It is estimated that up to 60 per cent of the world’s money may be located oVshore, where half of all financial transactions are said to take place. Meanwhile, there is a perception that secrecy about oVshore is encouraged to obfuscate tax evasion and money laundering.
Depending upon the criteria used to identify them, there are between forty and eighty oVshore finance centres spread around the world. The tax rules that apply in these jurisdictions are determined by the jurisdictions themselves and often are more benign than comparative rules that apply in the larger financial centres globally. This gives rise to potential for the development of tax mitigation strategies. McCann provides a detailed analysis of the global oVshore environment, outlining the extent of the information available and how that information might be used in assessing the quality of individual jurisdictions, as well as examining whether some of the perceptions about ‘OVshore’ are valid. He analyses the ongoing work of what have become known as the ‘standard setters’ – including the Financial Stability Forum, the Financial Action Task Force, the International Monetary Fund, the World Bank and the Organization for Economic Co-operation and Development. The book also oVers some suggestions as to what the future might hold for oVshore finance.
H I L T O N McC A N N was the Acting Chief Executive of the Financial Services Commission, Mauritius. He has held senior positions in the respective regulatory authorities in the Isle of Man, Malta and Mauritius.
Having trained as a banker, he began his regulatory career supervising banks in the Isle of Man. In Malta, his focus was on investment business, and in Mauritius his focus was on the establishment and strategic development of the recently created FSC.
H I LT O N MCC A N N
Cambridge University Press
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List of figures pagevii List of tables viii Preface xi
List of abbreviations xix
PA R T I The past 1
1 Linkages 3
2 The ‘OVshore’ env ironment 10
3 The ser v ice providers and the consumer (1) 37 4 The ser v ice providers and the consumer (2) 58 5 The significance of taxation 82
6 A description of regulator y and super v isor y processes 116
7 The regulator and the regulator y authorit y 177 8 Money laundering 202
9 Some international organisations and groupings 230
PA R T I I The present 259
10 Supranational focus (1): the Financial Stabilit y Forum and the International Monetary Fund 261
v
11 Supranational focus (2): the Financial Action Task
Force 287
12 Supranational focus (3): the Organization for Economic Cooperation and Development 307
PA RT I I I The future 331
13 Some problems ‘OVshore’ 333 14 Some problems ‘Onshore’ 345 15 Small islands and ‘OVshore’ 359
16 Some information on par ticular centres 373 17 The UK and ‘OVshore’ 388
18 The USA and ‘OV shore’ 400
19 Can the problems be identified? 422 20 O Vshore’s Future 433
21 How to assess an ‘OVshore Finance Centre’ 465 22 Conclusion 479
Appendix 1 491 Appendix 2 531
Index 534
6.1 Regulation: problem/impact analysis page 120 6.2 Regulation: cost/benefit analysis 121
21.1 The success paradigm 472
vii
1 Par ticipation in the Information Framework page 491 2 Ser v ices ‘O Vshore’ 491
3 The medical paradigm 492
4 Financial ser v ices regulator y tools 492 5 Number of registered companies 492 6 Regulator y structures worldw ide 493
7 External factors versus regulator y factors 493 8 Examples of punitive measures that may be imposed by
superv isor y authorities 494
9 The evolutionar y process describing the maturation of an international financial ser v ices centre 494 10 Members of the Basel Committee 495
11 Analysis as at end 2003 of the number of jurisdictions
assessed under the Financial Sector Assessment Program 496 12 Analysis as at Februar y 2005 show ing the number of
jurisdictions assessed under the Financial Sector Assessment Program 496
13 The general framework of the For t y Recommendations 497 14 The general framework of the Nine Special
Recommendations 497
15 Population, land area and population densit y of selected OFCs 498
16 Global statistics: foreign direct investment, assets under management and world expor ts 498
17 The FSF’s categorisation of OFCs (as at March 2000) 498 18 FATF Members and O bser vers 500
19 Tax havens, as defined by the OECD (as at June 2000) 501 20 The OECD’s ‘potential by uncooperative tax havens’ 503 21 The OECD’s ‘uncooperative tax havens’ 504
22 The FATF’s ‘First Set of Jurisdictions’ 504
viii
23 Ongoing changes to the FATF’s list of Non-Cooperative Countries and Territories 506
24 Members of the Egmont Group 508 25 Members of the European Union 509 26 OECD/FATF/FSF repor ts summarised 510 27 Analysis of FSAP and Module 2 assessment repor ts
(as at 12 March 2004) 516
28 Members of IOSCO (as at 30 April 2005) 518 29 OFCs, summar y status 521
30 IMF assessment status summarised 524 31 Analysis of total assets held in OFCs 527
It has been estimated that up to 60 per cent of the world’s money may be located ‘OVshore’ – which is the home of US$6.5 trillion of assets. Some 50 per cent of all financial transactions take place ‘OVshore’. According to an IMF report dated March 2005, in respect of the Cayman Islands alone,
‘the total international assets and liabilities held by Banks in the Cayman Islands were US$1.04 trillion’.1 It has been suggested that ‘the various oVshore jurisdictions play a role in over US$1000bn of business annually . . . [and that] . . . oV balance sheet transactions now account for a growing portion of oVshore business, so that the true scale of the uses to which sophisticated businesses make of the oVshore centres is not apparent from their public documents’.2
Even allowing for a material margin of inaccuracy in the estimates, the figures quoted indicate that the global economic potency of the compos- ite ‘OVshore’ environment is significant. The potential may be positive or negative; for example, ‘OVshore’ centres clearly perform a useful function which the volume of financial trade reflects. The quantum makes ‘OVshore’ a factor in, and therefore a potential opportunity in respect of, global financial stability. The text describes in detail why
‘OVshore’ centres add so much value. However, there is a potential threat also. It has been stated that ‘[t]he potential for financial system instabil- ity in an oVshore country underscores the need to better understand the nature of OFC [oVshore finance centre] activities and inter-linkages with the global financial system’.3 This text attempts to contribute to that understanding.
1 Cayman Islands: Assessment of the Supervision and Regulation of the Financial Sector, March 2005, Vol. II;Detailed Assessment of Observance of Standards and Codes, para. 7, p. 6.
2 D. P. Kempe and G. Wood,The Bermuda International Business Guide 2003, ISI Publica- tions Ltd, p. 5.
3 OVshore Financial Centres–The Role of the IMF, 23 June 2000, p. 3.
xi
The increasing competition for good quality business, mainland jur- isdictions’ concerns about how they will continue to finance budget deficits, the increasing frequency and extent of financial fraud and the overriding concerns about global money laundering and the financing of terrorism have all focused attention on financial environments and how they operate. The ‘OVshore’ financial environment is no exception. In the words of one commentator, ‘[i]t would be hard not to notice that something is going on oVshore, even if the public do not know much about it, or whether it is a good thing or a bad thing’.4
Insofar as ‘OVshore’ is concerned, the focus culminated in three far- reaching and fundamentally significant reports by the Organization for Economic Cooperation and Development (OECD), the Financial Stabil- ity Forum (FSF) and the Financial Action Task Force (FATF) respectively.
(Subsequently, the International Monetary Fund (IMF), the United Nations (UN) and the World Bank became involved also.) The reports underscored the quantum of business transacted ‘OVshore’ and prompted substantial further thought and action on the potential of the ‘OVshore’ environment. Without doubt, the ‘OVshore Environment’
has changed as a result of these reports and will change further as
‘OVshore’ attempts to optimise its potential in the global economic environment. The profile of ‘OVshore’ was raised significantly as a result of the amount of attention focused on it by the supranational bodies – but care should be taken to avoid any misunderstandings. Without a general awareness of the ‘OVshore Environment’, the rationale for such attention may be misinterpreted to mean something negative.
In fact, it is a positive development that currently more attention is being paid to ‘OVshore’ than ever before, and this book examines why that should be the case. The image and credibility of ‘OVshore’ is improving rapidly as jurisdictions understand their respective part in the global economy. The text attempts to place this increased interest into a meaningful perspective – but what is that perspective? Even those who are aware of ‘OVshore’ may not know a great deal about it – for example how might people in general – and financially oriented people in particular – define ‘OVshore’?
While it would be convenient to begin with a definition of ‘OVshore’, it is not possible to do so – because there is some uncertainty about the meaning of ‘OVshore’. According to some, this uncertainty is the direct
4 Milton Grundy, Introduction, The OFC Report 2003,OVshore Legislation 2003.
result of the shroud of secrecy that envelops everything to do with
‘OVshore’. However, the breadth and depth of information produced in this text suggests that the ‘OVshore’ environment is generally speaking not opaque. The absence of definitions need not thwart any attempt to find out what ‘OVshore’ means. In this respect, to enable some sort of framework to be established, some ‘working definitions’ are suggested in the chapters that follow. To underline the fact that the definitions suggested are merely means to an end (and not generally agreed), other than where it appears as part of a quotation, the word ‘OVshore’ will be shown within inverted commas in this text.
Despite the reasons, in the absence of factual information about
‘OVshore’, people are likely to default to anecdotal evidence, assumptions and estimates and will rely on ‘secondary information’ to form opinions, to make assessments and to draw conclusions. Such opinions and assess- ments are unreliable because they are based on perceptions that may or may not conform to reality. In fact, perceptions are an integral part of the ‘OVshore’ environment and sometimes they give rise to bizarre impressions – which in turn can lead to pejorative attitudes towards
‘OVshore’. Frequently, perceptions combine fact and fiction and are often subjective – having been influenced disproportionately by extraneous factors that have little real bearing on the true scheme of things. The progression begins with a classification of a jurisdiction as an ‘OVshore Centre’. Although it ought not, to some this infers some type of stigma – the reasons for which are explored in the text. Naturally, jurisdictions that might otherwise not object to being referred to as ‘OVshore Finance Centres’ (OFCs,) are not willing to be regarded or classified as such if that stigma attaches.
Perceptions can be insidious in many aspects of life, but, in respect of financial matters, they have a nasty habit of becoming reality. For example, if, in error, customers perceive their bank to be in financial diYculties, they might anticipate a run on the bank. As one nervous depositor reveals his anxiety to another, the probability of the actual collapse of the bank increases – to the extent that it might even become a reality. In short, wrong perceptions can potentially lead to disastrous consequences. In respect of ‘OVshore’, the perception is likely to gain momentum if there is no contrary action and message that are coher- ently presented to demonstrate otherwise. Those who are unwilling or unable to undertake appropriate research themselves or who – for whatever reason – do not know any diVerent will assume that whatever
they hear is true. The momentum gathers pace – and the negative stigma becomes a reality.
In the context of ‘OVshore’, there are ways in which facts are mixed with fiction. For example, it is generally true that many ‘OVshore Finance Centres’ are sparsely populated, tropical islands – where the main enterprises are finance and tourism. It is also frequently true that financial institutions in general and banks in particular which are located in such jurisdictions proliferate. There are likely to be many more banks than necessary for the business of the local community – which is almost certain to be small. Further, it is probable that the quantum of financial transactions processed through such centres will be extremely large both in value and in number. Probably, very large amounts of money will be held on deposit.
Having presented some of the facts, here is some of the fiction:
‘OVshore’ centres have more banks per head of population than other financial centres. Not true – for example, compare Lugano in Switzer- land; there is no meaningful regulation ‘OVshore’, which means that virtu- ally anything is possible there; the few rules that exist are benign, and even those are not really enforced; the unwritten rule is that few (if any) questions are asked; the only purpose that ‘OVshore’ serves is to help very wealthy people evade tax; the reason why everything to do with ‘OVshore’ is so secret is because all the business transacted has to do with tax evasion; ‘OVshore’ does not discourage money laundering; in fact, it is argued that the lack of rigour there encourages wrongdoing; money laundering is only possible because ‘OVshore’ jurisdictions will do anything to attract new business, so ‘funny money’ is acceptable‘OVshore’;
opening a bank account ‘OVshore’ is a mere formality; cash transactions are likely to be commonplace ‘OVshore’; ‘brass plate operations’ proliferate ‘OVshore’ (i.e. entities that are present only in legal form but without any physical presence or real substance); financial institutions operating ‘OVshore’ knowingly open accounts for money launderers and other criminals.Here are some reasons why ‘OVshore’ is an enigma. First, it is axio- matic that ‘OVshore Finance’ is conducted in an island jurisdiction – referred to as an ‘OVshore Finance Centre’ – but even this is not always the case (e.g. the International Financial Services Centre in Dublin has been referred to as ‘OVshore – Onshore’). It is irrelevant per se whether a person’s bank is on the island of Manhattan or on the island of Maur- itius. The quality and security of the financial environment is more important than whether the jurisdiction is an island or not.
Secondly, the ‘quality’ of the business that is conducted within the
‘OVshore’ environment is the key to its future. One commentator has said that ‘[i]n a world of 24 hour-a-day global markets and of integrated financial systems, having a mass of dirty money floating around the world threatens not just the markets but also western democracy’.5 Subsequent chapters will examine this global phenomenon and indicate the extent to which financial institutions in both mainland and
‘OVshore’ jurisdictions have been used to warehouse ‘dirty money’ (the proceeds of crime – including tax evasion – or representing terrorist finance).
Tax evasion should be distinguished from tax avoidance. It is the legitimate right of every person to pay no more tax than is due. Funda- mentally, ‘OVshore Centres’ provide eYcient opportunities for taxpayers to arrange their aVairs in such a way as to minimise their tax bills.
Business ‘OVshore’ revolves around tax. ‘OVshore Centres’ have been successful but this has aroused strong suspicions in larger mainland jurisdictions that their success infers that it is not legitimately achieved.
Other citizens – for whom the ‘OVshore’ route is not an option – have no sympathy because they are not prepared to condone someone else being able to enjoy an advantage which they cannot. ‘OVshore’ is a whipping boy – often disparaged and always mistrusted. The text tries to treat such suspicions objectively by enabling readers to compare like with like.
Thirdly, ‘OVshore’ is vulnerable – but perversely its vulnerabilities are exactly what make ‘OVshore’ attractive in the first place. They include:
autonomy, confidentiality oVered to investors, benign tax structures, and a tailored regulatory environment that is frequently less prescriptive than might be applied in mainland jurisdictions. These attributes are precisely what tax-sensitive corporations and individuals are looking for.
5 J. Robinson,The Laundrymen, Simon & Schuster UK Ltd, 1998, p. 394.
Regrettably, fraudsters, crooks, money launderers, tax evaders and finan- cers of terrorism are looking for exactly the same things – for other purposes. When something wrongful happens ‘OVshore’, it often attracts a great deal of attention but surprises no one because the general opinion is that ‘OVshore’ infers dubious business at best. When something wrongful happens in a mainland jurisdiction, it seems to receive less attention. Is this because it is regarded as commonplace and not news- worthy? No financial environment is safe from those who would exploit its advantages for wrongful purposes – so why should the same type of wrongdoing attract such diverse responses?
It is hardly surprising that, thus far, all attempts to define ‘OVshore’ or to suggest what it comprises, or which jurisdictions are ‘OVshore’ juris- dictions, and what particular traits or characteristics make them fall within the definition, have proved problematic. The reasons for all this uncertainty are explored in the text.
Meanwhile, in the words of Blaise Pascal, ‘Let it not be said that I have said nothing new. The arrangement of the material is new.’ In fact, much of the information presented is not new per se – but the construct in which it is presented is diVerent to what has gone before – and it is hoped that a composite presentation of the information contained in the text may be of use in particular to those who work ‘OVshore’. It is hoped also that, simultaneously, the construct adopted will not dissuade the casual reader while attempting to stimulate the interests of researchers to probe further. This might be achieved in a number of ways – but the optimum use to which this text might be directed is as a platform for subsequent study and research.
While there is a substantial amount of information available about
‘OVshore’, it is in myriad forms, and to a large extent it is unclassified and disjointed. The source of most information that is available is likely to be an article in a journal or in a newspaper. The footnotes aptly demonstrate this point.
At best, newspaper articles (and, to a lesser extent, articles in journals) about ‘OVshore’ are often helpful – but their publication is in response to a matter of current public interest. Matters arising are discussed in an uncoordinated fashion and, most often, the context is unclear. Books about ‘OVshore’ that combine related matters in a coherent and co- ordinated framework are not common. Often, the books that are avail- able are promotional in nature – they combine advertising with information that is sometimes superficial. Many are written with a view to persuading readers to contact the author (or related persons) for
advice on tax planning or fiduciary services. This text attempts to collate some of that information and to show some of the synergies arising from having done so.
The diYculties in researching ‘OVshore’ arise not only because existing information is not collated in any cohesive or coordinated or easily managed form, but also because there is a dearth of statistical information in particular. In this respect, the IMF has said that ‘[a]ll examinations of the role of OFCs in the international financial system have been hampered by a lack of adequate data’.6This means that we are less than totally aware than we should be of the potential benefits (and dangers) that characterise this part of the global economy. By extension, sub-optimisation of the environment’s positive potential is likely, and, at worst, the extent to which ‘OVshore’ is or might be used for wrongful purposes will not be understood properly. For example, it is only with the publication of a paper on Best Practice for Corporate Services Providers (CSPs) in 2002 that there has been any real emphasis on setting standards in what is an increasingly significant area of ‘OVshore’ activity.
Even though the services provided by CSPs have been a staple part of the
‘OVshore’ menu for many years (some jurisdictions have hundreds of thousands of entities incorporated therein), they have received scant attention until recently. However, the advances made have allowed some of the more progressive jurisdictions to adopt a regulatory response that leaves much bigger mainland centres (such as the UK) far behind.
A clearer perspective of ‘OVshore’ may contribute to the general store of knowledge and to our understanding of this integral part of the global economy. Ultimately, this enhanced level of understanding may lend something positive to the possible future uses to which the ‘OVshore Environment’ might be put. ‘There is a need for a better understanding of the operations of OFCs and surrounding risks.’7 Contrarily, unless the problems that exist are analysed correctly, the remedies suggested may not be appropriate. In short, it is suggested that any attempt to understand ‘OVshore’ is a valuable endeavour.
In respect of structure, the book is divided into three parts. The first third of the book (Chapters 1 to 9) sets the scene. It describes the context of ‘OVshore’ and identifies some of the problems that arise because of the lack of satisfactory definitions. Three diVerent interest groups are
6 OVshore Financial Centres–The Role of the IMF, 23 June 2000, p. 20.
7 OVshore Financial Centres–The Role of the IMF, 23 June 2000, p. 7.
identified – the marketplace, ser v ice prov iders and consumers. Tax and regulation – the two factors that are at the ver y core of ‘OVshore’ – are examined in detail.
The middle third of the book (Chapters 10 to 12) focuses on the extent to which ‘OVshore’ has been criticised, and explores whether it is fair to blame ‘O Vshore Centres’ for not doing more to disenable crim- inals from exploiting their jurisdictions by laundering the proceeds of crime ‘OVshore’. Some of the problems that aVect the g lobal financial ser v ices network are considered. The extent to which the ‘O Vshore’
env ironment has become the focus of g lobal attention is perhaps best understood by reference to work under taken at the end of the 1990s by the FSF, the FATF and the OECD. An analysis of the work of these three organisations is spread over three chapters. Whether there is any correl- ation between ‘OVshore’ and small island jurisdictions is considered briefly.
The last third of the book (Chapters 13 to 22) begins w ith a synopsis of how things stand currently. There is a comparison of two of the world’s largest – and most respected – financial services centres – the USA and the UK. This leads to consideration as to whether ‘OVshore’ is really the cause of so many global woes or whether it is somewhat a scapegoat. This section attempts to summarise the problems and to identify some options for the future – after the FSF, FATF, OECD and the catastrophic events of 11 September 2001 in the USA. Finally, the book provides a checklist that consumers might use in deciding where to transact ‘OVshore’, and ends with some recommendations for the future.
AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism
APG Asia/Pacific Group on Money Laundering ATS Alternative Trading Systems
BCP Basel Core Principles
BIS Bank for International Settlements CAD Capital Adequacy Directive
CARICOM Caribbean Community and Common Market CCJ Caribbean Court of Justice
CDD Customer Due Diligence
CFATF Caribbean Financial Action Task Force COSE Committee of South African Stock Exchanges CPIS Coordinated Portfolio Investment Survey CSME Caribbean Single Market and Economy CSP Corporate Service Provider
CTAG Counter Terrorism Action Group
EBRD European Bank for Reconstruction and Development ECB European Central Bank
ECOFIN Council for Economic and Financial AVairs (of the EU) EEA European Economic Area (EU countries plus Norway,
Iceland and Liechtenstein) EIB European Investment Bank
ESAAMLG Eastern and Southern Africa Anti-Money Laundering Group
FATF Financial Action Task Force
FINTRAC Financial Transactions and Reports Analysis Centre (of Canada)
FIU Financial Intelligence Unit
FSA Financial Services Authority (of the UK) FSAP Financial Sector Assessment Program FSF Financial Stability Forum
xix
FSR Financial Strength Rating FSRB FATF Style Regional Body
FSSA Financial System Stability Assessment
G7 Canada, France, Germany, Italy, Japan, the United Kingdom and the United States
G8 Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States
GAFISUD Financial Action Task Force on Money Laundering in South America
GCC Gulf Cooperation Council
GIABA Intergovernmental Group of Action Against Money Laundering in West Africa
GPML Global Programme against Money Laundering (UN) IAIS International Association of Insurance Supervisors IDB Inter-American Development Bank
IFI International Financial Institution IMF International Monetary Fund
IMoLIN International Money Laundering Information Network IMVT Informal Money or Value Transfer System
IOSCO International Organization of Securities Commissions IRB Internal Ratings Based
ISD Investment Services Directive
ISMA International Securities Market Association ITIO International Trade and Investment Organization JMLSG Joint Money Laundering Steering Group
KYC Know Your Customer
MLAT Money Laundering Assistance Treaties
MONEYVAL Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures
MOU Memorandum of Understanding
NCCT Non-Cooperative Countries and Territories NCIS National Criminal Intelligence Service (of the UK) NPO non-profit organisation
ODCCP OYce for Drug Control and Crime Prevention OECD Organization for Economic Cooperation and
Development
OECS Organization of Eastern Caribbean States OFC OVshore Financial Centre
OFSI OYce of the Superintendent of Financial Institutions OGBS OVshore Group of Banking Supervisors
OGIS OVshore Group of Insurance Supervisors
PC-R-EV See MONEYVAL
PEP politically exposed person
ROSC Report on Observance of Standards and Codes SADC South African Development Community SAR Suspicious Activity Report
SDE Small and Developing Economies
SIB Securities and Investment Board (of the UK) SIE Small Island Economies
SRO self-regulatory organisation STR Suspicious Transaction Report
SWIFT Society for Worldwide Inter-bank Financial Telecommunication
TA Technical Assistance
TIEA Tax Information Exchange Agreement
UCITS Undertakings for Collective Investment in Transferable Securities
UNODCCP United Nations OYce for Drug Control and Crime Prevention
VAR value at risk
VOI verification of identity WCO World Customs Organization WTO World Trade Organization
The past
Part I comprises the first third of the text, embracing nine chapters. The timespan is from the beginnings of ‘OVshore’ (say, the 1930s) until the late 1990s (say, 1998). Chapter1provides an overview and a brief analysis of each of the chapters that follow. More generally, this Part sets the scene, by describing the context in which ‘OVshore’ exists, and identifies why the lack of relevant information is problematic. Three diVerent interest groups are identified – the marketplace, the service providers and consumers. The two factors that are at the very core of ‘OVshore’ (tax and regulation) are examined in detail.
Linkages
Not many people w ill defend tax havens . . . They make fine whipping boys. 1
1.1 The str ucture of the book
The three sections into which the book is div ided equate roug hly to the natural div ision between the past, the present and the future. Some licence is taken w ith this ar bitrar y div ision – but not to the extent that it w ill detract from the purposes described in the Preface.
Each chapter begins w ith a brief summar y of its content. Many of the chapters ‘stand alone’, and can be read independently of other chapters. The object of Chapter 1 is not only to show the linkages between chapters but also to describe the core themes that run through the text.
1.2 What does ‘OVshore’ mean?
itions’ are suggested. The contributions of the OECD and of the IMF are noted in this respect. Some background information is provided on the origins of ‘OVshore’, and its development is traced. The world’s
‘Tax Havens’ (as defined by the OECD) are identified. Whether Tax Havens are the same as ‘OVshore Centres’ is a debate that is left until later, but section 2.7 shows that some writers see clear distinctions between the two.
1 ‘The Mystery of the Vanishing Taxpayer’, 29 January 2000, Special Supplement, The Economist, p. 6.
3
1.3 The market, the buyers and the sellers
Chapters 3 and 4 identify three diVerent interest groups that exist in respect of ‘OVshore’. Chapter3focuses on the marketplace, that is to say the ‘OVshore Centre’ per se. Comment is provided on some features of ‘OVshore’ jurisdictions and on the legitimacy of such centres, as described by the IMF. Reference is made to the three attributes that are the hallmarks of all ‘OVshore’ jurisdictions – tax, regulation and confi- dentiality. A brief comment is provided on confidentiality in Chapter3.
A subsequent chapter is devoted to tax and regulation. Chapter3ends with a description of some of the characteristics of ‘OVshore Finance Centres’, and a comparison with some of the characteristics of mainland finance centres.
Chapter 4considers the remaining two interest groups – the service providers and the consumers. The range of products oVered by the service providers is examined in detail. The FSF’s description of why OFCs are used is quoted. The consumer and his or her expectations are considered at the end of the chapter.
1.4 Three fundamental criteria for ‘OVshore Finance Centres’
The three key attributes of ‘OVshore Finance Centres’ have already been mentioned. Chapter 5 concentrates on the second of these (tax) and Chapter6is devoted to regulation.
Insofar as tax is concerned, ‘OVshore’ infers either no tax at all or low tax (see the OECD’s definition of a tax haven in section12.3below). On this basis, it can be no surprise that the ‘OVshore’ environment is a factor in many tax mitigation strategies. Chapter5begins with a discussion of the diVerences between avoidance and evasion. The chapter includes consideration of tax competition and tax harmonisation before describ- ing the importance of ‘OVshore’ in tax planning. The OECD’s approach to tax and ‘OVshore’ is described. The rest of the chapter is given over to a description of the EU’s Savings Tax Directive and its implications for ‘OVshore’.
It is suggested that regulation is one of the most critical components for success within any ‘OVshore’ arena – and the reasons for this are teased out in a description of the ‘success paradigm’ (see section 21.7 below). In the meantime, regulation is the last of the criteria mentioned above. It is described in Chapter 6. In the main, the people who use
‘OVshore’ do not live in the jurisdiction where they conduct their
business. Such people not only want to minimise their tax burden but also want to ensure that their assets are safe. This is why regulation is described as a ‘critical success factor’. Chapter6provides the rationale for regulation, and explains its functions by reference to a clinical analogy.
As an adjunct to a commentary on the role of the regulator and super- visor, some of the components of regulation, including licensing, fit and proper, compliance and ‘Know Your Customer’, are described in detail.
Reference is made to diVerent regulatory models (e.g. Twin Peaks) and techniques (e.g. consolidated supervision). Some diVerences between regulation and supervision are described.
Chapter 7 expands the theme of regulation – but does so with the emphasis on the role of the regulator and the regulatory authority – within the context of evolving financial services. A number of operational matters are considered – such as training and experience, communica- tions, boards – and some of the advantages and disadvantages of a single unified regulatory authority.
1.5 The ‘OVshore’ enigma
Much has been said and written about money laundering. It is fre- quently the case that ‘OVshore Centres’ are blamed for not doing more to frustrate the attempts of criminals in laundering the proceeds of their crimes and to prevent terrorists from financing their illegal activ- ities through ‘OVshore Finance Centres’. Chapter8explores the extent to which this accusation is justified. The FATF and its work are considered at some length. The crime of money laundering is defined, and some of the factors that contribute to its insidious nature are described. The implications for ‘OVshore Finance Centres’ are considered before an analysis of the fight against money laundering is provided. The chapter introduces ‘Financial Intelligence Units’ and includes a description of their role and that of the Egmont Group. Reference is made to the Wolfsberg Principles. The chapter ends with some comments on the Basel Committee’s paper entitled ‘Customer Due Diligence for Banks’. Comments on the threats imposed by terrorist financing are mentioned.
1.6 ‘OVshore’ in context
The global financial environment impinges upon ‘OVshore’ in many ways – not least through the myriad organisations whose operations
bring them into close proximity with that environment. Some of these organisations are described in Chapter9.
1.7 The supranational focus
The extent to which the ‘OVshore’ environment has become the focus of global attention is perhaps best understood by reference to work under- taken at the end of the 1990s by three supranational organisations.
The respective reports of the FSF, the FATF and the OECD are analysed in Chapters10,11 and12, respectively. These reports are fun- damentally significant because their influence on the ‘OVshore’ environ- ment is direct. The involvement of the IMF and of the World Bank is also described.
The OECD published a report in 1998 entitled ‘Harmful Tax Competition – An Emerging Global Issue’. The OECD believed that the development of tax systems encouraged by the globalisation of business enabled ‘tax havens’ to develop. The OECD’s report proceeded to define a ‘tax haven’ and has led to substantial changes in the ‘OVshore’
industry.
Meanwhile, in February 2000, in order to identify anti-money laun- dering weaknesses generally, the FATF published a report entitled
‘Report on Non-Cooperative Countries and Territories’ that focused on (unnamed) countries and territories that were described as ‘uncoopera- tive’ in the war against money laundering. This was to set the scene for what turned out to be a ‘name and shame’ exercise.
The FSF created a Working Group on ‘OVshore Finance Centres’. The Group was asked to research and assess certain jurisdictions. The Group’s work was completed in March 2000, and its conclusions were published in the ‘Report of the Working Group on OVshore Financial Centres’.
A survey (of both mainland and ‘OVshore Finance Centres’) was under- taken to obtain appropriate information. The results of the survey were used to classify those jurisdictions that were considered to have significant ‘OVshore’ activities into three categories according to their perceived quality of supervision and degree of co-operation.
1.8 Problems associated with some financial environments Chapters 13 and 14 are a mirror image of each other. They describe some of the problems that aVect the global financial services network.
Chapter 13 focuses on ‘OVshore’ and Chapter 14 looks at mainland jurisdictions – sometimes called ‘Onshore’. There are many reasons for problems in financial services jurisdictions and it is naı¨ve to suggest that merely tightening the rules will eradicate all weaknesses. Some of the examples cited will indicate why this is so. It is also the case that any jurisdiction that wants to continue in business as a financial services centre in the longer term cannot tolerate weak regulation and control. To do so would weaken the foundations on which meaningful growth will depend.
The following quote gives food for thought: ‘It is often suggested that markets push governments into complying with international standards . . . At most . . . markets will encourage countries to claim to implement international standards, but will not encourage them to implement stand- ards properly.’2
1.9 ‘OVshore’ and small island jurisdictions
Chapter15presents some (brief) comments on the correlation between
‘OVshore’ finance and small island jurisdictions. The chapter indi- cates some of the tensions that exist in such environments and also describes some characteristics that make small islands ideal for the conduct of financial services – but at a price!
1.10 An overview of some financial centres
In order to ‘globalise’ the matters under discussion, Chapter16presents some information and figures that indicate the size of the ‘OVshore’
environment. However, there are problems in trying to do so because the statistics available are limited and because ‘OVshore’ centres are in a period of continuous change. Within limitations, the chapter provides a snapshot of how things stand currently in some jurisdictions.
The information is not comprehensive – this is not the purpose of the text.
2 J. Ward, ‘Is Basel II Voluntary for Developing Countries’, December 2002,The Financial Regulator, Vol. 7, No. 3, p. 54.
1.11 The extent to which ‘OVshore’ business is restricted to
‘OVshore’ centres
Chapters 17 and 18 present some information on two of the world’s largest – and most respected – financial services centres. A closer look at what happens in the United States and in the United Kingdom indicates that what might be described as ‘OVshore’ business is carried on in centres other than small islands located oV a mainland. The chapter further indicates that even the largest financial services jurisdictions face challenges.
1.12 ‘OVshore’ and financial stability, money laundering and tax evasion
‘Directors [of the IMF] recognised that OFCs could pose risks, associated with prudential and financial integrity concerns, to the international financial system.’3This is so, despite the fact that ‘only limited evidence was available that far on the direct risks posed by OFCs for the global financial systems’.4 There are at least three areas in which ‘OVshore’
impinges upon the global economy – financial stability, money launder- ing and tax evasion. Chapter19considers the extent to which ‘OVshore’
is the cause of diYculties in respect of each.
1.13 ‘OVshore’ and the future
Chapter20attempts to tease out some options for the future of ‘OVshore’
post FSF, FATF, OECD and the catastrophic events of 11 September 2001 in the USA. There may be a direct correlation between the general public’s perception of finance centres and their ultimate survival. The question is whether in fact there are really any options at all.
1.14 Assessment criteria
The penultimate chapter of the book, Chapter21, is a practical chapter – in that it provides some suggestions that users and potential users of
3 IMF Executive Board Reviews the Assessment Program on OVshore Financial Centres, 24 November 2003, IMF.
4 OVshore Financial Centres – The Assessment Program–A Progress Report and the Future of the Program, 31 July 2003, International Monetary Fund, p. 5.
‘OVshore Centres’ might consider in deciding whether to use oVshore centres at all, and if so which, jurisdiction they might use.
1.15 Conclusion
By way of a brief recap, the last chapter, Chapter22, draws together some of the themes that have been examined in the previous chapters. The chapter concludes with some crystal ball gazing.
The ‘O V shore’ environment
The demonstrated success of most of these [OVshore] centres and their liberalised financial regimes has to an extent rewritten the geography of world finance.1
2.1 Introduction
Jurisdictions that provide financial services can be broadly categorised as being ‘Onshore’ or ‘OVshore’. These two financial environments co- exist within the global economic environment. This chapter starts with a brief explanation of the origin of the ‘OVshore’ environment and then proceeds to identify jurisdictions that might be described as
‘OVshore Finance Centres’. The growth of the sector is described in terms of available statistics.
2.2 Geographical dispersion
There are many ways in which the geographical dispersion of the
‘OVshore’ environment can be analysed. Here are two examples. First, Johns2 believes that ‘OVshore Centres’ fall within the following four regions:
the Caribbean Basin (e.g. Bermuda, the Bahamas, the Cayman Islands, the Netherlands Antilles and Panama); Europe (e.g. Switzerland and Luxembourg); the Middle East (e.g. Bahrain and the UAE); and1 C. F. Kerr and P. Donald, ‘Some Aspects of the Geography of Finance in Canada’, inReadings in Canadian Geography, ed. Robert M. Irving, Toronto, Holt, Rinehart and Winston, 1965, as quoted in R. A. Johns, ‘A Study of Trans-national Economic Develop- ment’,Tax Havens and OVshore Finance, Frances Pinter (Publishers) Ltd, 1983, p. 34.
2 R. A. Johns,Tax Havens and OVshore Finance – A Study of Transnational Economic Development, Frances Pinter (Publishers) Ltd, 1983, p. 191.
10
Elsewhere, five regions have been identified as follows:
Africa (e.g . Mauritius, Seychelles); Asia and the Pacific (e.g . the Cook Islands, Labuan, Nauru, Niue, Samoa etc.); the Caribbean (e.g . Anguilla, Antigua, Aruba, the Bahamas, Bar bados, the Cayman Islands etc.); Europe (e.g . Cy prus, Gibraltar, Guernsey, the Isle of Man, Jersey etc.); the Middle East (e.g . Bahrain, Dubai, the Lebanon).andWhether either of these categorisations is precise, or even whether any other is more precise, is not the most significant point. The most impor tant point is that, despite how such jurisdictions are dispersed, they are not represented by a sing le g lobal organisation. It mig ht be argued that this is not surprising in lig ht of this sor t of dispersion – but, precisely because of their dispersion, there is an even greater need to be identified by a collective grouping w ithin a sole forum. Each jurisdiction is relatively small so the potential synergies arising from combining forces seem wor th considering . The implications of not hav ing done so remain to be seen.
In the meantime, the geographical spread mig ht have something to do w ith the intrinsic secretiveness that is or was the hallmark of ever y member of the ‘OV shore’ communit y – and which prevented the inter- dependence that a single forum infers. This individualism has been counter-productive generally, not least when it came to negotiating with the supranational organisations about issues that are common to all (see Chapters 10 to 12). The implication is that it has been easier for the supranational organisations to impose their will on individual jurisdic- tions than it might have been if the supranational organisations had to deal with a composite, representative body. The OVshore Group of Banking Supervisors (see section9.21below) comes closest to being that representative – but, since ‘OVshore’ comprises much more than banking, the OGBS’s focus, while significant, is not comprehensive.
There have been some suggestions about how best to tackle representa- tion, but at this moment, there are no firm plans for change. Historically, when Americans want to use an ‘OVshore Centre’, they have tended to use the jurisdictions located in the Caribbean. By way of contrast, the Isle of Man and the Channel Islands (Jersey and Guernsey) have been used by
UK and Irish residents. Europeans favour Switzerland. There has always been a tendency for people onshore to use an ‘OVshore’ centre that is closest to where they themselves live – the comments above on the global dispersion of ‘OVshore Centres’ refer.
2.3 What does ‘OVshore’ mean?
It is not easy to say succinctly what ‘OVshore’ means because it can be interpreted to mean so many things that limiting its scope seems almost impossible. One observer has suggested that ‘[O]Vshore is a concept more appropriately defined not by whether a financial centre is large or small but rather by whether the client resides outside the jurisdiction providing the particular financial service’.3 It is often said that elephants are hard to describe but, once seen, they are easily recognised. The same might be said of ‘OVshore’. The boundaries of
‘OVshore’ are not fixed and its shape does not conform to any particular model or style that is readily identifiable – in fact one of its characteristics is its ability to change shape in adapting to new circumstances.
It has been said that:
the terms onshore and oVshore work often as an oppositional dualism. In this formulation they may be seen as exhaustive: that is, every space economy in the world fits into one of these two mutually exclusive categories. However, when observers and analysts have attempted to define the categories ‘Onshore’ and ‘OVshore’, and when places have been slotted into one or other of these categories, it becomes clear that while the terms are, by their very nature, oppositional, they may be better under- stood as relational. That is, the very idea of such a thing as oVshore only makes sense in reference to its ‘other’, an onshore, and vice versa. More- over, each term, each space, ‘contains’ the meaning of the other in its definition.4
In the report of the Working Group on ‘OVshore Centres’ published in April 2000, the Financial Stability Forum (FSF) acknowledged the
3 R. Hay, ‘International Financial Centres: Back on the Front Foot’, inThe 2005 Guide to International Financial Centres, Euromoney Institutional Investor plc, February 2005, p. 3.
4 S. M. Roberts, ‘Confidence Men: OVshore Finance and Citizenship’, as quoted inOVshore Finance Centres and Tax Havens–The Rise of Global Capital, ed. Mark P. Hampton and Jason P. Abbott, Macmillan Press Ltd. 1999, Chapter 5, p. 132.
absence of a precise definition. It may be that trying to create a definition proved to be such a diYcult task that this induced the Working Group to change its focus to describing the characteristics of ‘OVshore Finance Centres’ instead.
It is not that there are no definitions – because there are. However, existing definitions are disparate and inadequate to describe precisely all the concepts that are wrapped up in what is not only a word, but also a term. Perhaps the best way forward is akin to that adopted by the FSF.
So, for the time being, the focus will be on exploring the concepts that lie behind the term rather than on the term itself.
The ninth edition of theConcise Oxford Dictionarydefines ‘OVshore’
as ‘situated at sea some distance from the shore . . . made or registered abroad’. Clearly, an island is envisaged. Not surprisingly, the word
‘OVshore’ is most commonly used to describe a geographical location.
For example, an oil rig might be described as being located ‘OVshore’.
While this is a step forward in semantics, it is not progress in the direction intended because the context of our focus is financial, not geographical.
In this respect, the Collins English Dictionary sheds a little more light. There the word ‘OVshore’ is said to mean, among other things,
‘based or operating abroad in places where the tax system is more advantageous than that of the home country’. So, when used in the context of ‘finance’, the latter dictionary says that the word ‘OVshore’
has more than geographic significance – although geography is relevant to its financial meaning. The definition includes a tax element, a comparative advantage element and a ‘home country’
element.
As it stands, the absence of a satisfactory definition coupled with vague references to comparative tax advantages somewhere other than at home is enough to prompt those who do not know any better (and sometimes those who do) to speculate that, although they cannot say precisely why, the word ‘OVshore’ has negative connotations. In the absence of a technical definition, the meaning of the word will be inferred rather than stated, thereby increasing the latitude for specula- tion and confusion. Confusion not only derives from the word per se, but also from the financial environment that the word is used to de- scribe. Amidst all this confusion, there is at least one point that is clear – which is that, while the word ‘OVshore’ frequently conjures up images about its meaning, generally speaking the real meaning is not well understood.
That being so, there may be some value in clarifying that, for the purposes of this text, the terms ‘OVshore Finance’ (which includes
‘OVshore banking’, ‘OVshore collective investment schemes (funds)’,
‘OVshore trusts’ etc.)may be taken to include financial transactions conducted in a jurisdiction whose location is somewhere other than on the mainland (‘Onshore’).
It is not surprising that any location where finance is conducted is referred to as a finance centre. By extension, an ‘OVshore Finance Centre’ is a jurisdiction whose location is ‘situated at sea some distance from the shore’ where finance is conducted. Surely there must be more to it than that? Well, yes – because the word ‘OVshore’
not only infers that the location from which the service or product is oVered is ‘situated at sea some distance from the shore’, it also infers that, because the service or product is provided ‘some distance from the shore’, certain attributes attach which would not or may not apply if the service or product were not oVered ‘OVshore’. These attributes are considered elsewhere in this text, but theCollins English Dictionary definition quoted above provides a strong hint of what is to follow.
In the meantime, the absence of an agreed definition of an
‘OVshore Finance Centre’ has a number of implications. For example, the lack of an agreed definition means that it is more diYcult to determine with any accuracy how many ‘OVshore Finance Centres’ exist and what precisely is meant by the global ‘OVshore Environment’ or what its total quantum of business may be.
A further complication is that the word ‘OVshore’ is often used to mean diVerent things in diVerent contexts. Thus, many countries may be regarded as ‘OVshore’ by other countries in the context of specific transactions. For example, the United Kingdom might be considered as
‘OVshore’ in certain circumstances, although it is not usually referred to as an ‘OVshore Centre’ in the same way as, say, the Cayman Islands. Not all ‘OVshore Finance Centres’ regard themselves as such (see section2.4 below).
Lastly in this respect, the distinctions between ‘Onshore’ and
‘OVshore’ are more blurred than they once were, and the range of people transacting business ‘OVshore’ is now much wider than ever before (although in light of developments such as the EU Savings Directive – which will be discussed later – the number of users is not continuing to grow at the same pace).
2.4 Some working definitions
Consider the following working definitions. First, ‘OVshore Finance’
may be regarded as a multidimensional, global concept, which involves consumers in a mainland ‘home jurisdiction’ (‘Onshore’) using financial services oVered from an (‘OVshore’) ‘host jurisdiction’ (frequently an island) where the consumer will probably not reside.
The terms ‘home’ and ‘host’ are borrowed from regulatory termin- ology, where ‘home jurisdiction’ is used to refer to the country where a financial services company has its registered oYce. This might be on the mainland (i.e. ‘Onshore’). In this example, the home jurisdiction is the consumer’s country of residence. ‘Host jurisdiction’ in regulatory ter- minology means a country (other than the country of incorporation) where a financial services company is represented (by, say, a subsidiary or a branch). In this case, the host jurisdiction is where the consumer has chosen to transact his business (see section 5.4 below). ‘Onshore’ (the corollary of ‘OVshore’) should be interpreted to mean any mainland jurisdiction. Note that an ‘OVshore’ jurisdiction may be a ‘home’
jurisdiction, but is more likely to be a ‘host’ jurisdiction.
Secondly, the ‘OVshore Environment’ means the global population of
‘OVshore Finance Centres’.
Thirdly, an ‘OVshore Finance Centre’ – commonly referred to as an
‘OFC’ – means a jurisdiction (which may be an island) that holds itself out as a financial services centre that enables financial services companies to conduct financial transactions – mainly with non-residents. The identity and the business of clients will be regarded as confidential.
The infrastructure of the jurisdiction is likely to include a benign fiscal regime that is underpinned by a tailored legislative, financial and regulatory environment.
Whenever, the word ‘OVshore’ or any derivation of it appears subse- quently in this text, its meaning should be interpreted by reference to the definitions provided above. The term will appear in the text within inverted commas to show that its interpretation should be that set out above and also to indicate that this definition is peculiar to this text and may not be universally acceptable. Where the word does not appear within inverted commas, this means that it has been used by a diVerent author and so its meaning may be diVerent to the working definition suggested above.
Note that, while an OFC may be an island, it need not be so. For example, the International Financial Services Centre in Dublin (IFSC), a
designated zone in the city of Dublin, has been dubbed by some as
‘OVshore, Onshore’ because all the benefits of locating ‘OVshore’ were provided to promoters establishing in that zone – even though it is located onshore. In this respect, it has been said that:
there are several examples of deliberate regulatory changes designed to create onshore oVshore. Selective de- (or re-)regulation in established onshore financial centres such as London and New York permitted the development of defined regulatory spaces within these centres in which various ‘OVshore’ services could take place. In fact, Ireland has been seen as something of an innovator in this regard with the development of Dublin’s International Financial Services Centre (IFSC since 1987) . . . Dublin’s IFSC has itself come under fire, especially from German author- ities, for being in eVect a tax haven within the European Union.5
However, Dublin does not regard itself as a tax haven. The IFSC was established in the late 1980s. The IFSC is home to more than 400 financial institutions which employ around 4,000 people. This has been possible (inter alia) because firms located there pay only 10 per cent corporation tax as opposed to 37 per cent which is/was the average rate applying in the EU. EU members approved this tax rate on the under- standing that the IFSC would discontinue when it had achieved its goals.
Accordingly, in 1999, a new arrangement was established under which Ireland imposed a 12.5 per cent corporate tax from 1 January 2003.
Naturally, this type of situation is frustrating for OFCs who might argue that the EU has extended more flexibility to one of its own members than it was willing to concede to OFCs (at least at one stage). Whether this means that the Dublin IFSC is an ‘OVshore Finance Centre’ will be left to the reader to judge.
2.5 Examples of some other definitions
Reference was made above to some technical definitions applied to
‘OVshore’. Consider, for example, the definition provided by Johns.
R. A. Johns,The British Isles ‘OVshore Financial Centres’, Pinter Publishers,
5 L. Murphy, ‘Financial Engine or Glorified Back OYce? Dublin’s International Financial Services Centre Going Global’, Vol. 30, No. 2, Area, 1998, pp. 157–65, as qoted by S. M. Roberts, ‘Confidence Men: OVshore Finance and Citizenship’, inOVshore Finance Centres and Tax Havens – The Rise of Global Capital, ed. Mark P. Hampton and Jason P. Abbott, 1999, Macmillan Press Ltd, Chapter 5, p. 132.
1982. He suggested that an OFC will probably be a (geographically) small state that may be an inland enclave state, a coastal enclave or an island state. In any event, there will be an opportunity for mainland exploitation.
The same author believes that OFCs will be located in ‘economies which have made a deliberate attempt to attract thereto international trade- oriented activities by the minimisation of taxes and the reduction or elimination of other restrictions on business operations, such that, within the jurisdiction of the centre, aggregate economic activity is substantially geared to the special global invisible trade needs of external enterprises and investors’. So far as growth is concerned, Johns believes that ‘more often than not their growth momentum in the first instance derived, and derives still in many cases, from a particular historical tax haven relationship with an onshore economy or continent in near proximity’.6
In this respect, it has been noted that ‘[m]ost OFCs are either depend- encies, ex-dependencies or colonies of a major power or are in some form of relationship with a mainland or larger onshore country’.7(See section2.7below.)
It has been suggested elsewhere that an OFC is ‘a centre that hosts financial activities that are separated from major regulating units (states) by geography and/or by legislation . . . [with] . . . no, or, at best, low, direct and indirect tax rates’.8
Another definition says that an OFC is ‘a small territory in which the conduct of international banking business is facilitated by favourable and/or flexibly administered tax, exchange control and banking laws, and in which the volume of banking business is totally unrelated to the size and needs of the domestic market’.9
In his 1998 report on the British Crown Dependencies (see section 17.3below), its author, Mr Edwards, said that:
The terms ‘OVshore Centre’ or ‘OVshore business’ tend now to be used in several diVerent senses. They always include the business of: small island finance centres, constitutionally independent at least as regards their domestic aVairs, which have developed legislation, regulation and tax vehicles to attract non-resident business, mostly denominated in foreign currencies. But they are also sometimes used to include, by analogy, the non-resident business of some or all of the following types of centre, all of
6 R. A. Johns,The British Isles ‘OVshore Finance Centres’, Pinter Publishers, 1982.
7 M. P. Hampton,The OVshore Interface, Macmillan Press Ltd, 1996, p. 69.
8 M. P. Hampton,The OVshore Interface, Macmillan Press Ltd, 1996, p. 10.
9 R. B. Johnston,The Economics of the Euro-markets, Macmillan Press Ltd, 1983.
which have seen rapid growth in recent years: similar centres which are coastal or inland enclaves; special tax and/or regulation zones established by larger countries within their own borders; any finance centre including the large world centres, with a large volume of non-resident clients.10
The IMF has suggested that:
OVshore Finance is, at its simplest, the provision of financial services by banks and other agents to non-residents . . . [T]he definition of an OFC is far less straightforward. At its broadest, an OFC can be defined as any financial centre where ‘OVshore’ activity takes place. This definition would include all the major financial centres in the world. In such centres, there may be little distinction between on- and oVshore business . . . A more practical definition of an OFC is a centre where the bulk of financial sector activity is oVshore on both sides of the balance sheet . . . where the transactions are initiated elsewhere, and where the majority of the insti- tutions involved are controlled by non-residents. Thus, OFCs are usually referred to as:
Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents;
Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies; and
More popularly, centres which provide some or all of the following services: low or zero taxation; moderate or light financial regulation;
banking secrecy and anonymity.
However, the distinction is by no means clear cut . . . [T]he definition of an OFC depends on the use to which it is to be put.11
2.6 The origins and development of ‘OVshore’
As human beings, we have many needs that are common and which are not peculiar to the age in which we live. One such need is to preserve safely whatever we consider to be valuable. This need has spawned more than one industry – including insurance, security, tax planning and custodial services – and not surprisingly that which is loosely referred to as ‘OVshore’.
10 M. Edwards, Review of Financial Regulation in the Crown Dependencies, 1998, Part 1, para. 2.2.
11 ‘OVshore Financial Centres’, IMF Background Paper, 23 June 2000.
In respect of the latter, it seems that12many, many years ago, some wealthy people handed over their valuables to the inhabitants of Delos (an island oVthe coast of Greece) for protection. If this is correct, then the concept of moving assets ‘OVshore’ is far from being new – or even recent. Nevertheless, the sea is relevant:
[T]he concept of ‘OVshore’ is founded upon the concept of ‘Onshore’, whereas the concept of ‘Onshore’ is independent of ‘OVshore’ – that is, it depends only on other ‘Onshore(s)’. The concept of oVshore therefore is a logical derivation of onshore, thus sovereignty defines both realms . . .
‘OVshore’ therefore is not a statement about the delimitation of sover- eignty, but a statement about the relationship between a state and its territory, a statement encapsulated by the metaphor of thenew shores.
The metaphor of the ‘shore’ echoes the legal principles which gave rise to oVshore, namely the Law of the Sea.13
In this respect, it has been said that:
[W]hile sovereignty plays an enabling role in the evolution of oVshore, it equally plays a constraining or a distortionary role. The significance of oVshore and what sets it aside from other aspects of international deregu- lation is that it drives economic activities into jurisdictions they should not have been in in the first place. Strictly speaking, it does not make economic sense for the Cayman Islands to serve as the world’s fifth largest financial centre; it does not make sense for the Marshall Islands, Vanuatu or Liberia to be the world’s giant shipping nations. There is no obvious economic reason why small Pacific islands are at the forefront of the telecommuni- cations revolution, nor why Guyana and Niue are the central re-routing areas for internet porn. In direct contradiction to the theory of comparative advantage which assumes that economic activities tend to gravitate towards geographically relevant areas, oVshore has the opposite eVect. OVshore is therefore a form by which political and regulatory policies distort the relocation policies of international capital . . . OVshore . . . is not about economic eYciency but perversely, in strict economic terms, about eco- nomic ineYcacy; the most perfect market is in fact a distortionary mech- anism, dispersing economic activities away from their ‘natural’ location and grouping them where they would not otherwise be.14
12 T. L. Neal, ‘The Tax Haven’, inThe OVshore Advantage Newsletter, 2001, Issue 10, p. 1.
13 Ronen Palan, ‘OVshore and the Structural Enablement of Sovereignty’, in OVshore Finance Centres and Tax Havens – The Rise of Global Capital, ed. Mark P. Hampton and Jason P. Abbott, Macmillan Press Ltd, 1999, Chapter 2, pp. 27 and 28.
14 Ronen Palan, ‘OVshore and the Structural Enablement of Sovereignty’ in O
