In the aftermath of a major global crisis, there is often significant potential for IFCs to feel pressures on multiple political, regulatory, market and reputational fronts.
We saw this in the fallout of the global financial crisis more than a decade ago when IFCs became a popular target for politicians looking to divert attention away from domestic austerity and build favour with their electorate.
Back then, a narrative was built up around IFCs being home to untapped pots of gold that could be targeted to ease financial burdens at home and help resolve massive national debt. It was a popular narrative for obvious reasons.
In the decade since, IFCs have had to manage, respond and adapt to an environment that has been highly influenced by wealth politics – where issues like tax avoidance have become mainstream and international regulatory initiatives have grown exponentially.
In particular, ‘big number syndrome’ became a widely used tactic amongst those looking to create and fuel the anti-IFC fire. Reports and tables based around tax, for example, were published frequently, based on outdated figures, skewed data or flawed methodologies; whilst data leaks like the Panama, Paradise and most recently the Pandora Papers were more impressive because of their sheer scale rather than the progress they made in sensible debate around global financial flows.
For the most part, quality IFCs have been quick to respond to these sorts of allegations by developing and enhancing their regulatory frameworks, investing significantly in their compliance functions, and cooperating on international best practice.
IFCs Are Caught In The Crosshairs
Now, as the world looks to rebuild after a testing pandemic-disrupted couple of years, IFCs look set to be caught up in the crosshairs again.
Countries are faced with the unenviable task of replenishing national coffers after a period of unavoidable and significant spending and severely damaged domestic economies - figures from the International Monetary Fund[i], for instance, suggest that around US$9 trillion could be knocked off global GDP over the next two years.
Once again, seeking alternative means of raising national revenues departments has become a useful tactic for government treasury departments - economically and politically. Slowly but surely, we are seeing familiar pressures being exerted on the IFC world once more.
On the tax and regulation front, for instance, moves to establish a new global corporate tax framework were already well under way before the pandemic, but it’s no coincidence that its rise in appeal and quick progress towards implementation through 2021 is against the backdrop of a train of larger countries with gaping national deficits.
In addition, after a consultation over the summer, the UK Chancellor announced in the Autumn budget a number of measures to clamp down on the promoters of tax avoidance, including penalties on UK entities which facilitate tax avoidance provided by offshore promoters, and winding up companies that are judged to be “operating against the public interest” in promoting tax avoidance. It’s the next phase in an ongoing process to target tax avoidance and whether other European governments and tax authorities follow suit with similar measures will be interesting to monitor.
On the political and reputational fronts, meanwhile, the implications of Brexit continue to manifest themselves as the UK attempts to find a way to achieve its vision of Global Britain, remain a key European hub, and foster relationships with other countries further afield. As the recent threat of sanctions from France aimed at the UK and Jersey illustrate, stemming from disagreements around the new fishing licence regime, there is still real potential for IFCs like the Channel Islands to become embroiled in the Brexit fall out.
Meanwhile, the establishment of the EU Tax Observatory in early 2021 at the Paris School of Economics, to advise the EU on taxation based on research, is a further interesting development and illustration of how EU interests in taxation are being advanced through supported research that views the world through the lens of high tax countries. Recent reports include an analysis of which IFCs banks do business in and of the implications of a minimum global corporate tax rate.
Beyond Europe, governments and lobby groups more widely also see this is as an opportune time to assert more pressure. The leak of almost 12 million documents by a group of investigative journalists this year has sustained interest in emotive issues such as terrorist financing, tax evasion and private wealth.
It’s a source of frustration for IFCs that these same issues seem to go round in circles. It’s almost a decade since the first major ‘offshore leaks’ exposé, and although IFCs have been here before and over the past 10 years have put in place numerous compliance, anti-money laundering, anti-terrorist financing, and reporting mechanisms to counter allegations and put them way ahead of much larger countries, still they are faced with the same arguments and narrative. All this effort appears to have brought little by way of reward.
However, there is some good news. For high quality IFCs, market conditions and societal needs now present a significant opportunity - and an obligation – to play a fundamental role in the post-pandemic global economic recovery.
Never before has getting capital to where it is needed most around the world quickly, securely and efficiently been more important as communities and businesses look to re-invest and emerge stronger in the post-pandemic recovery. IFCs have all the tools to do just that - by supporting impact investment, philanthropic endeavours, and capital fundraising, for instance, all backed up by top rated regulatory, compliance and governance frameworks.
IFCs that have experience and reach in developed and developing countries, and those that specialise in international investment for families and private investors as well as institutional capital, can play a significant role.
In particular, the rise of Environmental, Social and Corporate Governance (ESG) and sustainable finance in the post-pandemic landscape presents a sizeable opportunity as institutional and private investors look to bolster their ESG strategies and look for expert support in establishing robust sustainable investment strategies that can stand up to scrutiny and bring about measurable and targeted change.
This should be the bread and butter of the modern, innovative, high quality IFC – as investment hubs, they are almost uniquely experienced in navigating global complexity and are ideally placed to support targeted international investment aspirations.
Those IFCs that are stable, agile, have digital capability, are hotbeds of innovation, have experience in managing and facilitating cross-border flows, and have tried and tested rules-of-law should be in high demand in this landscape. The provision of efficient administration, transparent capital pooling, and the upholding of the highest standards of regulation and good business conduct should be a powerful proposition.
But if people are to believe that role, they need to see it in action.
The key now will be for IFCs to move beyond initial frustrations and focus more on telling their story with confidence, clarity and conviction.
Evidence Based Approach Required
IFCs now need to adopt a mind shift away from talking about issues such as transparency, regulation, tax and capital flows in a defensive, reactive context, to a more positive, proactive context.
The environment they find themselves in now should be one where they can thrive; IFCs have an opportunity to draw on their strengths in all of these areas, to demonstrate the value they add, anticipate the challenges coming down the track, provide a forum for rational, sensible debate, and lead discourse in the areas where they excel.
To do that will require a commitment to ongoing research; an understanding that collaboration, cooperation and partnerships can drive positive change and foster mutual understanding; and an investment in high quality communication.
Taking an evidence-based approach will be vital – developing benchmarks to support their purpose agenda, shining a light to support progress in corners of international commerce, and showing leadership in core areas.
One such area is financial crime - IFCs must be at the vanguard of collaborating with the FATF and other jurisdictions in bearing down on the misuse of cross border structures and doing their very best to locate and repatriate the proceeds of crime wherever wrong-doing is uncovered.
Sustainable finance is another case in point – the pandemic has brought to bear issues that are not just financial - the repercussions are also social. If IFCs can evidence measurable, positive change through their activities that goes beyond just financial metrics, that should be a powerful message.
Evidence based research will prove a vital tool in the toolkit for IFCs in the coming years and, if they can evidence their value well, then ‘big number syndrome’ should not prevail. It will be those IFCs that can pre-empt the mood music and demonstrate the positive role they play that will be successful not just in aiding economic recovery but in changing the IFC paradigm for the better.
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.