The Evolution of International Finance Centres

Labuan IBFC’s 25th Anniversary Conference

John Harris

Director-General

Agenda

IFC’s – a definition

IFC’s – 3 histories, 3 geographies

Common development themes

1990s – 2007

2007 to present – the financial crisis and aftermath

• Tax and transparency

• The blame game and reputational impacts

• Regulatory changes

• Business model changes

• Potential winners and losers

What next for IFC’s?

Conclusions

Parting thought

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Confidence,

courage and

determined spirit

are vital for

surviving hard times

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Lailah Gifty Akita

IFC’s Definitions

Ireland

Luxembourg

Netherlands

Medium size, tax treaty based

sovereign fiscal dealers

London

New York

Tokyo

Singapore

Dubai

Metropolitan Centres

BVI

Netherlands Antilles

Turks and Caicos

Cook Islands

Cyprus

Self-containers

Switzerland?

Hong Kong

Jersey

Guernsey

Isle of Man

Labuan

Mauritius

Cayman

Mid-shores conduits

For today’s debate, the focus is…

Jersey Labuan British Virgin Islands

Evolution - respective histories

Asia - Labuan

1990 First mover advantage in

SE Asia niche

Major country backing

Simple and predictable tax

proposition

Determined build up of

increasingly wide and varied

product offering

Mid-shore, transparent and co-

operative approach

Islamic specialism

Consistent and forceful

marketing

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Caribbean/North America

1970sInternational Business

Companies Act 1984

Panama exodus

Registry core offering

Asian and Middle East

commodity specialism

Non-disclosure ‘advantage’

Product and service add-ons

– but what depth?

Increasing challenge of

transparency and co-

operation requirements

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Europe - Jersey

1960sDecolonisation and sterling

retreat

British merchant banks

Fiscal neutrality and relative

advantage…

1984 Trust Law

Legal profession and innovation

London proximity

Common law and court

experience

Consolidation and globalisation

= co-operation

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‘Permissive’ age for IFC’s

More relaxed attitudes to tax arbitrage and non-disclosure than seen now

Strong business build up driven by globalisation, leverage and benign economic

condition

Some moves from 1998 onwards towards more restrictive approach eg: OECD

and EU moves against ‘Harmful Tax Practices’ and beginnings of information

exchange (TIEAs) and EU Savings Tax Directive

1999 – Jersey criminalised tax evasion as a predicate offence for Money

Laundering

2002 - Jersey signed its first TIEA with USA

Swiss banking secrecy felt largely undisturbed

Common Development Themes 1990-2007

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Non- retail activities

Significant product and service innovations, for example:

Protected Cell Companies

Limited Liability Partnerships

Common Law Foundations

Islamic Finance

Securitisations

In some IFC’s at least something of a large parking lot for excess capital – flattering

profits and GDP performance

Geographical extensions of practitioner firms’ business development activities, for

example the multi jurisdictional trust client

Cross border fund flows – creating new generation of specialist alternative funds for

affluent and institutional investors

Common Development Themes 1990-2007 (continued)

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The Financial Crisis – impact of IFC’s

The blame

game – no

evidence that

IFC’s caused

the financial

crisis, but…

“We want to put a stop to tax

havens. We want results on this,

with a list of tax havens and a

series of consequences”

Nicolas Sarkozy, French President, after

2009 G20 summit

“We will also target tax evasion and

off-shore tax havens...

Everyone must pay their share”

George Osborne, UK Chancellor

“The wealth, power

and illegality

enabled by this

hidden system are

now so vast as to

threaten the global

economy’s

legitimacy”

Jeffrey Sachs, on tax

havens, April 30, 2011

“Secrecy is as vital as the air we breathe”

The Swiss Banking Association

“Tax havens aren’t just about tax. They are about

escape from criminal laws, escape from creditors,

from tax, escape from prudent financial

regulation – above all, escape from democratic

scrutiny and accountability”Nick Shaxson, Treasure Islands: Tax havens and the men who stole the world

“The activities engaged in

routinely and as a matter of

course by these tax havens are

hostile acts towards all

countries”

Willem Buiter, FT columnists and

former chief economist of the EBRD

“The City of London, that state within a state which has

never transmitted even the smallest piece of usable

evidence to a foreign magistrate”

Eva Joly, Notaire, from her book

Notre affaire á tous

The Financial Crisis - the reaction

Tax and

Transparency

Sweeping

changes

Abolition of full blown banking secrecy. Switzerland and

Luxembourg never thought the OECD would move against them

Swiss problems with the USA – the UBS deal

Having 12 x TIEAs in 2008 was gold dust

TIEAs, Automatic Exchange of Information, various Disclosure

Facilities

FATCA, UK FATCA

OECD – Common Reporting Standard –early adopters

Progressive criminalisation of tax evasion in all centres, eg:

Singapore

Registers of Beneficial Ownership of Companies (and call for

Public Registers)

Data thefts and leaks eg: Luxileaks, HSBC Switzerland, others.

The Financial Crisis - the reaction

UK

Designed

Tax Scheme

1 2

UK

Marketed

Tax Scheme

UK Resident

“Celebrities” as

Beneficiaries

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Jersey Trust

administrator –

pure

bookkeeping

role

In the prevailing moral climate the Jersey activity is paraded as the problem

The Financial Crisis – the reaction: driving regulatory change

Broad and sweeping – the proverbial blunderbuss!

Banking – BASEL III, capital and liquidity – all centres

Funds – post Madoff, AIFMD in Europe regulating the Hedge Fund and alternatives

space

Huge additional requirement in the AML/CFT space – probably

our single largest burden

New doctrine of third country regulatory equivalence eg: access to EU markets only

if you do regulation to the EU Standard

Massive burden for small IFC’s – what we are basically being asked to do

is major country regulation in small places

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The Financial Crisis - the reaction

Some examples:

FATCA – makes IFC’s an operational agency

of the US internal revenue service

More broadly all business lines need to be

able to withstand, and in effect to expect,

scrutiny and challenge

We are now data channels for massive and

indigestible information to be sent onshore –

and this includes cyber and theft risk

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international relationships

Record keeping and record keeping systems

now a major requirement, for example: blacklists

We need to demonstrate outperformance in

international evaluations

Pace of change, for example: to full disclosure –

IFC’s need to think about competitive

disadvantage

A demand for business

model change

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The new IFC model

Co-operative

Transparent

Reputationally clean

Tax neutrality

Support of a major country in

proximity

Excellent performance in

evaluations (IMF, FATF, etc)

Can demonstrate investment flows

Seize and repatriate illicit funds

Economic integration with major

market

Contributors not recipients

Winners/ Survivors

Mid-shores – Hong Kong,

Jersey, Guernsey, Labuan

Stronger sovereigns, Singapore,

Ireland, Netherlands

Losers/ Challenged

Switzerland

Panama

BVI

Cyprus

Cayman

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About

substance and

distributed

economic

benefits to

others

The Financial Crisis - the reaction

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What next for IFC’s

Maintain regulatory

and fiscal co-

operation standards

Continue to

develop markets

further afield

Requires regulatory

and fiscal agreements

and very good risk

management, CDD,

supervision,

intelligence

Also need to

demonstrate substance,

including having the

information

Continue to innovate, identify

niches and develop new

products and services

Co-operation means

information and

intelligence sharing,

credible enforcement,

funds freezing and re-

patriation

Maintain relatively

lower tax rates

than major

countries

Third party

evidence based

advocacy

Agile and responsive local

regulation and legislative

speed

Facilitate inward

and outward

investment flows

Play a visible and

active role in

international

organisations and

fora

Develop own

standards and

seek to export, for

example: TCSP

Standard

IFC’s – decades of development as players at the margin

Under the radar, discrete, undisclosed, little understood but largely

unmolested

Existentially challenged by the fallout from the financial crisis

Agile and adaptable but the burden of demonstrating world class regulatory

capability in small places is hurting and affects competitiveness

The successful IFC’s of the future not only meet the minimum requirements

to stay in the game but can, and will, demonstrate their utility to proximate

countries and markets and the world community endeavours

Conclusions

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The future belongs to those who prepare for it today.

Malcolm X

@JerseyFSC

Jersey Financial Services Commission