Securing an offshore haven
11 May 1996
6 November 2013
23 January 2013
3 December 2013
5 November 2013
1 October 2013
While it is true that there are horses for courses, it is difficult to distinguish between the courses when comparing offshore jurisdictions.
Publications that profess to shed light on the advantages of one jurisdiction over another frequently silence critical analysis in favour of maximising advertising revenue, and at conferences representatives of competing jurisdictions appear to have a tacit agreement not to dispute the propaganda of their fellows.
If we believe the glossy brochures, every offshore jurisdiction offers an island paradise, an ideal tax climate, political and economic stability, a sound legal system, modern legislation, a strong financial infrastructure, confidentially, excellent communications, first-class air services and, let us not forget, friendly locals.
So the obvious questions must be: Are there discernible differences between jurisdictions? Are these differences important? And how can the busy professional determine the right jurisdiction?
The first answer is that there are differences between jurisdictions. A few are good all-rounders, some are best suited to certain types of business and some do not bear serious consideration at all.
A good starting point might be to distinguish between the Caribbean jurisdictions and Bermuda, as a group, and their European counterparts. Apart from the climate, diversity has to be the main distinguishing feature of the former. In the Caribbean there is greater racial and ethnic diversity, which is evident in every aspect of the social, political and cultural fabric. Many of the jurisdictions remain colonies or are governed by their colonial inheritance.
The history of these islands has often resulted in the distribution of wealth along racial or ethnic lines, which can be in sharp contrast to the more recent vesting of political power. Some Caribbean jurisdictions are even located on established smuggling routes between South America and the US, and have predictable concerns.
But it is well known that some of the most successful offshore jurisdictions are located in the Caribbean. Their success results from a number of factors, but is due in part to historical links with Europe and a close proximity to the Americas, coupled with the reputation and quality of the banks, law and accountancy firms present in them. Some of the most innovative offshore products have been developed in the Caribbean and these jurisdictions have captured a significant share of the offshore market.
Irrespective of location, most offshore jurisdictions are inherently unstable in that they have insufficient landmass to produce food to meet the needs of their population. The pillars of their economies are twin - invariably tourism and finance - and they are often totally dependent on the goodwill of their largest neighbour for economic survival.
All jurisdictions are continually evolving. On small islands the rate of change can be quite dramatic, though most offshore structures require long-term stability. It is therefore not only necessary to select the right jurisdiction at the outset but also to monitor its evolution and continually reassess its acceptability. Professionals living and working there may not always be the most reliable source of information. With this in mind, we need our own criteria with which to assess what we see in those glossy brochures:
The Island Paradise claim. This is largely irrelevant and a matter of personal taste - one man's pristine wilderness is another man's mosquito-infested swamp. However, the quality, pace and control of development can provide a useful indication of maturity and future prospects.
The ideal tax climate, while essential, is rarely a distinguishing feature as most jurisdictions offer identical benefits.
Political and economic stability is the cornerstone of a good jurisdiction but can be difficult to measure - there is no substitute for a personal visit. Subscription to a local newspaper is also useful. An open press is the hallmark of a mature jurisdiction, and political fortunes can easily be followed.
A sound legal system is unfortunately a relative, and not an absolute term when comparing jurisdictions. Generally, mature jurisdictions have the upper hand and most practitioners are reassured if the final court of appeal is onshore.
Modern legislation may only be a distinguishing feature in the short term as good legislation tends to be copied quickly. Those differences that do exist, together with regulations, or the lack of them, provide a good indication of the type and quality of business a jurisdiction is trying to attract.
A strong financial infrastructure is an extremely elusive commodity offshore and requires both a quantitative and a qualitative assessment. There are a number of popular jurisdictions that are almost one dimensional insofar as their reputation in this area is largely down to one strong firm.
Confidentially should not be taken at face value. If it is enshrined in law, obtain a copy of the legislation and draw your own conclusions. Strict secrecy laws generally have a back door and it is important to determine how often this door is in use. Human nature being what it is, a jurisdiction's strong pitch for secrecy may indicate an undesirable clientele. Mutual legal assistance treaties and bilateral agreements also warrant careful consideration.
Excellent communications and first-class air services are readily apparent if they exist. In most instances, communications are no more than average and air services vary.
There are a number of other important factors that also tend to be mentioned in the glossy brochures. These are liveability, demographics, topography and corruption.
Many Caribbean jurisdictions are nice to visit, but only those with a pioneering spirit would want to live there. It is not just the variety of recreational activities that can be questionable; the level of crime and the quality or existence of medical, special care and education facilities can be, too. This is important for two reasons. Most jurisdictions aim to localise the workforce, but few are capable of doing so and therefore the industry relies on expatriate workers. Liveability affects the turnover of expatriates. If you ask settlers if they would find it acceptable to have a new account administrator every three years, you will get a clear response. On this point it is worth inquiring if the local immigration board imposes a rollover on work permits.
With certain industries, for example the offshore reinsurance industry, liveability is an essential prerequisite. The executives of this industry demand more than an annual bacchanal, fun though such social occasions may be.
Demographics can be an important factor for comparison. Some populations are high in proportion to the island's area, resulting in unemployment, high crime rates and, realistically, an uncertain future. At the other end of the scale, if the population is too low, it will be quickly outnumbered by expatriate workers, creating a different set of problems. Moderation is the key, especially in immature markets.
All Caribbean jurisdictions sit within the hurricane belt. Because the offshore finance centres are small the likelihood of any taking a direct hit is remote, but hits have occurred in the past and we can be certain that they will occur in the future. The topography of an island is a good indicator of how devastating a direct hit from a major storm will be and merits serious consideration. It is also prudent to enquire what disaster recovery plans are in place.
Consideration should be given to the use of fail-safe devices permitting the administration of offshore structures from more than one jurisdiction. A quality service provider can provide the operational support to ensure that such mechanisms are effective.
Do not hesitate to enquire how many government ministers or appointees have been dismissed or are under arrest for unsavoury activities in the past five or 10 years. There are a number of jurisdictions that have managed to exist and prosper in spite of themselves. Part of the reason is that problems can easily be brushed under the carpet on remote islands that clients and intermediaries introducing business rarely visit. But the advent of the Internet and better communications is making this more difficult.
The final arbiters are reputation and the quality of service providers. Whereas pricing is always a consideration, administration costs at the quality end of the market tend not to vary by jurisdiction.
The magnitude of assets held offshore demands that jurisdictions are selected and monitored on more than hearsay. Information is the key and the answer lies in asking the right questions.