Tim Ridley, an English
solicitor and attorney-at-law based in the Cayman Islands, is a former board
member of organizations including the Cayman Islands Monetary Authority, and is
a prominent figure in the Caribbean IFC
industry. This article was originally published in the IFC Caribbean 2014
review and is republished on this website with the author's permission.

The last two decades have proved challenging for the offshore
financial industry. It has been an era of heightened initiatives both
internationally and onshore, which have had a dramatic impact on the off shore financial
services industry. The 2008 financial crisis added to this movement, certainly
in terms of the rhetoric and renewed threats of drastic action against small
off shore financial centres, which have difficulty in pushing back in a meaningful
way.

After 2008, many OFCs, and those in the Caribbean
in particular, experienced declines in their two key industries, tourism and financial services,
which inevitably impacted on general local business activity and government revenues.
This in turn highlighted both short and long term fiscal problems for their
governments. However, reports of the impending demise of the offshore industry
have been somewhat exaggerated and will continue to be a place for high
quality, innovative and adaptive OFCs.

International initiatives and implications for OFCs

Driving much of the international activity is the battle to
retain control of the world’s capital and thus the ability to tax it. The old guard is fighting
hard to maintain the status quo under the cloak of securing financial stability,
tax fairness and transparency. Most major jurisdictions publicly support open and
competitive global markets between which capital can freely move. But many
jurisdictions that claim to support free markets principles and the
unrestricted flow of capital do so only as long as this system works in their
favor. Behind the façade of championing open markets, they actually pursue
self-interested financial imperialism and protectionism.

For example, with their financial services and products and
in facilitating the global allocation of capital, OFCs pose a major competitive and
potentially uncontrolled challenge. Th us, the UK
and the US
in particular are not keen to see OFCs thrive too much, but they do recogni`e that for their own fi
nancial service industries and multinationals to be competitive they need to use OFCs.
Further, they recognize that OFC structures are also often the conduit for valuable
inward investment from foreign investors. Th is traditional position is now under serious
pressure as many politicians see more electoral downsides than upsides in the continued
symbiotic relationship between onshore and off shore.

Other major European nations with growing and unfunded
entitlement programes and aging populations fear loss of capital to OFCs and
as a result reduced tax revenues. And they wrongly see OFCs (as opposed to
their own domestic policies) as the cause. So, while voicing their commitment
to open markets for (their own) financial services and products, they continue
to impose burdensome and anti-competitive regulation on OFCs and to raise
barriers to their residents investing in or using OFC financial products or services.

Ironically, many of the very same major economies continue
to give special ‘tax breaks’ to entice companies and individuals to relocate to
or remain in their countries. The international standard setters mandated to execute the
various initiatives are generally the creatures of and are funded by the very same
major countries that have no real interest in a level playing field open to
OFCs or to anyone else threatening to deprive them of control of the world’s
capital. The staff of these standard setters also has every reason to preserve
and expand their activities and their tax free benefits packages.

Current position

Various important initiatives are under way or threatened.
These initiatives have been significantly energized by broad political support at the
highest level in the major economies of the world as a result of the financial crisis.
At the very top are the G8 and the G20 policymasters leapfrogging each other every few
months in producing macro statements, followed up by often overlapping reports.
The G20 now seems to be the preferred leader.

The G8 and G20 have been laying out the ‘big picture’
framework for global standards on issues such as corruption, banking, corporate
governance, taxation, financial markets and executive pay. The G20 has endorsed
the work of the Global Forum (an OECD subset) on tax transparency and exchange
of information and urged completion of the peer review of effective implementation
and adherence to international standards and preparation of countermeasures
against non-compliant countries.

The OECD has since 1998 been pursuing its global tax
initiative, that has been chameleon like in its changes during the period. The
programe is now focused on automatic tax information exchange and transparency (beneficial
ownership disclosure) and their effective implementation. In tandem with this,
the OECD is now fast tracking its ‘BEPS’ (base erosion profit shifting) project
at the behest of the G20.

This potential recasting of the international tax regime
should keep bureaucrats happy for decades to come. The FATF (another OECD
subset) is reenergized with its planned onsite inspections and assessments to
ensure effective implementation of its anti-money laundering regime. The IMF
continues its programe of regular visits and assessments. Also active are the
Financial Stability Board (regulation and oversight of all things financial),
Basel III (bank regulation), IOSCO (securities), IAIS (insurance) and the UN
running its own initiatives on taxation and corruption.

In parallel with these global initiatives, there are various
unilateral actions by the EU and individual nations, most notably the EU Savings
Directive (mark II) and moves against off shore hedge funds (AIFMD), the US driven
FATCA regime and its duplicates now being eagerly adopted by other countries,
and the UK corralling of the Crown Dependencies and the Overseas Territories to
sign up to automatic tax information exchange and beneficial ownership
transparency. The compliance burdens and costs of all these are significant and
anti-competitive; and fall on both the private sector and governments in OFCs,
and ultimately the clients.

Price of OFCs not engaging

OFCs cannot safely ignore these issues and carry on as
before. Switzerland
has highlighted the dangers of playing the ostrich. This is simply not a
sensible or viable long term option for those OFCs that participate in global financial
markets, and for whom exclusion would sound an immediate death knell. Perception
and reputation are very important, both for OFCs and their major clients. And uncertainty
and delay are not good for either. Active engagement by OFCs is essential.

The future

The number and wealth of global businesses, families and
investors will increase over time and the greatest growth will be in the new worlds
not the old world. Global competition inevitably includes tax and regulatory
competition. No-one has yet created the perfect tax or regulatory regime, so competing
regimes (within broad agreed norms) are perfectly proper. Individuals and
corporations are still entitled legally to maximize their wealth. Indeed,
corporations have an obligation to their shareholders to do so.

Increased wealth will continue to make proper tax, estate
and succession planning for global businesses, families and investors essential and
lead to greater demand for tax advantaged/neutral and agreeable places to live
and work with easy access to quality professional services and markets. OFCs
with high standards of sensible regulation, appropriate transparency, cross border
assistance arrangements and good infrastructure while providing quality value-added services
have a valuable and vital role to play in this scenario. The barriers to entry as an OFC are ever increasing. The
cost of developing the infrastructure and meeting international standards is
significant and success cannot be achieved overnight or guaranteed. And there
are probably now too many OFCs.

Competition is increasingly fierce, and jurisdictions and
structures are increasingly seen as fungible. The survivors will be those who engage successfully, meet
international standards, have an established infrastructure and track record (in all
its aspects), tax efficiency, professional expertise and support services, a solid and
diverse base of business, and the ability quickly to adapt and innovate in the ever
changing global environment and to add real value to international transactions
and capital flows in an efficient and cost effective way.

A number of Caribbean OFCs meet the tests for being
survivors. But to thrive, they must learn better from history and from their
(and others’) mistakes and work more effectively to be accepted as legitimate participants
in the global financial world.