Panama, Loud Complaining and the Death of Offshore Centres... Again

While the world tolerates tax havens, they are frequently the lowest cost way of conducting business and so they continue to grow. They have reached the point where any tax or fund adviser in London who did not recommend them to their wealthy clients would soon be out of business as the competition would have a better product.

Offshore tax havens exist to make rich people richer, often at the expense of the honest taxpayer.

They are small countries which have no or low internal tax (usually because there is no social welfare in those countries), and they pay their way by hosting hundreds of thousands of companies which can only be used by people with no connection with the country.

While working as a lawyer for some of the world's largest firms my normal clients were typically investment funds who set up in Cayman and are managed from the UK. But not always.

My work included setting up a British Virgin Islands company for a group of wealthy people who bought an Old Master painting which was put in a box in a vault where it has stayed.

On another occasion a football agent enquired about a British Virgin Islands (BVI) company to have his commission paid into on a transfer of a Premier League footballer to evade tax in a major EU country. We declined, but another firm ended up doing it using a British Virgin Islands trust to make sure it couldn't be traced.

In another job, a wealthy Irish company owner wanted to set up BVI company to buy his company, and then he could sell the BVI company for much more, with the cash all staying offshore and undeclared. We didn't act, but he still got the deal done elsewhere.

While the world tolerates tax havens, they are frequently the lowest cost way of conducting business and so they continue to grow. They have reached the point where any tax or fund adviser in London who did not recommend them to their wealthy clients would soon be out of business as the competition would have a better product.

In reality, the only reason for the offshore scandal of today is that the onshore governments have allowed the havens to proliferate.

And it's not just the super-rich and hedge funds who use them. The chances are you do to, even if unwittingly.

Do you have shares in an employee share scheme? Probably, it's run in Jersey. Does your pension fund have the usual allocation to hedge funds? Almost certainly they are based in the Cayman Islands.

Is part of you investment portfolio in a property fund? Odds are that you are making use of the British Virgin Islands and Jersey there. The airplane you recently flew in - probably owned by an offshore company used by the airlines for financing purposes. These structures used legally by the hedge fund world, or airline leasing companies, can also be used for pure tax evasion by others.

Offshore havens might seem mysterious, but they are simple. Advisers in the major countries of the world devise schemes, which are then set up by local firms in the relevant jurisdiction - forming a company, opening bank accounts, keeping the private registers, providing directors who have no real connection.

All of this could be done in onshore. The offshore part only lowers the tax take, keeps it all private and allows the dishonest to evade tax.

A hedge fund will usually be set up in the Cayman Islands. But the only expertise there is a law firm that knows how to set them up (the brains are in Mayfair or New York). The Cayman Islands government will charge the fund thousands of dollars a year in return for promising not to tax them for at least 20 years. Those fees are charged to the fund and then passed on to the investors - probably your pension fund.

If the offshore centres ceased to exist tomorrow, the world would carry on and, with some simple regulation, with no real harm to anyone. But without united action, one country unilaterally cutting them off will suffer as the industry moves to somewhere which still allows it.

Governments have made minor changes to tax laws such as to reduce the incentive to go offshore, but have not shown the appetite to make the necessary changes that are available to them. It also relies on the honesty of individuals in declaring that they hold such assets.

The Panama revelations show that this is deeply flawed. The US allows Delaware to operate in this way within its borders. The EU has Ireland, Luxembourg and Malta. The UK has its Crown Dependencies - Cayman, BVI, Jersey etc. The major governments complain loudly, but nothing happens. The EU Savings Directive only affects interest payments and is very easily circumvented.

Meanwhile, the offshore centres continue make their own laws. They compete on the basis of the privacy they compete on the basis of the privacy they can provide. No registers are public. They do not have searchable databases. Sure, they have introduced anti-money laundering legislation, after being forced into it by the OECD but all that amounts to is a copy of someone's gas bill and passport sit in a lawyer's cupboard.

So what to do?

All that is needed to bring about real change is a requirement that any entity formed anywhere must have a real connection to the parties involved. The EU and US could prevent their citizens from setting up other than where they are based or where they have a real business being carried on - the exact opposite of what is currently required in the offshore havens.

At the global corporate level, this stops a US company having an HQ in Bermuda, or a UK organiation, randomly being owned by an Irish nominee holding company. At the fund level, set it up in the UK where it is actually run from. Bring the legal uses of offshore centres onshore, and there will be no infrastructure available for nefarious uses.

In 12 years working in the offshore industry, we were told on several occasions that the world was changing and offshore would die. But it is bigger than ever, and growing rapidly.

The solutions are simple if concerted action is taken. While market forces are allowed free rein, the offshore centres will continue to thrive. In reality, despite all the talk, there is no real appetite to close offshore down. While they exist, onshore advisers are forced to use them because if they don't, someone else will.

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