Edward Cain says offshore centres are often misunderstood and unfairly vilified but play a significant international role. Edward Cain is an English-qualified solicitor at Cains.
The significance of the role played by offshore jurisdictions in the international financial services industry has never been greater.
The presence of banking and other financial institutions is greater in some offshore jurisdictions than it is in major financial centres in traditional metropolitan centres.
But for one reason or another, profound misconceptions about the business and services undertaken in offshore jurisdictions such as the Isle of Man, Jersey and Guernsey have perpetuated, despite the efforts of such jurisdictions to develop sophisticated legal and regulatory systems. These regulations are often along similar lines to those in the UK.
Perhaps the greatest misconception is in the use of the term “offshore” itself. As a term of art, this is not accurate, since what is offshore to one person is onshore to another.
For example, resident Isle of Man businesses pay full income tax at applicable rates to the Manx revenue authorities, and businesses undertaking investment work are also subject to a licensing and regulatory regime operated by the Manx Financial Supervision Commission, based on laws akin to the UK Financial Services Act 1986.
The share of GNP taken into taxation is 43 per cent in the Isle of Man as opposed to 41 per cent in the UK.
The Isle of Man also has more than 200 manufacturing companies as well as a thriving film and shipping industry. These are clearly onshore characteristics.
At the same time, even objective observers agree that the UK and the US are regarded by much of the world as two of the largest low tax centres for non-resident investment, seeking to attract non-resident business in their countries while continuing to prevent residents from avoiding tax.
One estimate is that the City of London has 15 per cent of the world's offshore business with £600bn in non-resident deposits.
One financial observer stated that: “in terms of absolute revenue given up, the US should be considered one of the world's leading low tax jurisdictions.”
Yet centres such as the Isle of Man and the Channel Islands should not and are not permitted to use their metropolitan counterparts as a benchmark for the conduct of business to accepted international business standards.
They must go one step further, and be seen to be doing everything that is sensible and responsible to regulate their business environment.
This state of affairs has been given greater prominence this year in the UK, as a result of press coverage of the involvement of offshore centres in the private affairs of prominent individuals, such as Paymaster General Geoffrey Robinson, and, far more importantly, as a result of two initiatives undertaken by the UK Government.
On 20 January this year, the Edwards Review of the Crown Dependencies (Isle of Man, Jersey and Guernsey) was announced by the Home Secretary, Jack Straw.
To summarise, the review will cover an assessment of the current legal and institutional arrangements for financial regulation and international regulatory co-operation, combating financial crime, collaborating on criminal investigations, asset freezing or confiscation and company registrations.
On 4 February, the Foreign Secretary, Robin Cook, gave a speech to the British Dependant Territories (which include Bermuda, the Cayman Islands, the British Virgin Islands and the Turks and Caicos Islands). It was founded in the same rationale as the Edwards review and perhaps best expressed the current initiatives.
In his speech, Cook said:
“With the reputation, size and success of our offshore centres, come obligations to abide by internationally accepted rules and to enforce the highest international standards of financial regulation… all must play by the same rules and those rules must be strict if we are to avoid the risk of territories becoming channels for money laundering or the concealment of the profits of crime.”
He added: “The highest standards of regulation are the best guarantee for financial success, and the biggest draw to investors.”
Cook then set out a checklist of systems by which the credibility and acceptability of jurisdictions would be measured:
a package of regulatory legislation which meets recognised international standards;
comprehensive measures to combat money laundering which extend to all financial institutions and are sufficiently thorough to allow checks to be made on companies incorporated in one offshore jurisdiction but based elsewhere;
legislation to allow offshore jurisdictions to co-operate with overseas investigations; and
licensing and regulatory regimes for all financial activity that creates a level playing field between the offshore jurisdictions.
For those jurisdictions that take their international responsibilities seriously, such developments are to be embraced.
The Isle of Man, for example, already measures up extremely well to this checklist. Indeed, on his recent visit to the Isle of Man, Edwards was reported to have said that he agreed much of the UK and world media coverage of the island's finance laws were unfair.
Certainly, John Moscow, the New York prosecutor who led the US investigation into the failed BCCI, was quoted in the Financial Times recently as saying that “the Isle of Man authorities see their job as keeping the bad guys out”.
In relation to all three Crown Dependencies, Edwards said: “I believe… each of the three islands has made an enormous amount of effort to improve their regulatory proceedings.”
Perhaps this is even more so than other centres that have suffered enormous financial scandals in recent years.
This should come as no surprise to the well-informed. The contribution made by responsible financial centres outside of the UK to the economy of the mainland and to the economies of countries around the world from the US to China is very significant indeed.
Traditional misconceptions of offshore centres depriving onshore centres of tax revenues and regulatory influence should in time give way to a respect for smaller jurisdictions exercising their economic entitlement to make a living. In turn this will contribute to the development of the well-being of their own communities as well as that of others.
Provided such jurisdictions conduct themselves to the recognised standards of international business, observing the lead set by organisations such as the Financial Action Task Force, and that their taxation strategy is not felt to be too overtly in conflict with the EU and OECD moves for tax harmonisation, businesses should be confident in the use of such jurisdictions.