International Financial Centres – Setting the Record Straight

AndrewMorriss

Global Island News talks to Professor Andrew Morriss, Dean & Anthony G. Buzbee Dean’s Endowed Chair, Texas A&M School of Law about small island IFCs’ force for good credentials.

To what extent are reputable small island IFCs furthering the cause of sustainable development, both locally and beyond their shores?

Finance is a sustainable industry for small islands – these are jurisdictions that mostly lack significant natural resources and are simply too small to sustain themselves doing anything besides finance and tourism. Finance makes relatively few demands on the local environment compared to tourism because it involves far fewer people. If a jurisdiction like the Bahamas or Cayman had to make up for the loss of their financial sectors by expanding their tourist sectors, it would vastly increase the environmental strains on those jurisdictions’ environment.

Would you like to see small island IFCs doing more to speak with one voice in defence of their force for good credentials, thus affording them greater leverage at the global regulatory negotiating table? Have you detected any reluctance to collaborate with other jurisdictions for fear of diluting their USPs and competitive edge?

It is tricky for IFCs to collaborate in defense of their industry, since they are often competing with each other for business. However, they do have some common interests in pushing back against some of the more unreasonable measures coming out of the larger jurisdictions. The US adoption of FATCA is protectionism pure and simple for the US, and I think both the US and many of the EU jurisdictions are engaged in a campaign (coordinated through the OECD) to raise the cost of doing business in IFCs in an effort to inflict “death by a thousand cuts” on them. So, working together more in the future may be necessary. In particular, I think they could collaborate more on developing the intellectual support for the case for regulatory competition among jurisdictions. Towards a Level Playing Field did a wonderful job in showing the intellectual poverty of the OECD’s earlier efforts to shut down tax competition. If a number of jurisdictions got together, I think they could fund more work like that and make a real difference.

Do you view the various international regulatory compliance criteria as draconian and over-zealous, or do you think the prevailing winds have, to a degree, acted to compel small island IFCs to put their houses in order and provided them with an international platform to set the record straight as to their integrity?

Lotta Moberg and I have a paper that looks at the OECD’s efforts to shut down tax competition and I think the only reasonable conclusion one can draw from that is that the large jurisdictions are engaged in an anti-competitive effort to stifle competition from IFCs. It is certainly the case that the IFCs have invested a considerable amount in improving their regulatory efforts, but I’d hesitate to attribute too much of that to the anti-competitive activities of the UK, EU, and US. (The paper is Cartelizing Taxes: Understanding the OECD’s Campaign Against ‘Harmful Tax Competition’ ).

I think IFCs can fight back harder than they are now.

Are you satisfied that small island jurisdictions are sufficiently benefiting from their IFC sectors to the tune of revenues positively impacting their own citizens’ lives on the ground?

It is clear that IFCs generate substantial revenue for their governments, money that pays for all sorts of services for the citizens. They have other impacts – there are lots more accounting jobs, for example, in a place like Cayman than there would be in the absence of the offshore sector. Caymanians have more professional jobs per capita, even without counting the expats, than the size of the population would otherwise support. And bringing in professionals does all sorts of good things for expanding the local market for services and goods, and so improving the local population’s access to everything from air transportation to restaurants. So, I think there’s little doubt that having an IFC is a significant benefit, even if it does tend to mean more traffic jams and higher real estate prices as well.

Are you confident that the battle for minds can be won by small island IFCs? Is there anything more they can do to help the tide of opinion to turn in their favour, or are they at the mercy of external forces beyond their control, where political expediency must inexorably outweigh what is sensible, just and supportive of the global public good?

I think IFCs can fight back harder than they are now. Towards a Level Playing Field did wonders for the debate ten or so years ago – just getting people out there, telling the story about what these jurisdictions do. More recently, Jersey Finance has had considerable success getting the word out in the UK government about the contributions it makes to the UK economy by commissioning a solid study by a consulting firm. The problem is that politicians like Sen. Carl Levin and Pres. Obama in the US like to bully these small jurisdictions as part of their domestic political agendas. To fight that, it is going to take a sustained effort to regularly correct the media in the US, UK, and EU when they make mistakes. IFCs need to address popular culture too – it is not just in The Firm that IFCs look bad. Hollywood loves to have bad guys flee to exotic locations, and IFCs need to push back when they are misrepresented in popular culture as well.

Which jurisdictions, in your view, are getting it right? What has made them models for others to aspire to, with respect to such issues as the growth and success of their IFC sectors being inextricably linked to institutional reform?

The two jurisdictions I know best are Jersey and Cayman. I think both have done things that enhance their position. Cayman’s development of the captive insurance industry is a great example of how a non-tax driven regulatory competition produces huge benefits for everyone. Vermont is a stronger competitor because it has to compete with Cayman; more Americans get cheaper health care because of the growth of health care captives – often run by charity hospitals. Jersey has done a terrific job of providing business structures for doing business in the UK and in developing countries, especially in Africa. And they’ve done well by getting those stories documented in solid reports. In both cases, I think we see a collaborative model in which the local government and the financial industry work together to build something that works.

For more information on Texas A&M School of Law, of which Professor Morriss is Dean, please visit www.law.tamu.edu.