Friday, February 05, 2010

Onshore and offshore; boom and bust

From Alex Cobham writing in Europe'sWorld:

"As the experience of developing countries makes abundantly and painfully clear, every significant liberalisation of international financial flows has been followed by an economic boom, and then a subsequent bust. The boom periods involve rapid expansion of credit and are typically characterised by growth in consumption, bubbles in asset prices but little productive investment. The busts see a sharp contraction of credit, and – depending on the extent of countercyclical monetary and fiscal policy – often very sharp increases in unemployment and poverty."

With two key "asks" dear to TJN's heart: better forms of international information exchange, and greater forms of transparency.

The piece also goes into detail about how the problems of transparency, secrecy jurisdictions and financial liberalisation that are also core TJN issues have contributed to the latest financial and economic crisis, and the growth of opaque and poorly regulated structured investment vehicles that were partly to blame.

Now there has been quite a parade of defenders of the status quo who have pooh-poohed the idea that tax havens (or secrecy jurisdictions) had anything to do with the crisis. "Nonsense!" thy cry - "this happened onshore!"

Did it now? This blogger happens to have been examining a document from the Bank for International Settlements this morning, which explores this issue of Special Purpose Entities which were so important in the crisis. This section is revealing:

"As a result of the considerations outlined above, the most common SPE jurisdictions for European securitisations are Ireland, Luxembourg, Jersey, and the UK. However, for certain transaction types (in particular, for RMBS and covered bonds) it is quite common for originators to use their own jurisdiction of domicile as the jurisdiction of the SPE.

The most common jurisdictions for US securitisations are the Cayman Islands and the state of Delaware. The onshore (Delaware) versus offshore (Cayman) decision will generally be driven by factors outlined in the previous section (on tax considerations of SPEs), while other (non-taxation related) considerations (such as clarity of legal regime, ease of incorporation, etc) will generally be similar to those outlined for European SPEs immediately above."

Now look at the jurisdictions outlined above. Every single one of them is defined on our Financial Secrecy Index as a major secrecy jurisdiction. The Bank for International Settlements, however, seems to think that while Cayman is offshore, Delaware is "onshore."

The BIS, as so many commentators have done before them, have been using an arbitrary and unworkable definition of "onshore" to make their point. Once you understand what "offshore" really is, the problem begins to reveal itself.

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