Update April 2014: For more information on secrecy see
here.
This blog is part of a series highlighting the narrative reports
from a number of secrecy jurisdictions around the world, explaining how
they became offshore financial centres.
Jersey ranked ninth on the 2013 Financial Secrecy Index. This ranking is based on a combination of its
secrecy score of 75 (poor) and the island's tiny share of the global market for offshore financial
services. For decades the island has pursued a development strategy which has given primacy to offshore finance. It is now victim to The Finance Curse. Any attempt to diversify away from financial services will need to grapple with a host of issues arising from what development economists term the island's 'path dependence', the biggest of which are the extraordinarily high cost of living and the narrow skills base of the island's workforce.
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| French protestors spell out their vision of Jersey |
The Jersey financial centre: history and overview
Jersey, the largest of the Channel
Islands, lies 135 kilometres
south of the UK and just 45 minutes by jet from London. Proximity to the UK
means that the island’s financial centre is intimately linked to London and the
majority of inflows to Jersey are ultimately destined to the City.
Despite its tiny size, with a
population of around 95,000, the island hosts a major offshore financial centre
in its capital, Saint Helier, with a sophisticated cluster of international
banks, trust companies and law firms – including many top players in the
self-styled ‘Offshore Magic Circle’.
For
decades offshore trusts have been a mainstay of the island’s wealth management
sector, which attracts capital inflows from around the world. Jersey also hosts
hedge funds, shadow banks and has specialised in offshore securitisation of loans.
With its tiny population and economy,
and a long history of weak political governance, Jersey is 'captured’ by the financial services sector. Despite regular protestations that
it is clean and transparent, Jersey’s very high secrecy score and large
financial sector means it fully deserves its place in the top ten global
secrecy jurisdictions.
History
For centuries, part-British Jersey has
taken advantage of its peculiar constitutional relationship with Britain to
maintain its fiscal autonomy. It was a relatively early entrant to the offshore
financial services market. In the 1920s
UK high net worth individuals either emigrated to the island or shifted their
wealth to Jersey registered offshore trusts and companies for estate planning
purposes. Income tax was originally introduced in 1928 at a rate of 2.5 percent,
but subsequently raised to 20 percent in 1940 by the German military
government. The personal income tax rate remains 20 percent, but corporate
profits and capital gains are not taxed. As academic researchers have noted (Offshore Finance Centres and Tax Havens, p181): “a large proportion of the
transactions conducted in Jersey are tax driven (that is, transactions that are
booked there without the requirement of adding value so that there is little
real activity) which is a key identifier of a tax haven.”
Before the abolition of British
exchange controls in 1979 under Prime Minister Margaret Thatcher, all banks in
Jersey came under the Bank of England exchange control regulations, but the
Bank of England has historically been relatively content to operate a regime of
benign negligence with respect to Jersey. Offshore banking expanded rapidly
from the 1960s as London-based secondary banks expanded their offshore
Euromarket activities: Hill Samuel from 1961, then Kleinwort Benson and Royal
Trust of Canada in 1962, Hambros Bank in 1967 and then the first U.S. bank,
First National City, the following year.
Within a decade 30 international banks were operating from Saint Helier,
including Citibank, Bank of America, Deutsche Bank, Banque Nationale de Paris,
Barclays Wealth, HSBC and Bank of India.
The link with Britain and the City of London
A British Crown
Dependency since the 13th Century, Jersey’s key officials,
including senior law officers, the president of the States of Jersey (the
legislature), and the island’s Lieutenant Governor are all appointed by the
British monarch.
One commentator describes (The offshore Interface, p154) Jersey’s relationship with Britain
as “within and yet without, of being under the UK umbrella and yet with the
space to have a surprising amount of freedom”.
Jersey Finance, the self-styled Voice of the International Financial
Centre, admits:
“For many corporate treasurers,
institutional bankers and treasury specialists, fund promoters, brokers and
other corporate financiers, Jersey represents an extension of the City of
London.”
All legislation agreed by the island’s
legislature must be ratified by the UK monarch’s Privy Council before being
enacted. And yet politically Jersey is
not part of the UK and, through smoke and mirrors, regularly projects itself as
being free from UK interference. This
provides comfort to British elites using Jersey for tax cheating, while at the
same time reassuring them that if the worst arises they can protect their
interests through appeal to the UK Supreme Court. This odd relationship with the UK is echoed
in the peculiar relationship between Jersey (and its fellow Bailiwick of
Guernsey) and the European Union.
Strictly, Jersey is inside the Customs Union for the purposes of trade
in tangible goods, but is not party to EU Directives or treaties such as the
Single Market Act or the Maastricht Treaty.
This inside-outside relationship with
Britain is also reflected in the island’s culture and social relations. Superficially the island feels very British,
but with Norman-French street names.
And, as author Nick Shaxson notes in his book Treasure
Islands, the tiny scale amplifies many of the problems of contemporary
Britain: conflicts of interest and corruption are rife, social inequality has corroded all sense of community, and the elite have made
their own interests synonymous with the interests of the entire
population. In the near-absence of
opposition politics and independent media this is a recipe for stifling dissent
– especially when it challenges the dominant offshore financial sector.
Sun, sea and secrecy
Although Jersey does not have formal
banking secrecy backed by criminal law (as is the case in Switzerland or the
Bahamas, for example) secrecy is provided in various other ways, including via
Jersey trusts, offshore companies and, since 2009, foundations. These legal arrangements, combined with
judicial separation from the UK, provide an effective secrecy space that
attracts illicit financial flows from across the world. While the funds were flooding in during the
1980s and 1990s the island’s regulatory authorities did little to intervene to
prevent dirty money from rushing through Saint Helier en route to London. On
September 17, 1996, in a searing article about an accumulation of scandals in
Jersey, the Wall Street Journal described this secrecy jurisdiction as
“an offshore hazard . . . living of lax regulation.” Two years later, in
response to a major regulatory failure involving the Jersey subsidiary of Swiss
banking giant UBS and a convicted foreign exchange dealer operating from offices
in the island, New York assistant district attorney John Moscow was quoted in
the Financial Times:
“The Isle of Man authorities see their
job as keeping the bad guys out. Jersey
sees its job as co-operating with criminal authorities when the law requires
it, without necessarily keeping the bad guys out.”
Such articles are usually met by a
frenzy of public relations activity, along the line ‘we are clean, well
regulated and cooperative; and our critics are motivated by foul motives.’ In addition, when major wrongdoing has been
uncovered and publicised,
Jersey authorities argue that this kind of activity all happened a long time
ago, and point to their position (alongside nearly every other secrecy
jurisdiction) on the OECD’s failed 2009 white list.
Matters became particularly bad in the
1990s and 2000s amid a phase of management buyouts, whose financial
arrangements meant that the directors of trust companies were under tremendous
and unprecedented pressure to maximise short-term financial performance. This
led to a wave of particularly unscrupulous practices and tolerance of a wave of
financial criminality. In more recent
years, however, Jersey has had to respond to changes, which in some cases have
led to reforms of its offshore sector. These pressures have come in several
forms. First, external pressure from the OECD, the Financial Action Task Force,
the European Union and other groupings have forced Jersey to make some changes.
Second, the global financial and economic crisis has impacted Jersey’s
financial sector, although the response has typically be to respond to falling
revenues by increasing taxes on local people. Third, these external pressures
have to some extent weakened the inter-relationships of a previously closely
intertwined and mutually protective élite among the owners of Jersey trust
companies and other offshore firms, somewhat mitigating though not eliminating
a feeling of impunity in the face of potential criminal actions against
them. Insiders also tell us that
cultural changes now underway in Jersey have made some practitioners,
particularly younger ones, less tolerant of some of the more egregious and
illegal acts. One other change of the past few years is that the Jersey
Financial Services Commission, previously an unresponsive rubber-stamp, has
started to become more aggressive (and hence more unpopular) in trying to stamp
out some of the more outrageous practices.
The 2013 Financial Secrecy Index
demonstrates through undisputed legal facts and assessments by international
financial institutions, that these repeated claims of probity and transparency,
don’t hold water. Jersey’s sophisticated
wealth management structures, notably its trust industry, keeps the island open
to tax-evading/tax-avoiding and other illicit financial flows from around the
world.
“The highlighted
provisions in some of Jersey’s EOI agreements may limit the effectiveness of
information exchange. Further, in one case to date, the interpretation applied
by Jersey appears to be inconsistent with the definition of ‘criminal tax
matters’, and is preventing the exchange of information under that TIEA.
…
Jersey’s domestic legislation which provides access powers to obtain
information for exchange contains impediments which may significantly affect
access to relevant information although to date they have not restricted
access.”
Even less reassuring is the fact that
Jersey chose to remain outside the EU’s automatic information exchange process, even though
fellow Crown Dependencies Guernsey and Isle of Man signed up since 2009. Local officials justified this on the grounds
that they felt the need to be “internationally competitive”, though this raises
questions about what they are competing for.
Legitimate activities have no need to hide behind ineffective tax
information exchange agreements.
Foundations: a new step backwards
Our concerns that Jersey remains
largely an unreconstructed secrecy jurisdiction have been reinforced by the
recent adoption of foundations into Jersey law.
Private foundations do sometimes have legitimate purposes, but they can
also provide a particularly malign form of secrecy. As an offshore law firm in Panama puts
it:
“Foundations were designed not by the
rich but by the super rich to protect their assets, insulating them from
seizure and confiscation. These asset protection tools are so good they should be illegal
but they are not illegal. The big difference between a trust and a foundation
is the foundation is a separate judicial person. The term judicial person means
an unnatural person.”
The Jersey Foundations (2009) Law,
which mimics similar laws in Liechtenstein and Panama, appears to be an attempt
in part to move in on Asian wealth management markets, amid rising pressure
from European countries seeking to tackle their own domestic tax evaders.
Another angle on the adoption of the
Jersey Foundations Law was provided to us (hat-tip to Richard Murphy at Tax
Research UK) by an experienced and highly qualified industry insider:
. . . the main
reason for the foundation law was to avoid fiduciary responsibility. A number
of court decisions in Jersey held trustees responsible for the activities of
the corporations they controlled. Obviously this increased trustee risk to a
very high level. When a foundation is involved the new foundation law absolves
the agents creating and managing them from responsibility.
This interpretation of the rationale
for enacting the Jersey Foundations Law illustrates the insidious nature of the
offshore-led regulatory race to the bottom: when managing agents are
effectively absolved of responsibility for the activities of the legal entities
they create and manage, legal protection of third parties effectively ceases to
exist.
Enactment of this new law has directly
fed through into an increase in the island’s secrecy score and is clear evidence
of the authorities’ commitment to maintaining a development strategy based
largely on providing secrecy and lax regulation to non-residents.
The lack of an alternative development
strategy
should be a cause of great concern, not least for the islanders
themselves. Jersey is already highly
dependent on its role as a secrecy jurisdiction and has all the hallmarks of a
captive state. The offshore financial
centre in Saint Helier accounts for over 50 per cent of gross value added in
the local economy, and virtually every other sector operates downstream of its
activities. In such a monoculture
economy, and without any serious prospects to break free from such extreme
economic dependence, Jersey’s authorities are loath to introduce effective
regulation to curtail illicit financial flows and tax evasion. As researchers have recently argued, they are locked into a political
economy over which they have little control:
“They have
limited scope for reducing their dependence on offshore financial services.
With approximately one quarter of its economically active population directly
employed in the OFC, and the majority of the remaining workforce employed in
secondary sectors like construction, distributive trades and catering, there is
virtually no alternative skills base on which new industries can draw. This
path dependence has been reinforced by the extraordinary high costs of land and
labour, which have crowded-out pre-existing industries. Taking measures to
diversify the local economy will therefore require politically unpalatable steps
to significantly reduce the domestic cost base.”
For all of the above reasons, plus the
continued lack of transparency of Jersey trusts and offshore companies, and
despite the flurry of tax information exchange agreements signed since 2009
(which are highly ineffective anyway), Jersey is assessed with a secrecy score
of 75 and clearly well deserves its position at number nine in the overall
ranking.
Sources and further reading
-
Hampton, M (1996), The
Offshore Interface: tax Havens in the Global Economy, Palgrave Macmillan:
Basingstoke.
-
Hampton, M and Abbott, J (eds.) (1999), Offshore Finance Centres and Tax Havens: The Rise of Global Capitalism,
Palgrave Macmillan: Basingstoke.
-
Shaxson, N (2012), Treasure
Islands: Tax Havens and the Men who Stole the World, Vintage Books: London.
[i] This narrative report
is based on information up to date at 21st October 2013, however all
references to FSI scores or ratings reflect the 2013 results.
