Feeling the heat: why offshore centres are hitting back

In October 2008, the Organisation for Economic Cooperation and Development (OECD) renewed its campaign against offshore financial centres before, in November, the European Commission announced plans to extend its savings tax directive.

Although some offshore centres have adopted a wait and see attitude to these developments, others have already expressed anger at the potential threat to their financial services industries. Cayman and Switzerland have been among the most vocal.

The fundamental question for these centres is whether another round of baiting offshore jurisdictions prove injurious to business. The 17 members of the OECD asserted at their October meeting that although offshore centres were not responsible for the global financial crisis, individuals, families and companies held $10 trillion of assets secretly in offshore jurisdictions. The larger states, which make up the membership of the OECD, wanted to intensify the pressure on these jurisdictions to force them to reveal details of account holders.  

Cayman has been the most vociferous in response. It argues that it has reformed its financial sector regulation along the lines stipulated by the International Monetary Fund (IMF), the Financial Action Task Force (FATF) and its regional affiliate the Caribbean Financial Action Task Force (CFATF). Three recent IMF reports on anti-money-laundering policy have given the jurisdiction considerable praise. The view in Cayman is that it has complied in full with requirements on transparency and yet it is still attacked by onshore jurisdictions such as the US, the UK, France, Germany and Australia.

Cayman financial services minister Alden McLaughlin told Campden FO: “As a participant on the OECD level playing field sub-group, Cayman is fully aware of developments, and these have been and will continue to be assessed by the Financial Services Council and the assessment informs government policy. Having committed to addressing level playing field issues, it is publicly evident that at least some OECD Member States have devolved to the primeval state in which the OECD process began: threats, coercion and misrepresentation. This degeneration in the discourse is disappointing and the other OECD participants ought to find it so as well. Cayman has already established that our business is not built around tax evasion and that we have no difficulty with the concept of effective cooperation in tax matters. Our difficulty arises where, not only is such cooperation a one-way street, but we are also expected to stand in the middle of that street and be run over.”

Germany, of course, has another target much closer to home. Fellow OECD member Switzerland has been identified by Berlin as a primary candidate for inclusion in a new black list, which is expected to emerge in early 2009. The two most high profile black lists: the harmful tax practices black list published by the OECD and a similar document issued by the FATF have been a bane for offshore financial centres. Although almost all of the centres have been removed from the two lists, the original much longer lists are still circulating in treasuries around the world. Anti-tax haven policies have been formulated on the basis of these earlier documents which, say leading figures in offshore centres, give an unfair perception of their commitment to high quality regulation.

The OECD, in particular, has been attacked by offshore centres for its perceived failure to recognise the progress that these centres have made. Only three jurisdictions – Andorra, Liechtenstein and Monaco – remain on the harmful tax practices black list. These are, geographically, the three closest centres to the OECD in Paris. Jeffrey Owen, who is the head of the OECD’s Forum on Tax Policy, said that jurisdictions such as the Isle of Man, Guernsey, Jersey and the British Virgin Islands were to be applauded for their progress on tax information exchange agreements (TIEAs). But he was critical of territories like Panama, which he said had signed up for the harmful tax practices initiative but failed to implement many of the regulatory changes that were required.

The EU’s notorious White List has also muddied the waters. Many offshore centres were excluded from the document – published in Spring 2008 - which identified territories that Brussels said had strong anti-money-laundering controls. Since the list included the Russian Federation, Argentina and Mexico but not Jersey, Guernsey and the Isle of Man there were howls of complaint from offshore centres. They argued with some justice that anti-money-laundering controls in the Crown Dependencies were vastly superior to those in some countries that were adjudged clean by the EU.

Peter Neville, director general of the Guernsey Financial Services Commission, said: “Unfortunately, politics, rather than fairness, plays a large part in this. The UK has confirmed it considers Guernsey does meet the required standards in relation to anti-money-laundering and countering the funding of terrorism.”

The gulf between states and the tension which could develop has been exemplified by the attacks on Switzerland by German and French ministers. The vitriol emerged from the ongoing argument over EU citizens using Liechtenstein bank accounts. The alpine state remains on the OECD’s black list and although it has made various verbal commitments to ending banking secrecy, little practical evidence of a change in policy has emerged.

The Swiss, who are the standard bearers for banking secrecy, have given active support to Liechtenstein. The Swiss government reacted vehemently to a coruscating attack on its banking approach by the German and French finance ministers.
Both France and Germany argued at the OECD meeting for Switzerland to be included on the new black list. A day later the Bern foreign ministry summoned the German ambassador to express its surprise and discontent. “One does not treat a partner country in such a way,” Swiss Foreign Minister Micheline Calmy-Rey said.

Calmy-Rey said she took grave exception to German finance minister Peer Steinbrück’s “violent” language. He said that the OECD should “use the whip” against Switzerland. “The choice of language is very unfortunate seeing as Switzerland is pursuing a partnership and dialogue with Germany and the European Union,” she added.

In Brussels, EU tax commissioner Lazslo Kovacs announced proposals to extend the 2005 EU savings tax directive. He said: “The OECD has published lately a new report, Tax Co-operation: Towards a Level Playing Field – 2008 Assessment by the Global Forum on Taxation, in which it concludes that progress is being achieved in bringing greater transparency to financial centres around the world.

“It stresses, however, that progress on exchange of information on tax issues is more limited, since only a number of countries have improved the availability of ownership information and access to bank information for tax purposes. Furthermore, a small number of offshore financial centres have expanded their network of exchange-of-information agreements.

“The worst thing is that a number of offshore financial centres that committed to implement the standards on transparency and the effective exchange of information have failed to follow through.”

But the battle lines have also been drawn here and various EU members rather than wanting to extend this directive would like to rein it in. Luxembourg, Belgium and Austria have classically adopted withholding taxes rather than full information exchange and they would like that option to continue to be available.

While Switzerland is not a signatory to the savings tax directive, it has concluded a parallel agreement with the EU. Given the on-off nature of the relationship of the Swiss with Brussels and the poisonous atmosphere with France and Germany, this proposal could take far longer to agree than Kovacs hopes.

In the end, this all means greater uncertainty for offshore centre. It will certainly lead to more bellicose language from OECD and EU states. Commentators in offshore centres say that in the final analysis, it is not invective from these states which impacts on business.

Andrew Miller, head of trusts for global law firm Walkers, said: “As far as Cayman is concerned, the quality of our regulation is world class. The IMF and the CFATF have praised us. The countries we do business with know us and are largely unaffected by these statements. However, it is true to say that we were surprised not to be on the EU’s White List and we would not welcome inclusion on a new OECD black list.”