Money, we are told, is the sinews of war while treasure is often the object of war.
It is not, perhaps, polite to say so but the truth must be faced that the governments and people of international financial centres (IFCs), particularly those in the Caribbean region, are facing existential threats to their livelihoods. The EU has been lying to IFCs all along. No matter what IFCs do, it will never be enough for the EU till IFCs do not exist. For small island economies with primary production and tourism, including medical tourism, as the only obvious industries, offshore banking, and financial services, aided by the internet, have been a godsend – clean industry to complement tourism, diversify economic activity and raise wages.
IFCs in the region have been facing a 20-year war against their financial and banking industries and there are no signs of peace. Blacklists, and the threat of financial sanctions which they imply, are holding these IFCs to ransom. By themselves, blacklists mean nothing. As the childhood rhyme says, “Sticks and stones may break my bones, but names will never hurt me”. In fact, it is good advertising for an IFC to be “branded” as keeping its customers’ private financial affairs completely private - as was the basic banker’s duty of confidentiality in Tournier v. National Provincial & Union Bank of England  1 K. B. 461 which, unfortunately, has been abolished by statute law in much of the “developed” world.
However, like sticks and stones, financial sanctions will hurt. The IFCs are facing a group of schoolyard bullies. The most obvious blacklisting offenders are the European Union (EU) and the Financial Action Task Force (FATF), supported by the G20 and OECD.
For all the chatter and films about money laundering, criminals, terrorism, etc, there is a basic and quite logical reason for the EU to attack IFCs - demographically bankrupt welfare states need money.
It is politically easier for EU leaders to blame the foreigner and tell their voters that they do not have to pay taxes to meet the pensions they have promised themselves because there is hidden treasure in little islands. This rather mercantilist delusion confuses money with the real wealth of a country. Amusingly, it is also more primitive as an economic belief than any South Sea Islands cargo cult which a European anthropologist may ridicule.
The financial capital flowing through IFCs is not the real economy but part of the oil which helps the real economy of the world function. Much as “the bill on London” financed most global trade in the 19th century, IFCs have become indispensable to international trade and investment. The reality is that the money supposedly in offshore islands is almost all reinvested in some other OECD country and represented by plant, equipment, land, et cetera in other larger economies. (I do not say “developed” economies because many of them are very clearly un-developing).
Be that as it may, the EU, the OECD and FATF have all more or less sought to blacklist or coerce offshore financial centres into restricting their business in order to drive financial capital back towards the countries of origin. Blacklists are warfare by other means.
Blacklists derive their force not from any morality or international law but from the brutal fact of Realpolitik, as laid down by the Athenians to the Melians, that the strong lay down laws for the weak. The real threat is that blacklists will be enforced by sanctions such as disruption of IFC banking systems and denial of entry of goods or sale of services to EU domestic markets.
The unfortunate fate of the Melians who tried to remain neutral in the Peloponnesian War shows that offshore financial centres cannot fight blacklists or the threat of sanctions alone. As Roman client states realised, you had to choose and form alliances for self-protection. The converse of the Roman dictum of divide ut imperes - divide and conquer - is for the weak to divide their enemies and survive.
Therefore, offshore financial centres should be taking steps now to formulate backstop graduated defensive strategies to hold in reserve. Such strategies could include, inter alia, the following:
There are other counter-measures which small offshore jurisdictions could take against blacklisting countries but the above give the flavour of the measures which IFCs should be preparing and holding in the bottom drawer as counter-measures against financial sanctions.
Meanwhile, in the Great Game of Realpolitik, IFCs should follow a dual preventative strategy of forming alliances and commercial treaties to keep trade and financial transactions open between themselves, while each seeks a patron or backstop protector against sanctions through similar bilateral treaties with a patron power.
In the present world, there are three current Great Powers, China, Russia, and the United States. If you have a treaty of commercial friendship guaranteeing trade and financial intercourse with one of those countries you cannot be effectively sanctioned by the EU. In addition, there is the former great power of the United Kingdom which, after its exit from the European Union will be keen to protect the City of London as an onshore financial centre, has long recognised its symbiotic relationship with offshore financial centres.
The problem for an IFC is that, on paper, the three Great Powers are committed to the OECD/FATF witch-hunt against IFCs. However, looking at it from a “divide and survive” point of view, it is very clear the United States has very different views on tax policy to the European Union which is constantly seeking to attack the great American multinationals. The United States owes the EU no tax favours and resents the EU countries never having to pay for their nuclear umbrella. From another angle, China and Russia may have been “virtue signalling” when they signed on to these agendas and may have undisclosed private agendas. Many Russian oligarchs and Chinese plutocrats with good party connections seem to find IFCs useful. It is entirely plausible that the Russian and Chinese governments signed up to G20 and OECD initiatives on multilateral tax cooperation so that their rulers may find out about those of their citizens they do not like, while relying on their ability to control their domestic tax offices and regulators to prevent unwelcome requests being sent to offshore centres in respect of those citizens who are associated with the current ruling class. (They may not have contemplated the possibility that one day, they might not be rulers and new rulers may be seeking to trace allegedly ill-gotten gains.) Be all that as it may (and we will never know much of it), such considerations show that it may not be futile for small offshore IFCs to seek bilateral trade and commercial agreements with one or more of the Great Powers and/or the United Kingdom as a protection against the threat of EU sanctions veiled under blacklists.
Obviously, it would be desirable to have the direct protection of a country such as the US. The US Senate may never ratify the amended OECD Convention on Mutual Administrative Assistance in Tax Matters, given that it would impose obligations on the USA to assist the Russian and Chinese Governments. One can imagine Senators may have views, both on security issues and about assisting European countries trying to mount tax attacks on American business when EU countries cannot get their way under existing tax treaties. The current feud over digital taxes comes to mind. One notes that several American States, with several Senators, have business sectors keen to attract offshore investors and have no more interest in seeing the OECD, EU, or FATF destroy their financial services industries than other IFCs.
A complementary or alternative strategy for small IFCs would be to have an appropriate trade and commercial treaty with another middle-sized country immune to sanctions. Traditionally, Switzerland fulfilled that role for IFCs as an ultimate backstop. Unfortunately, it is landlocked within the EU. Switzerland, along with Luxembourg, signed its own death warrant as an IFC when it failed to veto the 1998 OECD report on Harmful Tax Competition, notwithstanding Switzerland’s correct and severe reservations about the quality of the intellectual argument in that report.
That raises the question of which jurisdictions are best positioned to succeed to Switzerland’s place. Ideally, what a small IFC is looking for as a “sanctions immune” treaty partner is a country which is economically developed, has a reasonably sophisticated infrastructure, and which is too large or strategically important to be sanctioned itself. Such a country can operate as a patron or protector of smaller IFCs. If there is such a centre, a smaller island IFC can enter into a financial non-aggression and free trade pact with that country and ensure that any sanctions imposed by the EU will be unenforceable by always being able to route transactions and banking through that third country, which cannot be effectively sanctioned by the EU.
Hong Kong and Singapore are major IFCs for banking, global asset protection and management. Hong Kong has increasing difficulties and, while it has the advantage of China as a protector, recent political events there have not helped its attractiveness. Singapore once aspired to be the Switzerland of Asia. Singapore has obviously been a beneficiary of the relative decline of Switzerland and Hong Kong but Singapore faces strategic vulnerability and therefore obviously feels it cannot antagonise its defence treaty partners by pursuing an isolationist strategy on tax information collaboration and has ratified the amended OECD Multilateral Convention. Banking in both centres is much harder and more expensive in time and trouble than it used to be.
There is however one country which appears to be able to step in to fill the “market vacuum” left by the surrender of Switzerland to the OECD – Taiwan. Taiwan used to have the largest holdings of US dollars as foreign-exchange reserve. It has long had a strong commercial relationship with United States. It has two unique advantages. The United States cannot afford to - and will not - sanction its largest aircraft carrier near China (or to be precise in the politically preferred term, the other part of China). So long as Taiwan assists the US authorities, the USA will not much care whether Taiwan assists EU countries.
Taiwan has the second (and unique) diplomatic advantage of being able to say it cannot sign OECD treaties on multilateral tax information assistance unless it is diplomatically recognised by all the other parties. That is simply not going to happen.
Hence, a feasible preferred strategy for small IFCs seems to be to form regional and global economic co-operation spheres (ensuring banking freedom and facilitating freedom of commercial intercourse) and to seek the same with Taiwan and the United States. If one can then strike a similar agreement with either China or Russia, so much the better. From the US point of view, it does not care about IFCs so long as it can track US citizens - and indeed, the USA benefits from some US States working with IFCs in offshore structuring – and those States have US Senators. Taiwan has more to gain, perhaps even diplomatic recognition from more jurisdictions. Becoming a backstop IFC could even be a protection for Taiwan from mainland aggression. No one is going to attack you if you are helping them store their money, a truth which appears to have helped Switzerland in World War II.
The fundamental truth is that the European Union represents the former Great Powers. It does not represent the current Great Powers. Its blacklists and sanctions are therefore worthless and unenforceable in Realpolitik terms if the three current Great Powers do not agree or cannot be bothered with helping the EU enforce them. In addition, London, as well as New York, has to be involved in the enforcement of any banking sanctions by the EU.
There is a great deal of money be made out of the ruin of a rich country. The EU countries experienced centuries of amazing progress after 1492 but are now in a sad demographic and fiscal decline as serious as that which faced the Later Roman Empire. That sad decline will not be solved by the vilification of offshore IFCs through blacklists and threats of financial sanctions. It will only be solved when European nations shift their tax burdens off labour and capital onto land values, representing the returns to the immobile and non-produced factor of production, as well as reforming their “pay-as-you-go” pension entitlement systems which are demographic Ponzi schemes. Tax competition is the means by which these simple economic truths can be imparted to the meanest intelligence.
In implementing “sanctions survival” strategies, offshore IFCs would not only be protecting their sovereignty and saving their own economies but doing an act of kindness in helping the EU face the fact of its increasing irrelevance and realise that “The fault is not across the seas in IFCs but in ourselves”.
Dr Terry Dwyer
Dr Terry Dwyer B.A. (Hons), B.Ec. (Hons) (Sydney) M.A., Ph.D. (Harvard), Dip. Law (Sydney) Principal at Dwyer Lawyers in Australia, specialising in taxation, trusts, wills and estates. Formerly: Senior Adviser, Taxation, Commonwealth Treasury and Prime Minister’s Department Private Secretary, Senator Brian Harradine