Safe havens or all at sea?
20 September 1999
5 February 2013
10 June 2013
25 February 2013
10 June 2013
10 June 2013
What does the future hold for Jersey, Guernsey and the Isle of Man, amid international pressure for greater disclosure, ever-tighter financial regulations and potentially threatening tax demands?
On the islands themselves, life is looking good. Their economies are buoyant, business continues to flow in, local expertise is growing and there is an air of confidence that they can adapt to whatever lies round the corner.
In Jersey, for instance, bank deposits went up to £109bn in the quarter to June, from £104.7bn in the quarter to March. Collective investment funds rose from £52bn to £57bn over the same period.
But there are still those who believe the British offshore islands (BOI) have had their day. The globalisation of business has made other jurisdictions as attractive, they say, and the islands cannot dodge either the European Big Brother syndrome, with its talk of tax harmonisation and a single currency, nor the Organisation for Economic Cooperation and Development's (OECD) proposals to end what it calls harmful tax competition.
The islands have been undergoing an intense period of scrutiny. The Edwards Review has been probing their financial regulations. And this summer they have been under the eye of the financial action task force, a G7 creation which checks whether a country's anti-money laundering legislation comes up to scratch against a list of 40 recommendations. Its conclusions are expected by the end of the year. And stories of huge quantities of Russian assets being hidden in Jersey keep the media spotlight on the islands.
Earlier this month, in his first public comments on his review, Andrew Edwards told a conference in Jersey that his inquiries had enabled him to confirm the island's position in the top division of offshore centres.
He welcomed the steps the islands had taken to meet his recommendations. In particular, he praised Jersey's efforts to improve international cooperation in the pursuit of financial crime and money laundering, Guernsey's moves to solve the problem of nominee directors, and the Isle of Man's steps to improve its system of company regulation and registration.
But he also had a word of warning. The islands would have to accept that disclosure requirements, such as the publication of company accounts, were going to have to go much further if they were to avoid being put on a blacklist of tax havens.
While the islands are working hard at getting their new financial regulations in place, there is an element of annoyance at the hypocrisy of some countries which are quick to demand a level of disclosure and legislation from offshore centres which they are not prepared to introduce themselves.
Andrew Corlett, senior partner in the Isle of Man law firm Cains, says disclosure is an area of disagreement with the UK Government. "It wants to replace the old double taxation agreements with an automatic disclosure of information on UK residents who have business dealings in the Isle of Man. Yet the UK won't do it with third party countries. I also don't think they realise the huge cost and bureaucracy that would be involved for probably little real value.
"The Americans are also quick to tell offshore centres what to do - yet the US does not have the all-crimes money laundering legislation or 'know your client' procedures that we do."
John Langlois, senior partner of Guernsey law firm Carey Langlois & Co and vice-president of the State of Guernsey advisory and finance committee, agrees. "There is a lot of hypocrisy involved over disclosure. Offshore centres are expected to exchange information freely, but countries like Austria, Germany and Switzerland have very strict banking secrecy laws which they are unwilling to change. What we want is a level playing field."
He feels the Edwards Review has cleared the air about the islands. "People often pointed the finger at the islands, but since the report there has been a resurgence of confidence. There has been a strengthening of business in every field and lawyers in Guernsey have picked up work on the back of that and are all at full stretch."
In Jersey, Matthew Robins, business development manager for law firm Mournat du Feu & Jeune and its trust company, says enormous volumes of business are coming into the island, primarily from Europe.
"Last year, our group acted for 50 of the FTSE 100 companies, which we have maintained this year, and we administer employee share plans for 35 of these companies, along with global schemes for blue chip multinationals. It is easy to be blase but objectively that is quite an astonishing position to be in."
The trust side of the firm has had a London office since 1997 and the law firm is now opening a legal office there, staffed by Jersey-qualified lawyers. "We are not turning up and trying to compete with the established English law firms. Our aim is to offer Jersey legal advice close to the City lawyers and bankers on whom we rely for a lot of our instructions in core areas, such as capital markets," Robins explains.
Accompanied by the growth in employee share ownership plans has been an increase in trust company business and securitisation. While most of the US-originated work is administered in the Cayman Islands, Robins estimates the firm's international finance team acted in securitisation and other securities transactions worth $59bn (£37bn) last year. "And I think that will double this year," he says.
Across the water, Gareth Fatchett, partner in West Midlands niche tax practice and offshore specialist Armstrong Neal, takes a much more downbeat view of the islands and maintains they only have a "limited shelf life".
"We don't advise clients to set up in the islands now," he says. "The major threat to them is from the EU. They say they are not part of the EU and are not bound by its regulations but the march of the EU is unstoppable and a lot of Jersey and Guernsey- based trusts are changing their domicile and looking further afield to the Cayman and the British Virgin Islands.
"The BOI are crown dependencies. The question is, if the EU forces through changes, will they opt for independence? I think it is inevitable that the islands will be pulled into any EU tax harmonisation. Their lawyers will always deny the end of the world is around the corner, but if it happens, our clients are already out. Our practice does a lot of investment-based work in the BOI but the vehicles are based outside them."
But for Jo Goldby, head of the private client group at City law firm Theodore Goddard, every offshore centre risks coming under pressure from the "local big boys".
"All high tax jurisdictions want to see what they regard as 'tax leakage' being kept to a minimum, so moving from the BOI to another tax haven jurisdiction could just be walking into similar problems," Goldby says.
Anthony Wands, managing director of Thesis Asset Management, the financial services arm of law firm Thomas Eggar Church Adams, is a keen supporter of the BOI. "There is a lot of sabre-rattling about tax. People should consider the reality of the type of safeguards that are in place in a particular centre rather than notions of what might or might not happen. I would be very worried about people running off to the Cayman Islands.
"In terms of fiscal paradises, I would start with Guernsey and then Jersey, because of their high probity and strong regulatory authorities. The Isle of Man would come in the second tier because of well-documented cases of fraud and because I don't believe it is as politically stable as the others. The Cayman Islands and the British Virgin Islands would come in the third tier with the weird and the wonderful."
He says the BOI are sensible places for "financial nomads" who perhaps work abroad in politically unstable countries to order their affairs. "The key question to start with is: is the business legitimate?
"If it is, then you look for the best regime in terms of quality and price and the BOI offer as good value as any other jurisdiction. They are also in the same time zone and they speak the same language."
For Pat Littlewood, managing director of Bailhache Labesse Trustees, the trust arm of Jersey solicitors Bailhache Labesse, the international pressure over tax is lessening because so many of the countries involved are fighting to protect their own corners. "My view is it is better to have a well-regulated, low tax jurisdiction that brings money into the European area than seeing that business flee to the Caribbean where you cannot exert any influence over it."
Certainly corporate business and high net worth individuals do not appear to have been put off the BOI.
For David Stearn, head of offshore lending for Flemings Bank in Jersey, one welcome spin-off of the scrutiny has been the increase in legal and accountancy expertise offered on the islands. "Complex transactions are now being done here which previously would have been done through the City. I feel the BOI will be able to placate the OECD and EU and continue carving out niches for themselves. People are worried about the future but I am not one of the gloom merchants who see everything being shut down in 15 years. The islands have regulated themselves to cope with the current of change."