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The Challenges and Contributions of Offshore Jurisdictions

By Denisse Rudich, Serum International

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The Pittsburgh Summit provides an important opportunity for the G20 to work with offshore financial centres to tackle the issue of tax evasion

Offshore financial centres (OFCs) have taken the world by storm. OFCs are jurisdictions where the controllers and customers of registered corporations are non-resident and the majority of transactions are

initiated from other territories. The transfer of funds from one virtual location to another cheaply, quickly and anonymously has facilitated the development of these centres. Many are located on small islands in the Caribbean and British Isles and form part of the Commonwealth or British territories.

While there is a belief that OFCs provide a refuge for illicit funds from money launderers, corporate fraudsters, corrupt politicians and tax evaders, many OFCs are sophisticated, well-run financial centres in their own right, as distinct from tax havens. Tax havens lack transparency, have no or nominal tax charged on income, have an ineffective exchange of information and no substantial economic activity carried out by their taxpayers. While some OFCs such as the Bahamas and Grenada have been identified as tax havens, the reliance on banking secrecy in well-established financial centres such as Barbados, Jersey and Guernsey pose challenges to governments worldwide in the area of tax evasion. This issue has regained the centre of the international stage, largely due to recent initiatives developed at the G20 London Summit in April 2009. Many wonder what the Pittsburgh Summit can add and what OFCs themselves can do to brush off the stigma associated with their economies.

It is estimated that the offshore economy amounts to between $5 trillion and $7 trillion, making up an estimated 6 per cent to 8 per cent of worldwide wealth under management. OFCs have much to offer to both consumers and businesses worldwide. They lower costs to customers using local banks by promoting consumer choice and competition in the financial sector. For businesses, OFCs decrease operational costs by offering operational freedom and flexibility in addition to confidentiality, light-touch regulation and low taxes. More than half of Europe’s top 500 companies have subsidiaries in OFCs, and approximately 50 per cent of the companies quoted on the Hong Kong stock exchange are domiciled in Bermuda. OFCs are central to industries such as banking, insurance and mutual funds because they allow financial institutions to manage their risks and worldwide distribution networks better. Moreover, many corporations engage in the legal practice of tax avoidance.

Tax evasion differs from tax avoidance in that tax evasion entails fraudulent and criminal behaviour and involves the destruction of records, the concealment of material facts and acts of deception. Tax avoidance uses non-criminal methods to minimise tax liability. Given the current global crisis and massive amount of tax funds pumped into banks to stabilise the world economy, domestic tax preservation is high on the agenda of many governments.

OFCs and tax evasion have been on the G20 ministerial agenda for many years. The G20 has catalysed change by garnering political will, achieving cooperation among both advanced and developing economies, and providing incentives for countries to adopt related global conventions and treaties. The G20 has played a pivotal role in compelling international organisations to work together in the area of tax fraud, money laundering and regulatory reform. It has assigned the Organisation for Economic Co-operation and Development (OECD) the primary responsibility for monitoring progress on implementing internationally agreed standards through the Global Forum on Taxation. Many countries have adopted the OECD Model Tax Convention and signed bilateral tax information exchange agreements (TIEAs). The G20 has renewed calls for all jurisdictions to adopt and implement agreed standards. It flexed its muscles at the London Summit by issuing a list of sanctions it would carry out against countries on the OECD’s blacklist of tax havens and non-cooperative jurisdictions.

At the Pittsburgh Summit, the G20 will likely welcome and fully endorse tasks assigned to the OECD in London in April. These include implementing a peer-review process to assess compliance and provide follow-up action; increasing the quantity, relevance and quality of TIEAs; expanding participation in the Global Forum; enabling developing countries to benefit from a cooperative tax environment; revising criteria to identify countries that have not substantially implemented international standards; and developing a toolbox of countermeasures against non-cooperative countries. Two of the biggest criticisms of the G20’s dealings with OFCs have been its failure to accommodate the challenges faced by small jurisdictions that lack the resources and technical know-how to implement imposed standards and its endorsement of the OECD blacklist. The Commonwealth Secretariat, following an assessment of Barbados, Mauritius and Vanatu, has suggested that the costs of implementing such standards outweigh the benefits.

The Pittsburgh Summit could contribute by bringing OFCs into discussions on tax evasion and illicit finance. US president and host Barack Obama could invite OFCs to attend the summit to discuss specific challenges that they face in implementing standards and to put forward recommendations in response. The G20 could commit to providing technical assistance to help OFCs meet their commitments. The G20 could further task the OECD to develop a standardised TIEA to ensure that countries’ financial intelligence units (FIUs) are able to obtain requested information. Finally, the G20 could persuade the Global Forum to hold a dialogue so countries could share domestic measures that have been effective in encouraging individuals and companies to disclose assets held offshore.

The G20, however, cannot act by itself. OFCs themselves must boost domestic efforts. OFCs need to invest in technology, and to hire and train more staff to work in their corporate registries and FIUs. The corporate registries of OFCs and other countries should screen the names of individuals and controllers of legal entities against commercially available databases of high-risk companies, individuals and politically exposed persons. Any matches would warrant further investigation, a decision not to register the entity and a report to law enforcement. Jurisdictions should also prevent the incorporation of entities issuing bearer shares. Alternatively, they could require the disclosure of holders and transfer of bearer shares.

OFCs need to take measures to improve the response time to TIEA requests. This could be accomplished by increasing investment in law enforcement and training to increase the speed of investigation of requests and search and seizure of dirty money. Countries should also consider amending domestic legislation to allow for requested information to be obtained without having to apply for a court order, or simply assign a judge to work inside FIUs. It is evident that OFCs, the G20 and international organisations must work together to tackle the joint issues of illicit finance and tax evasion. The Pittsburgh Summit presents an excellent opportunity not only to commit to and endorse the work of the OECD, but also to build a bridge for member countries and OFCs to work together in the area of tax evasion.

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