demonstrated the risks of being an outlier to those advocating a different path.

Any country refusing to meet such global standards will certainly see actions to limit the capital flows through it, and capital flows are the lifeblood of the IFC’s financial services industry.

Because of this, reputation and public perception are key variables in the competitiveness of the IFCs, which in many cases have found themselves in a race toward being seen as first movers and more compliant than their peers.

What can the IFCs do differently or better?

While many IFCs have for many years been complying in a way that exceeds what many major centers have done, they have failed to successfully communicate this at many levels.

Let’s look at the FATF (Financial Action Task Force) as a prime example.

The FATF has issued 49 recommendations and has done a first peer review based on the laws and regulations and a second review with on-site visits. The results of the review surprise the majority of the media Cayman Finance speaks with. Cayman is one level below the top rating, along with countries like the U.K., U.S., Germany and the Netherlands. More detailed reading of the report reveals Cayman is, in fact, ahead of the U.K. and U.S. in the area of collection and availability of beneficial ownership information.

While having your house in order in the form of legislation, regulation, transparency, infrastructure, competitive pricing, etc. is necessary, it is clearly not sufficient. The days of bankers sitting behind their desks waiting for the next customer to come in are over; now banks look for their customers – or at least the successful ones do. It should not be any different for IFCs.

IFCs should enhance their lobbying and public relations in key centers like London, Washington and Brussels, in order to influence political, media and public perceptions.

While IFCs compete with each other on a daily basis, it would be more efficient and beneficial for them to join efforts where possible, particularly when dealing with international initiatives that affect all of them and to which they are wrongly singled out over and over again.

They should also join forces to sponsor quality academic studies and think tanks analyzing the real role of IFCs, to be able to better respond to unfounded and biased publications that have been more successful in depicting a misleading picture.

As an example, the vast majority of the public in the U.S. still believes Caribbean IFCs offer secrecy in their accounts, while the reality is anybody in the Americas looking to hide the beneficial ownership of an account would be better off creating a company in Delaware. IFCs have failed to expose this and other hypocrisies; together they may stand a better chance of success.

Increased transparency

The recent initiatives to increase transparency, such as the automatic exchange of information, carry significant costs. However, there is no indication at this stage these costs are significantly different for IFCs than for other countries. The increased costs are a barrier to entry for new IFCs, as the cost to sustain the required regulation and structure to commit to international standards is increasing. As such, these costs are likely to prevent the new jurisdictions trying to copy the IFC model, and they may prove too expensive to those newer IFCs that have not reached a minimum size.

Appropriate transparency will not affect legitimate business but will be a key tool in public relations efforts. As the exchange of information initiatives are implemented and some IFCs continue to thrive, the opponents will have more difficulty in selling the Hollywood version of the Caribbean islands housing illegal fund flows, and more of those who have chosen to buy that picture will be persuaded to take the time to learn and acknowledge the reality.

The future

Leaving aside a catastrophic scenario that could change the capital system under which the world operates, wealth will continue to be accumulated by businesses and individuals around the world who will continue to have an increasing appetite to use that wealth as capital across borders.

While we have seen countries embracing common monetary policies, sharing a currency and creating trading blocks, it is unlikely individual governments will relinquish their tax collection capabilities any time soon. Individuals and corporations will continue to attempt to maximize after tax returns; in fact, it is the duty of the management of a company towards its shareholders legally to do so. Tax and regulatory competition is likely to continue with an enhanced number of tools utilized to curtail evasion and prevent abuse.

IFCs will continue to see demand for their offering as long as they remain active participants of global standards in the areas of regulation, transparency and international cooperation.

Increased costs generated by international initiatives will act as a higher barrier to entry and may affect the smallest ones. To survive, proper infrastructure and a scale that allows competitive pricing are necessary.

Many of the overseas territories and Crown dependencies of the U.K. meet these criteria, making them potentially successful. Only those IFCS that remain agile, avoid the pitfalls of others, maintain a welcoming domestic environment for new businesses, ensure existing business have the ability to attract and retain the necessary talent to compete internationally, and do not over rely in this industry imposing uncompetitive fees/taxes and restrictions, will succeed.