Inside Offshore: The morality attack on the offshore world

In the anti offshore debate, a new approach by OECD based advocates requires an effective response by offshore financial centres sooner rather than later.

Arguments against offshore financial centres (OFCs) have been around for about 2 decades but they have evolved with increasing effect recently. Historically, the attacks against OFCs began largely as a straight forward accusation that these financial services centres were encouraging or harbouring tax evaders. OFCs pretty much ignored this argument until about the early to mid 1990s when they responded in a number of ways. In addition to denying the tax evasion charge, they raised the issue of their right of tax sovereignty, the benefits of tax competition and finally that there was no level playing field between OFCs and the main OECD members countries.

In the mid to late 1990s the accusation that such centres were a key channel through which the world’s illegal funds were laundered entered the fray, and was further fueled by the FATF’s blacklisting of many OFCs after a round of reviews. OFCs, including the Cayman Islands, responded by making major changes to their anti money laundering frameworks. In all of the main OFCs these changes were so extreme that they stand today as being light years ahead of every OECD based financial centre in terms of the due diligence requirements in place.

The pressures continued from the OECD side around 2002 when a new and substantial argument was put forward; namely that such centres had very poor systems of financial regulation and were therefore a threat to global financial stability. This resulted in a round of reviews by the IMF and again many OFCs made enhancements to their regulatory frameworks.

All along the basic tax evasion accusation has remained at the forefront as this is not an issue that can be easily resolved due to the sovereignty of tax systems. Up until recently, the OFCs’ standard response to the tax evasion charge is that there is a distinction between “tax evasion” (illegal activity) which they do not condone, and “tax avoidance” (use of legal structures and law abiding activity to minimise one’s tax burden) which is a part of the services they have on offer. For the most part, this approach seemed to be working; at least until a series of “morality arguments” surfaced in recent years.

First there was the “scrutiny” of social corporate responsibility by OECD based firms, whereby companies which utilised OFCs were labeled “unpatriotic” by American politicians.

This “morality movement” continued without much impact until it was tweaked to have a more conscientious effect very recently. In a report earlier this year the group Christian Aid essentially lays the blame for poverty (and death) in developing countries at the feet of offshore financial centres. The Christian Aid argument is not only a ludicrous attempt to link OFCs to the demise of developing countries, but it also fails to apportion any blame on the policies of the World Bank, IMF or widespread corruption by international charities and local governments for the plight of these developing countries. Not surprisingly, in its 33 page report, Christian Aid manages to avoid highlighting a single example of how OFCs have actually helped the poor, for example by facilitating the financing of major infrastructure projects such as roads or water facilities via securitisations.

The Vatican offered its own assistance recently to the morality movement against OFCs, when the Pope argued that OFCs are to blame, not only for the world’s global financial crisis but for the abject poverty witnessed around the world. More important than the inaccuracy of the Pope’s arguments is the possibility that advocates of this new morality approach have been able to influence the Vatican’s public statements through his advisors. It shows that this new strategy should be taken seriously by jurisdiction like the Cayman Islands.

To the advocates of this new morality criticism of OFCs, it does not matter whether funds are missing from the coffers of OECD governments due to “tax evasion” or tax avoidance” as the core of this argument is simply the loss of such revenues. Therefore any future OFC strategy which relies on this distinction is likely to fail.

Policymakers and industry alike in OFCs need to understand that what they are up againstwith this new strategy cannot be dealt with by technocrats or new financial regulations, but that the commercial survival of offshore centres requires advocating the true economic benefits of the offshore world like never before.

If they fail to do so, the new morality propaganda will not only strengthen the existing perception of OFCs as the bad guys, but through OECD protectionist policies backed by a “new moral conscience”, it could eventually result in the type of isolation in the global financial markets that no amount of marketing, lobbying or legislation will be able to correct. And in 10 to 15 years, the basis of economic development in many OFC economies around the globe may all but disappear. Ironically, this would also be a loss to both the wealthy and the poor in the world economy.

About the Author:
Inside Offshore is an internationally syndicated column on topics relating to international financial services. Paul Byles is Managing Director of Focus Corporate Services & Consulting. He is a former regulator who has worked in the offshore sector for over 18 years and an economist and international consultant on offshore services and its regulation. He is author of the book ‘Inside Offshore’