Thursday, November 27, 2008

Forget tax havens

The title is the first three words from an article linked to a new Wealth Management Survey, run by an organisation whose output is described by one newspaper as "a must-read for the super-rich."

Forget tax havens? The article describes the problem.

"Unless high-net-worth individuals would prefer to divest themselves of their worth and return to just being individuals, their attention certainly must be directed to the wiser options out there. There are still wise options, and the question of where money is safest is one that can be reasonably answered even in uncertain times.

Perhaps it is best to start with tax havens, where there is plenty of HNW money which may well be less safe, especially now that the OECD is calling for sanctions against those which refuse to commit to greater transparency. The principal problem, however, that large tax havens based in small countries face is one of imbalance: if local banks go under, they take with them more billions than the government could ever hope to cover, let alone repay."


One example is drawn from the Isle of Man, where the demise of a local subsidiary of Iceland's collapsed Kaupthing bank has triggered a tiny depositor protection scheme that has cleaned out half that jurisdiction's reserves. The article gives another example, this time from Jersey:

"The island is debating a deposit protection scheme but it would only be for residents, and even were it to extend to non-residents with accounts in Jersey, there would be a limit grossly insufficient for HNWs. It has £240 billion in trusts managed on the island, and an income of £764 million: should even one or two of the 48 banks on Jersey catch a cold and fall over, there is no hope of full recompense. The arguments between local authorities and experts illustrate just why an HNW should not feel wholly secure in a tax haven."

Jersey's officials, of course, deny this.

"Geoff Cook, the chief executive of Jersey Finance, the non-profit organisation created to promote Jersey’s fiscal capabilities, denies that the imbalance is a problem, saying that banks are sufficiently insulated and that in the unlikely event of failure, customers are protected.

‘The risk-to-asset ratio for capital is 20 per cent higher than the Basel Convention requires; the strength of reserves is about 60 per cent higher,’ says Cook. ‘The liquidity pool is deep. [In the event of failure, the liability] moves upstream to parents, into London companies, and is protected by individual banks.’"

Sounds reassuring, doesn't it? The article continues, teasing out the UK government's response to Cook's words:

"This is not the case according to the Financial Services Authority, which issues a measured denial. Robin Gordon-Walker, a spokesman, says it’s ‘not right at all’ that protection would flow upstream. ‘The Channel Islands and the Isle of Man are separate countries for financial services,’ he says. ‘It’s rubbish — it always turns on who’s the local regulator. The Financial Services Compensation Scheme regulations apply for UK banks only.’"


And the article then quotes someone else whom we know well.

"John Christensen, an economist and director of the anti-tax-haven Tax Justice Network, is more forthright: ‘Jersey is very cheekily looking to governments outside the island, saying: “We’d like you to extend your deposit protection scheme here for [your] residents who have Jersey accounts.” What bloody nerve! Why would anyone agree to that?’ Christensen is also dubious about Jersey’s claims only to have chosen ‘reliable’ banks. ‘Who would have thought that Lehmans would go under?’ he asks."

Who ever could argue with that? The article reaches a more general conclusion:

"There does not appear to be general confidence in the ability of tax havens to withstand shocks, or at any rate to help account-holders to recover from them. Patrick Hamlin, a partner in trusts and succession at Withers, says: ‘Apart from the [deposit protection] schemes, if an investor who holds deposits in an offshore bank loses those funds because of a bank failure, the only redress is to prove for the debt in the subsequent liquidation,’ although he adds that ‘this is not as bad as it sounds’. However, he is ‘not aware of any deposit-protection schemes in the offshore world’, meaning the Turks and Caicos Islands, or the Bahamas, or Andorra are in danger."

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