Offshore: Shelters in a storm

Faced with a barrage of criticism, offshore centres are fighting back – again.

It has not been a great couple of months, news-wise, for offshore centres. At the beginning of October they featured heavily on the Financial Secrecy Index produced by lobby group Tax Justice Network and charity Christian Aid. A week later the mainstream press devoted considerable coverage to ActionAid’s data showing the number of offshore holdings for the FTSE100.

Meanwhile, Japanese camera company Olympus has found itself embroiled in a scandal over the payment of advisory fees to two Cayman Island-based companies. Whistleblowing revelations by chief executive Michael Woodford led to him being fired, but later forced the resignation of chairman and president Tsuyoshi Kikukawa.

All three stories generated a considerable number of column inches – more than those on the latest edition of the biannual Global Financial Centres Index (GFCI) in any case. The GFCI ranks 75 international financial centres on areas of competitiveness and assesses these on a continuous basis.

Ranked and filed

For the offshore world GFCI 10, released at the end of September, was pretty good news. The top offshore centres all lost a few places in terms of ranking, but conversely all gained in rating compared with the previous index in March.

GFCI 10 reported that offshore centres are recovering from reputational damage, although it noted that these jurisdictions receive better assessments from other offshore centres than they do from onshore jurisdictions, thus lifting their ratings.

The value of the ratings is debatable. Walkers chairman Grant Stein points out that the GFCI indices compare centres such as London, New York and Hong Kong – offering every conceivable financial service – with the more specialised services ­provided by the offshore world.

“You’ve got to be careful about treating the information that’s published as gospel,” he warns.

Appleby group managing partner Peter Bubenzer agrees. Like Stein, he thinks the GFCI is probably the most reliable index available, but must be considered in context.

“The GFCI is the closest to an assessment of factors relevant to business suitability and, as a result, can be seen as giving an indication of the relative popularity – and so the perceived utility – of given business ­centres, including offshore ones,” Bubenzer says. “It doesn’t assess, and so can’t be a measure of, the financial health of an ­offshore centre as a country.”

Guernsey Finance chief executive Peter Niven notes that the crisis of 2008 produced a slew of negative stories about the offshore world, which affected rankings for a while.

“I would caution against saying all indices provide an accurate representation of the health of the offshore market,” he says. “Indeed, our experience during the financial crisis and its aftermath is that offshore centres suffered in the rankings compared with onshore ones, and we believe that much of this related to perceptions or fears about the future rather than the hard data that suggested the opposite was true.”

Offshore lawyers point out that the ­offshore world is very much linked to the state of the global markets, so ­transactional work will naturally slow when markets get jittery. But generally they believe that the use of offshore structures has held up well in the past few years.

“I don’t think there’s been a slowdown in the use of offshore jurisdictions,” says ­Conyers Dill & Pearman director John ­Collis. “We’re now seeing all the numbers beginning to climb.”

Perceived wisdom

Nevertheless, the offshore world is aware that it cannot rest on its laurels when it comes to representing its role in the functioning of the world economy. Lawyers have a key role to play here, being behind a number of profile-boosting initiatives such as the International Financial Centres (IFC) Forum, which seeks to “provide authoritative and balanced information about the role of IFCs in the global economy”.

“We’re trying to put a balanced argument about the benefits smaller financial centres bring to the global economy,” explains Stein. “Financial flows through offshore financial centres increase the rate of GDP growth and employment in the G20 economies. That’s the message we’re trying to get out there.”

Stein points to a recent report commissioned by the World Bank that dissects the way corporate vehicles in onshoreas well as offshore jurisdictions can be used to conceal misuse of funds. He says it is the responsibility of onshore governments as well as ­offshore ones to help stamp out such practices, and accordingly the IFC is stepping up its involvement with onshore politicians.

“Our strategy isn’t to go head-to-head in the popular press, but to reach out to ­policymakers,” he adds. “We’ve had meetings with various sherpas for the G20 governments and also with a number of European and UK politicians to put the other side of the argument across.”

Niven believes consistent quality of ­service by offshore providers, including lawyers, in addition to jurisdictions being able to offer the “right menu” of products will help the case in the future.

Firms hold up okay

For the time being offshore law firms seem to be doing fairly well, given their reliance on the financial markets. Collis says Conyers has seen growth in the past few months, albeit from a lower base than before the ­crisis. Stein describes 2011 as “bouncy”, but ­predicts it will be better than 2010, particularly for funds work, as the number of launches begins to increase once more.

But the attacks on the offshore world are unlikely to subside completely, particularly with protests sweeping the world decrying the excesses of the financial markets. One of offshore’s consistent problems has been an inability to adequately put across its message to the man on the street. While ­sophisticated clients are happy enough to keep using ­Cayman or Channel Islands vehicles, few ordinary people really understand why this is the case.

“Lawyers can and must play a significant role in sharing information on the nature of the role played by offshore financial ­centres in the global economy,” argues Bubenzer. “We must also explain our role and the role of the centres we live and work in during our dealings with clients, professional contacts and journalists who ask about what’s done in our world and why.”

This role is not likely to get much easier in the current climate, but offshore lawyers are confident that they can make the case for the survival of the jurisdictions they work in – and, by extension, their own juridictions.