Offshore Financial Centers Face New Regulatory Pressures

[mean-green at hushmail.com]

Offshore Financial Centers Face New Regulatory Pressures 

BY CHARLES PIGGOTT


St. Peter Port in the Channel Islands  a self-governing crown dependency 
of Britain  is home to Guernsey's growing offshore financial services industry. 
Like most offshore financial centers, it has thrived on the back of the 
surging international wealth-management industry during the past decade. 
In this tranquil harbor town, the offices of large international private 
banks like Credit Suisse now jostle alongside the tourist shops looking 
out over the quayside yachts. This year, bank deposits in Guernsey banks 
topped #60 billion ($88 billion), 8% more than the year before. 

   

The neighboring Channel Island of Jersey, just 15 miles off the coast of 
France, has a similar story to tell. "Money is flowing in and this is very 
encouraging," says Richard Pratt, director-general of Jersey's Financial 
Services Commission. Deposits in Jersey's banks have grown to more than 
#115 billion, while Jersey-based investment funds reached #88 billion earlier 
this year, up 50% from the year before. 

Yet despite the healthy growth of offshore private banking, even well-regulated 
tax shelters like the Channel Islands face a difficult paradox: the more 
successful they become, the more pressure there is to close them down as 
large countries worry over lost tax revenue 

Larger countries want tax shelters to cooperate not just in the fight against 
money laundering and fraud, but in more routine matters of tax collection. 
On the other side of the debate, offshore jurisdictions with minimal tax 
and spending requirements resent outside interference in their internal 
affairs.

Laurie Morgan, Guernsey's most senior politician and president of the island's 
advisory and finance committee, says: "Nobody, not the EU nor the OECD, 
nor any other body is suggesting that we change our tax code, only that 
we apply it fairly to residents and non-residents alike. We have no quarrel 
with other countries taking steps to guarantee their tax revenues, but what 
we do object to is large countries grouping together to bully us into how 
to run our country.

  
 Offshore shelters like Guernsey in the Channel Islands are now confronted 
with calls for greater transparency.   


Since last spring, a series of international initiatives against money laundering,
 tax evasion and bank secrecy have stepped up the pressure on offshore financial 
centers. First, in April the Financial Stability Forum (FSF), a G-7 arm 
set up in the wake of the 1997 Asian financial crisis, published a report 
on offshore financial centers based on a survey of financial regulators. 

The report listed Hong Kong, Luxembourg, Singapore, Switzerland, Dublin 
(Ireland), Guernsey, Isle of Man and Jersey among the best-regulated centers. 
But among the 27 worst-regulated were European centers Cyprus and Liechtenstein.

The FSF report warned that in the event of continued nonadherence to international 
standards of regulation, transparency and cooperation, offshore centers 
could face sanctions including the withdrawal of aid from institutions like 
the International Monetary Fund and other multilateral development organizations. 
The report also suggested that regulators could stop domestic companies 
from doing business with or in problematic offshore financial centers.

In June another intergovernmental group, the Financial Action Task Force,
 published a list of 15 "noncooperative jurisdictions" whose "detrimental 
practices" hamper the fight against money laundering. Included in this list 
were Russia, Lebanon, Israel and Liechtenstein. 
Later that month, the OECD also published a list, this time of 35 "harmful" 
tax shelters. Included in the OECD list are European financial centers such 
as Andorra, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein and 
Monaco. Other centers, such as the Cayman Islands, Cyprus and Malta, missed 
out on inclusion only by promising to cooperate with initiatives to close 
tax loopholes. 

Frances Horner, head of the OECD's tax competition unit in Paris, says: 
"What we want is to stop the illegal nonreporting [of investment income]. 
In other words, we do not want the veil of secrecy in one jurisdiction to 
encourage citizens in any other to break the rules laid down by their own 
domestic authorities." . 

The OECD wants offshore centers to exchange information with overseas tax 
authorities not just in criminal investigations such as serious fraud and 
money laundering, but also in routine civil matters. Tax shelters included 
in the OECD list have until next summer to cooperate or face inclusion in 
a second definitive list of harmful tax shelters and the possibility of 
sanctions from OECD countries. 

Guernsey and Jersey were added to the OECD list after they refused to sign 
a letter of commitment, even though both were given a clean bill of health 
by the other recent reports into offshore financial centers. 

Guernsey politician Mr. Morgan explains: "The OECD wanted us to make the 
highest-level political commitment to do whatsoever it might require in 
the future. We wouldn't dream of signing such an open-ended agreement. So 
now we have 12 months in which to reach an accord." 

Some have complained that the OECD and other groups have given little guidance 
on how blacklisted financial centers can get themselves off the list. Jersey 
Financial Services' Mr. Pratt says: "None of these organizations designed 
a process through which [jurisdictions] can get themselves off these lists 
and they have yet to come up with an appropriate exit strategy." Multilateral 
negotiations between offshore financial centers and intergovernmental groups 
like the OECD and G7 are now likely, but little progress has been made so 
far. 

In addition to mounting pressure from the OECD and G7, low tax jurisdictions 
also need to convince the European Union that they pose no threat to EU 
plans to close tax loopholes on its own doorstep. Like the OECD, the EU 
also wants tax shelters to share information on private bank accounts.

Since 1997, EU member countries have been able to choose between implementing 
information-sharing agreements with other members, or charging a withholding 
tax on savings accounts. After 2010, however, all EU countries will be expected 
to implement information-sharing agreements. This will effect Luxembourg 
and Austria, whose secrecy laws forbid banks from handing over client information 
to foreign tax authorities in all but the most serious criminal investigations.

The abolition of bank-secrecy laws in Europe is still the subject of hot 
debate. Lucien Thiel, managing director of the Luxembourg Bankers' Association 
says: "The problem isn't bank secrecy, but the abuse of bank secrecy, where 
it is used to hide dirty or criminal money."

Both non-EU Switzerland and the EU's Luxembourg abstained from the OECD's 
recent recommendations that countries should loosen bank-secrecy codes. 
Meanwhile, Mr. Thiel says Luxembourg would only agree to EU plans on information 
sharing if non-EU countries accept the same conditions. Luxembourg fears 
that it will lose bank deposits to countries that preserve higher levels 
of confidentiality, particularly Switzerland, if it holds out for bank secrecy.

There are reports that private-bank clients are already reacting to increasing 
disclosure between high-and low-tax jurisdictions. Says Linda Foster, a 
partner at Andersen Consulting in London: "[Offshore] private banks are 
starting to encourage their clients to at least think about full disclosure. 
So yes, money is flowing back onshore, but not necessarily just because 
of tax."

Europe's tax shelters will have to walk a tightrope in the next 12 months 
between cooperating with larger governments and losing deposits to less 
scrupulous jurisdictions. "We must not chase money out of Europe. If other 
countries are not subject to the same conditions, money will simply go further 
afield," says Mr. Thiel, of the Luxembourg Bankers' Association.