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Is offshore still credible?

Justin Urquhart Stewart is a co-founder and director of Seven Investment Management based in in Mayfair, London.

With all the reluctance of an ancient creaking door, the old secure and secret banking vaults around the globe are slowly being prised open. One does not have to go too far back to remember the days of the traditional attitude to banking secrecy and privacy, and even for those wishing to avoid the invasive stares of the tax man, a swift trip to an offshore banking island usually resolved the concern of those more nervous clients. However, for clients with higher concerns and values there were, of course, other even more discrete alternatives, where banking secrecy was not just a way of life but a standard and tenet for some nations' banking systems.

Most notably of course we all refer to the old Swiss banking structures, which constantly abounded with rumours of the hidden treasures being squirreled away by not just the rich and famous but equally the infamous and dastardly. Whether it was old Nazi hordes of stolen treasure or deeply unpleasant Third World dictators, it has taken many years of pressure and persuasion to prise open these accounts with the crowbar of international opprobrium and legislative changes.

One by one these "lock boxes" have had their effectiveness curtailed, but strangely enough, not from the source that one would normally expect. For many years governments have long sought to try and restrict the seeping out of assets and tax revenue from their bailiwick, but few have had much success unless there were clear bilateral benefits for both nations – the one wanting at least sight of the hidden assets and the other the ability to continue to hold them.  

Some pressure has come from political bodies like the EU in providing pan union standards, and this has certainly had an impact on some of the traditional boltholes, including the Channel Islands and Gibraltar. However the main lever for accessing these vaults has been from crime and terrorism.

The huge growth of industrial proportions of criminal activity within the financial world has triggered a reaction from the authorities, especially since the fall of the Soviet Union. The impact in the major capitalist nations has been through the growth in the drugs trade and the growing threat and activities of terrorist organisations, which has resulted in the growing impact of ever more sophisticated money laundering and layering schemes.

The effect then has been clear, with action taken against such key banking areas as Switzerland, and most recently perfectly demonstrated by the normally demure and recalcitrant little fiefdom of Lichtenstein. With pressure from the EU, especially Germany, and other international bodies, it was inevitable that old secrecy rules would have to be changed. But don't think that this ends here – any nation that purports to participate in the capitalist banking system will eventually be forced by the crowbar of action against international crime and terrorism to be opened up to greater disclosure.

This means that other areas around the world that will receive such fleeing funds will eventually find that same pressure for exposure coming on them. Whether it be areas such as the well regulated Singapore, or the Middle East and Caribbean islands, dirty money will find it increasingly difficult to hide in mainline banking systems.

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