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The World Of Offshore And Its Future

The Rich Countries' Attack on Offshore Jurisdictions:
How and Why it Happened

How Did It Happen?

Nobody supposes that it's a coincidence that the EU, the OECD and the G7 all happened to attack the world of offshore at the same time. In fact, the roots of what happened in the year 2000 and in the period since lie some years back. In the most general sense, one can say that the left-wing ascendancy in most of the world's key economic powers that developed during the late 1990's led to the development of a common agenda among G7 and EU finance ministers which resulted in a series of initiatives with a common purpose.

The EU's Code of Conduct Committee

First off the plate was the EU, which on 28th February 2000 decided to make public the results of the Primarolo Code of Conduct Committee on business taxation. The Committee was established in 1997 when the ill-fated 'tax package' was launched, including the proposal for a harmonised EU withholding tax which was finally transmogrified into an information exchange plan at the EU Feira summit in 2000, and implemented on 1st July, 2005.

The Code of Conduct Committee examined hundreds of tax measures across the Community, finally listing 66 of them to which it gave a 'positive evaluation' as being harmful. At its session of 28 February 2000 the Ecofin Council decided to make this report accessible to the public 'without taking any position on its content'.

As can be seen from the list, the Primarolo report should be seen more as an attack on what were conceived as the excesses of corporate international tax planning, rather than exclusively an attack against 'offshore'. Several years later, most of the practices listed in 'Primarolo' have been resolved by negotiation between the EU and Member States. In some cases they remained in force, although diluted in their effect, and often with 'grandfather' periods for existing users.

Next Came The G7 and the Financial Stability Forum

On 30th May, 2000, the Financial Stability Forum, a group of financial regulators established by the G7 after the Asian crisis in 1998 to study methods of reducing global financial volatility, released a report which placed 25 of the world's leading offshore financial centres (OFCs) into three groups representing differing levels of threat to global financial stability.

Whilst the FSF's report acknowledged that offshore financial activities could be well-supervised and accompanied by strong co-operation by the supervisory authorities, it did see certain OFCs as presenting a serious problem, and in its list placed these in its third grouping, which very remarkably included the Cayman Islands, the BVI and the Bahamas. These jurisdictions were predictably outraged that the FSF should attack them in this way under the aegis of the G7.

The FSF claimed that the classification did no more and no less than rate the jurisdictions according to the scale of their financial activity, and that large financial agglomerations pose a threat to stability if they are not supervised in a transparent way. However it seemed that the FSF had very mixed motives, and was using the pretext of global financial stability to forward a more extensive anti-offshore agenda.

Within the FSF's first group were Hong Kong, Luxembourg, Singapore and Switzerland, which the FSF generally perceived as having legal infrastructures and supervisory practices of the best quality amongst all the OFCs. Dublin, Guernsey, Isle of Man and Jersey were also included in the group and more or less regarded in the same way, but with the added emphasis that continuing efforts to improve the quality of supervision and co-operation should be encouraged.

The second group consisted of Andorra, Bahrain, Barbados, Bermuda, Gibraltar, Labuan, Macau, Malta and Monaco. It was said about them that they should take action to bring themselves up to the standard of the jurisdictions of the first group.

The third group, with sixteen members, were said to have the greatest potential for impacting global financial stability. It consisted of Anguilla, Antigua, Aruba, Bahamas, British Virgin Islands, Cayman Islands, Cook Islands, Costa Rica, Cyprus, Liechtenstein, Mauritius, Netherlands Antillles, Panama, Seychelles, the Turks and Caicos and Vanuatu.

Andrew Crockett, chairman of the FSF at the time, said: 'OFCs are not in themselves bad, but if not prepared to maintain adequate supervisory structures they could pose a threat to global stability'. The FSF warned that jurisdictions failing to reach acceptable standards could face harsh sanctions including a prohibition from conducting business with the main financial centres.

However, the proposition that tiny islands with undeveloped financial industries such as Turks and Caicos could upset global stability was widely seen as laughable, and seriously undermined the impact of the FSF initiative.

At the seventeenth meeting of the Financial Stability Forum, held in March 2007, the Forum announced that:

"The FSF has noted progress by several OFCs (Offshore Financial Centres) in improving compliance with international standards, including cross-border cooperation and information exchange. The FSF urged its member bodies to continue to address remaining problems in OFCs. The FSF encouraged OFCs that fall short of international standards, that have not published their detailed IMF assessments, or are not actively contributing to the IMF Information Framework Initiative to make further progress in these regards. The FSF will discuss a review of its OFCs initiative in September."

The OECD and its Financial Action Task Force

In fact the OECD had two shots at the offshore target, first through the Financial Action Task Force, which it set up at the behest of the G7 to study and control money-laundering, and then on its own account, with the most famous of all the lists, that of jurisdictions offering 'Harmful Tax Competition'.

In mid-June 2000, the Financial Action Task Force (FATF) nominated a short-list of fifteen jurisdictions which it said offer the least co-operation to international investigators.

The list was: The Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St Kitts and Nevis, and St Vincent and the Grenadines.

As of October 2006, all NCCTs (Non-Cooperative Countries and Territories) had been removed from the FATF list.

Almost all of the named jurisdictions had been seen to make efforts to stay off the list, or had promised to do so in future, and some had expressed outrage at being included.

The Cayman Islands government said in a statement in Paris that it was 'astonished' and that repeated requests for FATF representatives to visit the British Caribbean territory had been ignored.

Many other jurisdictions, however, had visited Paris to put their cases before the 'tax police' at the OECD, some with success. Six jurisdictions, including Bermuda. Malta and Mauritius, even signed 'commitment letters' to the OECD promising to take measures to conform with the required standards. Interestingly, although the fairly uninformative text of the letters was published, not one of the six jurisdictions concerned saw fit at the time to publish the specific promises they made to the OECD in annexes to the letters.

Later it emerged that the commitments made by the initial six, and eventually a total of thirty jurisdictions, were broadly as follows, with minor individual differences:

Exchange of Information: The jurisdictions will not introduce banking secrecy laws, and will enter greements with all OECD members under which they will provide information in response to specific requests on criminal and tax matters, whether or not an alleged offence is criminal under local laws.

Transparency: Details of beneficial ownership for all business entities, trusts and businesses will be available to the authorities as and when needed ('Know Your Customer' rules will apply in all cases to intermediaries); businesses will have to keep accounts and audit requirements will be in line with international standards.

Non-Discrimination: Discriminatory tax regimes will be abolished along with the specialised corporate forms which offer them.

Timing: The commitments would be implemented in stages, with transparency installed by the end of 2001, tax discrimination for new company formations removed by the end of 2003, and all completed by the end of 2005.

From the middle of 2001 onwards, the commitment letters issued by jurisdictions began to include in addition what came to be know as the 'Isle of Man' clause, stating that the commitments made would only be enforced if equivalent measures were put in place in the OECD's own member countries, crucially including Switzerland and the US. The ability of the jurisdictions to impose such a clause on the OECD stemmed from the tenacious fight put up by a number of the listed countries in late 2000 and early 2001. This is described in detail below.

In the last week of June, 2000, came the final list from the OECD. Originally the OECD had said that it would impose sanctions on countries it listed as giving 'unfair tax competition' to its poor, defenceless members. But the growing chorus of resistance and outrage from offshore jurisdictions, and some internal dissension from parts of the OECD that felt the institution had been hijacked by a kind of fiscal 'militant tendency', led it to announce in April that the June list would be only in draft, and that the countries listed would have a further year to correct themselves before sanctions would be applied, ie until June 2001.

The list, when it appeared, was as follows:


Anguilla
Liberia St. Vincent
Andorra Liechtenstein Seychelles
Antigua Maldives Tonga
Aruba Marshall Islands Turks & Caicos Islands
The Bahamas Monaco US Virgin Islands
Bahrein Montserrat Vanuatu
Barbados Nauru Western Samoa
Belize Netherlands Antilles Cook Islands
British Virgin Islands Niue Dominica
Guernsey Panama Gibraltar
Isle of Man St Kitts & Nevis Grenada
Jersey St Lucia

To be fair to the OECD, it also criticised a number of its own member states for practices which 'have the effect of creating distortions in the international balance of tax collection, including the use of headquarters regimes, and tax breaks applied to leasing, fund management, shipping and investment.' This mirrored the Primarolo report to some extent.

Notable for their absence from the list of 'tax havens' were the six countries which had already escaped inclusion in the FATF list by writing 'letters of commitment' to the OECD, undertaking to conform to international standards of best practice for transparency and information exchange. The six were Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and San Marino.

The 'harmful' practices which the OECD wanted to root out included the availability of companies which don't have to reveal their shareholders or directors, 'designer' companies in which a corporation can choose what tax rate to pay, and the lack of information exchange or mutual assistance treaties between an IOFC and high-tax countries. This last is the most difficult point: hardly any IOFCs allow 'fishing expeditions' by foreign tax authorities; but if France's tax collectors want to find out whether Monsieur N Bonaparte has money in Mauritius (to pick a silly example) they can't do so unless they have grounds to suggest criminal behaviour on his part which they can show to the Mauritian authorities.

As will be seen, due to the resistance put up by some of the offshore jurisdictions, the OECD gradually had to abandon its attempt to curb low-tax competition from offshore, while sticking to its demands for transparency and information exchange.

(Despite this, in 2006 it declared that it had been successful in abolishing the vast majority of 'harmful' tax regimes, and announced its intention to tackle cross-border tax evasion activity next, with national revenue authority chiefs from all of its member states signing the Seoul Declaration to that effect.)

The EU's Attack on Banking Secrecy

Alongside the OECD Follies, another show was running in Europe, with the EU's withholding tax row reaching a climax in which Gordon Brown managed to persuade the EU to adopt an information-sharing model, albeit with such a long transition period, and such extreme requirements for almost world-wide acceptance of information-sharing that many cynics thought he had deliberately destroyed the withholding tax proposals in order to protect the City's Eurobond business. If only!

In July, 2000, France took over the EU presidency, and immediately made fierce noises about 'offshore'. A meeting in Paris organised by Laurent Fabius maintained the pace, but showed a more moderate tone.Together with France's Secretary of State for the Budget Florence Parly and the Secretary General of the OECD, Donald J Johnston, Fabius hosted a 60-country meeting in Paris to discuss the global implications of the spread of tax havens and other tax regimes deemed by the OECD, and indeed the French government, to be "harmful".

The meeting, which brought together ministers and senior officials from 60 economies, along with representatives from the European Commission, the IMF, the World Bank, the Commonwealth Secretariat and four tax-administration organisations, aimed to put to rest fears that the major G7 countries were out to establish a global tax system. OECD Fiscal Affairs Committee chairman Gabriel Mahklouf said 'Globalisation poses challenges for everybody. It's clear to countries, to many countries, that working together is the best way to meet these challenges. I don't think there is any work on tax harmonisation going on in the OECD.'

At the meeting was George McCarthy, who said: 'This meeting should, we hope, have helped the OECD countries have a better understanding of the Cayman Islands, what our fiscal regime is about and also clear up quite a lot of misunderstandings which seem to have emanated over the years. What this (OECD) process has shown is that when we sit down to a dialogue it can help to resolve differences and take us to a point of mutual understanding.' The Caymans were amongst the six jurisdictions which had pledged to work with the OECD over supposed harmful tax practices.

Mr Fabius said he hoped that the work so far accomplished by the OECD would continue to ensure "une veille concurrentielle internationale", and emphasised that co-operation with non-member economies was essential for the success of this work. The OECD Secretary General reiterated that there was a need for improved cross-border co-operation, calling on tax authorities to 'develop global co-operative networks amongst themselves and with other law enforcement authorities.'

Support for a unified fight against harmful taxation practices seemed to come from all corners. Maria Ramos, Director General of the South African Ministry of Finance, argued at the time that 'we need to ensure that globalisation does not exacerbate poverty. A failure of this work on harmful tax competition would lead to a race to the bottom with potentially catastrophic results for developed countries.'

Russia's Deputy Minister of Taxes at the time, Sergei Shulgin, stated his country's support for the project: 'Russia is concerned about harmful tax competition and welcomes greater co-operation to counter it. One country alone cannot combat these issues.' Morocco's Director of Taxation, Noureddine Bensouda, told the meeting that 'we share a collective ambition to fight against the growth of tax havens.'

The Stance of the US

Much of the force behind the multilaterals' attack on offshore had come from the US Treasury Department during Bill Clinton's presidency, and its loquacious Secretary Larry Summers. More compelling than the OECD's vague talk of sanctions was the threat under US legislation then going through Congress to cut off a jurisdiction in a financial sense if it was implicated in money-laundering. With this legislation, the OECD's threats would have had real menace, but without it, there seemed little to fear for the offshore jurisdictions. At least, that was how it seemed before the events of September 11th, 2001.

The Congress (Republican-dominated, after all, even before the November 2000 elections) had in fact shown itself unwilling to go along with the Administration, and had refused funding for an extension of anti-money-laundering activity. So it was little surprise that the money-laundering legislation failed to pass through Congress, and was lost when the 106th Congress was dissolved.

During the autumn of 2000 a fierce lobbying campaign against the OECD's proposals had been mounted in the US by a coalition of right-wing think-tanks and like-minded Congressmen.

Demonstrating the lack of agreement in the Congress over treatment of offshore jurisdictions, Dick Armey (Rep. Texas), the Republican Majority leader in the US House of Representatives, wrote to Treasury Department Secretary Laurence Summers in September, telling him in no uncertain terms to have no part in the OECD's campaign against offshore jurisdictions accused of 'unfair' tax competition.

Said Dick Armey: 'The financial protectionism that the OECD wants to impose against low-tax regimes is against our national interests and would also endanger the economies of other nations.'

This letter was just the first of dozens sent to Larry Summers and to his successor Paul O'Neill by Republican and even some Democrat Representatives and Senators urging that the US should withdraw its support from the OECD's initiative.

At first Paul O'Neill was taciturn on the subject of the OECD, no doubt balancing the barrage of external pressure against its initiative on the one hand with the equally fierce arguments of his own officials in favour. After his first G7 meeting in Palermo in Sicily in March, 2001, he made a statement which seemed to indicate that he was moving away from the OECD's stance, and finally in May he issued a precisely worded document making it very plain that the US would support only some aspects of the OECD's work on taxation.

European and Canadian politicians responded by saying, in effect, that the US had misunderstood the OECD initiative, and Frits Bolkestein, then EU Internal Market and Taxation Commissioner, in New York the following week for talks, even said he believed the US was in agreement with installing an information-sharing system, something that hardly seemed consistent with O'Neill's statement.

So in mid-2001 it seemed that offshore had gained the upper hand over the OECD, even though most jurisdictions had substantially tightened up their defences against money-laundering and fraud in response to the FATF and OECD initiatives. But then came the 11th of September.