Since the global financial crisis struck in 2008, offshore financial centres (OFCs) have come under sustained attack. As the world’s leading economies struggled to balance their books in the face of massive declines in tax revenue, the lowest fruit was seen to be hanging from the offshore tree. Estimates of the scale of offshore deposits vary wildly, from Boston Consulting Group’s $8.9 trillion (€6.5 trillion) to Tax Justice Network’s $21 trillion – but clearly it is a very enticing crop.
Before the crisis, the offshore sector was grappling with an international campaign against money laundering led by the Financial Action Task Force (FATF) and its 40 recommendations. Today, proceeds of crime legislation, “know your client” regulations and the reporting of suspicious transactions are the norm. But crucially a line was always maintained between criminality and tax. That line is now well and truly broken.
The catalyst has been the US Foreign Account Tax Compliance Act (Fatca), which was passed in 2010 in the wake of the tax evasion scandal involving Swiss bank UBS and came into force on 1 July this year. The US used the threat of heavy withholding taxes to force overseas banks to hand over information on their US clients automatically. It was an “offer” banks couldn’t really refuse.
The US, in order “to assist with Fatca implementation”, thoughtfully also devised transparency agreements at a governmental level. This meant that countries with strict bank secrecy rules were obliged to relax them and, having done so for the US, could no longer realistically refuse to share data with other countries as well.
The G20 nations pushed the OECD, which had been assiduously pursuing a lesser model of exchange of information on request, to raise its sights. It obliged in February, with a new global standard on automatic exchange of information, which requires countries to collect and exchange information on bank accounts and the beneficial ownership of companies and other legal structures such as trusts.
Seizing the moment, Europe’s leading nations set a deadline of September 2017 for reporting investors’ tax details to their home governments – which would be collected from 31 December 2015. The momentum has been such that even Switzerland, the world’s largest offshore financial centre with an estimated $2.2 trillion of assets, bowed to the inevitable by agreeing, in May, to adopt the new OECD standard.
So where does this leave OFCs? It will certainly see a thinning of their ranks, not least because the costs and resources required to stay in the game have risen hugely and only those OFCs with the political will and critical mass to be able to meet the new standards will survive. But people are still trading across borders, acquiring foreign assets, pooling investments, collecting royalties, securing finance, and planning for their futures and their ends.
Where and when the swelling masses of wealthy Chinese will park their international assets as more and more look to move assets out of mainland China is also a tempting carrot to keep many centres as players in the game. Investors will still need entities, vehicles, structures and products and they will still need expert advice and service on the best way to form them, shape them and manage them.
And that is what the more foresighted OFCs have now grasped. They are embracing the new order. They have the ingenuity, expertise and infrastructure to be competing out in the open – providing, of course, that the rules are fair and the playing field is level – and an increasing number of them are also beginning to display the confidence that should go with it.
Christopher Owen is editor of the FSC Report.