Offshore Financial Centres:
to recent International Initiatives
2002 Dr Jean-Philippe Chetcuti. All Rights Reserved.
Attempts to regulate the use of offshore facilities on a
case-by-case basis has generally been thwarted by the internationalisation of
the modern commercial world, the enhanced mobility of individuals and the
growing complexity of the offshore world. The onshore world has, in the last
few years, undertaken to augment challenges to specific regimes with a huge
confrontation on the set of laws and services commonly accessible in the
offshore setting. Presently, compromise of the sovereignty of the offshore
country is seen as a suitable way to induce observance of the regulatory
procedures and fiscal strategies perceived as adequate by the high tax states.
OFCs have been highly criticised by multinational
organizations and high-tax jurisdictions alike. The term “tax haven” has been
amply and indiscriminately used, referring tax jurisdictions with no or only
nominal effective taxes, with an absence of effective exchange of information,
with a marked lack of transparency and characterised by the absence of real
activities carried out by the entities incorporated therein.
The basis for criticism of OFCs is threefold. Primarily,
the sharp increase in money transferred to OFCs and the consequent loss of
income to high tax jurisdictions. Secondly, bank secrecy and confidentiality
rules which conceal indications of tax evasion and money laundering.
Thirdly, there is the ever-present unease that the enormous quantity of capital
being placed offshore will lead to an enhancement in instability in the world’s
Initiatives undertaken by the OECD in the ambit of
taxation, have had a major impact on OFCs. In 1998, the OECD published its
report on harmful tax competition.
This report set out the criteria for determining harmful tax practices and
presented recommendations for fighting such harmful practises. The OECD progress
report on harmful tax competition and practices was issued in the year 2000.
This latter report updated the previous work and identified 35 tax havens and 47
potentially harmful preferential regimes.
has four main parts:
The first part categorizes harmful tax practices among OECD MSs
and establishes a deadline by which these MSs must alter or give up particular
practices to keep away from sanction;
The second section characterises and lists harmful tax haven
The third is an attempt to incorporate non-OECD members in the
attempt to fight tax havens; and
The fourth encourages OECD members to assume specific practices
regarding uncooperative tax havens.
Countries listed in the
OECD’s list of tax havens are roughly 30 OECD members were encouraged to adopt
the disallowance of deductions, exemptions, and credits connected
to dealings with uncooperative tax havens;
the improvement of audit and enforcement activities as regards
unaccommodating tax havens; and
the imposition of transactional charges on certain transactions
involving uncooperative tax havens.
The OECD’s black list of harmful tax havens was primarily
intended as a warning to the countries listed therein. Bermuda, Cayman Islands,
Cyprus, Malta, Mauritius, and San Marino signed advance commitment letters and
hence, escaped “blacklisting”. In these letters of commitment, each pledged to
do away with the tax practices regarded as harmful in their own jurisdictions.
Widespread criticism followed the OECD report on harmful tax practices. The BIAC
contends that tax competition between different countries is nothing but
positive: it encourages governments to be efficient.
Furthermore, it contended that if adopted, OECD sanctions “would create a
cartel-like atmosphere that would be in clear conflict with the concept of free
trade and investment across national frontiers.”
In fact, it has been claimed that:
“The OECD is essentially a cartel consisting of the world’s
richest countries, most of which are high-tax jurisdictions ... most OECD member
states are guilty of egregious unfair tax competition that is much more serious
and harmful than that of which the OECD is complaining. These activities have
been conveniently ignored in the OECD’s self assessment of harmful activities by
its own members.”
OECD MSs, Switzerland and Luxembourg, also refrained from
partaking in the report because of similar practices in which they offer bank
secrecy and tax shelters to foreign investors.
The OECD supports its list by reiterating that by merely
being a low tax state, sanctions would not automatically result. For such
nominal taxes to have a negative effect, the low or nominal tax percentage must
come with no effective exchange of information, or lack of transparency or no
The OECD maintains that their plan is to prevent non-cooperation with tax
legislation, or “to put it in the vernacular, it is directed against ‘tax
assembled a primary list of 15 jurisdictions whose
policy for combating money laundering demonstrated severe shortcomings.
It issued 40 recommendations in 1990 serve as a guide to international
financial regulation and supervision.
Its main aim was to thwart money-laundering and it issued a set of 25 criteria
to determine whether a jurisdiction has adequate safeguards against money
The list of criteria is divided into four broad categories:
loopholes in financial regulations, including: inadequate regulations and
supervision of financial institutions; inadequate licensing rules, inadequate
know-your-customer rules and excessive confidentiality;
obstacles raised by other regulatory requirements, including: inadequate
commercial law for registration of business and legal entities; lack of
identification of beneficial owners;
obstacles to international co-operation, including: obstacles by
administrative and judicial authorities;
inadequate resources for preventing and detecting money laundering
By means of these criteria, 15 OFCs were classified as
Initially, the response was varied. Even though many OFCs
showed concern about the process of assessment, yet no rebelliousness similar to
that in response to the OECD list was manifested. This might have been due to
the fact that removal from the list did not entail an unlimited pledge to the
scheme in question, as in the case of the OECD requirements. Worthy of note is
also the fact that metropolitan jurisdictions gave strong support to the FATF
list and these onshore jurisdiction were more than ready to act upon the FATF
document. Therefore, OFCs did not have much choice but to abide by its
The UN Office for Drug Control and
concerns itself mainly with the abuse
of OFCs for criminal purposes.
In March 2000, the
Offshore Forum of the UN
invited around 30 OFCs to the Cayman Islands to approve a number of
internationally acknowledged minimum principles on regulation and supervision of
OFCs and on fighting money laundering. During December 2000, 124
countries also became signatories to the UN Convention on Transnational
which seeks to reinforce the authority of governments in the fight against
serious crimes. It is envisaged that the Convention provides the foundations for
stronger mutual assistance in the fight against money laundering, better ease of
extradition, and measures on the safety of witnesses and improved judicial
In 1991, the Council of Europe enacted the
Convention on Laundering, Search, Seizure and Confiscation of Assets
which has turned out to be the major international convention that obliges
signatory states to collaborate against the laundering of income derived from
all serious criminal offences. The EU is a signatory to the Convention.
It amalgamated the Convention to its own initiates to combat financial crime and
issued the 1991 Anti-Money Laundering Directive.
The EU is also examining the activities of organized crime in
OFCs and their dangers to the EU financial system.
inter alia, investigated the threats that could be potentially posed by
OFCs on international financial markets. Its report found deficiencies in the
regulation and supervision of various OFCs. Its study was based on the
identification of around 70 OFCs, which it divided into three Offshore
The IMF has also carried out work
in the field of “Offshore Banking”.
It received its mandate from the FSF to study the listed states in connection
with their observance to internationally acknowledged principles in the area of
financial market regulation and supervision.
3. Adapting to the new international legal order: a comparative study
From offshore to onshore:
International Trading and Holding Company Regime - tax efficient tax
planning vehicles in a reputable onshore regime"