THE OFFSHORE INTERFACE

Transcription

1 THE OFFSHORE INTERFACE

2 The Offshore Interface Tax Havens in the Global Economy Mark Hampton

3 First published in Great Britain 1996 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN ISBN (ebook) DOI / First published in the United States of America 1996 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y ISBN Library of Congress Cataloging-in-Publication Data Hampton, Mark. The offshore interface: tax havens in the global economy / Mark Hampton. p. cm. Includes bibliographical references and index. ISBN (cloth) 1. Investments, Foreign. 2. Tax havens. I. Title. HG4538.H '73-dc20 Mark Hampton 1996 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages CIP

4 To Joanna

5 Contents List of Tables List of Illustrations Acknowledgements List of Abbreviations Xl xiii XlV xv 1 How Tax Havens and Offshore Finance Centres Operate: Taxation and Secrecy 1 Overview 1 Tax havens and OFCs 4 Introducing OFCs 4 Tax havens and problems of definition 9 Common features of tax havens and OFCs 10 Tax haven or OFC? 15 Origins of offshore development 17 Mechanisms of offshore finance: the main players 18 The customers 18 The vendors - the OFC firms 20 The offshore state 22 Mechanisms of offshore finance: the main activities 23 Offshore banking 24 Offshore funds 26 Trusts 28 Offshore companies 29 Captive insurance 31 The abuses of OFCs 33 Tax avoidance and evasion 34 Other abuses of OFCs 34 Summary and conclusions 36 2 Offshore Finance in London, Regulation and Eurocurrencies 37 Introduction 37 Eurocurrencies and the international financial system 41 The economics of Eurocurrencies 42 Origins and legends 44 Vll

6 viii Contents Major players in the Eurocurrency m a r k e t ~ 45 UK bank regulation The City of London as an international finance centre 54 US bank regulation 56 Increasing US regulation 56 International bank supervision 59 UK regulation and the Secondary Banking Crisis 59 International supervision 60 Deregulation and other recent developments 62 Summary and conclusions 65 3 The Relationship between the Onshore State and Offshore Territories 68 Onshore states and offshore territories 68 The problem of the state 70 UK financial capital and the state 73 The state and OFCs 76 Financial capital and the state in the US 78 The US financial system in the early twentieth century 79 The consequences 84 The political relationship 86 The colony 87 The dependency or associated state 87 The independent state 88 The wider context of the onshore-offshore relationship 89 The international context 89 The national context 90 Costs and benefits of OFCs to onshore states 91 Costs 91 Benefits 92 Summary and conclusions 93 4 Area Study: Caribbean Island OFCs and Onshore States 95 Caribbean islands and European onshore states 95 Britain and the Caribbean 96 The Netherlands and the Caribbean 100 France and the Caribbean 101 US and UK attitudes towards island OFCs from the 1970s to the present 103 US policy - tax and tax havens 104

7 Contents ix US policy - drug trafficking and money laundering 110 UK policy - tax and tax havens 114 UK policy - drug trafficking and money laundering 116 Summary and conclusions Location, Technology and the Development of OFCs 120 Location and OFCs 120 Corporate organisation 121 Agglomeration economics 122 Radical approaches to location 131 Summary and conclusions Jersey Case Study: Part Introduction 137 The relationship of Jersey and the UK 137 The role of finance in Jersey 140 Offshore banking 141 Offshore funds 142 Companies 142 Trusts 143 Jersey's post-war development 143 Post-war changes in the island's economy Phase I: Notional tax haven ( ) Phase II: Functional tax haven and Sterling OFC ( ) 150 Phase III: Moratorium and consolidation (1972-4) 161 Phase IV: International level OFC (1975-8) 164 Phase V: Global level OFC (1979 onwards) 165 Summary and conclusions Jersey Case Study: Part The impact of the OFC 172 Direct negative impacts 173 Indirect negative impacts 175 Direct positive impacts 181 Indirect positive impacts 185 A summary of the impacts of the OFC 186 The issue of subsidies 187 Government expenditure in key sectors 188 Has Jersey been subsidised by the UK? 192

8 x Contents States of Jersey policy 193 Policies towards the OFC 193 What were the alternatives? 194 The future development of Jersey as an OFC 196 Summary and conclusions The Outlook for OFCs 201 Introduction 201 Can other territories copy Jersey? 201 Key factors 201 Are there replicable factors? 208 Should other territories copy Jersey? 209 Negative impacts of hosting an OFC 210 Positive impacts of hosting an OFC 212 Potential OFCs 215 Potential independent OFCs 217 Potential non-independent OFCs 220 The future: OFCs and the new regional blocs 221 Summary and conclusions 224 Notes 226 Appendix A 233 Bibliography 238 Glossary 255 Index 258

9 List of Tables 1.1 Main tax havens Functional OFCs, Compound OFCs Notional OFCs A comparison of selected OFCs Park and Zwick's typology of OFCs Offshore vehicles and customer categories Examples of offshore vendors Offshore vehicles and reasons for use Captives in largest island OFCs (1989 and 1993) International banking activity in selected centres (end September 1990) Example A: a bank operating in Montreal with reserve requirements Example B: a bank operating in London without reserve requirements Major banks involved in the London Eurocurrency markets (percentage share of business) Total UK bank deposits (all currencies) Growth in total deposits in London non-clearing banks Foreign bank offices in London Overseas branches of US banks Membership of the Offshore Group of Banking Supervisors Membership of the Offshore Group of Insurance Supervisors (OGIS) A comparison of US commercial bank lending by activity, 1915 and Degrees of autonomy in islands using key features to illustrate political status Flying time from selected island OFCs to nearest GFCs Estimated contribution of the 'primary sectors' to Jersey's GDP Selected international growth rates Tourist expenditure as a percentage of GNP Bank deposits in Jersey Xl

10 xii List of Tables 6.5 Bank deposits in Jersey Corporation tax companies and offshore funds in Jersey (totals) Types of open-ended offshore funds A summary of the impact of the Jersey OFC Population increase Surplus of trading committees, 1986 and Average profit per OFC employee Publicised abuses involving the Jersey OFC Selected Jersey OFC bank profits Comparison of sources of government revenue, Jersey and the UK, Average salary bill per OFC employee Employment in Jersey Employment in Jersey as a percentage of the economically active population Total government expenditure by sector, as a percentage of total expenditure for the UK, Jersey and The Bahamas (1990) Government expenditure per capita for selected sectors in the UK and Jersey (1990) Military expenditure for selected small economies Present offshore activities in five new OFCs Non OFC islands Potential independent island OFCs Potential non-independent island OFCs 221

11 List of Illustrations Figures 4.1 Mechanisms of money laundering 5.1 Linkages between financial services firms Maps Map I Location of the main Caribbean OFCs Map 2 Location of the Channel Islands Boxes 1.1 Asetco 1.2 The Rossminster Affair 4.1 Operation Tradewinds and Project Haven 4.2 The Turks & Caicos Islands 6.1 The Houston Family 8.1 Malaysia's OFC - Labuan Island xiii

12 Acknowledgements In the strange and prolonged experience of writing a book, it is hard to pick out individuals who have given so generously of themselves and of their time. However, I would like first to thank my two PhD supervisors - Chris Edwards and Rhys Jenkins - for their encouragement, constructive criticism and good humour from the start of the research project in 1990 that led to this book. lowe them both a massive debt of thanks. I would also like to thank all of my interview respondents in Jersey, Guernsey and The Bahamas for giving up their time so generously. The interviews were a key part of the research process, opening a door for me into the complicated world of offshore finance. For obvious reasons I cannot name them but they have my gratitude. David Judges read the entire manuscript and I am very grateful to him for the pages of perceptive comments on both content and my worst grammatical errors. Peter Scott, my colleague here at the University of Portsmouth, also read and constructively criticised several draft chapters. However, neither David nor Peter are responsible for any remaining errors or unclear sections: those are mine alone. Also, I would like to say a special thank you to my wife Joanna for her love and support throughout the prolonged process involved in researching, and then writing, the book. Finally, I would like to thank the States of Jersey's Education Committee for funding my PhD research at the University of East Anglia, Norwich. Although members of the States may not agree with the direction of my arguments I hope that this book may contribute to the understanding of how the island has become a major OFC since the 1960s and the central role of offshore finance within the global economy. Perhaps here at the start of the book it is useful to set out my own particular interest in the development of offshore finance, especially in small islands. This stems from my own upbringing and family roots as a Jersey islander, so that I hope that the reader will excuse any bias that might still remain. It is the result of the social scientist's common paradox: the difficulty of being both observer and participant in the island's story. The contents and any shortcomings in this book are, of course, completely my own responsibility. SOUTHSEA. HAMPSHIRE MARK HAMPTON XIV

13 List of Abbreviations BCCI BIBF BOLSA BIS BVI CGT CHIPS CI CRO CTR DC DEA DOM DTA DTI EEZ EPZ ERM EU FA FCO FDI FDIC FEC FIMBRA FSA GFC HNWI IBC IBF let IFSC IMRO los IR Bank of Credit and Commerce International Bangkok International Banking Facility Bank of London and South America Bank for International Settlements British Virgin Islands Capital Gains Tax (UK) Clearing House Association Interbank Payments System Channel Islands Commercial Relations Office (Jersey) Currency Transaction Return (US) Developed Country Drugs Enforcement Agency (US) Departement d'outre Mer: French Overseas Department Double Tax Agreement Department of Trade and Industry (UK) Exclusive Economic Zone Export Processing Zone Exchange Rate Mechanism Eur9pean Union Finance Act (UK) Foreign and Commonwealth Office (UK) Foreign Direct Investment Federal Deposit Insurance Corporation (US) Finance and Economics Committee (Jersey) Financial Intermediaries, Managers and Brokers Regulatory Association (UK) Financial Services Act (UK) Global Finance Centre High Net Wealth Individual International Business Company/Corporation International Banking Facilities Interest Equalisation Tax (US) Dublin International Financial Services Centre Investment Management Regulatory Organisation (UK) Investors Overseas Services Inland Revenue (UK) xv

14 xvi IRS IT JMLWG JOM LAUTRO LDC LLP MD MLAT NSA OBU OFC PAC RBC SIE SWIFT TA TNC VFCR UCITS List of Abbreviations Internal Revenue Service (US) Information Technology Joint Money Laundering Working Group (UK) Japanese Offshore Market Life Assurance and Unit Trust Regulatory Organisation (UK) Less Developed Country Limited Liability Partnership Managing Director Mutual Legal Assistance Treaties National Security Agency (US) Offshore Banking Unit Offshore Finance Centre Policy Advisory Committee (Jersey) Royal Bank of Canada Small Island Economy Society for Worldwide Interbank Financial Telecommunications Tax Act (UK) Transnational Corporation Voluntary Foreign Credit Restraint (US) Undertaking on Collective Investments and Securities (EC) Note: See the Glossary at the end of the book for an explanation for some of these abbreviations.