Offshore Financial Centres - Treasury Contents


Memorandum from the British Bankers' Association

  1.  The BBA is the leading association for the UK banking and financial services sector, speaking for 223 banking members from 60 countries on the full range of UK or international banking issues and engaging with 37 associated professional firms. Collectively providing the full range of services, our member banks make up the world's largest international banking centre, operating some 150 million accounts and contributing £50 billion annually to the UK economy. Financial services companies pay £12 billion directly in tax and their employees a further £15 billion in income tax. The sector contributes annually over £100 billion to UK economic growth and a trade surplus of £25 billion to the balance of payments.

EXECUTIVE SUMMARY

  2.  The Inquiry's terms of reference contain no clear definition as to what constitutes an Offshore Financial Centre (OFC). The categorisation of "offshore", however, is becoming increasingly less meaningful, given the diversity of the financial services centres covered by this term. The Inquiry should be wary of the generic connotations encapsulated by the term "offshore". The public perception of OFCs as havens for tax evaders etc is somewhat out of date and, particularly in the case of the Channel Islands and the Isle of Man, is quite at odds with the reality.

  3.  The BBA has sought to limit its focus to the territories in which its members operate in the main and with which it has experienced the most amount of contact: ie Jersey, Guernsey and the Isle of Man.

  4.  OFCs are complementary to the services provided by the City of London. They provide further benefits to worldwide financial markets by increasing economic activity and the competitiveness and efficiency of the banking system in nearby jurisdictions. The development of niche and specialized sectors in certain OFCs can be beneficial in general to worldwide financial markets.

  5.  OFCs which accept and implement international standards of regulation, supervision, disclosure and information sharing, do not constitute a major causal factor in the creation of systemic financial problems. Recent events have shown that a range of factors can interplay to threaten the financial stability of the world economies, including the credit crunch, bad debt, liquidity issues etc. The capital from OFCs, such as the Channel Islands and Isle of Man, may in fact be used by neighbouring onshore finance centres to assist the flow of liquidity around the world, thereby assisting financial stability.

  6.  The sustained interest in, and monitoring of, OFC activities has already gone some considerable way towards tackling concerns relating to the transparency of such jurisdictions. Jersey, Guernsey and the Isle of Man have all received positive assessments on their regulatory regimes from the IMF. They are also included in the OECD's list of 35 jurisdictions committed to improving transparency and establishing effective exchange of information in tax matters, resulting in their designation as co-operative jurisdictions.

  7.  Financial instrument innovation is not restricted to a particular type of jurisdiction or locality. The growth of financial instruments cannot be deemed to be "reliant" on OFCs.

  8.  Many factors play a significant role in market positioning, including the level of taxation, governance arrangements, corporate regimes and the availability of expertise.

  9.  Tax policies, and in particular rates of tax, are indeed a factor influencing companies' choices of where to conduct financial services, so inevitably the greater the relative attractions of other financial centres around the world, the less business will be conducted in the UK with resultant implications for UK tax revenue.

  10.  There is sufficient evidence to believe that the Jersey, Guernsey and the Isle of Man are well-regarded.

  11.  There are numerous reasons why financial institutions, in whichever jurisdiction they operate, would not wish to foster links to customers engaged with illegal and nefarious activities. Jersey, Guernsey and the Isle of Man have comprehensive legal frameworks for countering money laundering and the financing of terrorism.

  12.  The use of an OFC does not signify a propensity towards tax evasion, nor are financial institutions in a position to know what information their clients divulge to tax authorities.

GENERAL COMMENTS

  13.  We would note that the terms of reference contain no clear definition as to what constitutes an OFC for these purposes and indeed arguably, the categorisation of "offshore" is becoming increasingly less meaningful, given the diversity of the financial services centres covered by this term. The difference between those financial markets which are well-developed with mature infrastructures, such as Hong Kong and Singapore, and those that are considerably smaller and more modestly positioned, such as Labuan, is significant for the purpose of this inquiry.

  14.  In recognition of this, the BBA has sought to limit its focus to the territories in which its members operate in the main and with which it has experienced the most amount of contact: ie Jersey, Guernsey and the Isle of Man.

  15.  Additionally, the BBA is wary of the generic connotations encapsulated by the term "offshore".

  16.  The public perception of OFCs as havens for tax evaders etc is somewhat out of date and, particularly in the case of the Channel Islands and the Isle of Man, is quite at odds with the reality. They have not enacted banking secrecy legislation, their compliance with international regulatory and supervisory standards is judged by organisations such as the International Monetary Fund (IMF) to be high, and their engagement with other jurisdictions on tax information exchange is creditable.

To what extent, and why, are Offshore Financial Centres important to worldwide financial markets?

  17.  The statistics captured by the Bank for International Settlements (BIS),[332] and illustrated in the chart above, show that in comparison with a collection of onshore jurisdictions, the Channel Islands and Isle of Man take a relatively modest proportion of bank and non-bank deposits.

  18.  For the UK, the services provided by OFCs are complementary to those provided by the City of London. OFCs administer funds which are then frequently re-invested in onshore economies and therefore act as a conduit helping in the flow of global capital world-wide. They provide further benefits to worldwide financial markets by increasing economic activity and the competitiveness and efficiency of the banking system in nearby jurisdictions.[333]

  19.  The development of niche and specialized sectors in certain OFCs can be beneficial in general to worldwide financial markets. OFCs contribute to economic liberalization by providing tax-efficient platforms for global commerce, enabling investors and entrepreneurs to allocate capital in ways that boost economic growth.

To what extent does the use of Offshore Financial Centres threaten financial stability?

  20.  The BBA considers that OFCs which accept and implement international standards of regulation, supervision, disclosure and information sharing, do not constitute a major causal factor in the creation of systemic financial problems. There is sufficient evidence to suggest that many OFCs compliance levels, from a prudential and market integrity perspective, are of a standard that makes them no more likely to threaten financial stability than their onshore counterparts. Indeed, in 2007 a study[334] undertaken by Camille Stoll-Davey of Oxford University, for the Commonwealth Secretariat, disproved the contention that offshore centres have inferior regulation or standards to onshore ones. Based on an analysis of objective data compiled by the OECD, it was found that in key areas such as a willingness to exchange tax information or to identify who is behind companies or trusts, OECD member countries do not operate to a higher standard than OFCs and in some cases they operate to a lower standard.

  21.  Recent events have shown that a range of factors can interplay to threaten the financial stability of the world economies, including the credit crunch, bad debt, liquidity issues etc. The capital from OFCs, such as the Channel Islands and Isle of Man, may in fact be used by neighbouring onshore finance centres to assist the flow of liquidity around the world, thereby assisting financial stability.

How transparent are Offshore Financial Centres and the transactions that pass through them to the United Kingdom's tax authorities and financial regulators?

  22.  The sustained interest in, and monitoring of, OFC activities has already gone some considerable way towards tackling concerns relating to the transparency of such jurisdictions. The International Monetary Fund (IMF), the Financial Stability Forum (FSF), the OECD, the European Union (EU), the Financial Action Task Force ("FATF") and the International Organisation of Securities Commissions ("IOSCO") have all undertaken work to promote effective cross-border cooperation and information exchange and adequacy of supervisory resources. The OFCs have also engaged bilaterally with numerous countries.

  23.  Jersey, Guernsey and the Isle of Man have all received positive assessments on their regulatory regimes from the IMF. They are also included in the OECD's list of 35 jurisdictions committed to improving transparency and establishing effective exchange of information in tax matters, resulting in their designation as co-operative jurisdictions.

  24.  All three jurisdictions have signed up to the provisions of the EU Tax Package, including two business tax related measures, the Code of Conduct and the European Directive on Interest and Royalties, and one related to the taxation of private individuals, the European Savings Tax Directive (EUSD). Whilst the legal scope of the EUSD doesn't extend outside of the EU, these jurisdictions voluntarily agreed to apply the same measures to Member States in the EU and implement local legislation to support the Directive. They have also all endorsed the concept of the Tax Information Exchange Agreement (TIEA), signing up to a series of agreements between their jurisdictions and other countries designed to facilitate information exchange in appropriate circumstances.

  25.  The Channel Islands and Isle of Man have not enacted banking secrecy legislation. Like most jurisdictions, including the UK, banks in these jurisdictions take the confidentiality of their customers seriously, but there are appropriate procedures in place for law enforcement agencies to obtain information regarding suspicious bank accounts. We note, for instance, that HM Revenue and Customs has successfully used its information powers to obtain details of offshore bank accounts in these jurisdictions, related to UK-domiciled individuals who have not declared income on money kept in offshore centres.

To what extent does the growth in complex financial instruments rely on Offshore Financial Centres?

  26.  Financial instrument innovation is not restricted to a particular type of jurisdiction or locality. In our view OFCs play no material role in the development of such instruments and hence the growth of financial instruments cannot be deemed to be "reliant" on OFCs. However, as the tax treatment of such complex financial instruments remains uncertain particularly in the early stages, some, but not all, organisations may be motivated to go offshore for a period of time, to obtain certainty of treatment.

How important have the levels of transparency and taxation in Offshore Financial Centres been in explaining their current position in worldwide financial markets?

  27.  As previously stated, concerns in relation to the level of transparency of OFCs seems increasingly groundless, particularly in the case of the Channel Islands and Isle of Man. The level of taxation in these jurisdictions has been a significant factor contributing to the attractiveness of the locations, as it has equally for some onshore jurisdictions. Nevertheless, other factors play a significant role in market positioning, including their governance arrangements, corporate regimes and the availability of expertise. Offshore jurisdictions have proved to be innovative in establishing a niche, such as in trust and fiduciary services, where professional expertise and quality of service are as high as onshore but at a lower cost.

How do the taxation policies of Offshore Financial Centres impact on UK tax revenue and policy?

  28.  Tax policies, and in particular rates of tax, are indeed a factor influencing companies' choices of where to conduct financial services, so inevitably the greater the relative attractions of other financial centres around the world, the less business will be conducted in the UK with resultant implications for UK tax revenue. HM Treasury and HM Revenue and Customs will, understandably, be better equipped to respond in detail to this question.

Are British Overseas Territories and Crown Dependencies well-regarded as Offshore Financial Centres, both in comparison to their peers and international standards?

  29.  There is sufficient evidence to believe that the Jersey, Guernsey and the Isle of Man are well-regarded. They have all received positive assessments on their regulatory regimes from the IMF. They are also included in the OECD's list of 35 jurisdictions committed to improving transparency and establishing effective exchange of information in tax matters, resulting in their designation as co-operative jurisdictions. Additionally, all three Islands are members of IOSCO, holding positions in IOSCO's European Regional Committee. In addition, the Director General of the Guernsey Financial Services Commission is a member of the Executive Committee (the governing body) of the International Association of Insurance Supervisors—the insurance equivalent of IOSCO, taking an active role in setting international standards for insurance regulation and supervision.

  30.  In 1998, the Home Office undertook the Review of Financial Regulation in the Crown Dependencies that was published in November 1998. This review, referred to as "The Edwards Report" (after Andrew Edwards, the Treasury official who undertook its preparation), generally praised the level of service and regulation that then prevailed. A number of recommendations were made that have since been broadly put into effect by the local financial authorities.

To what extent have Offshore Financial Centres ensured that they cannot be used in terrorist financing?

  31.  There are numerous reasons why financial institutions, in whichever jurisdiction they operate, would not wish to foster links to customers engaged with illegal and nefarious activities. Firstly, a financial institution's reputation and integrity can be irrevocably harmed through involvement in laundering money or financing terrorism. The long-term detrimental effect of loss or reputation on business from its usual clients combined with regulatory sanctions can bring the institution to effective closure, as happened with Riggs in the United States. Furthermore, a financial institution that would accept illegal funds cannot rely on those funds as a stable deposit base. Large amounts of laundered funds are likely to be suddenly wired out to other financial markets as part of the laundering process, threatening the institution's liquidity and solvency.

  32.  The 2008 International Narcotics Control Strategy Report[335] (INCSR) is an annual report by the US Department of State prepared in accordance with the Foreign Assistance Act. It describes the efforts of key countries to attack all aspects of the international drug trade, money laundering and financial crimes. The report details in some depth the credentials of various OFCs, and notes that in the case of Jersey, Guernsey and the Isle of Man, they have comprehensive legal frameworks for countering money laundering and the financing of terrorism. The United States Inland Revenue Service ("IRS") have also approved these jurisdictions' "know your customer" provisions for the purpose of its rules on withholding tax.

  33.  The Channel Islands and the Isle of Man are not FATF members, however, as Crown Dependencies of the United Kingdom (which is an FATF member) and members of the Offshore Group of Banking Supervisors (OGBS), a body that is an observer to the FATF, they have fully endorsed the FATF 40 Recommendations and Nine Special Recommendations, and contribute to the deliberations of the body, for instance the Isle of Man's experts are assisting the FATF working group that considers matters relating to customer identification and companies' issues. The OGBS also conducts evaluations of its members' anti-money laundering systems. OGBS members are committed to publishing their assessment reports in full. These reports appear on the websites of the IMF, or the relevant FSRB with whom OGBS has joined in undertaking an assessment of a member jurisdiction. All the reports are also available on the OGBS website. The IMF OFC assessment programme also includes assessment of compliance with the international standards set by the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors.

To what extent do Offshore Financial Centres investigate businesses and individuals that appear to be evading UK taxation?

  34.  The use of an OFC does not signify a propensity towards tax evasion, nor are financial institutions in a position to know what information their clients divulge to tax authorities. Financial institutions adhere to due diligence and "Know Your Customer" procedures in order to gain certain assurances about the probity and the integrity of their clients. However, they are not privy to the tax reporting that the client actually makes. A bank cannot be in a position to know that a customer is evading tax until such time as they are notified of such behaviour.

  35.  Jersey, Guernsey and the Isle of Man all have Double Taxation Agreements with the UK, and are currently in the process of negotiating Tax Information Exchange Agreements with the UK. Additionally the criminal justice legislation in each jurisdiction allows them to assist when criminal investigations are underway in other jurisdictions including the UK.

June 2008









332   Locational banking statistics, Bank for International Settlements, 2008, http://www.bis.org/statistics/bankstats.htm Back

333   Offshore Financial Centres: Parasites or Symbionts?, A K Rose and M M Spiegel, May 2005, http://faculty.haas.berkeley.edu/arose/RevOFC.pdf Back

334   Assessing the Playing Field, International Coopearation in Tax Information Exchange, Camille Stoll-Davey, Commonwealth Secretariat, May 2007, http://publications.thecommonwealth.org/QuickSearchResults.aspx Back

335   2008 International Narcotics Control Strategy Report, Volume II, Money Laundering and Financial Crimes, US Department of State, Bureau for International Narcotics and Law Enforcement Affairs March 2008, http://www.state.gov/documents/organization/102588.pdf Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 26 March 2009