The Offshore Alert conference in Miami in May presented once again the whole spectrum of opinions with regard to offshore financial centres, describing their function as anything from “parasitic” to “greasing the wheels of the global financial system”. Onshore jurisdictions, however, also received their fair share of criticism for ineffective tax policy, lack of compliance and corporate services that facilitate crime.
Reuters columnist David Cay Johnston fired the first salvo in a debate with Cayman Finance Chairman Richard Coles stating that the Cayman Islands is a “parasite” on “countries with real economies”. Given that American budget holes are a significant threat to the national security of the United States, he advocated, the US should “invade the Cayman Islands”. The sole purpose of Cayman is tax avoidance, “some legal, some illegal” but “all immoral”, he claimed.
Coles in turn described Cayman as a location for the pooling of capital that is going to be invested elsewhere and noted that “the people who invest through those vehicles pay taxes in their home country”. He also pointed to the Mutual Legal Assistance Treaty with the US and Tax Information Exchange Agreements that can be used, should tax authorities suspect a taxpayer is not declaring offshore income.
In other panels Bloomberg news correspondent Jesse Drucker outlined how Google sold intellectual property rights to foreign subsidiaries and used transfer pricing, the price that is charged by one part of a company for goods and services provided by another part of the same group of companies, in combination with a “double Irish” “Dutch sandwich” corporate structure to move profits offshore.
Although perfectly legal under US tax law and of course tax was paid on the sale of the intellectual property rights, the measure reduced the effective tax rate of Google as well as the tax intake of the US government.
This again was contrasted by Michael Burns and James McConvill of Appleby in the BVI who showed how offshore financial centres benefit the global economy. The corporate attorneys gave examples of the entities and transactions used and specifically the non-tax reasons why joint ventures or financing transactions often involve offshore companies and other vehicles.
Burns and McConvill mentioned that language difficulties can be overcome, legal certainty, access to an effective court system, greater flexibility and greater access to regulators as just some of the benefits that offshore centres offer. Business from certain jurisdictions, for example in Central or South America may also have difficulties in attracting US investors directly, a problem that can often be overcome by using offshore entities. The practical uses and products have an impact on the global economy, they argued.
Stefanie Ostfeld of Global Witness presented corruption cases that involved offshore financial centres. “The easiest way to move money is to hide your ownership of it,” she said. But she acknowledged: “The problem is as much an onshore one as an offshore one, it is a structural problem in the global financial system.”
She detailed how the son of the president of Kongo set up a shell company in Anguilla and put the shares in the company in two separate trusts. The bank operating the accounts for the trust should have found out who the beneficial owner was. “Knowing that he was a politically exposed person the bank should then have done enhanced due diligence into the funds in the account.”
A panel that dealt with specifically with the issue of beneficial ownership, based on the Worldbank’s Puppet Masters report about the legal structures used to hide proceeds of crime or corruption, also confirmed that it is both an onshore and offshore problem.
Investigators surveyed for the report stated that they are generally comfortable when investigating entities in their own jurisdiction, expect for US investigators.
Jason Sharman, professor at Griffith University in Australia, and one of the authors of the report also noted that the issue of beneficial ownership is key. He dispelled the notion that “if the banks did their job properly it should not be an issue”, by arguing that anti money laundering and KYC procedures “are imperfect” and do not solve the problem.
He said beneficial ownership is a concern, because if the information is not collected at formation of the shell company, the owners become untraceable in investigations and any tax information exchange becomes meaningless.
As many of the instruments of offshore centres such as shell companies are also available onshore, the conference culminated in a debate over whether offshore or onshore countries were the worst offenders.
Thomson Reuters correspondent Brian Grow demonstrated that shell companies are widely used, both legally and illegally, with much secrecy in the US. Sharman presented a study based on a mystery shopping exercise.
Sharman had written to 3,500 corporate service providers worldwide with the objective of forming a shell company to determine what types of identity information would be required in the different jurisdictions.
The recommendations of the Financial Action Task Force’s anti money laundering regulations state that service providers should collect certified or notarised identity documents of the beneficial owners even if the shell company has nominee shareholders and directors.
The results showed that the Cayman Islands was one of only two countries out of 183 that collected all the identity information required by anti money laundering regulations. The 500 offshore companies contacted by the researcher overall were much more compliant than those in OECD or developing countries, the study results showed.
While the onshore compliance record is at best mixed, offshore jurisdiction have been much stricter in collecting information on beneficial owners, regulating service providers and prohibiting the use of bearer shares, the panel noted.