A review of past events:

  • 1997 "The European Commission is currently considering plans to order the shutting down of British offshore tax havens which, if successful, may well be extended to cover all other European offshore jurisdictions, including Switzerland. The catalyst for this move is Germany’s allegations that the equivalent of GBP 40 billion of German capital has, for the purpose of tax evasion, been transferred mainly to the islands of Jersey, Guernsey and the Isle of Man. The move was being led by German Finance Minister Theo Waigel.

  • Thursday October 1998 BVI Beacon, headlines, "Offshore banking attacked … Open warfare has been declared on offshore financial centres, Chief Minister Ralf O’Neal charged at Tuesday’s Legislative Council meeting."

  • In the same period Baroness Symons gave a speech to the British Virgin Islands at a financial services seminar. In which she highlighted the following:

    1. The Foreign secretary outlined measures necessary to ensure that the Overseas Territories (previously called the British dependent territories) met acceptable international standards for financial regulation, which included tightening up on company formation, improving international cooperation and creating independent regulatory authorities.
    2. It was noted that the UK had sought to encourage the Overseas Territories (OTs) to pursue a program of legislative reform covering banks, trusts, insurance, company managers and mutual funds.
    3. The harmful tax competition initiatives involve measures to reduce the incidence of international tax avoidance and evasion through preferential tax regimes and tax havens.
    4. The EU the OECD and the G7 have all looked at ways of combating harmful tax competition.
    5. The EU is also considering a directive to operate a withholding tax on cross border income from savings by individuals or to provide information on savings income to member states.

The resulting White paper talked about developing a modern partnership between Britain and the Overseas Territories. This was first pre-sweetened with the granting of full UK citizenship to the citizens of the dependent territories. (After refusing citizenship to Hong Kong citizens).

The United States has been pressuring other countries to recognize that tax evasion is a fiscal crime stating that the activity constitutes money laundering. The Revenue services presume that a person is guilty of fiscal crimes before trial, thus a properly thought out and legitimate avoidance mechanism is treated as evasion until proven otherwise. Evasion being a crime the funds are therefore subject to scrutiny as they have ergo been laundered.

For the first time in British History Baroness Simons and Robin Cook have linked evasion and avoidance with the simple word "and". Thus putting everyone on notice that the UK/EU has shifted into alignment with the US and that from now on they are not interested in what the law says but in what is "fair" as Tony Blair is so fond of saying.

Essentially the problem that the G7 countries, now called the International Community, are trying to solve, is how to pay for a government spending habit that keeps increasing. The EU has only been operational for a few years and their bureaucracy has already broken the budget notwithstanding fraud and misuse of funds. This phenomenon generates a requirement for further funds. No politician wants to tax there own they therefore look to find other places where they may replenish the treasury. First line of attack is therefore the Offshore Industry, the main thrust being UK associated and dependent territories. The Tax Haven industry was in fact created and promulgated by the British Governments many years ago in order to reduce the dependence of the dependent territories.

The USA is in a different category as they have a policy of taxing their citizens on a worldwide basis whether they are resident in the US or not. The result is that for many years they have considered offshore activity to be a prima facie case of tax evasion. The US has spent a considerable amount of time convincing the UK and other relevant EU partners that tax evasion equates to money laundering. There is further evidence that the IRS is spending large sums to track down and attack offshore structures.

We now have a situation where the United Kingdom has hands on control through the regulator network of all the Overseas Territories such as BVI, Bermuda, Cayman, Anguilla, T&C etc. They have persuaded the regulators of these territories to pass regulations that require that the trust companies have on record the beneficial owners of the entities they create and must allow unfettered access to the regulators this information is therefore directly available to the Government. The Government permits itself to distribute this information to authorized persons and the Government determines who is an authorized person. This tactic is the implementation of "(f) improving international cooperation and creating independent regulatory authorities".

Further the UK Government has demanded the jurisdictions pass a criminality law or proceeds of crime act that effectively makes the local practitioner a party to the crime of his client. This law works much like an extradition treaty in that the criminal act in the "home" jurisdiction must also be a criminal act in the offshore jurisdiction.

Thus we have a situation where practitioners in an offshore jurisdiction that does not have income taxes are not subject to income tax evasion crimes, where a practitioner in the BVI does.

Interestingly New Labour are currently in the process of stating they will block attempts by the EU parliament to impose a 20% withholding tax and or reporting requirements to member states. New Labour claims this would seriously damage the London Financial market. The London Financial market has grown because they have been able to offer interest on deposits "gross" with no withholding taxes and further will not and do not report the income paid depositors resident in member states.

What does this mean to the offshore practitioner and his client? Persons seeking privacy, asset protection and minimum interference from regulation will shift toward jurisdictions that are not under the grip of the UK/EU. The Overseas Territories will have to take a long serious look at their economies and have to decide whether their economies are sustainable without the offshore industry. Some will be forced to go independent, although time will tell as to whether the Government and regulators in these jurisdictions will move fast enough to save their industries.

If the International Community with a mixture of incentives and threats is able to shut down all the Overseas Territories and the Associated States, they will put a major dent in the availability of offshore services. They will then in turn be able to take on each independent jurisdiction one at a time. The use of trade sanctions, exclusion from the international banking system, the banning of flights and the cutting off of credit to these countries may well make the Governments capitulate. The strength of the offshore industry lies in having many competing jurisdictions. The sum of the whole being larger than the sum of the parts could forestall sovereign interference by the international community. The longer the Overseas Territories and Associated States stay in thrall of the UK/EU the greater the risk that the offshore industry as we know it will be shut down.

On a more hopeful note Governments and member states spend a considerable time engaged in politics, there is therefore a strong possibility that they will continue to disagree with each other over the basic tax harmonization issues or find some other more pressing matter to concern themselves.

Nevertheless, you can be sure that even if some of the jurisdictions commit suicide the professional practitioners will already be preparing new strategies for 2000 and beyond, bringing on the development of a purer offshore industry especially in the banking sector.

As ever if you are participating in the offshore arena the byword is Caveat Emptor.