The competition between countries to secure a share of the international financial services business is fierce, and some countries are more successful than others. Reliable financial data shows that the United States is both the destination of the largest amount of global mobile capital and the world’s greatest capital creator.
Since its very creation, the United States’ economic influence worldwide has steadily increased. Today, its economy stands in a position of unquestionable dominance. The United States is the world’s largest agricultural producer; manufacturer; consumer market; financial market; energy producer; and, historically, annually absorbs more immigrants than the other countries of the world combined.
This dominant position has been demonstrated rather dramatically by current events. The United States’ strategy of choice when dealing with perceived hostile political, military, and economic conflicts with Russia, Iran, China, and North Korea, is to leverage its economic strength first, while holding its military might in reserve. Trade sanctions imposed by the US are severely affecting these countries’ economies. With its own booming economy, the US can sustain this strategy for as long as necessary.
The American Culture
Like life itself, the success of the United States is a fortunate combination of nature and nurture. With the creation of the United States in 1789, and the ratification of the Constitution, a special system was established – one where personal rights are protected, and the actions of the government are to support a free-market capitalist system based on individuals having the freedom of choice. The signatories to the Consitution, reverently referred to as the Founding Fathers, knew what they wanted to accomplish.
Unlike any other country, this constitutional mandate to respect individual freedoms, while limiting the collectivist powers of government, facilitated the unification of all the disparate peoples of the United States. Consequently, while the United States respects and honors each person's ethnicity, people coming to the US expect to become a part of America. America may be a multi-ethnic country, but its people live in a uniquely nurturing culture—the American culture.
However, the saying of ‘America first’ does not mean America alone. The United States is a political and economic organism existing within a much larger ecosystem, composed of hundreds of other political and economic organisms; an ecosystem which is always evolving and mutating to greater or lesser extents.
Financial Services: An Evolving Industry
Financial services are an umbrella description covering a broad range of skill sets, facilities, and related amenities. Beyond basic banking or insurance, individuals or companies may need a variety of services or facilities, including financial advisory or counseling services; tax, and governmental compliance planning; hands-on asset management; access to, or the creation of, individual or collective economic opportunities; and external providers of the cold calculations necessary in the management of risk exposures – this is merely a short-list of items that could be on offer around the world.
The mechanisms and processes used in the financial world have changed dramatically over the last 150 years when compared to previous centuries – particularly within the last decade. Previously, jurisdictions depended on physical location and were reliant on the quality of their communication services, the convenience of transportation, hotel accommodations, restaurants, entertainment venues, shopping, and ease of obtaining other business or personal necessities of the financial world at that time.
By contrast, what has since become a critical factor in international financial services and capital management is the capability of a jurisdiction’s internet and computer systems and cyber-security. The virtual world of the internet holds, for large on-shore and small offshore financial-tax centres alike, the promise of access to global, regional, and local financial markets in a way they did not even dream about 10 years ago. The United States is the leader in internet innovation and its tech companies dominate the industry.
Why individuals and companies prefer to use the financial services offered in one country, over those of another, involves a complicated mixture of factors. The usual comparative analysis of jurisdictions in the business of financial services favours utilising quantifiable factors – but quantity and quality are very different forms of analysis.
Humans are emotional creatures, not logical ones. For decision-making, it comes down to a perception reality. How one determines the quality of trustworthiness – the foundational basis for all business and personal interaction – is unquantifiable. It depends on any one person’s perception of reality. As they say, the eye of the beholder.
The financial industry recognises the importance of psychological factors in our perception. The new disciplines of behavioural or psycho-physiological finance came into being to figure this out. This understanding is like that of the big tech companies which discovered how to monetise their access to vast amounts of data generated by actual human behaviour in real time. Sophisticated algorithms crunch data garnered from human behaviour; the result is a mathematical calculation of human decision-making, which enables tech companies to monetise human behaviour for the generation of profits and shareholder value. The financial service industry is following this trend. No country has a larger tech sector or greater ability to collect useful behavioural economic data than the United States. The future has arrived, and the United States leads the way.
The US and Global Regulation
The entire financial world is led or driven by the rules and regulation of its major industrial economies, primarily acting through their alter-ego non-governmental organisations. The OECD, for example, determines whether some lesser, non-member state is good or bad by whether that country complies with its dictates. Even lesser OECD members are not immune to being rebuked by the more powerful member states.
In the international financial services industry, the onshore industrial countries of the OECD have set up the organisation’s rules intending to make offshore jurisdictions providing rival financial services appear less desirable. Economically weak offshore jurisdictions are aware of this mismatch of power and wisely conform to the new rules, in order to live to fight another day.
The programme of the OECD to use the ‘name and shame’ tactic of blacklists, and threats of economic repercussions upon lesser states, reflects the desperation for capital of the member states of the OECD. The United States has not differed from any other OECD member state in wanting to limit its competitors.
The Foreign Account Tax Compliance Act (FATCA) was introduced in 2010 by the US as a potential revenue enhancement to another Congressional pork-barrel spending bill. Shortly after that, the OECD imposed Common Reporting Standards (CRS). The United States promptly rejected participating in the CRS and neither FATCA nor the CRS has succeeded in even coming close to fulfilling their goals.
The US Congress has exhibited little enthusiasm for legalising the International Governmental Agreements (IGAs) which are necessary to make FATCA work. Nor has its enacted legislation that would bring the United States into compliance with the same strictures that the OECD imposes on competing tax havens. The United States intends to keep its ‘tax haven status’ which successfully attracts capital into its economy and keeps it there, and capitalists around the world understand that they are welcome in the United States on favourable terms.
The perception of the United States as more trustworthy, in economic terms, than its major industrial competitors is warranted. Capital creators and financial service providers all want to maintain the image that they adhere to global regulation and standards to reduce the risk of reputational damage. There are some among these who have the imperative of achieving social goals, although there are many more who could not care less. The recognised benefit of transferring capital to the United States or using service providers from the United States is that the US promotes the freedom to choose whatever goals are deemed important to individuals or companies.
The world is not fair, and life is full of risks. Companies, being comprised of individuals, have similar risks. Death, even for a company, is the ultimate risk. Whether an individual or company is rich or poor, survival to another day is not guaranteed. For those with wealth, jurisdictional stability and sustainability are always a major concern.
The United States political system and its economy were created to sustain the needs of a capitalist free-market system supported by a legal system which respects individual rights. Its politicians, unfortunately, are like politicians in every other country. However, the brilliance of the United States lies in the rewards politicians receive by maintaining the existing system, despite political forces that would change US to a more politically socialist state.
The US government is not an eleemosynary organisation. Nor are its politicians overly charitable. America’s Founding Fathers anticipated this by creating a check and balance system which, more or less, holds politicians accountable to the voters. In 2016, some 65 million voters took the opportunity to reject the political establishment candidates for President and gambled that Donald Trump would do better. As of this writing, it looks like a winning bet.
The benefits to elected politicians in supporting the fundamental, historical principles of America are simple – an expanding private sector economy generates more tax revenues for the politicians to spend appeasing their respective voters. For politicians who deliver what most of their voters want, their reward is re-election, and to be clothed in the trappings of power and prestige, for another term.
The American system has allowed the United States to cultivate its natural resources and provide a nourishing culture for its people. This combination has created the largest economy in the world and, for its people, the greatest amount of personal freedom. Capital creators and financial service providers can, with confidence, rely upon the United States to sustain the American culture, and retain its dominant economic position, far into the future.
Denis Kleinfeld is highly regarded as a lawyer, teacher and author. His private legal practice, Kleinfeld Legal Advisors, is located in North Miami Beach Florida. He is an Adjunct Professor at the LLM Wealth and Risk Management Program, Texas A & M School of Law. His private practice focuses on strategy planning of domestic and international tax, legal, financial, matters involving the wealth and risk management for private clients and private businesses. He is co-author of the two-volume treatise, “Practical International Tax Planning,” 4th Ed. published by Practicing Law Institute. He is the contributing author on Foreign Trusts published in “Administration of Trusts in Florida” by The Florida Bar and authored chapters for the American Bar Association’s in “Asset Protection Strategies: Wealth Preservation Planning with Domestic and Offshore Entities Vols. I and II.” He is a contributing author to the “LexisNexis Guide to FATCA”.