Geoff Cook highlights how IFCs are essential cogs in the global economic machinery.
Against a backdrop of political heat stemming from the economic woes of larger countries, International Finance Centres (IFCs) have continued to find themselves the targets of allegations relating to illicit capital flows and schemes enabling individuals and multinationals to avoid paying their ‘fair share’ of tax. But these allegations, according to a recent academic study, are founded upon ‘poor data and analysis, and on mistakes about how financial transactions, international taxation, and anti-money laundering rules actually work’.
These sorts of accusations are, in fact, ill-judged and unrepresentative of the real role high quality IFCs like Jersey play, the function they have and the value they bring to both the UK and global financial system.
With a need for fact-based evidence and considered thought around Jersey’s global role, the combined findings of the recent ‘Moving Money: International Financial Flows, Taxes, and Money Laundering’ report, independently 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, and ‘Jersey’s Value to Britain’, a study commissioned by Jersey Finance and undertaken by Capital Economics last year, are increasingly pertinent.
The most recent ‘Moving Money’ report demonstrates that arguments against IFCs rest on a misunderstanding of how and why money moves around the international financial system and concludes that, contrary to inaccurate political rhetoric, IFCs like Jersey not only facilitate the free flow of global capital and increase international investment, but they do so in a legitimate way that actually reduces overall financial risk.
With the trend for globalisation persisting and new-found wealth emerging all over the world - India and China are set to resume their place as the largest economies of the world, whilst seven of the 10 fastest growing economies are African – the demand for high quality cross-border services is growing.
For many investors in these markets, Jersey is a useful and – importantly - stable jurisdiction for allowing cross-border investments, owing to its flexible legislation and robust regulatory frameworks.
Money doesn’t just sit in these locations anonymously, as some detractors like to suggest, they actually help collect and package funds from a range of overseas markets and prepare them for their final destination, facilitating and cutting the cost of trade and reducing risk.
Further, it can often be the case that the home regions of new-wealth investors may be prone to corruption or conflict, meaning that wealth security and asset protection, areas where IFCs excel, are increasingly much more of a driver than tax is. As the world’s leading offshore centre (GFCI, March 2014), Jersey can guarantee this much-needed security.
Combined, this all makes for a sensible and more efficient way of getting money working and moving around the global system to, for example, generate wealth or help fund essential infrastructure projects in both Western countries and the developing world.
In fact, according to the World Trade Organisation (WTO), the removal of barriers to global trade has caused a doubling of income in 10 developing countries with a total population of 1.5 billion, whilst overall annual growth in the world economy – 1.9 per cent per annum since World War Two – is mostly due to increased trade and global finance.
The truth is that the cross-border trade of goods and services responsible for this growth would simply be impossible without the international movement of money through jurisdictions like Jersey, which has become especially important since globalisation has opened trade channels through all four corners of the globe.
As Moving Money suggests, centres like Jersey act as important intermediaries in the flow of funds and can offer huge value in reducing the financial costs of trade transactions. In making these transactions possible by shifting resources from less to more efficient uses, Jersey has an important role to play in facilitating the creation of new wealth and jobs, effectively enriching the lives of millions.
Value to the UK
Whilst some critics suggest that IFCs act as an ‘unnecessary detour’, where money is either ‘lost’ en route to its final destination or even discouraged from flowing into the UK altogether, the ‘Jersey’s Value to Britain’ report ultimately proves that the relationship between Jersey and the UK is not one of competition and restriction, but mutual advantage.
Following on from the Government’s 2009 Foot Review, which demonstrated how offshore financial centres make a significant contribution to the City of London’s market liquidity and help UK banks to finance the wider UK economy, the Jersey’s Value to Britain report quantified for the first time exactly how significant this contribution is.
The report showed that, owing to its excellent relationship with the City of London, foreign investors use Jersey as their preferred gateway, with Jersey acting as a conduit for almost half a trillion pounds of foreign inward investment into the UK economy, or five per cent of the entire stock of foreign-owned assets.
That means that £1 in every £20 invested by foreign individuals and companies in assets located in Britain reaches the UK via Jersey, whilst around two-fifths of all assets administered or managed across Jersey’s financial and wealth management sectors comes from markets outside the UK and EU.
The resulting symbiotic relationship means that activity in Jersey supports around 180,000 UK jobs and generates significant net UK tax revenues of around £2.3bn. All this quite clearly points to the fact that Jersey generates an overall net benefit to the UK.
And this role looks set to become even more important. In July this year, UK Trade and Investment announced that Britain brought in a record number of foreign direct investment projects in the last 12 months, 14 per cent more than the previous year.
All this is backed up in the Moving Money report, which found that jurisdictions like Jersey ‘lubricate trade by facilitating international financial transactions’ and ‘play an important role by offering transaction-cost-reducing innovations and services’.
Meanwhile, Jersey recognises that the global drive is towards tackling tax evasion (legislation has been in place making tax evasion a crime in Jersey since 1999) and abusive tax avoidance schemes.
For this reason, Jersey is committed to the global transparency agenda and, contrary to various ill-informed commentators, is actually more compliant with international regulatory standards than many larger economies. It has to be, because Jersey competes on the quality of its services and its expertise.
As well as adhering to the highest standards set by international bodies such as the IMF and Financial Action Taskforce (FATF), Jersey was also an early adopter in signing up to the G5 pilot on automatic exchange of information and the OECD’s Common Reporting Standard. More recently, Jersey also committed to the US FACTA framework and an inter-governmental agreement with the UK.
Of course, for information exchange to have value, good quality information needs to be captured in the first place. All Jersey corporate service providers are regulated and must hold detailed client records whilst for trusts, this information is held on the files of the licensed service provider, which is subject to rigorous inspection by the regulator. Jersey is head and shoulders above many other countries in this respect, and was cited in a World Bank report as a model of good practice in capturing the details of beneficial ownership.
At the same time, Jersey is supportive of fair tax competition and legitimate tax planning as an entirely appropriate – and often the only - response to operating cross border in order to comply with the conflicting provisions, definitions and exemptions of multiple jurisdictions’ tax laws.
This does not mean that Jersey can sit back and relax. Jersey has always maintained a commitment to innovation and will continue to do so - to stay at the cutting edge of an increasingly competitive market, to appropriately manage shifts in regulation and to meet the needs of increasingly complex global wealth patterns.
One such innovation was the recent introduction of the Charities (Jersey) Law, which introduces a unique, flexible framework that is expected to prove attractive for a wide range of philanthropic and charitable organisations and help position Jersey as a mature and flexible centre for global philanthropic work.
The Jersey foundation, meanwhile, celebrates its fifth anniversary this year and continues to prove attractive, with the set-up rate far outstripping that in the other Crown Dependencies. More than 260 foundations have now been established in Jersey, around a third of those having a charitable or philanthropic objective.
There also continues to be a focus on enhancing Jersey’s trust legislation, which is 30 years old this year, and remains the model many other jurisdictions around the world look to emulate.
On the regulatory front, Jersey’s government recently outlined a package of measures designed to reinforce the message that Jersey does not welcome abusive tax planning structures. Under the measures, financial service providers in Jersey are expected to ensure that they identify if any new business they take on will facilitate the use of a scheme registered under the UK’s Disclosure of Tax Avoidance Scheme (DOTAS). These proactive, forward thinking measures by Jersey’s government in respect of abusive tax schemes and working more closely with HMRC are to be welcomed.
Decisions relating to complex global financial frameworks and the role of IFCs are simply too important to be made based on baseless and misinformed opinion. Third-party, robust, quantitative studies provide an invaluable resource in contributing to a meaningful debate on the true value of high quality IFCs like Jersey.
That there is a growing body of robust literature in this area, such as the Jersey’s Value to Britain and Moving Money reports, is very welcome indeed, and it is clear from the findings of these reports that centres like Jersey offer a positive and compelling proposition within the global financial landscape.
Both reports are available at www.jerseyfinance.je/valuetobritain and www.jerseyfinance.je/moving-money.
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is a non-executive director to a select number of Family Office, Private Capital, Banking and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also a Board member of Apex FS (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.