The truth will out

June 08, 2009 9:28 AM

Current focus on the regulations surrounding offshore financial institutions is a diversionary tactic that deliberately misses the point, says Stephen Platt, chairman of BakerPlatt Group.

The response of politicians in London and the US to the global financial crisis has, ­predictably, been one of denial and distraction. Offshore centres are part of the ‘flak’ that has been put up to divert attention from the causal factors that governments should be focused on if they are serious about averting future financial crises. Blaming offshore centres is the intellectual equal of blaming foreign workers for rising unemployment in the UK. It is flawed, it is dishonest, but it is popular.

Gordon Brown has called for action against tax havens “which have escaped the regulatory attention they need”. How much attention do they require?

The consensus view of informed observers is that the best of such centres are already better regulated than their big-country counterparts.

It is difficult to reconcile the charge that centres such as Jersey, for example, have facilitated systemic instability with, for example, the Financial Stability Forum’s assessment of Jersey as a Group 1 jurisdiction.

Similarly, how can we square the allegation that Jersey regulates its finance industry poorly with the 2007 House of Commons Public Accounts Committee report, which said: “In most of the territories the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies.”?

Finally, how do we make sense of the charge that Jersey does not tackle money laundering adequately when in 2008 it was deemed to be equivalent to the third EU money laundering directive - a feat that 17 of the EU member states have still to achieve?

There are, of course, on and offshore tax havens that do not past muster. They must be put under pressure to reform or be closed - not because they were a causal factor in the financial crisis, but because the business they transact is inherently suspect. The fear is that the clear distinctions between good and bad-quality finance centres are being ignored. There is a very real danger that the indiscriminate policy towards all offshore centres will result in ‘the baby being thrown out with the bathwater’. The Organisation for Economic Cooperation andDevelopment white, grey and black lists have gone some way to allaying that fear, but pressure on all so-called ‘tax havens’ will continue irrespective of their merits.

That is in nobody’s interests, least of all the City’s. The reputation of the UK’s ­offshore centres for probity, professional skills and financial sophistication enables them to attract capital from around the world. Such capital is then substantially directed into the UK, European and US capital, banking and securities markets.

Assuming there is an appetite for substance over rhetoric, what criteria should be used to distinguish the diamonds from the dirt?
There are five obvious criteria:

• Does the jurisdiction have statutory bank secrecy in place?
• Has the jurisdiction enacted money ­laundering legislation that criminalises the laundering of the proceeds of foreign tax evasion, or is foreign tax evasion excluded? And critically, does it use it?
• Does the jurisdiction regulate the ­provision of trust and corporate services?
• Does the law of the jurisdiction require the disclosure of the identity of the beneficial owners of companies?
• Has the jurisdiction enacted laws that enable it to cooperate with foreign ­investigating authorities in criminal matters, and does it use them?

Ahead of the game

If you enact money laundering legislation that excludes from its ambit of predicate conduct foreign tax evasion, you stand to be accused of attracting tax evaders. The UK Crown Dependencies enacted ‘all crimes’ money laundering laws in 1999. Many ­jurisdictions, including several on ­mainland Europe, have yet to do so.

The regulation of trust and corporate service providers is crucial. Frequently we see cases involving the abuse of trusts and ­companies for the purpose of disguising the connection between criminals and their assets. These vehicles, particularly trusts, are not inherently flawed; the vast majority are used for legitimate purposes not just ­offshore, but across the common law world. However, to deny their vulnerability to criminal abuse would be irresponsible. The UK Crown Dependencies began to regulate their trust and corporate service providers in 2001.

The UK, US and Switzerland, among others, have yet to do so.

Insisting that the identity of the ultimate beneficial owners of companies incorporated in your jurisdiction is disclosed to the ­authorities is a major disincentive for ­criminals, including tax evaders. Jersey has required disclosure for 35 years. Neither the UK nor the US have yet introduced this requirement.

If we apply these criteria transparently then quality offshore centres can compete on a level playing field and be judged not only against the poor-quality centres, but critically against those onshore centres that, through lax regulation, continue to attract tax evaders and others with impunity.

The fear is that there is not in fact an appetite for the distinctions between the ­regulatory regimes of different jurisdictions. Ostensibly, of course, the debate is about regulation, but the real agenda is in fact tax competition. Quality offshore centres have large pools of development capital that the governments of busted onshore governments need now to exercise control over. Globalisation is regarded with suspicion as it introduces competition, including on taxes.

Tax competition has always been and will forever remain a fundamental cornerstone of the global free market economy. Tax ­optimisation is as old as taxation itself.

The danger is that attacking the good-quality centres not only disincentivises those centrTes, it undermines the international ­standards on compliance and ­regulation themselves, thereby removing what should be a means for legitimate clients to ­distinguish between good and bad jurisdictions.

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 that it is about poor regulation or money laundering, particularly in view of the available evidence.

(Source: Magazine The Lawyer)

4 May 2009