As Britain ponders whether to join a single European currency, a small island in the north Irish Sea is threatening to sever its links with Britain and go it alone.
The Isle of Man is trembling at suggestions of pan-European tax harmonisation and a single currency and has started to draw up a contingency plan for independence.
While Jersey and Guernsey have issued statements ensuring everyone has a clear understanding of their constitutional status with the UK – that is, that they are in charge of their own tax matters – the Isle of Man has offered to take things further.
The island is concerned that, should the UK join the single currency, the Manx pound, which is pegged to sterling, could be left in limbo. Consequently, Chief Minister Don Gelling has called for the Isle of Man to prepare a contingency plan which would involve independence within the Commonwealth and linking the Manx pound to the US dollar. The thinking was to have a plan at hand in case the UK joins the euro, as Tony Blair is indicating, and aggressive tax harmonisation follows.
The motion for independence in Tynwald, the island's parliament, was defeated. But the island's Council of Ministers will continue to pursue greater autonomy, even though the electorate has not voiced a wish for independence.
Industry officials on the Isle of Man and the Channel Islands agree that tax harmonisation – and any future impact it could have – is still far off.
But who could blame the Channel Islands or the Isle of Man for fearing the prospect of tax harmonisation? Up to 60 per cent of these islands' economies depend on their financial services sectors: and the financial services industry relies largely on these islands for tax relief.
Removing the tax advantages, or harmonising with the UK and most of continental Europe, would leave little scope for financial services companies to continue operating there.
There would be an added dilemma for the UK. If the current tax arrangements of these islands were harmonised, and their economies were dented as a result, they would have no choice but to recourse to the UK for funding.
It has been a while since the UK needed to dig into its coffers to bail out the islands. In fact, the most recent funding was immediately after the second world war when the islands needed help to restructure after the German occupation.
Unfortunately it is not only European Union measures that are causing the islands concern. The Organisation for Economic Co-operation and Development (OECD) is also on their case, calling for the removal of harmful tax competition worldwide. Key targets include the Channel Islands and the Isle of Man, as well as their counterparts in the Caribbean. In a report last year, the OECD offered 15 recommendations to non-tax neutral countries which, if implemented, would strangle any business moving offshore.
The message from the OECD is brief but to the point: “Governments cannot stand back while their tax bases are eroded through the actions of countries which offer taxpayers ways to exploit tax havens and preferential regimes to reduce the tax that would otherwise be payable to them… a rigorous and consistent application of existing tools can go a long way towards addressing the problem of harmful tax competition.”
There is also the increased scrutiny by the UK of the islands' regulatory and legislative structures. Towards the end of last year, former senior civil servant Andrew Edwards completed a review of the islands' financial services regulatory and legislative structures on behalf of the UK Home Office.
Throughout the 11-month investigation, many senior officials on the islands expressed their dismay at the swiftness with which the UK decided to conduct this review. Although Edwards' brief was to ensure the islands have solid anti-money laundering procedures in place, many questioned whether there was a hidden agenda. Some still question whether the UK will address fiscal issues next.
The final outcome, following intense media speculation, was not as bad as had been feared. The length of time it took to put together the 175-page review gave the islands some leeway to improve their procedures and earned them praise from Edwards. In fact, Jersey launched an independent regulatory body, the Jersey Financial Services Commission, at around the time the review was complete.
Edwards points out in his document: “[Critics] sometimes object to secrecy, poor regulation and poor co-operation in offshore centres. Such criticisms, if applied to the Crown Dependencies, would generally in my opinion be quite wide of the mark. For the most part, the position of the islands is quite the opposite of what such criticisms would imply.”
But the report does conclude by expressing hope that by spring 2000 “the islands will have implemented, or be well on the way to implementing” all the proposals, or will have decided on other courses to pursue.
Among the radical changes that Edwards proposes is the strengthening of company regulation in all the islands to ward off disreputable businesses.
The issue of auditing accounts “was one of the most interesting” he handled. On the disclosure of accounts, he says the case is not so strong in the islands as in major centres where the companies are trading.
Edwards recognises that for disclosure of accounts to work there must be international agreement that all centres comply, rather than pressure put on individual centres.
He writes: “Many jurisdictions, onshore and offshore, do not require publication of accounts. The immediate consequence of public disclosure will cause companies to move to other centres where there's no disclosure. The greater priority for the islands… is to have some system of vetting. All centres will attract some disreputable money. The test is to deal with that.”
Company registrations business brings substantial fees: there are 90,000 companies incorporated across the three islands. Edwards says: “There are many further companies that operate in or are administered from the islands but incorporated elsewhere. The precise numbers are not known. But in Guernsey it is believed that the numbers could be of a similar magnitude to the numbers of incorporated companies [about 16,000].”
The Isle of Man, for instance, will need to consider vetting companies at registration and require confidential disclosure of beneficial ownership. Edwards goes as far as recommending the abolition of the locally incorporated non-resident company category. The islands “should extend registration and regulation to the many companies administered in the islands and incorporated elsewhere”. He adds that some disclosure of financial information, even confidential, should be considered “pending wider agreement, offshore and onshore, about disclosure regimes”.
The issue of nominee directors in Sark, otherwise known as the Sark lark, was also on Edwards' agenda. He found that total directorships held in Sark – where there is a population of 575 – is 15,000. “Three residents appeared to hold between 1,600 and 3,000 directorships each,” Edwards points out in the report.
“The authorities in Guernsey, Alderney and Sark have agreed, therefore, that the problem of “nominee” directors must be solved by means of new legislation with application throughout the islands of the bailiwick. The legislation would not prohibit Sark residents acting as directors but would enable and oblige the Guernsey Financial Services Commission (as being the only central body in the position to do so) to regulate those who provide director services anywhere in the three islands.”
While Edwards acknowledges that financial centres are generally well policed, the police need more resources. “There is a case for setting up self-standing, separately financed financial crime units,” he says.
But the priorities to implement the recommendations vary between the islands. In Jersey, Edwards says the priority for the authorities should be to reach a position where they co-operate internationally in the pursuit of financial crime and money laundering. In Guernsey, he says the priorities should be to solve the problem of nominee directors and, as in Jersey, to complete the legislative arsenal for countering financial crime and money laundering. In the Isle of Man, the priority should be to strengthen the regulation of companies.
Meeting these recommendations should keep the UK happy. The islands say they are determined to continue battling against money laundering and ensuring they keep in good stead with the UK. This way, perhaps, their future is better protected even under the threat of tax harmonisation debates.
After all, when considering that the total assets and liabilities of the islands are in the region of £300-£350bn, some would say this offers a good incentive for staying in line.