Can small offshore centres survive?

The banking crisis of 2008/2009 has already been the focus of a great deal of attention throughout the media, which often assumes full knowledge and understanding of what indeed is a bank. A bank is a financial institution whose primary function is to act as a transactions agent for customers, some of whom lend to the bank by way of deposits while others borrow in the form of loans.{{more}} The activities of banks can be further divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market businesses; corporate banking, directed at large business entities, and investment banking relating to activities in the financial markets. These latter institutions underwrite, that is, guarantee the sale of stocks and bond issues and advise corporations on capital market activities. In the meantime, merchant banks were traditionally institutions which engaged in trade finance, but modern day merchant banks provide capital to firms in the form of shares rather than loans. Finally private banks manage the assets of high net worth individuals. Offshore banks, often located in jurisdictions with low taxation, are essentially private banks, and this is the category of banks which will be the focus of our discussion.

The financial services industry has proven to be of vital importance to the economic well being of many small international financial services centres and is a major driver of high per capita GDP figures. Success will come to those jurisdictions that can genuinely add value to international transactions and operate in a well structured regulatory environment. Often it is a mixture of timing, geographical location, personal connection or spotting an opportunity why some centres have developed. Bermuda developed as a captive insurance domicile due to high premiums in the U.S. corporate market and its geographical convenience to the U.S. mainland. Using a captive insurer is a risk-management technique where a business forms its own insurance company subsidiary to write insurance exclusively for its core business. The types of risk that a captive can underwrite for its parent includes property damage, public and products liability, professional indemnity, employee benefits and medical aid expenses. Captives generally retain a portion of the overall risk and reinsure the remainder. The British Virgin Islands took off as an offshore centre in the late 1980s following the instability of Panama during and after the Noriega era when many service providers established operations in the BVI. In the 1970s the Cayman Islands took advantage of the perceived instability that was being associated with the Bahamas’ march towards independence. Both countries lost substantial business, but are now thriving jurisdictions again, having regained confidence of the international community. The Netherland Antilles had a helpful double taxation agreement with the U.S. that made it a major centre for U.S. corporate borrowing in international markets. So successful that the U.S. eliminated the benefits with the stroke of a pen. Likewise the BVI had a double tax treaty with the U.K. that was also cancelled for a similar reason by the stroke of a pen. During the period of these agreements, both jurisdictions gained a measure of prominence and have, therefore, continued to thrive.

The main reason why people move money offshore is not because of tax benefits but rather asset protection, that is, to protect their assets from predators who may be permitted access under a country’s domestic legislation. An International Business Corporation (IBC) is a legal entity, incorporated in a tax haven which is free from all local taxes except a small annual fee. The IBC cannot conduct business in the country of incorporation. These companies are commonly used for offshore banking to conduct international trade, investment activities and for asset protection. It would be important to carefully check the credentials of persons applying for the registration of IBCs since they could be used for offshore banking which a jurisdiction may lack the capacity to properly supervise.

The U.S. President has stated that his country loses in excess of US$100m a year because corporations set up mailboxes everywhere to avoid paying taxes. St. Vincent and the Grenadines has passed limited liability companies legislation to attract such entities to its jurisdiction. We live in a competitive world where countries jealously guard their own self-interests and the interests of their lobbyists. The banana lobby in the U.S. is a case in point. The U.S. and EU’s fear of leakage of capital and revenues is such that their not-so-subtle goal is to eliminate most small international financial centres or at least to neutralize their threat. While trumpeting their support for globalization of financial services and the desirability of opening all markets to products and services, they continue to impose unequal, burdensome and anticompetitive regulations on these centres.

St. Vincent and the Grenadines is yet to develop a niche in the international financial services business, on which to launch itself as a serious centre with growth potential. Even in the ship registration business where the country had an early start, more recent entrants like Antigua have forged ahead. Nevertheless, St. Vincent and the Grenadines should lend support to the established small international financial services centres in their attempt to devise strategies to counter this most recent threat by countries in the North to the viability of these centres, while making a determined effort to position itself to share in the rewards which have been accruing to this lucrative sector.