Jersey: OIL Opinion - Smoke, Mirrors And Offshore Regulation

Last Updated: 4 March 2013
Article by Vistra

Look beyond the political hyperbole about offshore financial centers and you find an industry that is responding to new commercial imperatives and is better managed and more regulated than ever before

Regardless of jurisdiction, client base or product type, the specter of regulation looms over offshore financial services. What is disheartening for many industry participants is that uninformed criticism remains so prominent despite considerable steps being taken to address concerns. Indeed, what began as a drive for tax transparency led by the Organisation for Economic Cooperation and Development (OECD) has morphed into a multi-agency and multi-government political crusade, complete with moral undertones.

Hypocrisy is rife. Various studies have found that anti-money laundering (AML) and know-your-customer (KYC) processes are regularly more rigorously adhered to by offshore financial centers than by their onshore counterparts. At the same time, offshore practitioners are not ideologically opposed to tighter regulation; they simply want to see workable processes and avoid 'over-regulation' that stymies legitimate business.

Sweep aside the hyperbole and what you see is an industry that is already coming to terms with the gradual onset of globalised regulation. This much was apparent in the latest installment of OIL's "Offshore 2020" survey, based on interviews with 155 regulators, bankers, accountants, lawyers, corporate service providers and industry associations from across Asia, Europe and the Caribbean. The prevailing view is that offshore landscape is better managed and more regulated than ever before.

There is no direct correlation between more regulation and better management. Neither does more regulation equate to better regulation. However, these moves have forced industry participants to up their game. Whether through formal licensing or an informal appreciation of where the regulatory drive is headed, service providers are becoming more professional.

Double tax treaties (DTTs) and tax information exchange agreements (TIEAs) feature prominently in this new world order. When these concepts first emerged there was a genuine fear that they would overwhelm the industry. Two years on, DTTs in particular are better understood by a wider section of the offshore community and increasingly seen as an opportunity rather than a threat. They are one of many wealth planning tools at the industry's disposal.

In the 2011 "Offshore 2020" survey, over half of respondents said the advent of DTTs and TIEAs had impacted their business. In 2012, when asked whether the increasing number of these agreements has prompted a slowdown in business, four in five people responded in the negative.

As national revenue authorities intensify their tax collection efforts, DTTs have emerged as the preeminent tool in efficient cross-border tax planning. In addition to the basic information exchange facilities offered by TIEAs, DTTs solidify trading relationships. Companies can avoid being taxed on the same income in two different places while the treatment of passive income is attractive.

The 2012 "Offshore 2020" survey found that DTTs are the fourth most important consideration for offshore service providers, after AML and KYC requirements. The prominence of the latter two comes as no surprise given industry participants on the regulatory front.

AML processes are likely to become more standardised, with mid-shore jurisdictions such as Hong Kong and Singapore tightening their approach, creating more pressure for traditional jurisdictions to improve compliance. Regarding tax information exchange, the OECD looks set to continue its move towards automatic mechanisms, while certain jurisdictions reach bilateral agreements similar to the UK-Switzerland accord, which mandate one-off payments on undisclosed accounts held by UK taxpayers.

Further regulations on tax avoidance and aggressive tax planning will further emphasise the importance of DTTs. Survey respondents also identified closer inter-territory cooperation (yet increased cross-border competition among tax authorities), fee disclosure and trust oversight as areas worth watching.

The overarching trend - of which these expected measures are part - is a move towards globalised regulation. A multi-tiered approach to oversight, comprising international, national and organisation-specific efforts, will remain, but different agencies are likely to become more collaborative. A loose cooperative framework between the likes of the International Monetary Fund and the OECD at global level and various revenue authorities at national level is not unfeasible.

These ideas may prompt concerns about a "world government" concept, but industry participants don't fear regulation. A clear majority think that service providers should be licensed and more than two thirds anticipate this happening within five years.

The additional operating costs tied to licensing - recruiting staff with relevant qualifications, providing training courses, or introducing new systems - would inevitably place smaller players under greater pressure. But the reality is that a combination of the burdens of compliance on a broader level and a need to meet the increasingly sophisticated client base are already being brought to bear on the industry in terms of resources.

Taken together, these driving factors suggest an incremental shift towards consolidation as economies of scale deliver efficiency while a broad geographic footprint facilitates the delivery of cross-border solutions to an increasingly globalised client base. OIL will be part of this new landscape and the company is not opposed to greater oversight of the industry - provided a balance is struck between the amount of regulation and commercial needs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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