Keynote Address Transcontinental Trusts Conference
21 June, 2012
This morning I am going to talk about what is really going on in relation to the offshore financial centres. Obviously, macroeconomic changes and the onshore political focus post the financial crisis have had an effect but there is clearly a good deal more going on than would be justified by a purely economic analysis. I will identify the detractors and their agendas, separate the truth from the myths, analyse what of the criticism of the offshore centres is justified and of concern to us and what is not. That in turn will lead me to a discussion of what we therefore need to do to realign the offshore financial services industry to ensure its economic success. There is no doubt we are facing a fundamentally changed set of financial and regulatory circumstances and a more hostile political environment. As Keynes said “when circumstances change, I change my mind, what do you do?” In making my observations, it is necessarily the case that much of what I say is based on my experience of over thirty five years in the Cayman Islands but these comments I hope you will agree are of general application to the offshore financial centres of the Overseas Territories and Crown Dependencies.
We can right away identify three fundamental changes that directly affect offshore financial centres. The first is that the high volume, low profit per transaction model may be impaired for the foreseeable future. This occurs because of the deleveraging in the global financial markets, at least in so far as the US and Europe is concerned. If the pre-crisis financial world was driven by leverage of 40:1 and if that ratio now drops to 2:1, we have to conclude that post-crisis there will be fewer transactions, particularly in the area of structured finance, because now everyone has to structure transactions with money that actually exists – unless of course you are the Federal Revenue or the ECB. This means in turn that the offshore financial centre will need to enhance revenue from each transaction for both the private sector and Government and this too leads to the essential point here to which I will revert: That of offshore substantial presence.
The second fundamental change we must recognise is that the high tax jurisdictions of the G20 specifically the United States and Europe have so badly mismanaged their benefit programmes that they face unmanageable deficits. One estimate of current rates of expenditure by the US concludes that by 2015, 40 cents of every dollar of revenue generated or borrowed by the United States will be needed to service a $15 trillion national debt. The UK relatively is no better off. The projected UK deficit is increasing with the result that by 2014 it will amount to a deficit of £1.4 trillion which will consume fifty percent of all income tax collections or some £70 billion annually just to service the interest.
It is this potentially catastrophic shortfall in tax revenues that drives the negative publicity that continues to surround the offshore financial centres. UK Government spending increased between 2000 and 2010 under a socialist government by 51 per cent. The US deficit under President Obama has increased by over US$3 trillion. But rather than accept that excessive expenditure is the true basis of the problem, it is politically more acceptable to seek to collect more tax. Thus we find, the left wing press now describe lawful tax avoidance as morally repugnant and offshore financial centres are in some way implicated. But is this negative publicity based on a genuine misunderstanding of the offshore business model? Clearly not. My view is that the mischaracterisations are deliberate and I will come back to the underlying reason for this or what I describe as ‘the hidden agenda’ later.
The third fundamental change is the demand from onshore politicians and regulators for more extensive regulation to prevent a reoccurrence of the financial crisis. But as you will see later, I am sceptical of the current regulatory response and doubt its effect. Financial crises have been occurring since the South Sea Bubble in the 1850′s on a 7 to 10 year cycle despite increasing levels of regulation.
I am going to focus on two of these fundamental changes, onshore tax and onshore regulation and analyse in detail why and how we in the offshore financial centres are subjected to a consistent wave of negative public relations based on mischaracterisation and misperception. To understand properly what is truth and what is fabrication we need to understand the sources that drive the negativity. Who is responsible and why?
In my view, the sources of public relations negativity can be broken down into two distinct groups.
The first group comprises small but disproportionately vocal bodies, often of only a handful of representatives of the extreme political left who have mastered the art of operating a blog site and who appear pathologically wedded to the notion that one high global rate of taxation is a solution to global poverty. These individuals have always existed. What has changed is that the internet now gives them a platform for their doctrinaire beliefs. No doubt these are beliefs to which they are entitled. What they are not entitled to do is what they actually do, which is present fictitious and, needless to say, unverified, unverifiable and often derisory statistics about the extent of tax evasion and tax avoidance in offshore jurisdictions which are designed to support their position. These individuals are surprisingly funded by charities like Oxfam and by less surprisingly funded by Trade Unions all of which share the common belief in large Government, a large public sector, high levels of social welfare spending and therefore very high taxation as a means to redistribute wealth.
The fallacy in the positions of these individuals is not simply the flawed philosophy of redistribution of wealth, not simply the fanciful and unverifiable fabrications of missing tax but the delusional notion that whatever monies are raised from increased levels of taxation globally will in some unspecified way not fund the deficits of G-20 countries but will necessarily be applied to reduce poverty in Africa, and incidentally not find its way to the bank accounts of various African Dictators.
What seems to be missing from their positions is any practical understanding that in a democracy it is not only those members of society who are being pulled in the wagon that get to vote for populist politicians but those who are pulling the wagon also get to vote and with their feet. 1% of tax payers in the UK earn 16% of revenue and pay over 33% of income tax collected.
We know that this debate is not about tax evasion
Let’s look at the Cayman Islands as an example of the Overseas Territories and Crown Dependencies. The simple truth is that the Cayman Islands has full tax transparency with 28 jurisdictions under the OECD approved Tax Information Exchange Agreements and full proactive reporting with all 27 European Treasury departments under the 2005 European Union Savings Directive. This means tax evasion is off the table in these Overseas Territories and Crown Dependencies. With this tax transparency also come the verifiable and positive statistics that show tax evasion in jurisdictions like Cayman to be statistically irrelevant.
The effectiveness therefore of these extreme left wing social activists, whom I describe as the Tax Taliban, in referring to “tax havens” is diminishing as they continue to loose credibility simply because their critisisms are unlikely to withstand the tax transparency that the offshore jurisdictions now demonstrate.
The second source of public relations negativity is more troubling as it is indicative of well-organized and powerful public relations campaigns driven by onshore Treasury, supranational and domestic regulatory bodies which in turn are driven by our populist politicians some of whom are anxious to suggest that the solution to mismanaged onshore fiscal and monetary policy lies in this mystical offshore pot of gold. The monies for example that Sn. Bernie Sanders of Vermont claims are “stashed” in Bermuda.
These blame deflecting politicians and regulators are anxious to obfuscate the failures of their domestic tax and regulatory systems in the G20 jurisdictions by suggesting that in some way it is the tax or regulatory system of the offshore financial centre that is at fault. This is the reason why we see hedge funds rather than Freddie Mac and Fanny Mae now described as the root cause of the recent financial crisis in the same way that the Enron collapse was, as amusingly suggested by Mr Shaxson, supposed to have its cause in the Cayman Islands and not Delaware, and the missing Bonlat monies were supposed to have disappeared in the Cayman Islands rather than having been fabricated in Parmalat’s head office in Italy with a Xerox machine and an eraser.
There was surely no better spokesman for this group than the unlamented former Prime Minister of the United Kingdom, Mr Gordon Brown, who in an effort to sound Presidential when addressing the US Congress in 2009, and somewhat ironically for someone who was not even an elected Prime Minister asked the rhetorical question “Would the world not be a safer place if jurisdictions, such as the Cayman Islands, were outlawed?” This theme is taken up more recently by Mr Jon Cryer, also a Labour MP, who put a motion in the House of Commons that the Cayman Islands be “shut down”. He said and I quote “As a former member of the Treasury Select committee, I think it is a disgrace that the Cayman Islands, a tax haven, can enable wealthy corporations and individuals such as Mitt Romney and others in the wealthiest 1% to avoid tax and still be cloaked in secrecy. Meanwhile all across the Western world, hard-working people are seeing their living standards stagnate or reduce”.
It is a pity the UK Olympics do not have an event in vacuous populist grandstanding, if so, Mr Cryer would be the clear gold medalist. It is fascinating that a former member of the Treasury Select Committee can be wrong on every single point.
What Mr Cryer seems to ignore is firstly, reliance on the expression “tax haven” as a pejorative term is hopelessly outdated. Even the OECD and former President Sarkozy have accepted that this terminology with its implication of secrecy is of no relevance to the Overseas Territories and Crown Dependencies. Secondly, Mr Romney has clearly made full disclosure to the IRS with respect to the investment income and long term capital gains from his Cayman Islands investments. And thirdly, and in response to what is perhaps the most derisory comment made by Mr Cryer, the rate of tax paid by Mr Romney on his Cayman Islands investment is precisely the same amount of tax he would have paid had he invested in United States investments. The 15% rate is mandated by United States law and in no way is this a loophole and certainly not a “controversial tax loophole” as suggested by Mr John Swaine of the otherwise balanced Daily Telegraph.
This is typical of the empty political rhetoric to which we in the offshore world are subjected. On analysis, we note that no financial institution in the Cayman Islands failed during the financial crisis, that we had no Northern Rock, no HBOS, no Lehmans and no Bear Stearns. Rather than the ovation Mr Gordon Brown received before Congress, the correct answer therefore should have been “Actually, Mr Brown, No, rather the contrary”. The simple truth is that the regulatory problems Mr Brown wished to obfuscate were in fact onshore regulatory problems. The banking industry in the US and the UK which collapsed was regulated under Basel II. Similarly, the provisions that Sn. Bernie Sanders complains of in relation to the monies “stashed” in Bermuda are in fact legitimate and lawful,not loopholes at all, rather specific and considered provisions of United States tax law intended to avoid double taxation on US corporate profits earned overseas. Mr Romney pays in the Cayman Islands exactly the level of tax mandated by US law on his long term capital gains and dividend income. Even if we conclude that the 3% effective tax rate paid by Google seems wrong in principle, the solution to that problem is in simplification of the US Tax Code, enforcement of the transfer pricing provisions of US law and ending the abuse of double tax treaties all of which were negotiated by the US and operated by the IRS under US law. The fact is that tax avoidance is by definition a function of onshore tax law.
It helps to identify the fallacies in the public relations negativity adopted by both the Tax Taliban and these politicians, who we shall together call the Truth Deniers by analyzing the vocabulary they use which is deliberately designed to confuse and mislead.
By “tax evasion”, we mean an illegal process that relies on offshore bank secrecy that facilitates a resident of a taxable jurisdiction in failing to accurately report taxable income or gains.
But the expression ‘tax evasion’ is deliberately misused by the Truth Deniers synonymously with the expression ‘bank secrecy’ in a pejorative manner so that bank secrecy and tax evasion become confused with wrong doing. The ABC news report of Mr Romney’s offshore investments apparently needed to include no more than the expression “notorious tax haven” wrongly to imply impropriety. This confusion prevents an understanding of the fact that confidentiality to use the proper term, can perfectly well co-exist with tax transparency provided, as is the case in the Overseas Territories and Crown Dependencies, that the bank confidentiality statutes yield to tax enquiry from onshore Revenue authorities under the relevant Tax Information Treaties.
As a result of this confusion, what is also lost completely is the public policy argument in favour of legitimate bank confidentiality. That is to say the truth deniers confuse the right to confidentiality about personal wealth and personal affairs with criminal conduct. There are legitimate reasons why confidentiality is an essential feature in the civilised world if the rights of the individual are to be protected. I am not going to deal at length with the issues of extortion and kidnapping today, save to say that confidentiality when coupled with the tax transparency that exists in the Overseas Territories and Crown Dependencies is desirable and unobjectionable both legally and morally.
The constant mischaracterisations of the Truth Deniers not only wrongly imply that no value added financial purpose is conducted in offshore structuring but also deliberately conflate the transparent offshore jurisdiction with those jurisdictions, which notwithstanding the most recent OECD initiatives have maintained confidentiality laws or lax procedures that not only enable tax evasion but actively encourage it, notably Delaware, Nevada and Wyoming.
More seriously now, we see the expression “tax evasion” also deliberately conflated by the truth deniers with the expression “tax avoidance”.
Lawful tax avoidance too has now in the eyes of the left wing media assumed a pejorative connotation. George Orwell said that if “thought corrupts language – language can corrupt thought”. George Osborne should read more George Orwell. With an increasing degree of desperation and no doubt recognizing that the tax evasion charge is no longer credible, the Truth Deniers seek to argue that tax avoidance is itself morally repugnant. But here the truth deniers are on thin ice. A civilised society operates on the basis of the rule of law. Arguments concerning the moral correctness of tax avoidance are entirely subjective. Mr Miliband, the Leader of the Labour Party, thinks that Mr Livingstone’s tax avoidance which uses a company to reduce his ordinary income tax rate from 50% to 20% is “correct and proper”. Mr Clegg, the Leader of the Liberal Democrats, thinks that Mr Romney’s tax avoidance, which we have established isn’t tax avoidance at all, is morally wrong. Clearly, once we move from the rule of law, the socialist positions lack any guiding principle and are in disarray. So to tortured now is the use of vocabulary by the left wing that no-one therefore outside the Cayman Islands would have concluded when President Obama made reference to the 12,000 lawfully and properly operating companies in Ugland House that he was engaged in an initiative to amend a provision of US domestic tax law providing legitimate tax deferral for US corporates operating overseas.
In some way, it was suggested by the US President that this lawful “tax avoidance” which he mischaracterised as a “tax scam” was facilitated by wrong doing in the Cayman Islands. The simple truth is that it was not appropriate for the President to criticise the Cayman Islands because tax deferral in the US is no longer considered politically correct. That too is extremely subjective. If it is no longer felt appropriate in the US to allow US multinationals to defer taxation then the answer is to amend US tax legislation. Notably, the White House Legislative initiative to amend this deferral provision of US tax law in September of 2010 failed to pass in the Senate, although the Presidents most recent Budget contains a proposal to apply a minimum tax to US companies operating internationally.
The inescapable truth which the Truth Deniers cannot confront is that the IRS has full access to all accounts in those Overseas Territories and Crown Dependencies like the Cayman Islands and no complaint about tax transparency is sustainable or credible. Very possibly, the IRS should be reminded of this power since it has exercised its unrestricted right to make enquiry in relation to the US$1.795 trillion dollars of bank deposits and interbank bookings in the Cayman Islands and the US$2.6 trillion of hedge fund assets under management on less than 20 occasions in nearly a decade and with no discernible benefit to the United States Treasury as a result. Interestingly, also the publically available statistics on deposits from European Union residents show statistically and fiscally irrelevant deposits in the Cayman Islands from EU residents of some US$25 million dollars.
The allegations typified by the comments of the recently retired Attorney General of Manhattan, Mr Morgenthau that Cayman is a money laundering jurisdiction are further evidence of this exercise in blame deflection and are as easily refuted. The position with regard to all crimes anti money laundering in the Overseas Territories and Crown Dependencies is perfectly satisfactory, although surprisingly an FATF evaluation in 2010 that ranked the Cayman Islands system under the Proceeds of Crime Law and the Money Laundering Regulations as superior to those of 40 other jurisdictions including the UK and the US never saw the light of day. In the event, the Department of Justice in 20 years has managed less than 250 applications for information in the Cayman Islands pursuant to its all encompassing and unrestricted authority under the 1990 Mutual Legal Assistance Treaty with respect to All Crimes Money Laundering.
But if these truths as I have just described are correct then all of these negative public relations comments about the Overseas Territories and Crown Dependencies as a ‘tax havens’ and “money laundering jurisdictions” must in time be unsustainable.
In so far as the Cayman Islands is concerned, this is not just my opinion. Not only is the operational validity and effect of our procedures continually reviewed by on site investigations by the FATF and the IMF, but recently fully corroborated by the report of the US General Accountability Office. The well informed criminal would be better employed establishing his company in Delaware where, unlike the position in the Cayman Islands, no information whatsoever is required on ultimate beneficial ownership prior to establishing a corporate structure. There is very little empirical evidence however to support the suggestion that that is the reason why there are 217,000 registered offices situate under one roof in one building in the Vice President’s home State of Delaware.
I have dwelt at some length on the factual position to emphasise how perverse it is that these negative public relations campaigns of the last decade can have persisted in the light of the fundamental advances made by the Overseas Territories and Crown Dependencies in relation to all crimes anti money laundering and tax transparency. But all of this negative publicity regrettably, is not simply blame deflection or left wing propaganda by the Truth Deniers but is also thinly disguised political double speak for a hidden agenda.
To identify that agenda, we have to look back to the 1998 OECD report on “Harmful Tax Competition”. This you will recall is the report which sought to create an Alice in Wonderland world in which all countries should be taxed at an agreed super rate of tax established by a globally omnipotent Mad Hatter. In this world, any jurisdiction establishing a lower or no rate of tax is branded as a “tax poaching” tax haven that in the eyes of the authors, harbours weapons of tax destruction even though the weapons inspectors from the IMF, the FATF and the OECD found no evidence. With imperiously retro-engineered Euro-logic, the tax haven was defined in entirely subjective terms to be any jurisdiction with low or nominal taxes, no transparency, bank secrecy and last, but by no means least no substantial business activity.
Now whilst the Overseas Territories and Crown Dependencies have dealt perfectly satisfactorily with two of the four so called indicia that described a tax haven in that report, that is transparency and bank secrecy and whilst each has a sovereign right to set its own tax rate, the issue of substantial presence remains. It is clearly the case that the recent financial crisis has enhanced the threat of tax competition to certain G20 jurisdictions in the light of their budget deficits. This then brings us to the core of the matter. In my view, these negative public relations campaigns are also about who controls global financial services and capital flows and the right to tax those capital flows. Jurisdictions which provide tax competition are seen as a threat by the high tax jurisdictions.
That is not in truth because of illegal tax evasion or immoral tax avoidance as the Truth Deniers would have us believe, but because of the concern that jurisdictions with lower rates of tax will attract capital flows and therefore economic activity from the high tax jurisdictions. As I said earlier, high tax payers can vote with their feet. Barclays just spent a quarter of a billion dollars to move an asset management division to the UAE. We are simply in a trade war for financial services.
Let me make three clear points here. The first is that the attraction of economic activity to lower or no tax jurisdictions occurs because business individuals understand that tax makes less of everything that creates economic activity and results in more government spending. It is this undeniable economic fact that the Truth Deniers seek to obfuscate by attempting to label offshore financial centres as criminal or immoral by way of tax evasion or money laundering activity.
The second point is that the offshore financial services industry operates on the basis that any offshore entity doing business in a taxable jurisdiction will pay tax in that jurisdiction in accordance with the laws of that jurisdiction. Simply put taxes are paid where profits are made.
The third point is made irrefutably by Professor Sharman in his report “International Finance Centres and Developing Countries” Jurisdictions like the Cayman Islands pool capital which is invested in G20 and developing jurisdictions. Capital is not “stashed” offshore. Here then is the heresy in the argument of Senators Levin and Sanders: of the $ 2.6 trillion of assets under management in Cayman hedge funds as at 31st December 2008 nearly 80% was invested into the US placed in the hands of US fund managers. Most of the balance was invested in the UK with UK fund managers. This Cayman Island investment undeniably created jobs and tax revenues in the United States and the United Kingdom.
The real issue here is therefore as it has always been. The fear of the OECD is that individuals and corporations being inherently mobile will move to the jurisdiction with the most competitive tax rate, which explains in large part the current success of Hong Kong and Singapore and the resurgence of Dubai and the UAE.
But in my view, it is the fourth indicia of that 1998 report, the lack of substantial presence, with which we have not yet dealt adequately offshore, and which is the road map for the future, if our financial services industries are to be accepted and viable. Without substantial presence, we will clearly remain the subject of continuing criticism however ill-founded.
Without substantial presence, it is too easy for Senator Levin to suggest that because of the conduct of financial operations in the Cayman Islands does not resemble a car manufacturing plant in Detroit with 10,000 people under one roof that in some way Cayman financial operations are a sham. That is the point that really underlies the President’s reference to the 12,000 companies in one building. Simply put, we need then more buildings and more financial professionals in them. Offshore substantial presence is also the key to extracting higher private and public sector revenues from the fewer transactions that I mentioned. We need to ensure more value added.
Now lastly lets take a look at the third fundamental change. That is the current onshore regulatory onslaught and the attendant comment which seeks to attribute blame for the financial crisis on the offshore financial centre.
But do these criticisms on the subject of regulation, once again amplified by the formidable public relations machines of the EU and US governments, withstand scrutiny or are they also simply a transparent exercise in blame deflection. Even the briefest analysis does not suggest a level playing field.
Surely if regulatory protection and a desire to prevent a repetition of the crisis were the real objectives, the US regulatory response to the financial crisis would have introduced some passing reference to two of its fundamental causes. Yet the framers of the Dodd/Frank Act did not see fit to restrict Fannie Mae and Freddie Mac’s ability to guarantee mortgages to un-creditworthy borrowers, nor to restrict the rating agencies in granting AAA ratings to the repackaged toxic waste that resulted. In the onshore political world therefore, it follows that the cause of the crisis could not have been failed onshore regulation but must have been elsewhere and hence this fickle finger of regulatory fate points in the direction of the offshore financial centre.
The position in the EU is no better. Mr. Michel Barnier, Europe’s Single Market Commissioner, in describing plans for regulating Europe’s financial markets proposes Brussels is given new powers to end “abusive speculation” and “impose order” on Europe, including the City of London. “We want to know”, he states with imperious disregard for how regulation works in practice, “who is doing what”. The only way I suppose to he could do so, would be to place an EU regulator at the screen of every trader. But Barnier told the Daily Telegraph that the EU authorities are going to “look at every product”. [They] can restrict leverage, or in exceptional circumstances even ban a product temporarily”. But, if I pause to turn on my Euro-regulatory double-speak translation device it seems to me that what this means is “We European bureaucrats cannot possibly prop up a totally bankrupt European fiscal Union if hedge funds are allowed to trade in and price European sovereign debt at its true market value rather than the value we want to attribute for regulatory purposes when applying our Bank regulation to our bankrupt European Banks. So we in Europe must control market pricing.” This is hardly a ringing endorsement of the free market principles on which the European Union was supposed to be founded.
Thus we see hedge funds, and indirectly offshore jurisdictions like Cayman which is the domicile of the majority of them, now targeted in Europe and subject apparently in the UK to a regulatory response that will not only restrict leverage and trading activity but apply remuneration restrictions to fund managers, as if to say hedge funds or their bonuses were instrumental in the European financial meltdown. Even the FSA has concluded that hedge funds were not responsible for the financial crisis. So is this criticism of hedge funds and the offshore financial centre justified or is the real threat here which hedge funds pose the threat to the political aspirations of those driving a totalitarian federalist agenda in Europe?
Regrettably, the question of whether the UK Coalition Government will have veto power over EU regulatory determinations for whatever reason they are arrived at, despite the fact that the City of London is the only globally recognised financial services centre in the EU, remains a matter of conjecture. The UK will as a result, carry the same vote in these matters as Latvia.
In the face of this onshore regulatory tsunami, many self-styled industry commentators have been forecasting the demise of any offshore jurisdiction which does not fall immediately into line with the new [EU] regulatory order. But is that the right path for the offshore world? We need to be somewhat more analytical.
In his book Engineering the Perfect Storm, Jeffrey Friedman points out that it was in fact ill-considered onshore regulation that fueled the financial crisis. The risk weightings applied under the Basel Convention under which Banks are regulated globally encouraged heavy investment in the mortgage backed securities market because in 2001 US banking regulators (the very same bastions of public protection to whom we now look under Basel III) assigned $2000 of regulatory capital for every $1m of MBS on the balance sheet of the bank as against $10,000 for every $1m of commercial loans. The result was that banks owned 45% of all subprime backed mortgages by 2005, “secure” in the knowledge that 95% of these MBS were AAA rated and accepted as such by the banking regulators. Thus does ill-considered regulation distort the marketplace and in the current example assumed a direct causal relationship with the catastrophe that followed.
But we are assured that Basel III, the new global banking regulation, makes no such similar mistake. Or are we? Commentators have already pointed out that none of Bear Stearns, Washington Mutual, Lehman Brothers, Wachovia and Merrill Lynch would have failed the new increased Basel III capital adequacy ratios of 10%, having regulatory capital ranging from 12.3% to 16.1% thus, the much-lauded Basel III would not have saved any of them.
In all of this we should not take the words of the regulators as gospel. It is becoming increasingly evident that financial professionals have a very distinct voice which we in the offshore world need to hear. In so far as EU regulation is concerned many are voting with their feet. The excellent and objective KPMG report “The Future of Alternative Investments” investigates the opinions of over 200 investment managers, administrators, institutional investors and service providers on the effect of the suggested increased regulation. It states in clear terms:
“Anticipated regulation, driven by external forces that continue to blame alternative investments for the meltdown of the global financial system, is not wanted by the majority of investors, managers or service providers. The widely held view is that the industry did not cause or contribute to the credit crisis. Furthermore, investors believe more regulation will not produce any tangible benefits”.
We can therefore argue that onshore territorial regulation ultimately stifles ingenuity and entrepreneurial opportunities in those jurisdictions. The fallacy of domestic or onshore regulation that is not global in application is that it may operate to impede potential growth at the peril of EU and the US economies, which are regulating themselves out of a productive industry and the capital flows that are essential to the recovery of their failing economies. Further, the effect of localised or regional regulation introduced in the US through FATCA and in the EU through the Alternative Funds Directive or the Financial Transaction Tax is equally perverse given the financial marketplace is not static. The exodus of fund managers of Cayman-based hedge funds and of banks from London is now occurring as alternative offices are established in Switzerland, Hong Kong and Singapore.
By way of specific example, this means that the offshore hedge fund with manager situate outside the EU may continue to trade traditional hedge fund strategies and with traditional rates of return – with which the EU based fund manager will struggle to compete, starved as it will be of the oxygen of leverage, a more liberal risk profile and the best-remunerated talent.
In short and by way of conclusion, the offshore world needs therefore to maintain a non intrusive regulatory approach on securities regulation that is relevant and appropriate and a tax neutral competitive environment. This approach must be coupled with enlightened immigration policies to improve substantial presence in the offshore financial centre so that requisite professional expertise is available and can be expanded across a broader range of labour intensive financial services.
By remaining alert to the opportunities created by the effects of increased territorial, rather than global, regulation and the movement of individuals and corporations caused by unacceptable increases in onshore taxation and by providing enhanced offshore substantial presence, the opportunities for the offshore world will, in my view, continue and indeed I predict are set to improve.