The recent G20 Preparatory Summit in Berlin has added further to intense media speculation over measures to be taken against ‘Tax Havens’.
‘Tax Haven’ now competes with ‘Bank’ as the pejorative label of choice deployed by politicians and journalists alike.
To a degree this is understandable given the dislocation to the global economy as a consequence of the financial crisis. But this doesn’t make it right.
Following the EU leaders Summit, Martin Wolf of the FT , widely regarded as one of the worlds leading financial journalists, proposed a speech for President Obama to deliver at the G20 London Summit on 2nd April. It included the following observation;
“First we must set priorities. I note with consternation Europeans’ obsession with regulating hedge funds and tax havens. Did they cause the crisis? No. Europeans also call for regulation of all markets, products and participants without exception. This is like calling for research into Radar whilst the Titanic sinks. Do they realise that the systemically significant banks at the heart of this crisis are the most regulated institutions we possess. Let us not be diverted from todays priorities.”
Mr Wolf is right and reveals a poor grasp amongst some commentators as to the causes of the financial crisis, and the role of small international finance centres dubbed as ‘Tax Havens’.
How did this happen?
Clearly there is a continuing sense of moral outrage as countries slide into recession, unemployment rises, and already strained national budgets in the US and Europe come under intense pressure, as a result of the financial crisis.
The truth, however unpalatable, is that the crisis has its roots anchored firmly in debt taken on in the major western deficit economies. Debt became the rocket fuel of Wall Street and the honey pot of Main Street, and when credit couldn’t expand into yet more new and increasingly fragile frontiers, it collapsed, as all asset bubbles eventually must.
So why the linkage with ‘Tax Havens’?
Well before I explain let’s lose the pejorative label. No one can define it meaningfully and like many nasty nick names it is designed to conjure up negative images of wrongdoing and dodgy activity, and neatly sidesteps any sense of obligation to conduct an objective examination of the facts.
The criticism is aimed at niche International Finance Centres ( IFCs) and is usually fed to the media and politicians by anti business groups, opposed to tax competition and free markets in mobile international capital. Ironically these critics are inclined to attack globalisation, multinationals of all types, and are the authors of the protectionist clamour that the G20 has vowed to avoid, as the following quotation from the Berlin Summit evidences:
“All countries have a duty to resist protectionist tendencies and to work towards a tangible further opening of world trade”
So why all the focus on IFCs? The distorted logic behind the criticism being fed to the G20 governments runs something like this…….
Banks have been irresponsible, hedge funds have been irresponsible, and both use specialist international finance centres so they must be to blame.
The bank bail outs are costing billions and the international finance centres are assisting tax evasion so if it weren’t for them, we wouldn’t be facing the prospect of steep tax rises.
Now its true many banks and hedge funds have operations in international finance centres. They provide a cost effective tax neutral administration platform in a well regulated environment. Blaming them for what has happened in the US and UK is rather like blaming the mechanic who performed a perfectly good service on a car which was then crashed by a reckless driver.
Given that most western governments were already under immense pressure from a burgeoning public sector, and faced with huge additional borrowing due to the financial crisis; the location of a blame candidate with no international voice, no votes, and no way of fighting back could look like a pretty attractive opportunity if you are a government on the ropes.
Is this just sour grapes from one of those niche international finance centres?
Well not according to some of the worlds leading academics in the field of economics, law and international relations.
‘As anyone who has read the FT’s coverage of the financial crisis would know, its roots lie not in Grand Cayman or the Isle of Man but in New York and London. If there has been any “brutal exposure” it is of the inadequacies of the US and European Union oversight of their financial systems.
Second, your article suggests that Cayman and others “thrived” because the second half of the 20th century was “free-wheeling”. Nonsense. Cayman and the other top offshore financial centres all have more rigorous anti-money laundering regulatory regimes than the US or any member of the EU. Our research into OFCs has consistently shown that they have better legal tools and tougher standards than do most onshore jurisdictions.
Associate Professor of Law, Case Western Reserve University,
Cleveland, OH, US
Andrew P. Morriss, H. Ross & Helen Workman,
Professor of Law and Business, University of Illinois,
Champaign, IL, US’
So what do international finance centres do and what is their role in the global financial system?
International Finance Centres or IFCs provide administration and wealth management services to international corporates and individuals around the world. They compete for international business in exactly the same way as do many OECD and G20 nations; on a mix of financial expertise, lower costs, attractive tax regimes, political and social stability, and robust, flexible, laws and regulation.
IFCs act as conduits for mobile international capital so essential to the operation of free markets, they attract this capital from where it is not needed and route it to where it can be most efficiently deployed.
Major academic studies by a number of highly respected institutions have been completed to evidence empirically that IFCs are an economic accelerator and not only do they not detract from major economies they provide a net benefit.
Irwin Stelzer commented recently in ‘The Daily Telegraph’ on the G20 approach to competition and the role of international finance centres:
“legal competition by governments to attract businesses by offering the most attractive mix of low taxes and quality public services is as effective in making governments efficient, as competition amongst retailers, or producers of a host of household goods is in forcing private firms to be efficient”.
Over the course of the coming weeks leading upto the G20 we will produce a series of articles which address the fears and phobias around ‘Tax Havens’ and evidence that the debate should move to a more rational assessment of two kinds of financial centre; those which are well regulated and transparent and those which are not.
Further we will make a compelling case as to why Jersey is firmly placed amongst the well regulated and transparent, and demonstrate the value and integrity of its proposition.
In 2003 the world believed that weapons of mass destruction were in Iraq and that free nations were under threat from this menace. History has proven that all the ‘experts’ were wrong. Centres such as Jersey are not weapons of tax destruction; they are agents of wealth creation, making a valuable contribution to free markets, international financial services and to global prosperity.
We would urge the G20 to discriminate between transparent, well regulated and cooperative jurisdictions such as Jersey, and those which are opaque, less well regulated and cloaked in secrecy. To do anything less would undermine the very basis of the democratic principles of fairness, ju