I recall the time when I first went to work in the Caribbean back in 1994. The universal reaction of colleagues, friends and family at the time was both surprising and frustrating. Any envy on their part was well hidden by gleeful comparisons with crooked lawyers in John Grisham's book, 'The Firm': the assumption was that I was off to assist criminals the world over in hiding their ill-gotten gains offshore! I still cannot watch repeats of that movie! But it highlighted to me the prevailing level of ignorance about the offshore world at that time, influenced heavily by the media's constant portrayal of the Cayman Islands (and the Caribbean in general) as the money launderer's jurisdiction of choice.
Fifteen years later, I have moved back to England, but attitudes remain unchanged. The onshore world still views the world's IFC's with deep suspicion, blaming them in part for the multitude of onshore scandals and fiscal difficulties that have arisen over the years. The majority of IFC's cleaned up their acts many years ago; but old prejudices are hard to dispel, apparently.
There had been earlier threats posed by the onshore world toward IFC's, which heralded undoubted improvements in risk management, regulation and compliance, and some modest gains in information exchange. IFC's absorbed the changes that were forced upon them, albeit sometimes grudgingly. Prior to the events of 9/11, the top tier of offshore IFC's were as a consequence better regulated, with tighter anti-money laundering regimes than most onshore sectors! Those IFC's adapted to the pressures and continued to thrive. But these international initiatives never produced the fiscal dividend that onshore governments had been looking for at the time.
Now, though, driven by the need to collect additional revenues to service burgeoning national debts and, no doubt, with the aim of deflecting attention (and blame) away from themselves, governments and cross-border organizations are targeting IFC's as never before; and this time their efforts (together with domestic amnesties aimed at bringing the non-compliant back into the tax network) have met with unprecedented success.
The OECD's grey-listing of IFC's that fall short of their criteria for transparency has resulted in a sudden spate of Tax Information Exchange Agreements ('TIEAs') being implemented by IFC's, desperate to reach the threshold of 12 TIEA's to achieve white-listed status and thereby avoid sanctions.
The UK's TIEA with Liechtenstein will be the model for agreements with other IFC's; and its more widespread purge on offshore accounts generally has already the names of many potentially defaulting UK taxpayers, with further disclosures from up to 300 banks set to follow.
The recent settlement of the case between the US and UBS will result in the disclosure of 5,000 errant, non-tax paying US citizens. The IRS already has in its possession hundreds of thousands of names of US holders of foreign credit cards released by the credit card companies themselves. Non-compliant US and UK taxpayers would be wise to accept the opportunities for voluntary disclosure presently on offer before the net closes in on them.
The playing field has definitely changed, or at least it has in relation to the fiscal affairs of the major economies of the western world. IFC's can no longer turn a blind eye to tax evasion. In truth, service providers in a few IFC's were already demanding tax compliance for UK and US clients. But it will be a brave trust company or bank that accepts a client in future from certain countries without ensuring that the client is tax compliant both before and after any structure is established. Unless tax evasion is made a predicate offence under IFCs' anti-money laundering legislation, a dual standard toward tax compliance will continue to exist, particularly as regards Latin America where personal security is often the governing motive for offshore planning. That dual standard, though, is not limited to IFC's.
Nor can IFC's continue to market confidentiality in the same way, to the extent to which some of the more prominent European centres have until now. Individuals are perfectly entitled to keep their legitimate personal affairs private; but they cannot expect the same right to keep their illicit affairs private as well. IFC's will have to reflect that distinction in their legislation and in the way in which they and their service providers promote their jurisdictions.
Does this present dismantling of confidentiality and tax transparency mark the beginning of the end of IFC's as we know them? For those centres (the dinosaurs of the industry) that have thrived on offering evasive secrecy, perhaps it will over time. As other jurisdictions have discovered in the past, once you attract a bad reputation, it is difficult to get rid of it, no matter how much you change. There is presently a noticeable flight to quality, at least in European circles, with top tier IFC's benefitting at the cost of centres that have been tainted by recent exposés.
For the more progressive and enlightened IFC's, tax transparency should yield its own dividends. There will always be a need for tax efficient, tax compliant structuring for private clients in centres of excellence, so that line of business should continue. Clients will be able to maintain confidentiality of their affairs, provided they are not breaking the law.
With tax evasion no longer a valid criticism going forward, and with a sophisticated regulatory, anti-money laundering and anti-terrorist financing infrastructure firmly in place in each jurisdiction, the only possible objection to the top tier of IFC's is the fact that they are zero-tax centres. But then, some major onshore jurisdictions have deliberately offered zero-tax options in the hope of attracting similar business; and still others thrive on offering very low-tax solutions to international businesses (often hosted by trust companies rather than run by those businesses themselves) that would have no other commercial reason to establish operations there. So, if that is a valid criticism of IFC's, it is one that must also be levelled at some OECD and EU member states as well.
Now that there will be tax transparency offshore, all the moral arguments against top-tier IFC's should now fall away. Perhaps now we have finally reached the stage when those IFC's can justifiably demand a level playing field with the world's largest economies.
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