While we can point to being a responsible international finance center meeting global standards and co-operating on the international drive for greater transparency, we have learnt that we need to do more to defend our reputation.
In order to promote the value of IFCs more effectively, it has been necessary to go further and accrue independent, academic evidence that demonstrates the positive contribution that IFCs can make to global finance and, of equal importance, to shatter the myths that have arisen about the offshore marketplace, especially the ill-conceived accusations of secrecy and lax regulation surrounding leading jurisdictions.
There is a growing body of evidence that supports the case that IFCs contribute positively and significantly to international investment, jobs, growth, and poverty alleviation and, during the last few years, Jersey Finance has been instrumental in producing a number of such studies.
First, research undertaken on behalf of Jersey Finance by the macro economic research firm Capital Economics1, showed that Jersey was a net contributor to the UK economy and demonstrated that the money invested in Britain through the Island would likely go elsewhere without Jersey’s financial services industry.
A second paper, part-funded by Jersey Finance and conducted independently by two leading American academics, entitled ‘Moving Money,’2 examined cross-border finance and the international free flow of funds around the world. It concluded that the role of IFCs was positive and essential in helping funds move around the global economy and in increasing international investment.
The study rejected allegations that IFCs allowed significant illicit capital flows enabling individuals and multinational enterprise to avoid paying a ‘fair’ amount of tax, and concluded that such claims were based on poor data and analysis as well as on mistakes about how financial transactions, international taxation and anti-money laundering rules actually work.
The latest research, again produced by Capital Economics3, looked at the contribution that Jersey could make to African development, and whether IFCs could be a catalyst for growth in developing countries.
While Africa has 15 percent of the world’s population, it generates just 4 percent of global output. But the Capital Economics report argued that Africa was on the verge of a demographic dividend. While other continents faced ageing populations, Africa’s working age population was expected to double to 1.2 billion over the next 30 years.
To support this growth by 2040, Capital Economics calculated that Africa would need to invest $85 trillion in infrastructure. At current levels of investment, the study estimated that Africa must invest 37 percent of gross domestic product instead of the 23.5 percent that it does currently. This would still leave an investment gap of US$11.4 trillion by 2040 and domestic profits and local governments would only be able to plug some of this gap, with a total of US$6.1 trillion of this needed to come from foreign investment.
Currently, Africa receives only 2.7 percent of the world’s total stock of foreign investment. If it could attract similar rates of inward investment as the rest of the world, argued the report, it could contribute the much needed funds that would help close the gap.
Putting Africa in a world context
In locations such as the British Crown Dependencies and indeed in Cayman, the role of IFCs in facilitating foreign direct investment is understood and so it is easy to appreciate where jurisdictions such as Jersey could play a positive role in helping Africa fulfil its economic potential while offering investors a safe, robustly regulated business environment.
Jersey provides specialised cross-border banking, wealth management, investment and legal services, backed by a sound, stable and mature government and judiciary. These offer a platform for secure and efficient cross-border transactions, especially important for individuals and companies doing business in potentially risky or unstable countries with poorly defined property rights, weak legal systems and a culture of corruption.
We believe that being part of the sterling zone, Jersey offers a safe business environment for those already investing in Africa and those looking to do business there. Its tax neutrality makes it an ideal location for pooling funds from investors across the globe. It can also help encourage entrepreneurship in Africa by providing security for entrepreneurs who might worry about the riskiness of doing business there.
Yet for the present and confirmed in the report, Jersey has only a small book of African business, funnelling between 0.5 and 1.5 percent of all foreign investment into the continent with the majority of the business concentrated in South Africa and Kenya. It is evident that we have the scope to support Africa’s economic development in a much more fundamental way.
The report also highlighted that the ultimate driver of demand for Africa’s equity markets would lie in better governance of the broader economy. There is a clear role for Jersey, with its robust, independently acknowledged regulatory system, to help African countries to improve their governance and structures.
Economic crime, including bribery and corruption, is a major problem for the developing world, including Africa. More than US$1 trillion in bribes is paid each year, a cost of more than 5 percent of global GDP. Some respected charities and non-governmental organisations have alleged that financial institutions in IFCs are conduits for large sums which are the proceeds of such illicit activity, sheltered by a veil of secrecy. They also say that such centres help large multinational businesses avoid paying tax in African countries.
However, the report outlined that vast estimates of the proceeds of economic crime in developing economies failed to distinguish between legitimate trade between countries and illicit capital flows. Some relied on unattributed and unverifiable hearsay, while others relied on assumptions that were unjustifiable. All were based on data sources that were unsuited for the task.
Africa needs investment to realise its full potential
Few jurisdictions work harder than Jersey to stamp out bribery, corruption and illicit activity anywhere in the world – as international regulators have testified. Jersey has tough up-to-date legislation, a strong financial regulator with a wide remit and determined enforcement by the police.
There is no banking secrecy on the Island: Jersey willingly exchanges information in appropriate circumstances with police and other competent authorities elsewhere in order to detect those profiting from bribery, corruption, money laundering, tax evasion and other criminal activity. As far as tax evasion is concerned, it has been a criminal offence in Jersey since legislation was introduced in the 1990s.
In addition, Jersey can point to signing more than 40 tax agreements with countries worldwide, and being a signatory to U.S. FATCA, an inter-governmental agreement with the U.K., and the European Savings Tax Directive for automatic exchange of information within the E.U.
Our government has also welcomed the development of a Common Reporting Standard, a step towards the implementation of a new single global standard for automatic exchange of information. In total 51 countries and jurisdictions, including Jersey are signatories to the ‘Early Adopters Group’ and are committed to the new OECD standard.
Africa’s economy has the potential to grow by 5% per annum
During the course of June we embarked on our first series of ‘roadshows’ in a number of African nations when, alongside the promotion of Jersey’s capabilities and high regulatory standards as a leading IFC, we highlighted the findings in the Capital Economics report on Africa and outlined where Jersey’s involvement in structured vehicles and investment strategies can be applied.
We are also staging a seminar in London in which we will explore the role IFCs could play in the growth of developing countries. We have further research in the subject which will also be released shortly.
It is vital that IFCs accumulate sufficient evidence to defend their role when necessary and prove their positive value to the global economy and their effective approach to transparency.
It is our view that centers such as Jersey that can demonstrate their positive contribution to economic development, and package, administer and invest international capital at a competitive cost without dislocating domestic tax systems, will thrive.
Demographic trends should boost Africa’s productive capacity over the next 30 years
- ‘Jersey’s Value to Britain’, Capital Economics, 2013 http://www.jerseyfinance.je/valuetobritain
- Moving Money: International Financial Flows, Taxes, and Money Laundering report, authored by Professor Richard Gordon, Professor of Law at Case Western Reserve University, and Dr. Andrew Morriss, Dean at the Texas A&M University School of Law http://www.jerseyfinance.je/moving-money
- Jersey’s Value to Africa, the role for international financial centres in delivering sustainable growth in developing countries, November 2014 http://www.jerseyfinance.je/value-to-africa#.VW2iX89VhBc