Offshore Financial Centers and Regulatory Competition

Description

Offshore financial centers (OFCs) have a troubled reputation for enabling tax evasion, money laundering, autocratic looting, and even the financing of terrorism-but they play an essential role in the world economy. Fears of criminal activity have prompted many onshore governments to restrict offshore competition, but over-regulating OFC activity presents a serious risk of destabilizing the global financial system. In Offshore Financial Centers and Regulatory Competition, a group of leading international law and finance experts argues that offshore jurisdictions have become key players in corporate finance and captive insurance markets. OFCs offer legal protections for financial privacy and provide regulatory competition to onshore jurisdictions, forcing national governments to evaluate and reform their own tax and regulatory policies. Offshore centers also help to streamline foreign direct investment and create growth opportunities for countries with weak financial systems by providing access to global capi

Sujets

• Economics
• Business
• International

Informations

• Publié par: AEI Press
• Date de parution: 16 juin 2010
• Nombre de lectures: 0
• EAN13: 9780844743394
• Langue: English

Extrait

Distributed by arrangement with the Rowman & Littlefield Publishing Group, 4501 Forbes Boulevard, Suite 200, Lanham, Maryland 20706. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact AEI Press, 1150 Seventeenth Street, N.W. Washington, D.C. 20036 or call 1-800-862-5801.

This publication is a project of the National Research Initiative, a program of the American Enterprise Institute that is designed to support, publish, and disseminate research by university-based scholars and other independent researchers who are engaged in the exploration of important public policy issues.
Library of Congress Cataloging-in-Publication Data
Offshore financial centers and regulatory competition / Andrew P. Morriss, editor.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-8447-4324-0
ISBN-10: 0-8447-4324-0
1. Banks and banking, International. 2. Banks and banking, International—Law and legislation. 3. Investments, Foreign. I. Morriss, Andrew P., 1960-
HG3881.O335 2010
332.1'5—dc22
2010001641
14 13 12 11 10 1 2 3 4 5 6 7
© 2010 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI.
Printed in the United States of America
Introduction
Andrew P. Morriss
Since World War II, offshore financial centers (OFCs) have played an increasingly significant role in the world economy. For the United States, the benefits of that role have been substantial. Bermuda-based captive insurance companies have dramatically lowered insurance costs for thousands of U.S. businesses, permitting them to reduce product costs and thereby benefit their customers. Health-care captives, largely domiciled in the Cayman Islands, have allowed U.S. health-care providers, including many nonprofit hospitals, to devote a greater proportion of their resources to providing health care to those in need. Particularly since the 1990s, hedge funds predominantly domiciled in the Cayman Islands have funneled billions in foreign investment into the U.S. economy. Structured finance arrangements in OFCs have given U.S. companies, in industries from aircraft manufacturing to television sales, increased access to global capital markets while permitting them to monetize noncore assets. From the mid-1960s to the mid-1980s, when tax law changes rendered them unnecessary, finance subsidiaries domiciled in the Netherlands Antilles reduced the global cost of capital for thousands of U.S. parent companies.
Nor have benefits been limited to the U.S. economy. Because of a network of tax treaties there, entities formed in Barbados play a key role in the international competitiveness of Canadian multinationals by preventing double taxation of income earned outside Canada. European countries have found captive insurance solutions in Guernsey, one of the Channel Islands. Investors in the People’s Republic of China have sought security and access to commercially sophisticated courts through Hong Kong entities, bringing substantial foreign investment into China that otherwise might not have been available. OFCs, too, have benefited, as offshore financial intermediation has created legitimate business and employment opportunities in jurisdictions having limited natural resources. Moreover, for companies in countries with weak financial systems and few financial services professionals, the clustering in OFCs of corporate, accounting, and legal services, together with strong legal systems committed to the rule of law, has offered a low-cost means of creating the business structures necessary to participate in the global economy.
OFCs have been a mixed blessing, however. While the most developed ones have institutional expertise equivalent to or better than many onshore governments, not all OFCs share this characteristic. A few examples reveal the legitimate concerns of onshore governments about certain aspects of the OFC world. In 1985, several ministers from the Turks and Caicos Islands were convicted of narcotics charges in the United States; more recently, a commission of inquiry found “general administrative incompetence” and “serious dishonesty” in the islands’ government. 1 Aruba earned the title of “the world’s first independent mafia state” from terrorism expert Claire Sterling. 2 American financier R. Allen Stanford used the island nation of Antigua as the base for what appears to be a vast Ponzi scheme involving his Antigua-domiciled Stanford International Bank. 3 Some bankers in Switzerland and Liechtenstein went well beyond giving traditional tax planning advice to private banking clients and encouraged European Union and U.S. citizens to commit tax fraud. 4
Combined with the regular portrayal of OFCs in popular fiction (for example, John Grisham’s The Firm ) and film ( National Treasure ) as the locations of unsavory financial dealings, these scandals have left many people dubious about the role of OFCs in the world economy. Even where OFCs provide onshore economic benefits, onshore regulators dislike competing for business with more nimble jurisdictions, and certain elements within onshore governments may be inconvenienced or threatened by the competition OFCs provide. Tax authorities in high-tax jurisdictions insist that low- and zero-tax OFC regimes are “unfair tax competition.” Law enforcement authorities worry that strong financial confidentiality principles offshore prevent investigators from tracking down illegal funds. National security authorities fret that OFCs will serve as conduits for operations that finance terrorism.
As a result of these concerns, OFCs today face serious threats from onshore governments determined to limit OFC competition. Channeling popular distaste for, and ignorance of, OFCs, the United States and various European countries are once again attempting to restrict their use. In the United States, the Stop Tax Haven Abuse Act is progressing through Congress and, in some form, appears likely to become law by the end of 2010. 5 In Europe, Germany and France are leading efforts to restrict the ability of individuals and firms to make use of offshore business structures. The April 2, 2009, G-20 communiqué promised “action against noncooperative jurisdictions, including tax havens.” 6 The secretary general of the Organisation for Economic Co-operation and Development (OECD) announced that same day that he was “confident that we can turn these commitments into concrete actions to strengthen the integrity and transparency of the financial system.” 7 Efforts by politicians, from British prime minister Gordon Brown to New York district attorney Robert Morgenthau, to blame offshore financial centers for at least some of the current global financial crisis also pose a serious threat to their continued viability. 8 Unless they are preceded by more thoughtful consideration of the overall effects of international regulatory competition, efforts like these present a serious risk of destabilizing the global financial system.
Before embarking on such efforts, we need to examine carefully the role OFCs play in the global economic system. This volume begins that task by addressing five neglected and misunderstood aspects of that role. In the first chapter, attorney Anna Manasco Dionne and corporate law expert and Yale Law School professor Jonathan R. Macey examine the role of OFCs through the lens of jurisdictional competition, a framework often employed in assessing competition within the United States, but rarely applied to competition from offshore jurisdictions. After evaluating OFC critics’ complaints, Dionne and Macey argue that jurisdictional competition from OFCs has led to improvements in offshore regulation, which in turn has fostered onshore innovation and further regulatory competition. Because some financial market regulation is value-increasing, the authors find a race taking place to optimal regulation rather than one to the bottom.
Two issues that dominate the discussion of OFCs are tax competition and confidentiality, the subjects of the next two chapters. University of West Indies professor Rose-Marie Belle Antoine examines the legal principles underlying OFCs’ efforts to resist pressure from onshore governments. Antoine, a leading authority on both confidentiality and trust law issues, argues that well-established legal principles spawned in onshore jurisdictions underlie confidentiality and trust law in OFCs. Drawing on Commonwealth court decisions in both areas as well as OFCs’ statutes, Antoine shows how offshore legal systems have evolved and explains why these legal developments deserve respect by other nations’ courts under widely accepted conflict of laws principles.
International tax expert and DePaul University professor Craig M. Boise explores the efforts of onshore jurisdictions to regulate international tax competition through the transnational organizations they influence—specifically, the OECD and the European Union (EU). He begins by outlining the architecture of international taxation and describing the tax benefits that individuals and corporations seek in OFCs. Boise assesses how onshore jurisdictions have defined “tax competition” and “harmful tax competition” in ways that frame the tax competition debate and pave the way for regulation of such competition. He provides the first complete taxonomy of the arguments for and against regulation and summarizes the efforts undertaken by the OECD and the EU to regulate tax competition by OFCs. Finally, Boise lo