Marcus Killick provides analysis of recent regulatory pressures effecting Finance Centres.
The banking crash and subsequent economic crisis has led to an increased polarity in beliefs concerning the nature of the services provided by the international financial centres (IFCs). At one end lie the unreconstructed free market advocates. These are groups such as the USA’s Centre for Freedom and Prosperity (CFPs). CFP’s mission is “to educate the public and members of Congress on the benefits of tax competition, financial privacy and fiscal sovereignty”. It is ideologically opposed to everything from the Organisation for Economic Cooperation and Development (OECD) to Foreign Account Tax Compliance Act (FATCA) seeing them as inhibitors to economic growth.
At the other end lie bodies such as the Tax Justice Network (TJN). TJN promotes “transparency in international finance and opposes secrecy” and supports a level playing field on tax.
To the first, IFCs are a cause of prosperity, to the second ‘tax havens’ cause poverty. Each has their political supporters. Without doubt, both groups are earnest, passionate and sincere in their beliefs. Without doubt, both cannot be right.
This economic argument has increasingly, although in some cases unperceptively, entered the dry world of financial service regulation. Indeed it is through such regulation that many of the battles are now being fought.
Let us begin with the fight against money laundering. Originally this fight, and the early laws designed to support it, were focused, almost exclusively, on money generated in the illegal drugs trade. Indeed many of the first pieces of legislation expressly contained the words drugs in their title. Then, over time, the net was cast wider to include ‘all crimes’ (in reality, all predicate offences). Now tax evasion is firmly on the list of criminal acts covered by the law. Today, the draconian weapons once targeted against gun wielding Colombian drug dealers are now equally aimed against tax evading Belgian dentists.
In another time such a change would be the cause of public uproar, there would be stout defenders, way beyond the CFP, to criticise the use of such powers on otherwise (apart from evading taxes) ‘honest’ citizens.
Yet we live in a different world where even the distinction between tax evasion and tax avoidance is becoming blurred. The attack on those using legal tax avoidance mechanisms, from Jimmy Carr to Starbucks, has been vocal and significant. Public opinion now seems to be that everyone should pay their fair share of tax. IFCs, as the location of many of the structures that enabled a lower tax to be paid, are themselves subject to criticism. Not because they did anything illegal or facilitated illegality, but because they helped someone commit a legal, but now publicly frowned upon, act.
Let us be clear, this has nothing to do with secrecy. The arrangements may have been private (ie, not public) but they were disclosed to the relevant revenue authority. To that extent the secrecy debate is dead. Indeed, for those who missed the obituary, secrecy itself is ‘a dead parrot’ it has ceased to be.
Of course, if you can find a willing service provider or corrupt local official in some financial sector company, you can undertake your activities with a degree of anonymity (as you can in London, Paris or Rome). However, the concept of a bank account or trust, behind which you can hide, and through which you can perform illegal acts with impunity, now firmly belong in the world of fiction.
Confidentiality remains, but if you are suspected of market abuse, money laundering, tax evasion or a myriad number of other crimes, then your financial details will be disclosed, often without your knowledge and certainly without your consent. Service providers who do not co-operate or who even do not maintain the required records may find themselves subject to criminal penalties.
Bank employees stealing and selling client details to tax authorities may grab the headlines but they are becoming superfluous. Today, you do not need a thief, you simply need an international agreement to gain the information.
There does, however, remain the question as to whether the jurisdiction where the tax evader lives will actually prosecute, but the information is available.
For the legal, but morally frowned upon, tax structures, the IFCs find themselves with an interesting dilemma. They are legal and it is a free market. However, every time one is exposed or its structure publicly challenged, the IFC is named and the image that IFCs are somehow shady and unclean perpetuates. Indeed a number of centres have taken stances against certain activities which, whilst legal, have been regarded as unacceptable. An example of this is the Guernsey government’s recent ban on certain types of vulture funds.
Beyond the privacy issue, the question of tax harmonisation has received greater impetus, not least within the EU and particularly the Euro zone, as a result of the crisis. The issue of the financial transaction tax is but one manifestation. Here, however, the prospects of the TJN achieving their goal are less likely. Tax is merely one element of competition. To equalise tax merely accentuates and distorts other competitive areas (eg, labour costs, infrastructure etc). Nations fiercely defend their sovereignty on tax matters. Fiscal harmonisation may be forced through to save the Euro but its prospects elsewhere are weak at best.
Whilst the fiscal debate remains safely outside the regulatory field, one area, that of the actual benefits of international finance centres to the global economy, is not. Yet, even here, the debate is far wider than the IFCs but, rather concerns the social utility of the finance sector globally.
Before the crisis, the finance industry was generally accepted as being economically beneficial. Working for a bank was seen to be a decent job. The banking crash changed the public’s perception. Some bankers such as Fred Goodwin turned from figures of respect to figures of hate. As mortgages and commercial lending dried up so people began to ask what use were banks? As the cost of the public bailouts mounted the anger increased. Market abuse such as the Libor scandal and further examples of misselling such as that of Payment Protection Insurance (PPI) broke into the news exacerbated the meltdown of confidence and trust. This was not an IFC problem; it was a globally systemic one.
Whilst the public will accept certain fringe activities which lack genuine social utility, they will not accept mainstream financial institutions that appear to have failed to deliver real social benefits. In correcting this, the IFCs can play a small but vital role.
For a start, every centre will need to decide whether they want to be part of a new financial dawn or to continue serving the global financial sector in the same old way.
If a centre does choose to evolve it will, without doubt be taking risks. This is because it will have to work new fields for financial benefits rather than plough old ones. Yet the benefits in terms of reputation and potential growth will be significant.
There are a number of ways individual IFCs can use the current lack of confidence and trust to deliver a new quality reputation of their own.
Firstly, the IFC will need to demonstrate a manifest commitment to the quality of service provided by its financial institutions. Firms will be required to ensure their staff are appropriately trained and effectively monitored. This may be deliverable via professional bodies but the government will need powers to improve those who cannot, and sanction those who will not, deliver quality of service to their clients. Clients must feel safe when dealing with the jurisdiction.
Secondly, the government must decide what activities it does, and those it does not, wish to encourage. Some financial products may be so high in risk and so low in social benefit that they may be considered unacceptable. On the other hand government may wish to encourage beneficial green shoot sectors such as micro finance, working to end financial exclusion and facilitating entrepreneurship financing.
Thirdly, the jurisdiction can work towards a cultural change in the sector by promoting good corporate governance, which includes corporate social responsibility. A government cannot enforce a change in the sector to one of profit by quality of service but it can create an environment in which such a change can blossom. We are already seeing major financial institutions change the way in which they remunerate staff. This is generally by moving from bonuses for volume of sales to bonuses for quality of service. Partially this is in order to facilitate cultural change within the organisation. IFCs by virtue of their size can, in their own way, deliver a similar climate of change.
Finally, the benefits of IFCs have to be explained better and more widely. The public do not understand the distinction between avoidance and evasion. They look at a far simpler argument. Do firms and individuals pay their fair share of tax? The ‘shareholder spring’ on directors pay can easily become a ‘taxpayers autumn’.
Focus has previously been on convincing the decision makers of the benefits of IFCs. However, these decision makers now have louder voices in their ears. Outreach therefore has to be greater, from beyond this group to those that elect them. This requires clearer, simpler messages.
Of course, centres can continue to provide support to those elements of the finance industry that prefer the old approach, those that regard the last few years as a temporary blip. Such a route is easier; it is within the comfort zone. To them there is no reason to believe profits will not return. Many will argue such a path.
But suppose we are at a tipping point, that IFCs, have come to a tide in their affairs, like a tide in the affairs of men, “which taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound by shallows and in misery”[i]. If this is true, then there is no fork in the road where a centre can choose one route or the other with equal equanimity.
Maybe, just for once, this time it is going to be different.
[i] Shakespeare, Julius Caesar, Act 4, scene 3.
Marcus Killick OBE Marcus is an English Barrister and member of the New York State Bar as well as a Chartered Fellow of the Chartered Institute for Securities and Investments and a member of the Chartered Management Institute (Diploma in Management and Leadership) and the Chartered Insurance Institute, Marcus was awarded the OBE in the 2014 New Year’s Honours List Marcus was also Chairman of the Gibraltar Investors Compensation Scheme and the Gibraltar Deposit Guarantee Board as well as the Group of International Insurance Centre Supervisors Prior roles include Chief Executive Officer of the Gibraltar Financial Services Commission, Deputy Chief Executive of the Isle of Man Financial Supervision Commission, Head of Banking and Investments at the Cayman Island Monetary Authority and Director in KPMG's Financial International Regulatory Services Team. Marcus was one of the founding directors of the United Kingdom Association of Compliance Officers (Subsequently renamed the Compliance Institute).