Delving Deeper

Attending our British Virgin Islands (BVI) seminar in February and listening to one speaker, Martin Kenney, defending BVI against claims that it harbours criminal assets and shelters them by virtue of its confidentiality laws, it struck me that international financial centres are in serious need of a reputation makeover.

Alternately viewed as ‘tax havens’ for the rich or money laundries for the dishonest, jurisdictions such as the Crown Dependencies and British Overseas Territories (‘CDOTs’) are viewed with such suspicion that a major educational and public relations effort is needed to overturn the public distrust that exists.

One needs only to reflect on the 2016 Panama Papers leak (actually it was a major computer misuse offence) to realise the scale of the problem. In the biggest leak in whistleblowing history, 11.5 million documents from law firm Mossack Fonseca were leaked to the media, revealing details of hundreds of accounts, trusts and shell companies that had been set up to minimise owners’ tax liabilities.

The revelations led to the resignation of the Icelandic Prime Minister, who failed to declare an interest in a company when entering parliament, and threw the affairs of then UK Prime Minister David Cameron into the spotlight after the leak revealed connections to his father’s offshore company. Despite media efforts to give these disclosures the ‘Shock, Horror’ treatment, relatively little criminality has actually been revealed.

Worldwide calls for countries to take action led to the UK establishing its people with significant control (PSC) register, the world’s first open data register of real owners and controllers of companies.

While the motive may have been noble, because the UK public register is self-reporting with no verification required, how successful it will be is another matter. Dishonest people are hardly likely to allow their details to appear in a public register. It is naïve to suppose that getting people to ‘mark their own homework’ will somehow resolve global money laundering problems. Crooks lie and publicly available ultimate beneficial ownership (UBO) registers simply drive the unscrupulous further underground while increasing the burden for honest owners.

That is not to say that efforts to ensure transparency and root out criminals are futile. Offshore compliance systems are some of the most stringent in the world, even prior to the Panama Papers. Regulated corporate service providers in places like Jersey, Guernsey, Isle of Man, Bermuda, Cayman and BVI have stringent regulatory requirements placed upon them to verify ownership of the companies they administer and follow tried and tested know-your-customer procedures, including verification of the owner by a regulated professional. This contrasts with the UK and USA where one can form a company online with no checks provided all the spaces in the form are completed!

The collection and housing of ownership data in well-regulated jurisdictions such as the CDOTs have helped countless fraud and corruption fighters investigating those suspected of tax evasion or other criminal activities. What is often misunderstood is that UK law enforcement already has access to the UBO of companies in the CDOTs through agreed protocols; so the authorities who should be investigating crime have the information anyway. Furthermore, tax and information ownership data are now automatically exchanged under the common reporting standard.

The danger of moving from a system of controlled transparency to one that is completely open to the public, NGOs and the media is that one runs the risk of valuable investigative material being lost. Unless all countries follow the same rules, crooks will simply migrate to places with no open UBO register and as a consequence it will be harder to investigate them.

The latest challenge to the CDOTs was the EU’s insistence that they should introduce Economic Substance legislation by the end of December 2018 or risk blacklisting. The Economic Substance legislation states that any companies conducting certain ‘relevant activities’ must ensure they have ‘adequate substance’ in the jurisdiction in terms of office space, income expenditure and personnel.

Some may wonder if the CDOTs are not the EU’s real target but rather a means whereby similar Economic Substance requirements may be imposed on some member states to secure tax harmonisation across the EU!

The CDOTs enacted their legislation and the Crown Dependencies made it onto the EU’s whitelist. BVI and Cayman were put on the greylist as there were a few tweaks that the EU wanted those two jurisdictions to address before whitelisting them. Bermuda was not as fortunate as it was put on the blacklist. However, it seems that a typo in the Bermuda legislation was the difference between it joining BVI and Cayman on the greylist and slipping onto the blacklist. This however should be resolved in early May.

Forcing countries to introduce such measures is essentially a knee-jerk reaction to the so-called ‘court of public opinion’ whereby ordinary taxpayers see the rich as tax dodgers and offshore companies as shady.

Superficial media coverage does little to disabuse people of these misconceptions. While there are important ethical questions about individuals and companies paying taxes commensurate to earnings and profitability, the blinkered stance against the CDOT fails to appreciate that the majority of companies in those jurisdictions act as passive holding companies for share capital in subsidiary undertakings domiciled and operating elsewhere.

International financial centres provide a domicile of choice for corporate clients looking to achieve an efficient cross-border structuring, so it is strange that the contribution which these territories make to UK employment, thanks to the inflows of funds for investment, is so often overlooked.

It seems inequitable that centres such as the CDOTs should be singled out for pillorying and blacklisting or greylisting when inferior compliance systems exist elsewhere, including in the UK and some states of the USA.

There is also the wider issue about the human right to privacy. Identity theft, misuse of data and exposure to cyber-risk have all been overlooked in the clamour for public registers.

These centres have more to offer than the public, media and NGOs realise; they just need a better PR person to tell their story.

Simon Osborne FCIS is CEO of ICSA: The Governance Institute

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