The Multilaterals' Campaign Against Offshore In 2000

by Mandy Robinson, Tax-news.com

01 January 2001

The year 2000 was an eventful year for tax havens, or for the more politically correct among us - offshore financial centres (OFCs). First came the Financial Stability Forum (FSF) intent on seeking out those OFCs that pose a threat to global financial stability. Hot on the heels of the FSF was the Financial Action Task Force (FATF) on a quest to root out jurisdictions seen as unco-operative in its crusade against money-laundering. But perhaps the most threatening of them all was the report by the Organisation for Economic Cooperation and Development (OECD) - try to imagine some dramatic piano music at this point.

The OECD's report on 'harmful tax competition' focused on practices which threatened the collection of tax by its own members. For OFCs it is perhaps the most worrying of the three initiatives because the OECD has threatened the offending jurisdictions with sanctions and other punitive measures if they do not improve their regimes.

The Financial Stability Forum

The Financial Stability Forum (FSF) is a group of financial regulators established by the G7 after the Asian crisis in 1998 to study methods of reducing global financial volatility. Its Chairman is Andrew Crockett, Managing Director of the Bank for International Settlements. In April 1999, the Financial Stability Forum (FSF) asked a working group to consider the implications of offshore financial centres (OFCs) for global financial stability and to make recommendations for addressing any concerns identified. The Working Group on Offshore Financial Centres chose 37 jurisdictions to study, completing its work in March this year. Its report was endorsed by the FSF on 26 March 2000 and publicly released on 5 April.

The report noted that offshore financial activities do not pose a threat to global financial stability provided they are efficiently supervised and regulated. While the report said that this was the case with some OFCs, others were described as 'unable or unwilling to adhere to internationally accepted standards for supervision, co-operation, and information sharing [which] creates a potential systemic threat to global financial stability.'

The report's recommendations urged the offending OFCs to raise their standards of supervision to an internationally accepted level and called for the International Monetary Fund (IMF) to assume the task of developing and organising a system to monitor this process.

According to the report, the jurisdictions were measured against criteria relating to 'legal infrastructures and supervisory practices . . . the level of resources devoted to supervision and co-operation relative to the size of their financial activities'. The report categorises the 37 jurisdictions into three groups, saying that some OFCs (presumably the third group): 'constitute weak links in an increasingly integrated international financial system and hinder broader efforts to raise standards of soundness and transparency in the global financial system.'

In Group 1 are Hong Kong, Luxembourg, Singapore and Switzerland, which the FSF perceives as having legal infrastructures and supervisory practices of the best quality amongst all the OFCs. Dublin, Guernsey, Isle of Man and Jersey are also included in the group and more or less regarded in the same way, but with the added emphasis that continuing efforts to improve the quality of supervision and co-operation should be encouraged.

The second group of Andorra, Bahrain, Barbados, Bermuda, Gibraltar, Labuan, Macau, Malta and Monaco fare less well, with the conclusion that action should be taken to bring them up to the standard of the jurisdictions of the first group. Group 3, said to have lower standards than Group 2, consists of Anguilla, Antigua, Aruba, Bahamas, Belize, British Virgin Islands, Cayman Islands, Cook Islands, Costa Rica, Cyprus, Lebanon, Liechtenstein, Marshall Islands, Mauritius, Nauru, Netherlands Antilles, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Samoa, Seychelles, Turks and Caicos and Vanuatu.

The FSF's claim to have addressed solely the 'threat to global economic stability' was widely dismissed as inadequate, if not downright deceitful. How can St Kitts and Nevis or the Cook Islands threaten global economic stability? It was obvious to most commentators and to the jurisdictions themselves that the FSF was taking part in a co-ordinated and orchestrated campaign against the OFCs whose two main goals were to attack money laundering and (mostly) to reduce the use of offshore jurisdictions to bypass tax-collection in G7 and OECD countries.

Financial Action Task Force

The Financial Action Task Force (FATF), a body which is loosely associated with the OECD, has existed since 1989 and has 27 members. It has developed a set of 40 recommendations directed towards the control of money-laundering.

In 1999-2000, the FATF began the process of identifying jurisdictions with serious deficiencies in their anti-money laundering regimes. This major initiative is 'designed to encourage the implementation of comprehensive and effective anti-money laundering measures in significant financial centres.' At its meeting in February 2000 the FATF agreed 25 criteria which were to be used in this process, and agreed on a list of 50 countries which were to be measured against the criteria.

In a report issued on 22 June 2000 15 of the 50 countries were labelled as 'non-cooperative in the fight against money laundering'. The report contains a brief explanation of the issues or deficiencies identified and of the remedial actions that need to be taken to eliminate these deficiencies, as well as any positive steps taken so far.

The 'non-cooperative' jurisdictions are: The Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St Kitts and Nevis, and St Vincent and the Grenadines.

The FATF is pursuing its Non-Cooperative Countries and Territories initiative during 2000-2001 'through the monitoring of previously identified weaknesses, the consideration of countermeasures for jurisdictions that maintain their detrimental rules and practices, and the review of a further set of jurisdictions.'
The report recommended that financial institutions should take especial care in dealing with the 15 'non-cooperative' jurisdictions; this led to the issue of 'financial advisories' against the 15 by the US and the UK.
The report threatens unspecified 'counter measures' against jurisdictions which do not take action to bring their regimes into conformity with the group's 40 recommendations.
The FSF rankings drew sharp protests from many of the Group 2 and Group 3 OFCs, but the FATF report had to be taken much more seriously because of the advisories and the threat of other punitive action. Many of the 15 named countries complained bitterly that they were being unfairly treated; but almost all of them set to work to remedy the specific deficiencies listed in the report.
However, it was the third and final report conducted by the OECD that really stuck in the throats of most of the OFCs. There's that scary music again.

Organisation for Economic Co-operation and Development

The OECD's 'Forum on Harmful Tax Practices' was set up in May 1998 with the issue of a report on Harmful Tax Competition which included a definition of a 'tax haven', ie a jurisdiction which engages in 'harmful tax competition', and a series of recommendations for combating harmful tax practices.

The report says: 'The main factors for being a tax haven are a) no or only nominal effective tax rates; b) lack of effective exchange of information; c) lack of transparency; and d) absence of a requirement of substantial activities. The key factors to be used in identifying and assessing harmful preferential tax regimes are a) no or low effective tax rates; b) 'ring fencing' of regimes; c) lack of transparency; and d) lack of effective exchange of information.'

The harmful tax practices which the OECD wants to root out include the availability of companies which don't have to reveal their shareholders or directors, 'designer' companies in which a corporation can choose what tax rate to pay, and the lack of information exchange or mutual assistance treaties between an IOFC and high-tax countries.

The Forum is responsible for identifying harmful tax practices, and compiled a list of jurisdictions which it intended to label as 'tax havens having harmful tax practices'. The list was about to be published on 26 June when on 19 June 2000 the OECD announced that six jurisdictions had made commitments in advance of publication to end the use of harmful tax practices by the end of 2005, and to embrace international tax standards for transparency, exchange of information and fair tax competition. The "advance commitment" jurisdictions are: Bermuda, Cayman Islands, Cyprus, Malta, Mauritius and San Marino. In December the Isle of Man and the Netherlands Antilles also issued commitment letters.

On 26 June 2000, the OECD publicly released its Report on Progress in Identifying and Eliminating Harmful Tax Practices, which included a list of 35 jurisdictions that are tax havens under the criteria of the 1998 Report. Also, on 29 June 2000, the OECD with the French Minister of Finance Laurent Fabius launched a global dialogue on harmful tax practices, holding a symposium which brought together the 29 OECD member countries and 30 other countries to discuss how to develop a global response to the challenges of harmful tax practices. Donald Johnson, Secretary-General of the OECD, introduced the symposium, establishing transparency as the key goal of the harmful tax practices initiative.

The OECD (keen for its members not to lose out on the revenue which is clearly and rightfully theirs!) says the aim of the Forum's work is to ensure that the burden of taxation is fairly shared: 'Tax should not be a dominant factor in making capital allocation decisions. The project is focused on the concerns of OECD and non-OECD countries, which both experience significant revenue losses as a result of harmful tax competition. Tax base erosion as a result of harmful tax practices can be a particularly serious threat to the economies of developing countries. The project will, by promoting a co-operative framework, support the effective fiscal sovereignty of countries over the design of their tax systems.'
Here at least the OECD is honest about its goals: it wants to stop people 'allocating their capital' away from high-tax areas to low-tax areas.
The jurisdictions found guilty of harmful tax practices by the OECD were:

Anguilla	Liberia	St Vincent
Andorra	Liechtenstein	Seychelles
Antigua	Maldives	Tonga
Aruba	Marshall Islands	Turks & Caicos Islands
The Bahamas	Monaco	US Virgin Islands
Bahrain	Montserrat	Vanuatu
Barbados	Nauru	Western Samoa
Belize	Netherlands Antilles	Cook Islands
British Virgin Islands	Niue	Dominica
Guernsey	Panama	Gibraltar
Isle of Man	St Kitts & Nevis	Grenada
Jersey	St Lucia	1

And the jurisdictions said …

Collectively the FSF, FATF and OECD reports rocked the 'named and shamed' jurisdictions and had major consequences for them on both an international and a domestic front. It is probably safe to say that all OFCs aspire to have the reputation of a major international financial centre, so that their inclusion on one, two or, for some, on all three lists came as a substantial blow. The range of responses of the beleaguered jurisdictions has been diverse and interesting to say the least; judging by their reactions, some must have felt as if they were the victims of a conspiracy of schoolyard bullies.

• CARICOM (the Caribbean community) turned on the OECD, saying 'the organisation is clearly uncomfortable with the competition for mobile capital and investments and its members are out to protect their own interests.' A CARICOM press release stated: 'The OECD Report purports to address issues of harmful tax competition in one particular area, financial services. This results in a discriminatory and distorted view of the world economy. The OECD's own initial mandate proposed a wider review. Further, and to be consistent, the OECD would need to consider, in the social field, the impacts on Caribbean and other developing countries of issues like 'harmful drug consumption practices', 'harmful violent cinematic practices', 'harmful gun control practices', and 'harmful criminal deportation practices'. All these emanate from their jurisdictions.'
  

• In some cases, amidst outrage there came suspicion: Barbados' Ambassador in Washington, Sir Courtney Blackman spoke out the day after the OECD report's release saying he could not understand why many Caribbean OFCs were on the blacklist but not the traditional typical tax haven found in Europe where banking secrecy goes hand in glove such as Luxembourg and Switzerland.
  
  
• Outrage also led the president of the Jersey Offshore Institute to level accusations of 'fiscal colonialism' at the OECD. This is one of the better insults bandied around at the time and represented the feelings of many a tax haven.
  
  
• Jersey, Guernsey and the Isle of Man were initially extremely vexed by the OECD and accused the organisation of a lack of clarity as to what constitutes a harmful tax regime. The jurisdictions said they were willing to enter discussions with the OECD but that it had failed to act swiftly and efficiently towards the islands' request. At first they refused to pledge any co-operation with the OECD until it made clear what it wanted the jurisdictions to commit to.

Then there were the compliant OFCs. The Bahamas springs to mind in this category. Although initially shocked and, of course, outraged, the Bahamas' Prime Minister, Hubert Ingraham, made it his personal quest to effect the removal of his country from the blacklist and restore the good name of the jurisdiction. If release from the clutches of the OECD is in proportion to effort, then surely the Bahamas should be let off. In terms of amending and enacting new laws, you name it and The Bahamas has probably done it. Almost every legal component governing, regulating and supervising The Bahamas' financial industry has been reformed. The PM has been constantly on the go, visiting government officials in Canada and the United States, not least to plead against the Advisory. Then it was a whirlwind tour of Europe with more pleading, sorry, talks, with the FATF, the OECD, and various heads of European governments and the leaders of European financial institutions. In fact Mr Ingraham has been out of his country so much that it may have compromised his political position, with the opposition accusing him of disinterest in domestic affairs.

What Will The Multilaterals Achieve?

In fact, after initial outrage most of the 'named and shamed' OFCs have attempted to comply with FATF and OECD requirements in some respects, and for its part the OECD was obliged by the outcry that followed publication of its list to say that it had nothing against low taxation as such. Although this was seen by many as a contradiction of the basic, if unspoken, premise of the entire campaign against offshore, it has at least allowed minds to be concentrated on a practical set of reforms which will remove some of the more egregious abuses of secrecy legislation in the jurisdictions.

In November, after a long period of public and private argument over its intentions and requirements, the OECD published a Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practices, intended as a basis for a continuing dialogue with the jurisdictions. This text, available on the OECD's website at http://www.oecd.org/media/MOUrev20novR1.pdf, sets out in clear terms the steps that the OECD is asking the jurisdictions to take in order demonstrate a commitment to transparency, non-discrimination and effective co-operation. It was sent to all 35 Jurisdictions identified in June 2000 by the OECD as meeting the technical criteria for being tax havens, along with a letter, also available on the OECD's website at http://www.oecd.org/media/MOUletter20nov.pdf, setting out the enhanced procedures proposed by the OECD's Committee on Fiscal Affairs to meet the procedural and political concerns expressed by a number of jurisdictions.

The OECD's Committee on Fiscal Affairs said it believed that this text would provide a useful framework within which it can continue its co-operative dialogue with each jurisdiction. In parallel, the OECD committed itself to participating in regional conferences on the issues raised by its initiative against harmful tax practices.

The first of these is due to take place from 8 to 9 January 2001 in Barbados, and will be attended by the Commonwealth Secretariat, the IMF, the World Bank and the United Nations as well as by the OECD. Some think these regional conferences reflect a decision to 'bribe' the jurisdictions into compliance with promises of various types of compensation. In effect: 'If you let us go on putting our hands in our citizens' pockets then we'll pay you to go back to growing bananas'. If that isn't 'fiscal colonialism' then nothing is! But perhaps the conferences represent a sincere attempt to square the circle.

Bringing together the Caribbean jurisdictions may of course have the effect of stiffening their resistance to the multilaterals' attack. It seems strange that there has been so little co-operation between the OFCs - some have talked about joining forces, but almost nothing has happened. From the perspective of 'offshore' that seems a missed opportunity.

In the absence of concerted opposition, the multilaterals' campaign has clearly had some success in terms of cleaning up the legislation in a large number of jurisdictions; but it is an interesting fact that country after country continues to report more company formations, more funds under management, and bigger bank assets. What is going on? Has no-one told investors that they are threatened? Aren't they worried? Do they perhaps think that this whole business is just an elaborate pantomime and that after a few token changes the world will go on much as before?

The 'commitments' which the OECD is extracting from its client OFCs amount to a promise that they will cease harmful tax competition by the end of 2005, and that by then they will be observing global standards of transparency. The second half of that probably won't happen - if it means a comprehensive system of information exchange between the world's major economies then this is probably twenty years away at least. As for the first half, it seems to mean the harmonisation of internal and external taxation rates in those countries which have taxes (many offshore jurisdictions don't - it can't mean anything for them). Presumably it's open to a jurisdiction to harmonise its tax rates down to zero, and that's what many may do if they want to remain competitive; others such as Jersey or the Isle of Man have already indicated that they will follow the Irish route of harmonisation in the 10-15% range, and that may be a price which investors will pay in exchange for stability and 'correctness'.

The Morality of The Multilaterals' Campaign

Most of the offshore jurisdictions are, or were, poor countries, often ex-colonies, which by their own efforts have constructed financial industries and think that they should not be bullied out of their legitimate income by rich countries afraid of losing revenue because they tax too highly. The view of a libertarian economist is that letting rich countries tax their citizens more heavily simply puts more money into the hands of the state which spends it badly. Competition between countries, in tax as well as in other respects, creates a virtuous circle of increasing efficiency and wealth.

However, others will say that it is about time that the offshore game was brought to a halt. For too many years unsavoury or downright criminal characters have benefited from the banking secrecy and the complex legal barriers erected by tax havens behind which they can conceal tax frauds and money-laundering operations.

On this view, money-laundering must be stopped in order to control the spread of drug-smuggling and drug usage. Money-laundering is also the counterpart of capital flight, which often represents the plundering of assets from poor countries by criminal businessmen and corrupt politicians.

The problem though for those who would control capital flight or crime through stopping up the money-laundering channels is that offshore resembles a balloon: pinch it in here, and it will expand over there. All 'tax havens' have to be stopped at once if anything is to be achieved. The OECD and its fellow multilaterals have attacked 20 or 30 jurisdictions in 2000, but there are nearly a hundred of them, with more opening up all the time. There are a lot more tropical islands than there are bureaucrats at the OECD!

The need to be thorough, combined with a lack of openness about their motives, led the multilaterals to over-reach themselves: when it became clear that the OECD had a tax harmonisation agenda, the many legitimate users of offshore began to get worried. For the serious investor or international businessman who is attracted by the low-tax and in some cases no-tax regime of an offshore financial centre, the aligning of its tax rates with that of the most powerful nations in the world is not so appealing.

To a large degree the timing of these assaults on OFCs in the year 2000 is no coincidence - they were co-ordinated between the smallish group of top finance ministers and their advisers.
No-one knows to what extent the rich country offensive against tax havens will be successful, but here is a deeper question: should it succeed? What is the morality of taxation and the escape from it? Where do you stand on the axis of mitigation - avoidance - evasion?

There sure was a lot to think about in the year 2000.

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