Offshore Finance

This book was first published in 2006. It is estimated that up to sixty percent of the world's money may be located offshore, where half of all financial transactions are said to take place; however, there is a perception that secrecy about offshore is encouraged to obfuscate tax evasion and money laundering. McCann provides a detailed analysis of the global offshore environment, outlining the extent of the information available and how that information might be used in assessing the quality of individual jurisdictions, as well as examining whether some of the perceptions about 'offshore' are valid. He analyses the ongoing work of the Financial Stability Forum, the Financial Action Task Force, the International Monetary Fund, the World Bank, and the Organisation for Economic Cooperation and Development. The book also offers some suggestions as to what the future might hold for offshore finance. HALF-TITLE......Page 3 TITLE......Page 5 COPYRIGHT......Page 6 CONTENTS......Page 7 FIGURES......Page 9 TABLES......Page 10 PREFACE......Page 13 ABBREVIATIONS......Page 21 PART I The past......Page 25 1.2 What does ‘Offshore’ mean?......Page 27 1.4 Three fundamental criteria for ‘Offshore Finance Centres’......Page 28 1.6 ‘Offshore’ in context......Page 29 1.8 Problems associated with some financial environments......Page 30 1.10 An overview of some financial centres......Page 31 1.14 Assessment criteria......Page 32 1.15 Conclusion......Page 33 2.2 Geographical dispersion......Page 34 2.3 What does ‘Offshore’ mean?......Page 36 2.4 Some working definitions......Page 39 2.5 Examples of some other definitions......Page 40 2.6 The origins and development of ‘Offshore’......Page 42 2.7 Tax havens identified......Page 51 2.8 Quantification of the size of the market......Page 57 2.9 The IMF's Coordinated Portfolio Investment Survey (CPIS)......Page 59 2.10 The IMF's Information Framework......Page 60 3.2 Why should a jurisdiction want to be a marketplace?......Page 61 3.3 The creation of a market......Page 63 3.4 Legitimacy......Page 64 3.5 Tax, regulation and confidentiality......Page 65 3.6 Tax......Page 66 3.7 Regulation......Page 67 3.8 Voluntary compliance......Page 69 3.9 Confidentiality......Page 70 3.11 What else besides tax and confidentiality?......Page 72 3.12 Standards ‘Offshore’......Page 73 3.13.3......Page 74 3.13.5......Page 75 3.13.8......Page 76 3.13.13......Page 77 3.14 ‘Offshore’ versus Onshore......Page 78 3.15 Some characteristics of 'Onshore' finance centres......Page 79 3.16 Capital flight......Page 80 4.2 The service providers......Page 82 4.4 Examples of services available ‘Offshore’......Page 83 4.5 ‘Offshore’ banking......Page 84 4.7 International Business Companies (IBCs)......Page 85 4.9 Collective Investment Schemes (CISs)......Page 88 4.9.3 Companies......Page 89 4.9.4 Hedge funds and ‘Offshore’......Page 90 4.10 Trusts......Page 92 4.10.1 The Hague Convention......Page 95 4.10.2 Forced heirship......Page 97 4.12 Shipping......Page 98 4.14 Foundations......Page 100 4.15 Other services......Page 101 4.17 What does the consumer expect from the market?......Page 102 4.19 ‘Offshoring’......Page 104 5.1 Introduction......Page 106 5.2 In general......Page 108 5.3 Tax avoidance......Page 109 5.5 Tax evasion......Page 113 5.6.1 Example 1......Page 114 5.7 Tax competition......Page 115 5.8 Tax harmonisation......Page 116 5.9 Tax and ‘Offshore’......Page 117 5.10 Tax and ‘Offshore’ and the OECD......Page 118 5.11 Specific committments......Page 120 5.13 The Code of Conduct......Page 121 5.14 The EU Savings Tax Directive: background......Page 122 5.16 Developments......Page 123 5.17 The USA and the EU Savings Tax Directive......Page 126 5.18 Switzerland and the EU Directive......Page 128 5.19 Agreement in the EU......Page 130 5.21 The response Offshore......Page 132 5.22 ‘Offshore’ and the zero tax option......Page 133 5.24 Tax amnesties......Page 135 5.25 Controlled foreign companies......Page 137 5.26 Double tax avoidance agreements......Page 138 5.28 Global forum on taxation......Page 139 6.1 Introduction......Page 140 6.2 The rationale for regulation......Page 141 6.2.2 Market misconduct......Page 143 6.2.3 Conduct of business......Page 144 6.2.4 Information asymmetry......Page 145 6.2.5 Systemic instability......Page 146 6.3 The cost/benefit analysis......Page 147 6.4 Core values......Page 148 6.5 A medical analogy......Page 149 6.6.2 Institutional supervision......Page 154 6.6.4 Prudential regulation and supervision......Page 155 6.7 Licensing......Page 157 6.8 The 'fit and proper' criterion......Page 160 6.9 The 'Know Your Customer' criterion......Page 162 6.10.1 Investment Services Directive......Page 163 6.10.2 Capital Requirements Directive......Page 165 6.10.3 Basel Capital Accord......Page 166 6.10.4 Basel II......Page 167 6.11 The single passport......Page 170 6.12 Conduct of business......Page 171 6.13 Regulation and crises......Page 172 6.14 Regulation in practice......Page 173 6.15 Self-regulation......Page 175 6.16 The Twin Peaks model......Page 177 6.17 Regulation Offshore......Page 178 6.17.1 Trust and company services providers......Page 179 6.18 Auditors and accountants......Page 181 6.18.1 Reporting accountants......Page 184 6.19 Supervision......Page 185 6.20 The UK model......Page 187 6.21 Consolidated supervision......Page 189 6.22 Compliance......Page 191 6.22.1 Risk-based supervision......Page 193 6.23 Memoranda of Understanding......Page 194 6.24 A critical success factor......Page 195 6.25 The European Central Bank......Page 196 6.27 Regulatory independence......Page 197 6.29 Summary......Page 199 7.1 Introduction......Page 201 7.2 Evolving financial services......Page 202 7.3 Regulatory structures in practice......Page 203 7.4 The single regulator......Page 204 7.6 Training and experience......Page 207 7.6.1 'Onshore'......Page 209 7.6.2 ‘Offshore’......Page 210 7.7 Operational implications......Page 211 7.8 Is there an answer?......Page 214 7.9 Boards......Page 215 7.10 Enforcement......Page 216 7.12.1 Phase 1: new......Page 218 7.12.2 Phase 2: young......Page 220 7.12.4 Phase 4: mature......Page 222 7.13 Regulatory immunity......Page 223 7.14 Conclusion......Page 224 8.1 Introduction......Page 226 8.2 Which jurisdictions are most at risk?......Page 227 8.3 United Nations initiatives......Page 228 8.3.1 Money laundering defined......Page 229 8.4 The criminalisation of money laundering......Page 230 8.5 A summary of some problems arising......Page 231 8.6 Money laundering and Offshore......Page 233 8.7 Action taken by OFCs to prevent money laundering......Page 234 8.8 The fight against money laundering......Page 235 8.9 Financial Intelligence Units......Page 238 8.10 The Egmont Group......Page 239 8.11 Alternative remittance systems......Page 241 8.13 'Customer Due Diligence for Banks': a Basel Committee paper......Page 242 8.14 Terrorist financing......Page 244 8.15 The EU and anti-money laundering......Page 246 8.16.2 Customer due diligence for banks......Page 248 8.17 Future action......Page 249 8.18 FATF and IMF/World Bank......Page 251 8.19 Assets recovery......Page 252 9.2 Bank for International Settlements......Page 254 9.3 Basel Committee on Banking Supervision......Page 255 9.3.2 The revised Concordat......Page 256 9.3.4 The Minimum Standards......Page 257 9.4 Overview of the work of the Basel Committee......Page 258 9.4.3 Capital adequacy......Page 259 9.5 Committee of European Securities Regulators......Page 260 9.6 The Enlarged Contact Group on the Supervision of Collective Investment Funds......Page 262 9.7 The European Union......Page 263 9.8 The Financial Action Task Force......Page 264 9.10 The Financial Stability Forum......Page 265 9.11 G7/G8/G10......Page 266 9.12 G20......Page 267 9.14 The International Association of Insurance Supervisors......Page 268 9.15.1 The context......Page 269 9.15.3 The Creation of the IMF......Page 270 9.16 International Organization of Securities Commissions......Page 271 9.18 The International Trade and Investment Organization......Page 274 9.21 The Offshore Group of Banking Supervisors......Page 275 9.22 The Offshore Group of Insurance Supervisors......Page 277 9.24 The Organization for Economic Cooperation and Development......Page 278 9.27 The World Bank......Page 279 9.27.4 The Multilateral Investment Guarantee Agency......Page 280 9.27.5 The International Centre for Settlement of Investment Disputes......Page 281 PART II The present......Page 283 10.2 The work of the Financial Stability Forum......Page 285 10.3 Some reactions to the FSF Report......Page 290 10.4 A comment......Page 292 10.5 The International Monetary Fund......Page 293 10.6 The International Monetary Fund and OFCs......Page 294 10.7 The IMF's OFC Assessment Program......Page 295 10.7.2 Module 2 assessments......Page 296 10.8 Financial System Stability Assessments......Page 297 10.9 Financial Sector Assessment Programs......Page 298 10.10 Standards......Page 301 10.10.1 Reports on the Observance of Standards and Codes (ROSCs)......Page 302 10.11 Anti-money laundering and combating the financing of terrorism......Page 303 10.12.1 2001......Page 304 10.12.2 2002......Page 305 10.12.3 2003......Page 306 10.12.4 2004......Page 307 10.12.5 2005......Page 309 10.13 The OFC programme: phase 2......Page 310 11.2 The work of the Financial Action Task Force......Page 311 11.3 Non-cooperative countries and territories......Page 313 11.4 Some negative comment......Page 318 11.5 Some positive comment......Page 319 11.7 11 September 2001......Page 320 11.8 The Forty Recommendations......Page 323 11.9 Joint working of the World Bank, the IMF and the FATF......Page 325 11.10 Membership......Page 326 11.11.2 Caribbean Financial Action Task Force......Page 327 11.11.4 Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)......Page 328 11.11.7 Middle East and North Africa Financial Action Task Force (MENAFATF)......Page 329 11.12 Update......Page 330 12.1 Introduction......Page 331 12.2 OECD Report on Harmful Tax Competition......Page 332 12.3.2 April 1998......Page 333 12.3.3 1999......Page 335 12.4.1 June 2000......Page 336 12.6 Two approaches......Page 339 12.8 Exchange of information......Page 341 12.9 Even more commitments......Page 342 12.11 Some reactions to the OECD's 1998 Report......Page 343 12.12 The Center for Freedom and Prosperity......Page 347 12.13 Some clarifications by the OECD......Page 348 12.14 Behind the corporate veil: using corporate entities for illicit purposes......Page 349 12.14.1 Disclosure to the authorities ab initio......Page 350 12.14.3 Reliance on an investigative system......Page 351 12.16 OECD Global Forum on Taxation......Page 352 12.17 Behind the corporate veil......Page 353 PART III The future......Page 355 13.2 Background......Page 357 13.3 The extent of the problem......Page 358 13.4 Some underlying principles......Page 359 13.5 Are there any common features in frauds Offshore?......Page 360 13.6.1 BCCI......Page 361 13.6.2 Enron......Page 364 13.7 Some ‘Offshore Centres’ in particular......Page 365 13.7.1 Switzerland......Page 366 13.7.2 Seychelles......Page 367 13.8 A balanced perspective......Page 368 14.2 Some quotable quotes......Page 369 14.4 The Abacha affair......Page 370 14.5 Corporate governance......Page 371 14.5.2 USA......Page 374 14.5.3 Parmalat......Page 375 14.5.6 Banca Antonveneta......Page 379 14.6 A long list......Page 380 14.7 Bearer shares......Page 381 14.9 A closing comment......Page 382 15.2 Economic expedience......Page 383 15.3 The services of OFCs are in demand......Page 386 15.4 Small islands offer a conducive infrastructure......Page 387 15.5 There is a natural good fit......Page 389 15.6 The involvement of outsiders......Page 390 15.7 Apparent dominance of finance within the economy......Page 391 15.8 Lack of influence externally......Page 392 15.9 Currency of advantages......Page 393 15.11 Value of the business generated......Page 394 15.13 Conclusion......Page 395 15.14 Population Density Comparatives......Page 396 16.2 What is the problem?......Page 397 16.3 What do we know?......Page 398 16.4.2 Aruba......Page 400 16.4.5 Bermuda......Page 401 16.4.6 British Virgin Islands......Page 402 16.4.8 Cook Islands......Page 403 16.4.11 Guernsey......Page 404 16.4.13 Isle of Man......Page 405 16.4.15 Labuan......Page 406 16.4.18 Malta......Page 407 16.4.19 Mauritius......Page 408 16.4.23 Switzerland......Page 409 16.4.25 Turks and Caicos......Page 410 16.4.26 Vanuatu......Page 411 17.1 Introduction......Page 412 17.2 Is London an ‘Offshore Finance Centre’?......Page 413 17.3 The Edwards Report......Page 414 17.5 The UK's overseas territories......Page 415 17.6 The KPMG Report......Page 417 17.8 Anti-money laundering......Page 419 17.9 Problems in the UK......Page 422 17.10 Companies and trust service providers......Page 423 18.1 Introduction......Page 424 18.2 Is the USA an ‘Offshore Finance Centre’?......Page 426 18.4 The link to ‘Offshore’......Page 428 18.5 Money laundering and the USA......Page 429 18.8 'Know your customer'......Page 430 18.9.1 Nevada......Page 431 18.9.2 Delaware......Page 432 18.11 The US and the OECD's Harmful Tax Initiative......Page 434 18.12 The USA Patriot Act......Page 435 18.12.1 UN Convention for the Suppression of the financing of Terrorism......Page 437 18.14 Corporate inversion......Page 438 18.15.1 General......Page 439 18.15.2 Citigroup......Page 440 18.15.3 Xerox......Page 441 18.15.4 Mutual funds......Page 442 18.15.7 Riggs National Bank......Page 443 18.16 Sarbanes–Oxley Act......Page 444 19.2 What are the issues?......Page 446 19.3 Global financial stability......Page 447 19.4 The money laundering threat......Page 450 19.5 Tax evasion......Page 453 19.7 Summary......Page 455 20.2 A glimpse of the future......Page 457 20.3 Do observers believe that ‘Offshore’ will continue to exist?......Page 462 20.4 The influence of the work of the supranational autorities......Page 466 20.5 Is the focus appropriate?......Page 467 20.6 Regulation......Page 471 20.7 Aspiring OFCs......Page 472 20.8 A step in the right direction......Page 475 20.9 The future summarised......Page 477 20.10 What about products for the future?......Page 486 21.2 The significance of reputation......Page 489 21.3 What's in a name?......Page 491 21.4 Stability and credibility......Page 493 21.5 The components of a good reputation......Page 494 21.7 Three perspectives......Page 495 21.7.2 The service providers......Page 496 21.7.3 The consumer......Page 497 21.8.2 Economic stability......Page 498 21.8.4 Credibility......Page 499 21.9 In summary......Page 500 22.1 A thumbnail sketch......Page 503 22.2 Relative newness of regulation......Page 504 22.3 A middle course......Page 506 22.4 The ‘Offshore’ stigma......Page 508 22.5 Is the stigma warranted?......Page 509 22.6 The rationale for ‘Offshore’......Page 510 22.7 Concluding remarks......Page 512 Appendix 1 Tables......Page 515 Appendix 2 Some useful websites......Page 555 INDEX......Page 558