Turning the tide
29 January 2007
AIFMD update — Bermuda, BVI, Cayman Islands and Mauritius: approval of third country co-operation arrangements with ESMA
6 June 2013
29 April 2013
22 November 2013
16 September 2013
10 June 2013
The popular image of offshore financial centres as havens for tax evasion and money laundering persists. This is despite lawyers in offshore jurisdictions adamantly claiming that there has been a fundamental change over the past decade in the nature of the business carried out and in the quality of supervision of the businesses that operate in such locations.
A decade after the first efforts were made to rein in offshore jurisdictions and to ensure, as far as possible, that they were not used for tax evasion or as conduits for the proceeds of drug trafficking and other crimes, there is an increasing number of centres that can be described as 'offshore', and many are thriving. Bermuda, for example, has just been adjudged to have the highest gross domestic product per capita in the world.
During the past four years Jersey law firm Ogier has extended its reach across the offshore market to jurisdictions including the Cayman Islands and the British Virgin Islands (BVI). Ogier chairman Jonathan White says: "The long-established image of offshore centres consists of men in suits wearing strong aftershave, carrying bagfuls of cash, flying to remote, exotic locations on small aircraft. "As late as 2001 the FBI said, 'For years, the authorities have agreed with the widely-held notion that the Channel Islands and the Isle of Man are maverick centres of thinly regulated financial activity, attracting money launderers and impenetrable by law enforcement. Fortunately, two reports from outside evaluations have dispelled this longstanding myth.' This is pleasing in that the FBI has actually acknowledged that the Channel Islands and other centres are in fact centres for quality business. That acknowledgement reflects the wide level of support and cooperation that goes on between the offshore centres and the onshore centres. What's extraordinarily depressing is that it took until 2001 for them to realise that."
What has happened, say White and other lawyers active in the offshore world, is that offshore jurisdictions have been obliged to comply with so-called international standards on issues such as transparency, the exchange of information in tax evasion investigations and inquiries into money suspected of being the proceeds of crime. Other standards include the equality of treatment between offshore companies, trusts and financial services entities and domestic businesses operating in the jurisdictions.
The age of authorities
If there was ever a golden age when individuals could park their money in offshore jurisdictions with impunity, confident that any attempts by onshore tax authorities to track down their untaxed wealth would run into a brick wall, it is long over. The process began in the 1990s, when the Organisation for Economic Cooperation and Development (OECD) led efforts to force offshore centres to open up their operations.
Since then the OECD has been joined by an alphabet soup of organisations set up largely at the behest of the world's wealthier countries, including the Financial Stability Forum (FSF), the International Monetary Fund (IMF) and the Financial Action Task Force (FATF).
Since the attacks on the US on 11 September 2001, the FATF has been at the forefront of efforts to bring transparency to the international financial services industry as terrorist financing joined money laundering as an urgent priority for the US and its allies.
As offshore lawyers note, the scrutiny placed on offshore centres by these supranational regulatory initiatives has obliged the former to adopt many of the measures demanded by the rich countries. These measures include steps that some onshore jurisdictions have introduced only belatedly, such as the regulation of trust and corporate service providers, or abandoned as too difficult, such as retrospective due diligence on all bank account holders.
Many offshore centres, as Crown dependencies or UK-dependent territories, have also found themselves under pressure from the UK tax authorities to allow UK tax evaders to be pursued by gaining access to their banking details. In consequence, many offshore territories have become much less attractive for individuals seeking simply to evade tax.
The focus has turned to tax 'minimisation' or 'structuring' for companies and high-net-worth individuals through measures that may not be welcomed by rich countries, but which are not illegal, as well as the provision of a 'tax-neutral' platform for structures or ventures that operate across a number of jurisdictions and tax regimes.
The new 'offshore' world
One apparent aim of supranational regulatory initiatives was to thin out the ranks of the offshore financial centres, leaving in place only those with sufficient resources, expertise and volume of activity to be able to afford to put in place the required level of supervision and transparency. To some extent this has succeeded, with the virtual disappearance from the offshore map of jurisdictions such as the South Pacific's Nauru and Vanuatu, which suffered from poor reputations.
But other centres, such as the Channel Islands, Bermuda, Cayman and the BVI, have gone from strength to strength. Some of the smaller jurisdictions in and around the Caribbean, such as Anguilla, the Turks & Caicos Islands and Barbados, continue to make a living as niche centres, and a number that a decade ago were of modest stature, such as Mauritius and the Malaysian island of Labuan, or that enjoyed a mixed reputation, such as Panama, are gaining increasing volumes of business.
White also points to the emergence of international financial centres that fulfil the standard definition of 'offshore' by providing financial services for a sustainable number of non-residents, but that shun the offshore label. "Singapore has been pushing hard to develop itself as an international financial centre," says White. "Dubai is another particularly interesting example in view of the job that's been done there, including not only a huge building project, but the drafting of a whole set of international laws and the establishment of an international court in order to enable any kind of business at all to be done in that centre."
White also notes that new would-be centres are emerging in Eastern Europe, such as Latvia. Finally, other US states are rapidly following the example of Delaware and competing for international business.
The recipe for success
According to Hélène Anne Lewis, a partner at Panama firm Morgan & Morgan and chair of the BVI's chapter of the Society of Trust & Estate Practitioners, the resurgence of a jurisdiction that until recently was seen merely as a factory churning out thousands of offshore companies is down to a combination of factors, including a convenient location, compatibility of legal systems, language and infrastructure, but also a proactive response on the part of the authorities.
"The recipe for success includes innovative legislation that combines tradition with adventure," says Lewis. "In the case of the BVI it includes flexible corporate vehicles, with the introduction of new types of trust and company. It involves new ways of doing old things and thinking ahead of the curve."
In the past three years the BVI has replaced its longstanding 'international business company', of which there are more than 500,000 in existence, with a business company structure that can be used equally by offshore and domestic individuals and institutions. It has also introduced the Vista trust, which allows trust settlors to restrain trustees from selling assets such as family-owned businesses because of their obligation to diversify the trust's assets.
After a slow start Vista trust business is picking up steadily, says Walkers partner Chris McKenzie, who is one of the main authors of the legislation. "We're seeing far more Vista trusts than ordinary ones now," he adds.
But other trust lawyers, such as Antony Duckworth, senior partner at Cayman firm Charles Adams Ritchie & Duckworth and author of the Cayman's much-imitated Star trust legislation, worries that offshore centres are going too far in pushing the boundaries of innovation, especially in areas such as trusts, which rest on hundreds of years of legal tradition.
But White rejects the suggestion that in their desire to remain at the cutting edge, offshore centres are in danger of turning into designer jurisdictions that are constantly remaking their legislation to stay ahead of the pack.
"What offshore, and also onshore, jurisdictions constantly try to do is to develop their laws in a way that's potentially attractive to those who wish to use it," he concludes.
-Simon Gray is a freelance reporter