Although 1961 is often referred to as the year in which Jersey began its development as a centre for international business and finance, could you outline some of the factors that contributed to this development before this date?
What was significant about 1961 was that it was the first time an international bank had sought to set up in Jersey to serve foreign clients and the first occasion when with the repeal of the interest rate limits set by the Code of 1771, the States of Jersey had taken such specific action to facilitate such business. However Jersey had long been a location of appeal to non-residents and there was a long history of experience amongst lawyers, accountants, investment advisers and the High Street Banks in handling non-resident business. In the 1920s and 1930s many UK high net worth residents were legitimately able to use a Jersey trust or company to limit exposure to UK taxation and did so to such an extent that the UK Government asked the Jersey authorities to take action to discourage the formation of companies clearly designed to avoid UK tax. UK expatriates were also using the Island as a safe place to hold bearer bonds and other investments, to an extent that banks in Jersey had to arrange for transhipment of the documents to the UK in June 1940 to ensure they did not fall into the hands of the German occupying forces.
Following WWII, UK taxation was increased to higher levels than before the war and for some time UK residents continued to legitimately use Jersey to limit their exposure to UK taxation. UK expatriates in jurisdictions achieving or pressing for independence from the UK were also looking for a secure location for their bank deposits and investments which was close to the UK but where they were not exposed to the high rate of UK taxation on capital and income and were not subject to tax on bank interest or on their foreign source income. Jersey provided such a location.
In 1961 there was therefore a solid base of experience and expertise in handling the financial service needs of non-residents that made Jersey the destination of choice for a number of UK Merchant Banks seeking to meet foreign client needs. There were other factors too that had an influence. Jersey’s rate of tax on bank profits at 20% was for a time lower than Guernsey’s rate. Also Jersey had a well developed tourism industry, better air services and service infrastructure that made it a more attractive location for bank staff.
The problem faced by the Merchant Banks was the limit to the interest rate they could charge when investing the funds available to them, a problem that was quickly overcome through the repeal of the provisions of the 1771 Code. The repeal was proposed by Senator Cyril Le Marquand, the President of the Finance Committee, who was forward thinking and remained a driving force in the development of Jersey as an international finance centre until his death in 1980.
With the removal of The Code of 1771 and its anti-usury provisions in 1961, how dramatically did the business landscape in Jersey change?
The business landscape did not change dramatically through the 1960s. Tourism remained the dominant industry and by the decade’s end financial services still did not account for more than 10% of the national income. However whereas in 1960 bank deposits totalled £40 million, by the end of the decade they totalled nearly £300 million. In 1960 there were just the High Street Clearing Banks and the Jersey Savings Bank. By the end of the decade 22 bank licences had been granted and in 1967 the States adopted legislation to regulate the banks and protect the interests of depositors. A tide of decolonisation left UK expatriates, many of whom took up residence in Jersey, increasingly in search of a secure home for their savings and a wide range of financial services. A greater need for financial service skills than the Island could provide also saw an influx of qualified accountants and others to satisfy the new employment needs and this added to population growth pressure on the Island, which averaged 1,000 a year over the decade.
Can you tell us what gave the Island a substantial business boost 10 years later in 1971 (vis-à-vis Jersey’s position within the European Community), which – alongside other factors – led to increased interest in Jersey from international business during the 1970s?
At the beginning of the 1970s two events in particular helped to reinforce the Island’s appeal. One was the removal of the uncertainty surrounding the Island’s position vis-à-vis the then European Community following the UK decision to apply for membership. Through Protocol 3 of the Treaty of Accession of the UK it was established that, while Jersey was to be part of the Customs Union for trade in goods, Jersey would not be subject to EU fiscal policies and would be outside the Community for trade in financial and other services. The second event was the decision of the UK Government to redraw the boundaries of the Sterling Area and the application of Exchange Control so that in addition to the UK only the Crown Dependencies and Gibraltar would be in the Area. For those banks that had been able to serve their Sterling Area business through the nil tax Caribbean jurisdictions there was an immediate need to establish offices within the new Sterling Area, preferably in a location with a tax on bank profits significantly lower than the UK’s. Such was the demand for bank licences that a move was made by a member of the States of Jersey to postpone the licencing of banks until a report had been prepared evidencing the benefits for Island residents arising from the continued expansion of financial services.
One of the major benefits derived from this demand for bank licences was an ability to set a policy of only licencing subsidiaries or branches of banks in the world’s top 500. Also because of the pressure to gain entry, it was possible for the Jersey authorities to pursue a policy of encouraging new entrants to establish themselves through acquisition of offices that had been established by smaller banks in the 1960s and which had fallen foul of the secondary banking crisis in the UK. The arrival of a significant number of international banks helped to maintain conditions of full employment and population growth which gave rise to the adoption of the Regulation of Undertakings and Development Law in 1973 to limit the rate of job growth. Faced with these pressures there was political acceptance that what resources were available should be engaged in supporting quality institutions and business. There was therefore full political support for the policy of limiting bank licences to those who could show that they were effectively regulated by parent regulatory authorities and generally considered too big to be allowed to fail. As a result Jersey was one of very few jurisdictions to decline granting a banking licence to BCCI which collapsed in the second half of the 1970s with significant global repercussions.
Why did the financial services sector experience significant growth in the 1980s and how important was the enactment in 1984 of Jersey’s Trust Law (currently being enhanced with a seventh amendment) as one of a number of initiatives that lay behind Jersey’s business growth at that time?
By the end of the 1970s Jersey had a well established reputation as a quality international finance centre and played a significant part in the international loan business at that time. This position was given an important boost by the decision of the UK Government to remove all exchange controls in 1979 which opened the Island to more international business. This, combined with dramatic global wealth growth in the 1980s – together with the general increased convertibility of currencies – generated a considerable increase in cross-border capital movements. Jersey was faced with a situation where there was much more business seeking to take advantage of its financial services than it had resources to accommodate. This also had the effect of producing rising bank profits which were reflected in increased tax revenues, budget surpluses and the creation of a significant strategic reserve to help cope with any future downturn in tax revenues.
The policy pursued was to give preference to accommodating the manpower needs of the established financial services such as banking, trust administration and fund management with particular regard for the profit per employee. As a result, while legislation was enacted providing for captive insurance, the Island did not encourage the development of this new sector. What had long been one of Jersey’s core strengths was the formation and administration of trusts and while the profit per employee for the trust service providers was lower than that for the banks, it was recognised that there was significant spin-off to the banks from trust business. What became evident was that the attraction of a trust to residents in many jurisdictions was affected by the fact that the protection sought by settlors and beneficiaries was based on Common Law and was not to be found in any Statute. Enactment of the Jersey Trust Law in 1984 offered a solution to this problem and widened the global appeal of the Jersey trust. It was so successful that it was copied by many jurisdictions seeking to develop their trust activities.
Following the Edwards Report in 1998, do you see this period as the moment when Jersey’s reputation as a cooperative and compliant jurisdiction was given due recognition, with the Island benefitting from having understood the importance of adopting international standards as far back as the early 1970s?
In the 1970s Jersey recognised that if it was to have a long term future as an international finance centre it needed to have greater regard for its international reputation and that this would be further assisted by focusing on quality financial institutions and quality business. At the time however there were limited international standards to be measured against. This began to change towards the end of the 1970s but initially much more in respect of financial regulation than taxation. With some major international bank failures in the 1970s the international community focused on the role of what were seen as poorly regulated offshore finance centres and the Basel Committee on Banking Supervision sought to raise the standard of regulation in these centres. They did so by the formation of the Offshore Group of Banking Supervisors in 1981 and Jersey – which had followed the Bank of England in its approach to bank regulation and was seen as a relatively well regulated centre – was appointed the second chair of the Group in 1982, a position held for the following 30 years. During that time Jersey actively supported development and implementation of the standards set by the Basle Committee and their adoption by the Offshore Group members, with the consequential enhancement of their international reputation.
In the 1990s the international community turned its attention to the role it was believed so-called tax havens or low tax jurisdictions were playing in encouraging tax evasion through a lack of transparency and a failure to exchange information with other tax authorities. In 1998 the OECD published its Harmful Tax Initiative report which led to the listing of low tax jurisdictions and a call on such jurisdictions to commit to a new international standard on tax information exchange in 2002, a call to which Jersey responded positively. Against this background the UK came under international pressure to take action in relation to its dependent territories, pressure emanating in particular from its fellow EU Member States. The UK responded by asking former HM Treasury Official, Andrew Edwards, to review the Crown Dependencies to assess whether they were doing enough in supporting international efforts to fight financial crime, including money laundering and tax evasion. The Edwards Report was the first of what since 1998 have been a succession of assessments by international bodies seeking to ensure greater compliance with international standards, all of which have shown the Island to be a cooperative jurisdiction with a high level of compliance with the standards set and a commitment to respond positively to what recommendations have been made for further action.
What were the key developments from the 1990s to the present day which led to increasing financial services activity in Jersey, extended its global reach (whilst providing benefits to the UK and EU) and helped cement the Island’s position as a premier IFC?
From the 1990s to the present day, Jersey’s reputation as a quality finance centre providing professional services of the highest standard supported by an excellent judiciary and business friendly legislation in accord with international standards, has become increasingly recognised globally. This has reinforced the Island’s appeal to those generating wealth, particularly in the Middle East and Asia, looking for security and effective wealth management. Jersey’s political and fiscal stability, its tax neutrality, professional expertise and overall international reputation, has continued to enhance its role as an intermediary for capital movement mainly destined for investment in Europe. This flow of funds has benefitted the Island’s economy through employment opportunities and tax revenues. It has also provided significant benefits for the City of London and other European financial markets.
As the Government of Jersey remains committed to upholding international standards in the area of financial crime – following the Recommendations on Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) set by the Financial Action Task Force (FATF), whilst also being regularly assessed by MONEYVAL – how does the Island ensure it effectively tackles financial crime, including the role of the Jersey Financial Crime Strategy Group (JFCSG)?
Jersey has an excellent record in fighting financial crime, not just as reflected in the assessments made by international bodies such as the IMF and Moneyval but also in practice through assistance given to many jurisdictions in recovering proceeds from financial crime. This is based on a clearly stated political commitment to fight financial crime and discourage the use of the Island by those engaged in such crime. It is also supported by the close working relationship that exists between Government officials in the Chief Minister’s Department, the Law Officers, the States of Jersey Police, the Financial Crimes Unit and the Jersey Financial Services Commission (JFSC). This relationship is important for both the development of strategic policy in which the Jersey Financial Crime Strategy Group has a key role and for day to day operations, including cooperation with other law enforcement authorities, of which those in the UK are of particular significance. Jersey has played – and continues to play – a well recognised leading role in meeting the international call for accurate, adequate and timely information on the ultimate beneficial ownership of corporate vehicles to be both available and accessible by law enforcement authorities, which is essential for the successful pursuit and bringing to account of those engaged in financial crime.
Jersey’s inclusion on the OECD’s ‘white list’ of cooperative and compliant jurisdictions in April 2009, its appointment as one of the vice chairs of the OECD’s Global Forum Peer Review Group on Transparency and Exchange of Information for Tax Purposes in 2013 and now vice chair of the Global Forum Working group on Automatic Exchange of Information (AEOI) – plus its implementation of the Common Reporting Standard (CRS), support of the Base Erosion Profit Shifting (BEPS) initiative and now its rating from the OECD’s Global Forum as being fully compliant in tax transparency and meeting international standards – has shown the Island to be proactive rather than reactive on addressing high international standards but does early adoption risk its competitiveness as an IFC?
Jersey has long taken an active and leading role in the work of the OECD in the development and effective implementation of international standards of transparency and exchange of information for tax purposes. Jersey signed its first Tax Information Exchange Agreement (TIEA) in 2002 with the USA, having that year formally committed to a new international standard set by the OECD. By 2009 Jersey had signed a sufficient number of TIEAs to be accepted by the OECD as a cooperative jurisdiction. Jersey then joined with the OECD in progressing implementation of the international standard set through the work of the Global Forum on Transparency and Exchange of Information and in 2010 was appointed one of the four vice-chairs of the Forum’s Peer Review Group, charged with the assessment of jurisdictions’ compliance with the new standard. At the end of 2013 Jersey relinquished that position and became one of four vice-chairs of the Forum’s new AEOI Working Group charged with promoting the implementation of the new CRS for the automatic exchange of information on financial accounts. Jersey was one of some 50 jurisdictions known as CRS ‘early adopters’.
Jersey has also been among the leaders in implementation of the OECD BEPS programme. Jersey is a BEPS Associate and a member of the Inclusive Framework, the purpose of which is to ensure the effective implementation of BEPS on a global basis. As a BEPS Associate, Jersey is able to contribute to overall development of the BEPS programme through policy dialogue and exchange of information, participating on an equal footing with OECD, G20 and many other countries. Jersey is also a vice-chair of the Ad Hoc Group on Country by Country reporting. Jersey was a signatory in June 2017 of the OECD’s Multilateral Instrument (MLI) and was only the third jurisdiction in the world to complete ratification of the MLI, as the process by which countries will be able to implement the OECD’s anti-avoidance measures. This is one of the minimum standards underpinning the BEPS programme. It means Jersey became one of the earliest adopters of an international measure designed to stop multinationals shifting profits between countries to avoid paying tax. As publicly stated by the Director of the OECD Centre for Tax Policy and Administration, “Jersey is a forerunner in the implementation of the far-reaching reforms agreed under the BEPS Project”.
The foregoing is ample evidence of Jersey’s total commitment to compliance with international standards set by the OECD. This proactive approach on tax transparency and information exchange is reflected in the fact that Jersey was recently accorded full compliance with the OECD current standards assessed by the Global Forum, which now put much greater focus on the availability and accessibility of information on beneficial ownership, a status not yet met by a number of OECD and EU Member States.
There was concern expressed by the finance industry that the Island’s proactive approach would be detrimental to business. In the event it is now recognised by the industry to be an approach that has served the Island well, as more attention has been focused by the international community on evidence of compliance with the international standards. Good business has also wanted to be seen to be associated with a centre accepted by the international community and where there is assurance that through the action taken the risk of black listing can be avoided. A positive feature of the present international approach by bodies like the OECD, is its global application. In the past when action was taken against a certain list of jurisdictions, there was a risk business would be lost to other jurisdictions that avoided being so listed but which offered similar financial services. Now the international standards are being applied on a global level playing field and any country not meeting the standards is being identified. As has been stated by the international standard setters, there is now no hiding place.
Does the ability of the Government of Jersey, its judiciary, the Jersey Financial Services Commission (JFSC) and the Island’s finance industry, to effectively cooperate in a timely manner on reviewing fiscal policy, legislative and market developments beyond its shores and when deemed necessary create or amend its laws and legislation, remain central to realising new business opportunities?
Yes this has been an important feature of Jersey’s continued success as an international finance centre. That success has depended on being alive to new business opportunities and Government, in partnership with all the stakeholders, has sought to ensure through its fiscal policy the enactment of legislation and the accommodation of those with the necessary experience and expertise, an environment best suited to take advantage of those opportunities. Also of great significance in recent years, has been a proactive response to developing international standards and a general concern to reinforce the Island’s reputation as a cooperative jurisdiction through independent assessments of the level of compliance with those standards to which the Government, law enforcement, the judiciary and the JFSC, all make an important contribution. Government – with the industry – are also actively monitoring the business environment. This is reflected in a Global Markets Strategy which is identifying business opportunities and the steps needed – such as through negotiation of Double Taxation Agreements and Bilateral Investment Treaties – to better ensure those opportunities can be taken advantage of to benefit Jersey.
Can you outline areas currently being addressed, such as the OECD’s Common Reporting Standard with the Taxation (Implementation) (International Tax Compliance) (Common Reporting Standard) (Amendment) (Jersey) Regulations 2017 and maintaining adequacy with the European Union’s General Data Protection Regulation (GDPR), as Jersey looks to retain its reputation as a compliant IFC of substance serving global markets?
Jersey is constantly seeking to maintain and where necessary further enhance its reputation as an IFC complying with international standards and be recognised as such by the international assessment bodies. It has done so most recently through active involvement in the development and implementation of the OECD CRS and BEPS programmes. Where the implementation of the new standards has called for legislation, as was the case with the CRS and BEPS country by country reporting, this legislation has been quickly enacted. The same positive approach is adopted by the JFSC in meeting international standards on financial regulation and generally by all relevant stakeholders in the fight against financial crime.
In view of the recent publication of the European Union list of non-cooperative tax jurisdictions (set to be updated annually), how do you feel about the wide set of good governance criteria employed in the process?
Jersey was one of 90 jurisdictions that the EU included in a screening process with the objective of producing a list of so-called non-cooperative jurisdictions. The Code of Conduct Group on Business Taxation that has managed this process considered jurisdictions against a set of criteria agreed by the EU Council. Jersey had no difficulty satisfying the Code Group that four of the criteria were fully met because they were based on international standards with which Jersey was fully compliant. Thus Jersey satisfied the requirement of compliance with the CRS on AEOI having been one of the early adopters. Jersey also met the requirement on tax information exchange on request being fully compliant with the OECD Global Forum standards. The requirement of the adoption of the Multilateral Convention on Mutual Administrative Assistance was also met, as was that of compliance with BEPS.
Jersey faced greater difficulty in satisfying the criteria that “the jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction”, because there is no international standard against which to test the application of the criteria, as there is yet to be international agreement on what constitutes real economic activity or substance, particularly in respect of investment holding companies which figure most prominently in Jersey’s corporate landscape. Comfort has been obtained however from EU acceptance that the fact of the absence of a corporate tax or applying a nominal corporate tax rate equal to zero or almost zero, cannot alone be a reason for concluding that a jurisdiction does not meet the requirements of the criteria.
Jersey presented evidence to the Code Group that there was a firm policy of requiring those with a presence in the Island to have real economic activity or substance. This could be shown in the JFSC approach to what was required of those providing regulated financial services. These requirements are set out in the regulatory laws and/or in the statutory AML obligations. For those corporate activities outside the regulatory framework, the AML obligations also apply either directly or through the fund managers or trust and company service providers that administer those activities. However, in the absence of clear legal substance requirements there was uncertainty on the part of the Code Group as to whether the requirements of real economic activity or substance were met. In seeking to satisfy the Code Group on this point there is, as previously stated, the problem of the absence of international agreement on how the terms should be defined. However what is clear from the international discussions under the auspices of the OECD, is that there is a considerable range of requirements according to the nature of the corporate activities involved.
The Code Group, reflecting what they saw as perceived gaps in Jersey’s ability to satisfy the criteria, sought a commitment from Jersey – as it did of other jurisdictions it considered in a similar situation – that perceived gaps would be addressed by the end of 2018. Jersey’s Government willingly provided that commitment and the Code Group duly concluded Jersey was a cooperative tax jurisdiction.
Finally, what do you see as the most pressing issues facing Jersey today and how confident are you about the future and the Island’s ability to be seen as a compliant IFC, whilst continuing to enhance its appeal in global markets?
When considering what are the pressing issues facing Jersey today it must be remembered that over the years Jersey has always been faced with issues arising from an ever changing external environment over which the Island has no influence. Jersey’s economic success has relied upon the adaptability and flexibility with which the issues have been responded to. Since 1961 the finance industry has faced many challenges arising from changes in tax rules in its main markets and development of new international standards. Simultaneously there have been many market opportunities available which the industry has taken advantage of. The finance industry has shown its ability to evolve and to respond successfully to an ever changing external environment and there is no reason to expect the future to be any different.
An obvious current issue facing the finance industry and the Island generally is Brexit and in particular the impact on the City of London with which Jersey has long had a close and mutually beneficial complementary relationship. The current issue is the uncertainty. However, as many commentators have stated, the City’s international significance and dominance in many areas is such that it is difficult to contemplate the City as other than the top international finance centre. Outside of the EU the City will have a similar focus on global markets as that of Jersey and the two will remain complementary with Jersey’s strengths in areas such as trust and fund administration combining with the City’s greater global reach.
The future relationship the UK has with the EU can be expected to be mirrored in the EU approach to third countries generally. Experience to-date would suggest that when the EU reaches a conclusion on what is expected of third countries if they want to access EU markets, Jersey should be more than able to meet any EU requirements on regulatory equivalence. However in looking at the current issues and taking a view of the future success of Jersey as an IFC, one should not be hypnotised by Brexit. Jersey has a global appeal and the fundamentals of that appeal, notably fiscal and political stability, tax neutrality, compliance with international standards and quality of service, remain unchanged. The future will depend on building on that appeal, for the wealth creation and the need for wealth management will be more in Asia and Africa than in Europe.
Of particular importance will be maintenance of a reputation as an internationally recognised, well regulated jurisdiction complying with international standards and thereby avoiding inclusion in any list of non-cooperative jurisdictions. As recent experience has shown, there is no conflict between being seen as compliant with international standards and retaining appeal for international investors and this is expected to be even more evident in the future. The regulatory regime can continue to satisfy international standards whilst retaining sufficient pragmatism and flexibility (within the international rules) to continue to create conditions of confidence for all investors.
Complying with the international standards also does not preclude the enactment of legislation and the pursuit of policies that secure a business friendly environment. An issue here is to ensure Jersey is sufficiently fleet of foot to respond to market opportunities ahead of its competitors. Also required is the accommodation in the Island of new businesses and those with skills and experience not already sufficiently available. It will be important to continue ensuring domestic policies on such matters as immigration do not frustrate the necessary process of change and development.
The general conclusion to reach in addressing the current issues is that, given the appropriate action, there is no reason to be other than confident that Jersey will continue to be a successful IFC of benefit to the Island through employment and tax revenues and also of benefit to its near neighbours through the capital flows so generated.
