Until recently, demonstrating empirically the value of International Finance Centres (IFCs) to global economies has proven relatively difficult. Despite IFCs being able to point to the high quality of their regulation and the endorsement they receive on a consistent basis from global authorities such as the OECD and IMF, this has not been enough.
Mainstream media have been more willing to listen to the wild claims of NGOs and lobby groups, based on selective use of unsubstantiated data and sweeping generalisations, that IFCs are somehow responsible for illicit capital flows. The problems of tax evasion and transfer mispricing were drowning out the messages of probity and sound regulation that IFCs were promulgating.
However, that situation is now changing with a growing body of academic and scientific studies as well as specially commissioned research clarifying the important role leading IFCs play in facilitating the flow of capital into markets around the world. The studies shed light on how IFCs can, and want to, offer a solution to global financial flows by bringing knowledge and investment to and from developed and developing countries, and ensuring that developing countries don’t have to rely on economies built on aid.
As Neil Armstrong once commented, albeit in quite a different context, ‘research is creating new knowledge’, and that is very much a statement we believe in. Evidence-based research is giving Jersey an ability to position itself strongly on the international stage, correcting some of the misinformation that is often propagated surrounding IFCs, and ensuring key messages are communicated to current and potential investors, media, political groups, and those focused on Jersey’s transparency programme and merits as an IFC.
Over the past few years, Jersey Finance has taken up the initiative to build a strong library of research in order to position the jurisdiction as at the forefront of thought leadership around international financial services and to set it apart as a destination of choice for managing and facilitating high quality cross-border financial flows.
In 2013, Jersey Finance commissioned its first research-based report (‘Jersey’s Value to Britain’), carried out by independent research firm, Capital Economics, in order to showcase the benefits Jersey provides to the UK. Among its findings were that Jersey is a conduit for nearly £500 billion of foreign investment into the UK, helping generate around £2.3 billion in annual tax revenues and supporting an estimated 180,000 British jobs.
This data has enabled Jersey to respond with hard evidence to arguments from opponents about the high levels of so called ‘tax leakage’ from jurisdictions such as Jersey having a detrimental effect on the UK economy. The research showed, for instance, that the amount of tax evaded through the British Crown Dependencies is far less than NGOs have claimed. The study indicated that tax evasion in Jersey in the year in which data was collected (2011) was estimated to be no more than £150 million and was probably much less.
Further reports were then commissioned, including the ‘Moving Money’ paper published by two leading US academics, which provided a powerful answer to the critics of offshore financial centres, and demonstrated the value of having an open global financial market in helping to boost global trade and economic growth.
This was followed by the ‘Jersey’s Value to Africa’ report last year, also carried out by Capital Economics. This report confirms the fundamental role that Jersey can play in facilitating foreign direct investment into the continent to help Africa fulfil its economic potential by 2040. It calculated that around US$6.1 trillion of inward foreign direct investment through secure IFCs like Jersey is the only way Africa is likely to be able to plug its funding gap of US$11.4 trillion.
The latest study to be completed is a report published recently by global management advisory firm, Investment Consulting Associates, and commissioned by Jersey Finance, entitled ‘Jersey’s Contribution to Foreign Direct Investment (FDI)’.
It sought to identify the appeal of IFCs in supporting cross-border investment, highlighting how they play an increasingly important role in facilitating FDI, reinforcing Jersey’s role as a conduit for FDI, and emphasising the positive contribution it makes to the global economy.
The total value of FDI by investors, the report found, increased from US$1.33 trillion in 2012 to US$1.41 trillion in 2013, whilst such investments routed through IFCs are at historically high levels, accounting for a six per cent share of global FDI flows.
Within the report, FDI was defined as investment by corporate investors in a company or entity based in another country, investment by individuals to optimise their international investment revenues, and greenfield investment, which creates new physical operations such as factories, distribution centres, service centres and regional headquarters.
With a growing amount of capital flowing across borders, the report concluded that IFCs provide investors with essential services that facilitate FDI by attracting, pooling and directing economic flows between source and destination jurisdictions, while increasing the global volume of and returns.
The report suggested that investors continue to find IFCs like Jersey attractive for FDI precisely because of the strengths of their financial markets and the quality of the services they offer, as well as the suitability of their vehicles and the stable institutional, tax and regulatory environment they provide for cross-border transactions.
As far as Jersey specifically is concerned, the stock of outbound FDI distributed globally in 2012 was US$75.8 billion, with FDI originating from the island flowing to a diverse range of countries including many emerging markets. Top 20 for countries for capital invested and jobs created through FDI included Poland, Turkey and Netherlands, whilst several African developing markets have also benefited directly and indirectly from FDI originating from Jersey.
In addition, greenfield FDI distributed from Jersey prompted 94 projects to be completed between 2003 and 2014, with an aggregated value of US$13.34 billion, creating over 39,000 foreign jobs and raising a potential US$445 billion in foreign tax revenues.
Whilst we know that private clients and corporate investors find Jersey an attractive centre, this latest report provides concrete evidence that it not only attracts significant financial inflows, but also enables outflows that stimulate economic growth in a range of developed and developing countries across the globe.
Although this report focuses on figures available for Jersey, they serve as a good illustration of how many leading IFCs are making a positive contribution to global investment.
Annual wealth management surveys depict a world in which there are increasing numbers of high net worth individuals (HNWI), especially in the developing markets in the Far East, the Gulf and Africa, which will prompt an increase in demand for infrastructure investment around the world even more. According to the RBCWM/Cap Gemini World Wealth Report 2015, for example, global HNWI wealth is forecast to surpass US$70 trillion by 2017, and this can present IFCs with further potential in facilitating cross-border investment aspirations.
The Middle East, for instance, is one of the regions anticipated to witness the highest rise in ultra-high net worth individuals over the next decade. The FDI report found that around 20 per cent of Greenfield FDI from Jersey (around US$2.5 billion) was targeted at projects in the Middle East region, whilst Jersey already provides a solid platform for Middle East investors with almost 15 per cent of the total value of Jersey’s bank deposits emanating from the Gulf region. However, Jersey is also now providing a good springboard to further the international strategies of Middle East investors into new sectors and markets as they look to diversify their strategies and consider international options.
By asserting its cross-border investment expertise and capabilities, as well as its position in terms of standards of regulation and commitment to international cooperation, Jersey is giving investors confidence in its ability to make it safer and more efficient to manage wealth and structure investments around the world.
In highlighting the role IFCs play in the global economy, this new report provides compelling evidence of their positive role internationally in both developed and developing markets, and in their ability to add considerable value for investors. Without IFCs and their favourable fiscal and regulatory regimes, flows to developing economies might not have happened since the risks of such investments could outweigh the returns.
It is Jersey’s intention to continue commissioning relevant studies to add to its library of research. Gaining this invaluable knowledge is giving us the power to further strengthen our core investment, private wealth management and banking platforms and enhance our reputation as a thought leading, cutting-edge jurisdiction.
Geoff Cook International Board Director and Consultant - Formerly Chief Executive Officer at Jersey Finance. Geoff Cook is a regular speaker and contributor to conferences and seminars around the world and writes frequently on the issues affecting Jersey and other finance centres. Prior to his role at Jersey Finance, he was Head of Wealth Management for HSBC Bank Plc, based in London, responsible for the delivery of Financial Planning Services to the 10 million HSBC customers in the UK.