The island fortress
30 July 2001
In the last few years Jersey has seen new legislation to combat money laundering, stricter regulation of the investment industry and legislation for trust and company providers. Along with building on the legislation that was already in place, these moves reinforce how Jersey is cooperating with the international authorities in the fight against crime, and at the same time demonstrate to international bankers, lawyers, other professional advisers and their investor clients that there is a commitment to quality and to the safety of their assets through the regulatory process.
The latest regulatory development was announced only last week at a conference on international cooperation organised by the Jersey Financial Services Commission, the island's regulatory body in Jersey. A Memorandum of Understanding (MoU) was signed between the Jersey authorities and the German Securities Regulator. This agreement ensures mutual help and exchange of information for investigating securities offences such as insider trading, market manipulation and conducting financial business without a licence.
As a result, Jersey has become the first offshore international finance centre to secure an official MoU with the German Securities Regulator. It is an indication of Jersey's willingness to cooperate with the leading Western governments in the fight against international crime. Similar MoUs have been established by Jersey with regulators in South Africa, Belgium, the UK, Bermuda and the Netherlands.
The international finance centres are entering a new era, spurred on by the increasing scrutiny they face from multinational organisations and governments, in which regulatory and legislative developments have become important differentiators. As competition intensifies, it is likely that these factors will be highlighted by jurisdictions whenever possible to demonstrate their commitment to quality.
For some of the international finance centres, this independent scrutiny has proved a helpful ally in promoting their strengths.
Jersey's finance industry has been established for four decades, long enough to build up a wealth of experience in handling the needs of offshore investors across a broad spectrum of financial services. The result is a finance industry that is remarkably diverse. The range of skilled professionals working in banking and in the related fields of investment, trust and company work and legal and accounting services, has been central to Jersey's more recent success. This world-class skills base has been the platform for the development of innovative products and services, and has helped the industry to develop successful niche businesses.
The island continues to see growth in the number of leading financial institutions and law firms using Jersey structures for the setting up of securitisation vehicles, private equity and venture capital funds and the running of captive insurance companies. It is true to say that Jersey does so much quality business with the City of London that the island has been described as the offshore arm of the City. Much of this business comes to Jersey through the top local law firms, which have built up a significant reputation for their skills in this specialised, and sometimes complex, work.
The use of Jersey as the jurisdiction of choice in the European zone for establishing securitisation vehicles, for example, shows no sign of abating. In just 12 months, the number of special purpose vehicle (SPV) authorisations has shown dramatic increases, from 403 in 1999 to 630 last year. The numbers have trebled in three years. One source, the Fitzrovia Encyclopaedia on Securitisation, estimates that in June 2000 there were approximately 200 transactions running in Jersey, with a maximum debt value approaching $300bn (£209.7bn).
The growth in the administration of global employee benefit plans from Jersey is another example. The island's top law firms can point to the high proportion of companies from the FTSE 100 that have found that the legislative environment and the skills available in Jersey are ideal for administering their global employee benefit plans.
There are other factors that combine to play a part in the continued success of the jurisdiction. The taxation regime on the island remains important. It has no capital gains or inheritance taxes, which is clearly attractive to private investors. Meanwhile, institutions are often able to create tax-neutral positions when they are putting together SPVs and other sophisticated structures. The tax transparency of the limited partnership legislation, for example, has been an important factor in the establishment of many SPVs, such as the private equity schemes that have proved so popular.
The geographical position of the island has served it well. It starts work before Hong Kong closes and is still in mid-flight when the New York Stock Exchange opens for the day, making the servicing of European and Far Eastern clients far easier than it would be in the Caribbean, for example.
The Jersey Financial Services Commission has been another important factor in the recent success of the island. It has implemented regulations that have earned plaudits from influential overseas organisations, and yet it has also maintained a flexible approach when considering specific structures in order to offer the industry a bespoke service.
Above all, the island's political and fiscal independence has been the twin pillars of its success. Outsiders often speculate on the influence that the UK Government and its treasury can exert on the island and its finance industry. The reality is that Jersey is a Crown Dependency and has its own independent parliament and sets its own rules on taxation. This constitutional position has been the bedrock on which Jersey has prospered over many centuries, and in recent times the finance industry has been uninhibited in its development and free of external influence.
The authorities have needed to outline this unique constitutional position with the UK in many of its discussions with outside organisations, including most recently the Organisation for Economic Cooperation and Development (OECD). The OECD is seeking a commitment from a list of 35 jurisdictions, including Jersey, to remove what it described as "harmful tax practices" - the alternative of compliance is to face the threat of OECD sanctions.
Jersey was surprised to be on any such list, particularly as it had earlier emerged with credit after being assessed by two other important bodies. The Financial Stability Forum, established by the G7 nations to promote enhanced financial supervision and surveillance, rated Jersey as being in the leading group, which is "cooperative with a high quality of supervision, which largely adhere to international standards". The Financial Action Task Force, set up by the United Nations, meanwhile, endorsed the island's standing in respect of its anti-money laundering measures.
The island, working closely with the authorities in Guernsey, which was also on the OECD list, has been arguing its case with OECD representatives, and with some confidence, particularly following the positive endorsement that the island's authorities obtained elsewhere.
The US government has also questioned the OECD's overall strategy in respect to offshore jurisdictions; the result of this has been a delay in the publication of a formal black list at least until the autumn. Jersey's authorities and the industry remain confident that the island will not appear on any future list.
Legal professionals, then, can take comfort that the international community has instigated a far-reaching review of the quality of offshore jurisdictions worldwide. A competitive environment where quality and reputation are the driving forces should be welcomed by all serious, legitimate investors, and Jersey, which has demonstrated its commitment to the highest standards of regulation in its financial services industry, is well placed to benefit.
Phil Austin is chief executive of Jersey Finance, a joint venture between the island's government and finance industry.