Ingrid Pierce and Grant Stein discuss transparency, the industry buzzword of the past year, and why IFCs can be less defensive about their role in the global economy going forward and more vocal about their attributes and accomplishments.
Transparency has clearly been the watch word of the past 12 months for all in the offshore world. In addition to the major focus on improving corporate governance standards, small offshore IFCs have been seen to effectively 'onshore' certain aspects of their regulatory regimes. The leading IFCs have argued over the years – and quite rightly – that in order to attract capital from around the world, they operate with sophisticated and robust standards of professionalism and stand on, or very close to, the cutting edge of regulation.
It is interesting to consider how the drive towards transparency will influence the relationship between onshore and offshore jurisdictions. Thus far it seems that the IFCs are at pains to cooperate and embrace calls for newer and higher international standards, but are rarely treated to the same courtesy from those who are critical of their regimes. What will the critics find to say about the recent comments by UK Prime Minister David Cameron? Speaking in the House of Commons in September 2013, the Prime Minister said that it is no longer fair to refer to any of the Overseas Territories or Crown Dependencies as tax havens: "They have taken action to make sure that they have fair and open tax systems." Unsurprisingly, his comments were warmly welcomed by governments and industry representatives from the Caribbean to the Channel Islands.
Just a week or so prior to Cameron's comments, a report by the OECD Secretary General to the G20 leaders, highlights how far certain offshore centres have come in terms of transparency, in particular when compared with certain onshore jurisdictions. Ratings were given for 98 jurisdictions judged on nine transparency criteria, with green the highest, followed by amber and then red. Cayman received the highest rating, with green across all measures, while the US had two amber ratings, Russia had seven and Canada, Germany, Spain and the UK each had one amber rating.
Given Cameron's comments, the message is perhaps getting through that small IFCs like Cayman, BVI, Jersey and others are committed to the exchange of tax information. It has been a long road to reach this point, with Cayman's first tax information exchange agreement (with the US) signed back in 2001. Another 30 agreements have been signed since then.
Taking a broad view, it might be said that these agreements are beneficial for the relationship between onshore and offshore territories. While many of these TIEAs have been in place for a long time, each new additional TIEA means that jurisdictions should be better placed to position themselves in the eyes of foreign investors, governments and the general public as transparent, reliable and legitimate. Whether this will silence the critics is another story.
It is important, however, that a TIEA is more than just a symbolic gesture. Practically speaking, the agreements should result in a greater degree of consistency in the standard of information exchanged between authorities in the context of a specific investigation.
One of the difficulties with any discussion around transparency is that it usually means different things to different people.
The UK’s G8 Action Plan published on 18 June 2013 commits the UK to collecting "adequate, accurate and current" information regarding beneficial ownership of private companies and to implement a central registry of company beneficial ownership information maintained by Companies House. The proposal is at best ambitious and is in any event practically impossible to implement since many of the G20 countries do not collect the relevant information required to achieve the policy goal set by the Action Plan. By contrast, the OFCs have substantially implemented corporate transparency standards promulgated by the Financial Action Task Force and most already collect information on beneficial ownership through regulated corporate service providers operating in those jurisdictions. Perhaps the UK might consider doing the same?
As the IFC Forum has submitted in response to the proposals, the mechanics of collecting and maintaining accurate information on beneficial ownership is prone to error and more readily amenable to deliberate misrepresentation. The proposed UK system will rely on self-reporting and lacks an effective mechanism for verification. Further, making such information public is both novel and potentially damaging to the UK's own interests. It may also provide unintended opportunities for the data to be used for nefarious activities.
A Matter of Measurement
The academic link between the presence of small IFCs and increased economic development in both advanced and emerging nations is also well established. The rich body of theoretical research on the topic has been covered to great extent for a number of years, but the wide ranging benefits that IFCs provide to global economic advancement would perhaps be better understood by the general population and wider media if there were greater emphasis on the practical realities of the onshore/offshore relationship.
Central to this dynamic is the fact that the capital invested from all around the world into IFCs rarely stays in these jurisdictions, but instead flows directly into the onshore banking and securities markets. It is well understood in financial circles, that the neutrality that IFC platforms provide to international investors, allows the efficient pooling of investor capital without benefiting one investor over another. IFCs also act to remove certain legal and political risks associated with investing in some foreign countries when doing business abroad. IFC structures were utilised to ensure the overall smoothness and efficiency of the transaction, with investors benefiting from an agreed, stable legal jurisdiction in the event of any dispute or other issues.
In order to really get this message across, however, more attention needs to be given to dispelling the myth that individuals or companies need to be extremely wealthy to benefit from the kind of structures provided by Cayman and other OFC jurisdictions.
Numerous offshore products and structures are utilised directly or indirectly by individuals and companies at all levels of wealth. For example, pension funds and savings schemes are one of the key ways in which ordinary people invest and save. Any attack on the tax neutral platforms that underpin these pension funds would result in reduced returns for onshore pensioners and greater problems for governments looking to provide adequate pensions for their populations. The special purpose vehicles used for aircraft financings help protect US manufacturing jobs in the North West of the United States, thanks in large part to the efficiencies that these structures provide. Captive insurance and reinsurance activities in places like Bermuda and Cayman provide the means to insure highly specialised industries such as healthcare and nuclear power, which may otherwise be unavailable onshore (or at least not at competitive prices)and shutting down these activities would necessarily lead to job losses and reduced services within those sectors.
Given the undoubted manner in which the smaller IFCs have signed up to various OECD initiatives and the recognition that jurisdictions such as Cayman have received for their efforts, what can we now say about any changes in the relationship between the onshore and the offshore world?
It is not always apparent, but the UK leadership seems to appreciate that OFCs provide a platform for the international transfer of capital into the UK through the activities of funds and bank deposits sourced from investors around the world.
When Henry Bellingham MP, Parliamentary Under Secretary of State at the UK's Foreign and Commonwealth Office, visited the Cayman Islands in April 2012, he endorsed Cayman as a "success story", and a "world class financial centre which is a vital part of the operations of the City of London".
Hard statistics are another manner in which the IFCs can both justify their existence and quantify the benefits they provide to the wider global economy. An assessment by Europe Economics in April 2012 analysed the impact of capital invested by large EU nations into small IFCs, focusing primarily on the effect of exports from this investment. The team looked at FDI coming out of Europe's main three economies (Germany, France and the UK) into some of the more significant IFCs, including Jersey, Guernsey, the Cayman Islands, Bermuda and the British Virgin Islands. Europe Economics found that capital flows into the small IFCs are invested and this investment over time results in manifold benefits and in particular higher exports, as gains from investment returns and exports generated outweigh the costs. When adjusting for factors such as the size of economies, Europe Economics concluded that FDI into small IFCs is more export promoting than FDI into countries that are not small IFCs.
Onshore versus Offshore
Certainly, much has been made in recent years of the so-called blurring of the lines between onshore and offshore, in particular as those operating in the offshore financial industry have increasingly established a presence on the ground in onshore financial centres. Walkers for example has offices in London and Ireland at the heart of the EU, Singapore and Hong Kong in Asia and Dubai in the Middle East, which help provide clients with real-time advice from those who have developed a greater understanding of the local environment and opportunities.
The reality of the situation is that in order to succeed, offshore professional service providers need to have a deep understanding of both the onshore and offshore environment, so that effective client focused solutions can be provided. This is clear from the degree that leading OECD nations interact with the leading IFCs. For example in the UK, according to The Guardian, close to 50 per cent (£375 million) of the funds from the Commonwealth Development Corporation (CDC), the UK Department for International Development's development finance arm, are routed through IFCs such as Mauritius, the Cayman Islands, Luxembourg and Vanuatu.
David Cameron's admission that the tax haven tag is now unfair may well mean that the IFCs can be less defensive about their role in the global economy going forward and more vocal about their attributes and accomplishments.
It is fear of inadequacy that drives us to embrace every new measure, to be first off the line to sign up to new international initiatives as quickly as they come off the press, hoping for a salute, a reward, even a prize. And just as we comply and stand ready to graduate, a new rule is created, a new standard to be reached, just that bit further away. We know what we do works and works well - so why are we waiting for the prize giving?
Ingrid Pierce Ingrid Pierce is based in Walkers' Cayman Islands office and is a partner in the firm's Global Investment Funds Group.
Grant Stein Grant Stein is the Global Managing Partner for Walkers, the global offshore law firm of choice for investment banks, international law firms, collateral managers, and other financial institutions. Based in the Cayman Islands with offices in the British Virgin Islands, Dubai, Hong Kong, Jersey, London, and Singapore, Walkers provides clear, concise and practical advice based on an in-depth knowledge of the legal, regulatory and commercial environment in the Cayman Islands, the BVI, and Jersey.
Walkers Bermuda, British Virgin Islands, Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore.