Regulation is a leading cause of uncertainty within the offshore industry, amid downward pressure from FATCA, the OECD’s Common Reporting Standard and BEPS, the EU’s AIFMD, and the UN’s Anti-Money Laundering Convention.
The global landscape for the offshore industry has changed dramatically in the past year. Levels of uncertainty are at an all-time high and the world has undergone significant geopolitical and economic shifts. This includes uncertainty about the global economy, immigration, terrorism, Russia’s reported interference in the US election, the Chinese economy, and the stability of the EU. This volatility is challenging the momentum of globalisation, and is also impacting the public appetite for cross border asset flows.
The unexpected results in the US election and the Brexit referendum demonstrate large-scale unease with the status quo and a concurrent rise of a more populist, protectionist, anti-globalisation and anti-offshore attitude. This shift is unsettling for an industry that relies on the robustness of globalisation. This year’s ‘Vistra 2020’ survey of almost 600 corporate services executives found that 71 per cent consider globalisation to be at least somewhat under threat. This rising contempt for borderless activities is also poised to drive more regulations and ‘nanny-state’ oversight, as well as ongoing sensationalised media coverage which misleads the public and perpetuates an inaccurate perception of the international financial centre (IFC) and trust, fund and corporate services industry. For an industry that hinges on cross-border transactions and international supply chains, as well as free trade and investment, whilst also providing an infrastructure for the global financial system, it is unsettling that globalisation is now under threat.
Anti-globalisation sentiment is hardly new, but the force and scale of this recent attitudinal shift is significant, and has prompted increasingly heated debates within the industry over what we can expect in the coming years. This is leading international financial centres and the corporate services industry to focus more on reputation and ensuring the public has an understanding of their quality and legitimacy. However, this is an uphill battle following recent high-profile industry scandals. Outlier cases, such as the Panama and Paradise Papers, are selectively reported in the media and serve to push the tired narrative that all offshore activity is wrong. This tends to ignore the tax contribution of the wealthy ‘1 per cent’, which comprises 39 per cent of taxes paid in the US and a similar portion in the UK. Some media reports on the Panama Papers also included significant errors, which only add to the public’s resentment and misunderstanding of the industry’s legitimacy and its benefits to the global economy. The outrage surrounding the Panama Papers also shows the extent of the negative sentiment already enveloping IFCs and the level of political currency the OECD and governments have with which to attack the offshore industry.
This growing animosity is showing IFCs the importance of ensuring they follow scrupulous practices and maintain sterling reputations, in an effort to shift public perception. Increasingly, jurisdictions are taking significant steps to fight illegal activity. However, these compliance efforts are hindered by public perceptions, which cloud the reality that IFCs support, rather than harm, other jurisdictions.
Whilst the need for change within industry practice has been recognised, global compliance and regulatory initiatives tend to be based on speculation, and international measures are not being given a chance to work before new measures are introduced. Regulation is a leading cause of uncertainty within the industry itself, amid downward pressure from FATCA, the OECD’s Common Reporting Standard (CRS) and Base Erosion and Profit Shifting (BEPS) plans, the EU’s Alternative Investment Fund Managers Directive (AIFMD), and the UN’s Anti-Money Laundering (AML) Convention. Many of these regulations force the industry to try and do business with one hand tied behind its back, increase compliance time and costs, and deter legitimate business. Striking the balance between black and white transparency, and the right to privacy is one of the biggest challenges within the industry with the convergence of new regulations.
The potential impact of the Common Reporting Standard (CRS), which establishes automatic information exchange among participating national revenue bodies, is causing particular concern among both providers and clients seeking tax efficient strategies. More than 100 countries – save the US - have signed up, which also raises concerns about implementation. It remains to be seen if and how the US will be involved; and whether other countries will be willing to send information to the US if they receive nothing in return. The US may even benefit from not joining, due to a perception of opacity. There is also scepticism about how CRS will actually work, including how local tax authorities will manage the influx of data, and importantly, how this information will be handled given several countries with little respect for privacy and data protection have signed up.
A potential ramification is the idea that CRS is yet one more step towards a global tax authority designed to eliminate low or zero tax regimes. Around 40 per cent of corporate services executives consider it possible that we may see global tax accounting standards by 2020, taking us one step closer to a single tax authority. There also continues to be a push towards registries of beneficial ownership (BO), which many in the media not only agitate for, but would like to see made public. The survey findings show that while more than half of the industry thinks beneficial owner information should remain with regulated service providers and be given to authorities on request; almost half also still expect registries of publicly available information to start appearing, a huge jump from the response in previous years.
The cost of compliance for these regulations is likely to disproportionately impact traditional centres, which face more adverse pressure compared to onshore or originating markets. These double standards mean that the ‘usual suspects’ bear the brunt of new regulations, regardless of their actions and compliance level. Certain onshore jurisdictions are well known tax havens, but seem to be off limits for criticism. Meanwhile, smaller and less protected jurisdictions comply with expensive and onerous regulation and still suffer threats of blacklisting.
One takeaway from this is that IFCs need to be more vocal. The industry needs to more proactively articulate their legitimate role in the financial system and better defend against hostile attacks to communicate the industry’s contributions to the global economy. Every year or two a ‘leak’ emerges and shines a spotlight on parts of the industry in which most participants do not engage, building an overarching narrative that ‘offshore is bad. More leaks will come in future and a polite defence is no longer enough. Our industry bolsters the global economy, prevents extra layers of taxation and protects investors with robust legal systems. We need to be more proactive and aggressively raise the level of understanding about the merits of IFCs.
However, despite the myriad factors driving uncertainty, or perhaps because of it, the majority of the industry does not expect to see a significant drop in demand for international corporate services. Twenty percent of corporate services executives actually expect demand will increase. After all, in times of political and economic unrest, what clients are looking for is stability and stable jurisdictions. The last thing most investors want is uncertainty and unpredictability.
Like all industries or markets, some players are better than others. The future of the offshore industry lies in fewer, better-regulated jurisdictions with regulations that balance the need for transparency and privacy. The offshore industry is moving towards increased transparency, but, in return, it should receive the recognition it deserves for enabling globalization and providing the plumbing to the global financial ecosystem.
Jonathon Clifton is Managing Director, OIL Asia with P&L responsibility for the region. He is a member of the Group’s Global Executive Committee and speaks regularly at international conferences on the future state of the offshore industry. He has over 18 years of experience in a range of strategic business development, consulting, client relationship and corporate strategy roles in a career that has taken him throughout Asia Pacific.