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Comment: Much ado about nothing?

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At first glance, it would be easy to say that the report by former UK regulator Michael Foot on the three British crown dependencies and six other overseas territories was a statement of the blindingly obvious. And possibly at second glance, too.

The report published yesterday warned the territories that they would have to meet international standards on regulation, financial crime and exchange of tax information, and suggested that for reasons of both economic need and fiscal compliance those jurisdictions that currently do not levy a standard corporate income tax should consider doing so.

None of this is any revelation to observers of the offshore scene, and certainly not to the territories involved. One is almost (but not quite) tempted to agree with Richard Murphy of the Tax Justice Network, a sworn enemy of offshore financial centres, that “we have a weak apology for a report that is going to do little but allow it to be claimed the issue has been tackled… I never had high hopes for this report, and even then I have been underwhelmed.”

But some people are happy with the report. Especially in the crown dependencies, it is seen as echoing a myriad complimentary reviews, inspections and surveys over the past decade. “This latest review has demonstrated once again that Jersey’s financial services industry has good resilience in the face of a severe economic downturn, and that it has a regulatory regime of a high international standard, capable of evolving to meet changing global requirements,” says Jersey Finance chief executive Geoff Cook.

In Guernsey, he is echoed by chief minister Lyndon Trott, who says: “This report vindicates the position of Guernsey and the other crown dependencies. Once again an independent expert has found Guernsey to be a favourable, compliant and transparent international financial centre, which can offer high quality professional services for the benefit of the global economy.”

Tony Travers, the chairman of Cayman Finance and former managing partner of Maples & Calder, is less complimentary: “This report is much ado about nothing. Apart from a passing and justified concern over the recent short term funding problems experienced by our new government, the report acknowledges the enormously important role Cayman plays for the City of London and Wall Street [but] strangely omits reference to the most recent FATF report which describes the Cayman Islands anti-money laundering systems as superior… The report is not helped by the generalised nature of its conclusions but which, on specific application to the Cayman Islands’ legal and regulatory regime, do not suggest that any immediate action is required.”

A couple of comments are in order. First, a key driver for the Foot review was the collapse of three Icelandic banks and their subsidiaries in the UK and the crown dependencies. This was primarily a retail banking issue that has nothing to do with the institutional business, such as investment management and fund services, in which the jurisdictions largely specialise, and on which their future as financial centres depends.

Secondly, issues of tax compliance, financial crime prevention and regulatory efficacy are the province of organisations such as the EU and OECD, FATF and IMF. It didn’t really need a fresh review to point out the requirements of doing international financial business in today’s environment include compliance with international standards, and while it may be true that certain jurisdictions could improve their technical and human resources devoted to fighting crime, the biggest deficiencies uncovered over the past two years have been onshore rather than offshore.

What the report does do, however, is indicate clearly that the offshore jurisdictions cannot expect the UK to act as lender of last resort if, as at present, unforeseen changes in the business environment leave their public finances in disarray. Foot says that the dependencies should embrace, if they do not do so already, some sort of goods and sales tax or VAT to replace their dependence upon Customs duties, and should consider levying some level of corporate income tax, not only to bolster their finances but to draw closer to “international consensus on tax policy norms”.

Was the ultimate aim of the report to give the UK government cover to use issues of borrowing and public resources to push offshore centres into line on corporate taxation? Travers bravely insists that Foot’s conclusions do not call for immediate action, but in Cayman in particular some hard decisions about fiscal policy cannot be evaded for much longer.

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