Offshore Business: Review of the Year 2000

by Robert Lee, Tax-news.com

01 January 2001

It's been quite a year for the various business sectors that make up the offshore world. Whilst the news was undoubtedly dominated by the initiatives of the Organisation For Economic Co-operation and Development (OECD), Financial Action Task Force (FATF) and the Financial Stability Forum (FSF), to name but three, offshore financial centres (IFCs) have been silently and steadily carrying on with the day-to-day business of catering for the affluent, the tax-efficient, or simply those who'd like to try something a bit different. It's pretty much been business as usual in the Channel Islands, the Caribbean, on the Continent and in the far-flung reaches of the Pacific. If anything, business has been brisk, as Tax-news.com is about to illustrate…….

OFFSHORE GAMING

Tax havens have been gleefully rubbing their hands together in 2000. The hefty UK 9 per cent betting tax has pushed countless bookmakers overseas to warmer and more profitable climes. Malta and Gibraltar have reaped the biggest rewards, with Stanley Leisure and Ireland's Paddy Power establishing tax-free operations in Malta and Coral's Eurobet locating to the Rock. Although UK Chancellor Gordon Brown recently signalled that he might scrap the prohibitive tax on betting, he could just as easily replace it with another "stealth" tax and bookmakers are taking no chances.

Whilst it's still early days, less familiar jurisdictions in the Pacific could stand to make substantial gains from developments this year down under. Vanuatu, the south Pacific tax haven, has become the lifeline for many Internet gaming companies now that the Australian federal government has secured a 12-month moratorium on Internet sportsbooks. The Cook Islands looks like it's going the same way.

In 2000 the Caribbean remained the premier jurisdiction for US gaming companies, with Antigua probably beating the rest of its neighbours hands down, but we come to the end of the year with Costa Rica, dubbed "Virtual Vegas", threatening its crown. In the last year it has become a key location for the fast-expanding online gambling industry as US gaming entrepreneurs flock there to take advantage of the low setup costs and to avoid legislation in the US, namely the 1961 Federal Wire Act, which prohibits interstate wagering via telephone or telegraph. As well as the North American Sports Association (NASA), San Jose can boast other major players well-known to Americans, such as Casablanca Sportsbook & Casino, Inventabet.com, e-Las Vegas and Casino Earth.

There's no doubt that offshore gaming has represented a big boost to the offshore world in the year 2000. Whilst Internet gaming might not go down well with Gamblers Anonymous, at the end of the day the fact remains that these companies bring employment, revenues and do a far better publicity job than any PR company could do. The offshore jurisdictions which have benefitted this year take great pride in them, and the signs are that it's a phenomenon set to last.

OFFSHORE E-COMMERCE

Offshore gaming is just part of a wider explosion in e-commerce. And it has truly been an explosion. When offshore financial centres haven't been worrying about the OECD/FATF/FSF reports or banking secrecy or withholding tax or foreign sales corporations, they've been espousing their virtues as e-commerce hot-spots. "E-Commerce Hub!" has been shouted on virtually a daily basis from every corner of the globe. Bermuda started hollering a long time ago, and has been joined by the Channel Islands, Ireland, Malta, Gibraltar, Hong Kong, and now it's Dubai. In fact, it would be easier to list those jurisdictions with no e-commerce aspirations. Hang on a minute - are there any?

It's unlikely that Andorra or Monaco, or even Panama, will ever be known first and foremost for their e-commerce achievements, but a number of other jurisdictions are less modest and have made a point about letting the world know about them. Certain jurisdictions stand out from the crowd - Isle of Man, Bermuda, Hong Kong, Ireland…and several more. The year 2000 was exceptional in that governments started recognising that e-commerce is the way forward. Take the Isle of Man, for instance, which has seen a whole raft of e-commerce enabling measures put into place on every front. The island now boasts an e-commerce envoy, a £6m submarine cable loop with Ireland and the UK, a legal framework for electronic transactions for business in the shape of the Electronic Transactions Act 2000, and more besides.

Bermuda also ranks among the leading e-commerce jurisdictions. Officials there have spent the latter part of 2000 drumming up business. A much-vaunted tour of Europe recently saw business leaders treading on the toes of the Channel Islands and Ireland by making a pitch for European e-business. There's no denying that Bermuda possesses geographic neutrality, progressive e-commerce legislation and a sophisticated telecommunications infrastructure, but most jurisdictions are laying down exactly the same claims.

Moving across the globe to the Middle East, Dubai is the latest offshore jurisdiction to sell itself as an e-commerce idyll, capping its achievements with the recently-launched Dubai Internet City, which aims to provide the infrastructure, environment and attitude that will enable e-commerce enterprises to operate locally, regionally and globally out of the emirate. It's early days for Dubai, but the fact that the OECD has decided to hold a high-profile e-commerce forum there in January 2001 augurs well for the jurisdiction's future.

If any country has had a turbulent year for e-commerce, it has to be Hong Kong. The former British colony is a law unto itself. Everything seems to be electronic or if it's not, it soon will be. Unlike most other jurisdictions, Hong Kong has a huge dot-com culture, and in 2000 a large number of them listed on the stock exchange. Now, at the end of the year, quite a few don't exist any more - they've fallen victim to the global malaise in technology stocks, their share prices have plummeted, and they've bitten the dust. But those looking to Hong Kong for their offshore needs shouldn't necessarily be deterred. Hong Kong's e-commerce woes of 2000 have little to do with the region's infrastructure, which must rate as one of the best. Hong Kong has been unlucky, but is redeemed by the fact that it has a major share of the online stockbroking market, which doesn't seem to have met the same fate as many of the dot-com companies. Online financial services in Hong Kong have expanded rapidly over the course of the year, with increasing numbers of customers coming online, and it's a growth that looks set to continue.

Right across the offshore world, e-commerce has been the watch-word this year. Whilst smaller offshore centres might have been neglected in the scheme of things, they have pretty much all been busy putting their e-commerce grand plans into position and legislating fast and furiously. Offshore centres were spurred on this year by the threat of punitive measures from the OECD and G-7 for having "harmful" tax practices. With the traditional offshore world looking somewhat vulnerable in 2000, it is perhaps fortuitous that e-commerce came along when it did. This year's silent Christmas message from the world's tax havens is: "E-commerce ain't taxed yet, so we're going to exploit it!"

INSURANCE

With all the hullabaloo over e-commerce in 2000, traditional offshore business sectors have found themselves pushed out of the limelight, but that certainly doesn't mean that they've been overlooked. Captive Insurance - whereby companies are set up so the parent company can insure its own risk - has done well this year.

Non-owned captive insurance services have become increasingly popular, especially now that Bermuda, the largest captive domicile, has passed segregated account legislation. Segregated account companies have been forming offshore in Guernsey and the Cayman Islands and attracting hundreds of new captive-like accounts. Even jurisdictions that are relatively new to the concept of captive insurers are catching on fast. Hong Kong, for instance, authorized its first two captive insurers this year and hopes that other enterprises will be encouraged to set up shop there.

One offshore centre that has stepped up its insurance marketing drive this year in a big way is Gibraltar. The Rock now ranks sixth in a 'league table' of European domiciles compiled by EIMS, which uniquely counts each active cell of protected cell companies as an individual captive. The unblocking of the EU passporting issue has really opened the door for Gibraltar, which has also revelled this year in the decision by the Bermuda-based ACE Group of Companies to establish an underwriting branch, ACE Gibraltar Limited. ACE has created a number of products specifically for the Gibraltar market. The Gibraltar authorities, bent on making the Rock an e-commerce hub (sound familiar?) must have been delighted to learn that ACE is to set up an supporting company specifically to underpin e-commerce insurance initiatives. Not only that - it all brings experience, prestige and expertise to Gibraltar, and that's good news for any finance centre seeking to diversify.

BANKING

If it's been quiet but steady in the offshore insurance arena, then it's been nothing short of tumultuous in the world of banking. Ask the offshore banking community to sum up their year in two words, the answer would surely be……banking secrecy. Constantly under debate in 2000, especially after the FATF report on money laundering and shenanigans over the introduction of withholding tax, a significant number of offshore banks have found themselves facing a stream of government legislation aimed at appeasing the G-7 nations.

Those bastions of traditional banking secrecy - Liechtenstein and Switzerland - have been pushed and pilloried like never before. In October 2000 Liechtenstein crumpled under the pressure and closed the door on banking anonymity. The tiny principality has brought in a "Know Your Customer" system, and it's not the only tax haven to have succumbed to the three little words. Switzerland, however, has put up more of a struggle, repeatedly saying this year that it will not compromise its banking secrecy rules, although the issue of taxing cross-border savings has placed the Alpine country's renowned secrecy under threat.

And it doesn't end there for the Swiss banking industry. While it continues to rake in the dollars and francs, it's been seriously embarrassed by a number of scandals concerning suspect deposits, not least the scandal over the wholly unsavoury accounts of the late Nigerian dictator Sani Abacha. Six Swiss banks have been exposed as failing to display the necessary diligence in accepting around US$600m in Abacha-related funds. Taken together with the US$1.25bn settlement Swiss banks may be duty bound to make to Holocaust survivors and the holders of Nazi-era bank accounts, which was approved in November, it's been a year that Swiss bankers might prefer to forget.

It's probably true to say it's been a better year in the Caribbean. Although faced with the same pressures surrounding banking secrecy, the OECD and FATF initiatives appear to have had only a marginal effect on banking business. Several Caribbean islands have passed laws reducing banking secrecy, amongst them the British Virgin Islands and the Bahamas, which brought in a radical new law allowing foreign inspectors to scrutinise banks, but these do not seem to have deterred investors.

Bermuda banks were given a real window of opportunity in 2000. The Bank of Bermuda became the first bank to be granted exemption from the 60/40 rule that prevents foreign ownership of a Bermudian company exceeding 40 per cent. It's been a long awaited development in Bermuda and the first exemptions have paved the way for further applications. The Bank of Butterfield, Bermuda's other large, international bank, will presumably be awarded exempt status too.

TRUST MANAGEMENT

It's been quite an eventful year in the trust sector too. The Channel Islands have been a particular hive of activity, with a flurry of acquisitions and takeovers and new regulations taking the offshore trust management sector by storm. Insinger de Beaufort, the Dutch banking and trust group, made three acquisitions in the Channel Islands alone, and Investec did pretty well too, picking up a trust company in Jersey and another in Switzerland.

The trust industry got a major overhaul in 2000, with Jersey taking an especially tough stance and imposing strict new rules on companies specialising in setting up trusts on the island. Part of a major money-laundering crackdown, the new law has serious repercussions for Jersey's trust sector - under its provisions, as many as a tenth of trust and other companies providing offshore services could disappear in the first few months of 2001.

Offshore trusts have also fallen prey to scrutiny and pressure from outside forces. In the summer, Canada stepped up its campaign against offshore tax havens and released draft legislation to prevent Canadians using the income tax system to avoid paying domestic taxes by transferring funds to offshore trusts.

INVESTMENT FUNDS

And finally, we come to investment funds, which have quite simply had an amazing year, with assets under management rising in many jurisdictions by 20, 30 or even 40%. Many jurisdictions got to grips with investment funds for the first time: Cyprus got its foot in the mutual funds door, whilst Gibraltar had no significant fund industry until the launch of an innovative new umbrella fund back in the summer.

The year 2000 will be notable for the rise of hedge funds as an investment vehicle to rival the more widespread mutual funds. Many offshore centres have embraced hedge funds wholeheartedly: Bermuda-based HedgeWorld.com even announcing plans to launch an online supermarket for wealthy investors to buy into hedge funds. Keen to increase its share of the hedge fund market, Bermuda also launched a new trading system in the autumn called The Plus Market, which aims to increase trading in hedge funds by eliminating the disadvantages of conventional trading, and marketed it as 'the world's first truly independent electronic secondary market for hedge fund shares.'

Not all jurisdictions have taken to them so easily, however. Hong Kong has an enormous investor base but although interested in get-rich-quick funds, Hong Kong investors have generally tended to shy away from them. Things may change in 2001 - who knows?

Smaller offshore centres have developed burgeoning investment fund industries in 2000. Guernsey, for instance, recently reported a huge surge in demand for collective investment funds.

Hedge funds and mutual funds have not really reached the outposts of Vanuatu, the Cook Islands or even Costa Rica, but nothing should be taken for granted as far as offshore is concerned. It could well happen next year!

So, there you have it. Quite a busy year for offshore financial centres on the business front - they have had plenty to keep them occupied. There have been overriding winners amongst the jurisdictions, some others have been moderately successful, and a few have done very little that is noteworthy. But the initial outpouring of anger over the attacks from the likes of the OECD and EU seemed to subside towards the end of 2000 and tax havens got on with doing what they do best - bringing in the dollars. Mainstays of the offshore world, such as banking, have remained strong, but new trends emerged which started to transform the offshore world in 2000. The one to really keep an eye on is e-commerce. With almost all tax havens vying for the coveted title of "Best E-Commerce Jurisdiction", 2001 could prove very exciting indeed.

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