Global offshore incorporations up 9%

Despite all the doom and gloom in the press recently regarding tax havens, according to a report released by offshore law specialists Appleby the number of new offshore companies being registered globally in the first six months of 2012 was up 9% from the previous six months, to 41,556, indicating that the offshore markets are recovering from the financial crisis.  

The British Virgin Islands, which have always been very popular with clients from Asia in particular, dominate offshore new company registration activity by volume, enjoying a huge six-fold lead over its nearest rival, the Cayman Islands. However, Cayman was the fastest growth jurisdiction for new registrations, with a 13% increase in the first half of 2012 over the previous six months. 

Despite the global growth, overall company registrations in the offshore sector have still not yet returned to their pre-crisis growth - hardly a surprise given the very slow haul out of recession being experienced by many of the major economies which provide them with their work. Furthermore, the total number of active offshore companies has actually decreased 4% to 801,168, implying that significant numbers of companies are being wound up.  Nevertheless, the level of activity in new incorporations will be reassuring to those working in the sector.

Whistle-blower leaks details of 4,400 HSBC Jersey bank accounts

It is being reported this morning that a whistle-blower has sent to HMRC details of every British client of HSBC Jersey, including names, addresses and account balances.  The list apparently covers more than 4,400 accounts and almost £700 million in deposits.

Early press coverage of the leak is whipping up something of a storm regarding failures by the bank in its compliance standards, primarily on the basis that it is being suggested that there are 5 individuals on the list; one of whom has a conviction for arms offences eleven years ago, one of whom is wanted for questioning regarding the growing of cannabis some years ago, and three of whom are City bankers facing fraud allegations.  However, I can't help feeling that the bank is being castigated for failings here before the situation has been verified.  Those facing allegations have, I assume, not yet been convicted of anything.  It would be a strange and unjust situation indeed if people were denied  banking facilities as soon as any allegation of wrong-doing is made against them.  There is nothing at this stage to indicate that the bank has done anything inappropriate in relation to those accounts, and we should not rush to judgement before the facts are examined.  

Certainly it appears troubling on the face of it that there is an individual on the list who has past arms convictions, but again, we have no detail regarding what safe-guards the bank may or may not have put in place to verify the bona fides of that account or the purposes for which it is being used.  

And even if all of those  highlighted accounts are found to be opened in breach of regulations, five accounts out of more than 4,400 is hardly a pattern indicating a malignant culture and justifying the leaking of such a huge amount of data and such sensationalist reporting.  All banks have to be vigilant regarding their clients, but few would dare to cast the first stone as they all worry, whether onshore or offshore, that the occasional rogue customer can slip through the net.  Indeed, recent research (on the subject of which I have recently blogged) tends to show that on balance offshore jurisdictions are more inclined to challenge and question customers than onshore jurisdictions.

Perhaps there has been a wholesale failure of compliance at HSBC Jersey - clearly I don't have the facts to know at this stage.  But let there be a proper evaluation before we leap to judgement. If there are found to be serious shortcomings then the regulator should deal with the bank appropriately (the Jersey regulator has a reputation for dealing with compliance failures very robustly) and HMRC can deal with any individuals who have not properly disclosed their financial arrangements. But in the meantime it is dangerous to assume that the mere existence of the 4,400 accounts is in itself evidence of major compliance failings.

In fact, I would be very surprised if a large number of people on the list are involved in money laundering or tax evasion.  The fact is that there are plenty of very sound and legitimate reasons why people may have bank accounts in Jersey.  For example, someone who is UK resident but non-domiciled would be routinely advised to keep their cash offshore, and to bring it in to the UK tax net as and when required.  These arrangements are perfectly legal, and usually transparent to HMRC.  Indeed, if a money launderer or a tax evader did want to set up bank accounts to hide his ill-gotten gains there are many more conducive places to doing so than in Jersey, a territory with a large number of Tax Information Exchange Agreements with onshore territories and with a strongly regulated banking and fiduciary industry. The innuendo that the 4,400 people are involved in nefarious activities is, in my view, likely to be proved wholly wrong - but if this is found to be the case and the bank is exonerated no doubt the reporting of that would take up considerably fewer column inches than this morning's coverage.  

Indeed, the fact that the details of the individuals seem to have been leaked not only to HMRC but simultaneously to the press would seem to me to suggest that the action has been taken by someone with a general political anti-offshore agenda, rather than someone who is simply concerned with ensuring that people are not permitted to hide money from the tax man.  If the latter were true, then the details would have been passed only to HMRC to investigate with proper thoroughness, and without thousands of probably entirely innocent taxpayers having their confidential information touted around journalists.

Maitland acquires fund administrator Admiral Financial

Maitland, the law firm and trust company group, has expanded its hedge fund and fixed income fund administration capability to new markets through the acquisition of Admiral Financial Group.  Admiral is a multi-national administrator head-quartered in the Cayman Islands with offices in Dublin, Virginia and Nova Scotia.

The acquisition will bring Maitland’s total assets under administration (AUA) to US$145 billion, of which US$25 billion are hedge fund assets.

The company will continue to trade as Admiral Administration and will also establish an operating subsidiary in Cape Town, South Africa, where Maitland has an existing platform. 

The objective is to establish Admiral as a leading provider of administration services to the hedge fund industry in multiple jurisdictions, both onshore and offshore.

Cayman Islands Premier pushed into humiliating climb down

Yesterday I reported how Cayman Premier McKeeva Bush had precipitated a crisis in relations with the UK by stating on Monday in the Legislative Assembly that he would refuse to pass the Framework for Fiscal Responsibility into law without amendments (despite having agreed the FFR with the UK a year ago), and would proceed with a deal with the China Harbour Engineering Company for new port facilities, despite the outright opposition of the UK.

Less than 48 hours after making these bold statements, he has been forced into a humiliating climb-down.

In an emotive statement released last night, Bush stated of the proposed deal with CHEC:

"No reasonable person could say that our process has not been fair, open, and carefully scrutinized. It has been as robust as the standard form of tendering and would have produced good value for money. However, we are told by the UK that it is the specific type of process that matters, not the outcome; and it is not acceptable to use any other process, even one that can be shown to be as good as the one they prescribe.

Accordingly, in spite of the sustained efforts this government has made to bring improved port facilities to reality we have been stymied unless we follow their prescribed approach to the letter. I must therefore regretfully say that the government is left with no choice but to abandon the present contract negotiations, which were on the verge of being completed. .... I want to publicly extend an apology to China Harbour Engineering Company. ...I trust that having to abandon these negotiations will not harm future relations with Chinese companies."

Of the FFR Law, he said:

"The UK calls for us to implement the FFR into Law without debate or amendment. As I have said publicly, I agree with the UK on much of the FFR because of the large loans and debt left by the PPM. The Opposition has joined in the hue and cry for implementation without amendment. They should both be concerned for the position of the Cayman Islands Government, should we suffer financial or reputational loss as a result of following budget management advice handed down by the UK. The FFR Bill will therefore be taken to the Assembly as prescribed and God help us all if it proves to have the negative consequences that some experts have warned are likely.

I make these announcements with a heavy heart. I have fought against these positions, but I am now forced to do so, through the dictate of the UK Government, which is supported by the Opposition. While I am prepared to bear the political pressures that would result in continuing to resist these demands, I am NOT prepared to expose my family to the political turmoil being brought into play at the present time. I can only pray that the worst will be averted, and that we will find a way forward that shields our population from too painful a decline in our living conditions. The government will continue do its utmost to bring forward the swiftest possible advances towards an improved economy, and trust our industry partners will appreciate that while our hand is now being forced, we will do everything within our power to perform our obligations, and to work for mutually beneficial outcomes now and in the future."

Whilst the climb-down by McKeeva Bush will no doubt avert the immediate prospect of the UK forcing the legislation on the Islands by direct rule, the wording of his statement will do nothing to foster a productive relationship between the two territories going forward.

I make no comment on whether the CHEC deal was a good one or not for the Island - I do not know the details and so cannot make an informed judgement.  Nor do I comment on whether the amendments that Bush sought to the FFR would have been good and sensible ones.  The issue for me that the time for negotiation had long since passed - the FFR agreement was signed last year and, once signed, there was never going to be anything other than enormous difficulty if Bush then sought to block it or disregard its requirements. As a highly experienced politician, he should have been able to avoid both the diplomatic crisis, and being pushed into such a public climb-down.  

An unlikely Anglo-German alliance on tax

In recent years the UK government has been at loggerheads with many of the EU jurisdictions when it comes to matters financial – whether it be the imposition of a financial transaction tax, giving more power to the EU or even agreeing its budget.  It was perhaps surprising, therefore, to see George Osborne, the UK’s chancellor, tightly aligned with the German finance minister, Wolfgang Schäuble, in announcing an international crackdown on tax avoidance by multinational companies at the G20 finance ministers’ summit in Mexico.

The subject of tax avoidance by corporate behemoths has been very high profile of late. Most recently, according to Reuters, Starbucks has not paid tax in the UK for three years and has paid only £8.6 million income tax since 1988, on sales of £3.1 billion – something which has caused a media storm in these straightened circumstances, despite the fact that everyone seems agreed that Starbucks has done nothing illegal.  And nor are Starbucks the only target of public and political ire – Google, Amazon and many others have all also recently been berated by politicians for using lawful techniques to move profits to low tax jurisdictions such as Netherlands and Luxembourg. 

There is a perception that these huge multi-national groupings have opportunities to structure their businesses to be tax efficient in ways that are simply not open to small independently owned businesses, giving them an unfair competitive advantage.  This has added to the sense that what they are doing may be legal, but is fundamentally unfair.

The difficulty is that large nations have enormously complex and unwieldy tax laws which have evolved over many years and were designed in days where businesses were largely static – they would have a physical presence in a location and would trade from there.  Nowadays, e commerce in particular has changed the nature of the game fundamentally – it provides companies with a huge degree of flexibility in where they trade from, and offers opportunities to separate intellectual property rights from trading entities in order to control where profits arise. The simple fact is that the ponderous nature of international corporate tax rules and the tortuous process that most of the mature jurisdictions have to go through to amend them means that governments are permanently trying to catch up with the accountants employed by big multinationals as they shift profits around the globe.  The companies always seem to be at least one step ahead of the tax man, and many of the most creative brains in the field are employed in private practice rather than in HMRC.

So whilst it is not surprising that Osborne and Schäuble have both recognised the problem, finding the solution will be a lot more taxing (forgive the pun!).  At present the detail is vague save that they have said that they will back ongoing work by the OECD to identify gaps in tax laws. But Osborne treads a fine line in as much as the UK actively encourages businesses and individuals to come to it because of its own relatively low taxation rates relative to its European competitors in key areas – Britain has the lowest rate of corporation tax in the G7, and has cut its rate by more than any other G20 country over the past two years and intends to keep doing so (from 28% in 2010 to 22% by 2014). Furthermore, it was only a few months ago that the government was encouraging the French wealthy to relocate to the UK in response to an increasing tax burden in France.  Osborne appears to want to try to keep the UK’s own tax competitiveness whilst limiting the opportunity for companies to use other lower tax areas, which raises the interesting question of at what point a tax rate is unacceptably low – traditionally it has been the offshore “tax havens” such as the Cayman Islands and the Channel Islands which have been the target of criticism, but it appears that it is countries such as Netherlands, Luxembourg and Ireland which are the key centres to which the corporate behemoths have been flocking.  These are much harder nuts to crack – their membership of the EU affords them a power and influence that the smaller offshore centres lack, and they are not naive enough to be turkeys voting for Christmas. 

So for now, despite the strong words, it is likely that the joint statement is more a case of political grand-standing than a real threat to the financial services businesses in the Netherlands, Luxembourg and Ireland.  There may be a growing and understandable feeling that "something must be done" - but identifying the solution is incredibly difficult when there are so many vested interests to balance.  The cynic in me can't help but think that in making this announcement with the Germans, the UK government is playing gesture politics so that when the forthcoming difficult EU budget negotiations begin, it can say that the UK does not always oppose the direction in which Angela Merkel wants to go.

Relations between Cayman and the UK deteriorate dangerously

Relations between the Cayman Premier McKeeva Bush and the UK have sunk to a new low. 

In November of last year, McKeeva Bush signed a Framework for Fiscal Responsibility with the UK government, in light of UK concerns regarding governance in the Island and its large fiscal deficit.  The FFR was designed to reduce risk and increase accountability in public decision making, and to control public spending within a tightly defined framework.

However, it now seems that the Cayman Premier feels that he is in a position to call the shots and tell the UK government which bits of the Framework for Fiscal Responsibility he is prepared to honour and which he chooses not to.   He has stated that the FFR will only be passed into law with a series of amendments which he is proposing – something which the UK’s overseas territories minister, Mark Simmonds, has made very clear is completely unacceptable. 

It is astounding that a politician of McKeeva Bush’s long experience should feel that he can simply ignore binding commitments publicly given by him, and is an eloquent example of why the UK had concerns about the governance of the Islands in the first place.  It may well be that McKeeva Bush genuinely feels that the FFR is not right for the Cayman Islands and it is in the interests of the Caymanian people that it should be changed, but if that is the case then he should not have signed the agreement last November.

In addition, McKeeva is insisting on going ahead with a partnership with Chinese investor CHEC in relation to a proposed new cruise port, again despite the clear opposition of the UK.  The Premier said he did not believe that Mark Simmonds was aware of all the facts regarding the port, but once he was, he felt sure he would support the project.

In a statement delivered in the Legislative Assembly today Bush told the parliament that if the UK was, as it claimed, a reasonable partner, it could not object to the changes he had made to the FFR bill.  I would argue that it is not unreasonable for the UK to expect the Cayman Islands’ Premier to honour agreements made less than a year ago.

He has also levelled some powerful criticisms of the current governor, saying:

“So far, the only ‘help’ coming from the present Governor – has been to keep our economy flat, people unemployed and unable to pay their mortgages and lose their homes – all of which has exacerbated the rise in the level of crime at gunpoint”.   

What puzzles me is why McKeeva Bush feels he is in a position to take such a defiant stance.  In a letter to the FCO last week (which appears to have bypassed all the usual protocols for correspondence between the two territories), he wrote that Cayman can be led but not pushed, and makes it very clear he will be doing things his way.  In fact, he is entirely wrong in this analysis.  The UK can indeed push.  The Cayman Islands are a British colony and as such are capable of being ruled directly from the UK.  Those who doubt that the UK government would take such a drastic step would do well to learn the lessons from Turks and Caicos.  If direct rule was imposed, it would be disastrous for the Islands’ financial services industry.

The current situation leaves the Cayman and UK governments at what many are already suggesting is a very worrying stand-off and there will be many hoping that an urgent resolution can be found before the situation spins out of the Islands’ control.

Cyprus could be first to exit Eurozone as bailout talks are in chaos

This weekend concerns are growing that Cyprus may be the first Eurozone country to be forced into exiting the Euro.  The country is in an enormous financial mess, and its leaders seem to have their heads in the sand about the size of the problem, refusing to accept EU conditions for a bailout and clinging to the naive hope that the Russians will come to their rescue with a no-strings-attached loan. 

Of course Cyprus is not the only EU country in financial difficulties at the moment, but the crucial difference is that, unlike those other countries, it is probably not too big to fail and there would be limited contagion within other EU countries if it were to do so. It is therefore entirely conceivable that it may be forced out of the Eurozone soon unless the Cypriot government takes a radical and very swift change in approach.  

Cyprus applied for a bailout from the EU and the IMF in June after its two largest banks sought state aid to help with massive losses incurred by the Greek debt write-down earlier in the year.  The island has been unable to borrow from international financial markets for more than a year and the country’s financial system is consequently hanging on a knife edge.  There is a real danger that the prolonged uncertainty and instability of the system, and the spectre of a Eurozone exit, could prompt foreign depositors to move their cash to another country, in which case the overnight collapse of the banks would appear inevitable. 

A lot of the blame for this situation, in my view, lies at the door of President Christiofas who has shown his political naivety in recent months, stalling discussions with the Troika and ultimately rejecting their conditions for an EU bailout in favour of his own set of populist leftist proposals.  He seems entirely to have failed to appreciate the size of the hole he is in. One might expect that negotiations regarding a bailout would involve a healthy debate about the size of wage reductions to be made or new taxes to be levied, but the fact that Christiofas is still sticking dogmatically, for example, to a demand that wages should continue to be index-linked shows the scale of his delusion.

Contrast the approach of Cyprus with that of Ireland, which found itself in similarly straightened circumstances but instead of sticking its head in the sand faced up to the difficult decisions that had to be made.  The Irish public undoubtedly felt the pain of harsh cuts and tax increases, but are now starting to see light at the end of the tunnel as a consequence.  Why should the Irish people, having taken their own harsh medicine, now have to subsidise the Cypriots so that they do not have to do the same?

The upshot of the Cypriot approach in recent months is that the chances of a bailout being agreed in time to save Cyprus are now rapidly receding, with it being clear that the ill-thought-out counter offer is unacceptable to the Troika and no clarity as to where the parties go from here or even when they will next meet to discuss the problems.  The deadline which had been set of 12th November to have agreed the bailout now seems a very remote, if not impossible, prospect.

For Cyprus, the future looks very frightening and it will take some heroics to bring the small country back from the brink.  Unless of course you believe that the Russians will save the day with a very large suitcase of cash........