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FINANCE Offshore Finance.Pdf This page intentionally left blank OFFSHORE FINANCE 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. HILTON Mc CANN 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. OFFSHORE FINANCE HILTON MC CANN CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521862332 © Hilton McCann 2006 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2006 ISBN-13 978-0-511-34975-1 eBook (NetLibrary) ISBN-10 0-511-34975-0 eBook (NetLibrary) ISBN-13 978-0-521-86233-2 hardback ISBN-10 0-521-86233-7 hardback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. CONTENTS List of figures page vii 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 vi CONTENTS 11 Supranational focus (2): the Financial Action Task Force 287 12 Supranational focus (3): the Organization for Economic Cooperation and Development 307 PART III 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 FIGURES 6.1 Regulation: problem/impact analysis page 120 6.2 Regulation: cost/benefit analysis 121 21.1 The success paradigm 472 vii TABLES 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 LIST OF TABLES ix 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 PREFACE 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 xii PREFACE 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.
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