Excerpts from an Address to the STEP Caribbean Conference

Characterising a successful “international finance centre” is probably trite, but it is perhaps necessary in order to determine what practical advice I could possibly give to any IFC to attain if not ensure success in the current and foreseeable environment. As much as we have come to abhor the term, I perceive that the topic is really directed at an examination of “offshore financial centres” rather than the well-established metropolitan finance centres such London, Zurich and New York – which hardly need my advice!   Permit me then to paint a picture of a landscape that forms the back drop for this topic.

The emergence of financial centres outside of Europe, North America and Japan, began of course with the Channel Islands, initially only because of issues over radio licenses that caused an entity known as “Radio Caroline” to set up offshore the UK (in waters closer to The Channel Islands than to Britain) for the purpose of broadcasting popular music and other content not offered by the government controlled BBC. The concept of “offshore” was born – and avoidance of licenses soon gave rise to avoidance of taxes.   The post war explosion of wealth, simultaneous with the rise of trade unions and heightened concerns over equitable distribution, gave rise to concerns over protection of legacies and the necessity to pre-empt the squandering of resources by governments on so-called “socialist” programmes. The wealthy looked for different ways to protect their wealth for themselves and future generations – estate planning and tax minimisation became high priorities – so a growing number of professionals became expert in developing wholly legitimate ways and means of avoiding estate and other taxes at a time when international financial centres as we know them now didn’t yet quite exist. Initially it was as simple as a Swiss or Channel Islands bank account, but schemes became more sophisticated – no doubt lots of lawyers were involved – and by the late 60s people were being knighted for tax avoidance,

International Finance Centres came to be recognised, in the words of Dr Rose Marie Belle Antoine, in her 2013 publication Offshore Financial Law, as jurisdictions which “have chosen as a main or important path to development, legislative, financial and business infrastructure which is more flexible than orthodox infrastructure and which caters more specifically, and often exclusively, to the needs of non-resident investors”.

By the early 1970s the Bahamas, Bermuda and the Cayman Islands had gained recognition as niche markets offering a range of financial services attractive to increasingly mobile wealthy global citizens both individual and corporate. Perhaps it was the very mobility of such persons that ensured the emergence of island states as financial centres as “snow birds” took up residence in warmer climates for much of the “winter season”. The BVI came fairly late to the party, but soon achieved unimaginable success – due in no small way to the fall of Noriega in Panama in 1987. The trajectory from latecomer to what the GFCI characterised last month as the most successful of the Caribbean IFCs, has been well documented and indeed experienced by many of us in this room. But what were the hallmarks that catapulted the BVI from virtual obscurity as a place “fit only for a bird sanctuary” to a major contender for high honours on the Top 100 list of successful offshore finance centres?

Of course the introduction of appropriate legislation was the beginning of the climb up the ladder, but legislation alone could not have ensured success. The government of the day and successive governments since then established and maintained close and productive working relationships with the private sector. By consulting widely with the technical experts who have first-hand commercial knowledge of clients and their needs, governments are able to develop and introduce attractive products facilitated by modern, innovative legislation and hospitable working environments for the plethora of experts needed to underpin the industry.

While the islands of the Caribbean were playing catch up with the Channel Islands, their political status became a deeper cause for concern in Whitehall. Political correctness became imperative and the defences against increasingly unacceptable governance arrangements with former colonies, led to a restructuring of relationships with Britain that saw more autonomy vested in local governments, which were encouraged to develop financial services as an assured revenue stream and a path away from aid and grants from the UK.   The new status of British Overseas Territories brought with it tensions over citizenship and control of finances. The governments of BOTS were however urged not to rock the boat as the tenuous financial services industry could soon evaporate if the perceived stability of British status and the presence of Her Majesty the Queen as Head of State were threatened. So, political stability became an important characteristic of the successful IFC.

Easy access to markets and the development of niche products also became important with each of the Caribbean sectors developing a specialist track. While competition was keen, specialisation afforded room at the table for everyone and, although proximity to the US east coast was a huge advantage to some, others found Asian markets very receptive to a cost effective product and the mobile expertise that resided in the Caribbean but commuted frequently to Hong Kong and Singapore which was then still called the Far East. The rapid advances of technology and the flexible co-operative relationship with Cable & Wireless allowed Caribbean IFCs to capitalise on the modernisation of communications with the introduction of the internet (which eliminated the arrival of faxes stamped “Top Most Urgent” on the desks of lawyers all over the Caribbean). The burgeoning populations of the new IFCs put a strain on the islands’ infrastructure but governments remained sensitive and attuned to the demands of the industry and in most centres made the adaptations necessary to sustain it. So, technology and infrastructure are added to the list of requisite characteristics for a successful IFC. In the meantime they all became truly international – providing products and services that were sought after and used by global corporations and UNHWIs as parts of complex cross-border transactions. In most Caribbean financial centres there are significant developments in corporate and trust law not only at the legislative level, but also in jurisprudence as a result of litigation involving multinational corporations and individuals who choose to litigate their causes in the well renowned courts of the region. Indeed, the establishment in the BVI of the Commercial Division of the Eastern Caribbean Supreme Court has become a significant feature of the BVI offer winning accolades from prominent commercial litigators globally. So reliable judicial systems are yet another sought after feature of the successful IFC.

Unfortunately, as with the larger and more accepted financial centres such as London and New York, there have been those who abuse the systems for their own benefit and to conduct illicit activity. However, the foresight of the region’s governments saw the introduction of regulation as early as 1990, such that some jurisdictions were found to be ahead of the curve by the time Whitehall chose to become involved. Since 1990 the introduction of appropriate regulation has been an increasingly important requirement for the preservation of the industry around the world. However many people are still stunned by the rapidity with which the provision of financial services from outside of the large Western cities has become reviled and despicable in the eyes of international organisations that have come in the last ten years or so to regard what was once the legitimate avoidance of taxation and the preservation of wealth for future generations as abominations.

International organisations have reacted with uncharacteristic speed and resolve to reverse well established tenets of privacy, confidentiality and legitimate succession planning. Statutory provisions onshore that saw a flight of capital to emerging financial centres and to “tax havens” have been repealed and criminal liabilities imposed on actions that were once perfectly legitimate. ! Disclosure of the identity of beneficial owners is now atop the agenda of all political parties in Europe; meanwhile, the real powerhouses of the Asian economy, Singapore and Hong Kong, having outstripped the growth and development of the Caribbean IFCs, have only now begun to emulate the regulatory provisions that have been in place in the Caribbean for more than 15 years – and they deserve full credit for that, For the Caribbean IFCs, however, it is a different story –no sooner is the ink dry on one sanctioned agreement than another imposition is pushed through the pipeline. Keeping pace with the international “common standards” is not for the fainthearted, nor for the unfit. Indeed we may well have come to the point where only the super-strong will survive.

While the demands of stringent global and some may say extra territorial regulation have begun to impact the growth and development of all IFCs, it is particularly true that allegations of over-regulation fall on deaf ears while in fact the politicisation of the arguments in support of the most dramatic measures – public registers of beneficial owners – tend to cloud the underlying issues and the practical realities. In the Caribbean – particularly in Cayman, Bermuda and the BVI identification evidence of beneficial ownership has long been the norm, although such information is confidentially held not publicly available. There are very good reasons to maintain that position, but NGOs are not satisfied with such reasons and revenue hungry jurisdictions have become the most ardent supporters of the positions adopted by the likes of Tax Justice Network and ICIJ.! In the meantime the advisability of maintaining an appropriate balance between the need for regulation and the benefits of international business, is overlooked and decried as a tax dodger’s anthem.

Professor Jim Hines, no stranger to this Conference, published a significant work in 2009 analysing the role of IFCs in the global economy. He has concluded that:

“Offshore centres act as conduits for global trade and ease international capital flows. International joint ventures are often structured as companies in an offshore jurisdiction when neither party in the venture wishes to form the company in the other party’s home jurisdiction for fear of unwanted tax consequences. Although most offshore financial centres still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore.”

Where then are the benefits or advantages of doing business with IFCs in the foreseeable future? How can the success of the 90s and early millennium days be sustained? Is there a demand for the services provided by these centres? Are the markets available and accessible? Can IFCs survive? What must IFCs do to ensure their survival? Of what value today are the characteristics that helped achieve their success? Does the new regulatory paradigm require “reinvention” of the IFC?

The viability and success enjoyed by IFCs between 1984 and 2007 were in no small way due to the emergence of a class of persons particularly in Asia and Latin America who have come to be known as HNWIs or UHNWIs. Being more commercially minded and business savvy than the wealthy of the 18th and 19th Century, they became increasingly involved not only in cross border transactions but in the movement away from the “socialist” 60s and 70s, where Government raised taxes on the rich in order to provide programmes for the poor. Tax efficiency became an imperative, and the demand for financial services that facilitated such efficiencies as well as the protection of assets from rapacious governments willing not only to impose high taxes, but also to confiscate private wealth, increased exponentially. So far as wealthy private citizens especially in Latin America were concerned, the threat of kidnapping – a measure adopted by many “revolutionaries” for the purpose of raising revenues –was a growing and predominant concern. Legal and financial advisers in the Global Financial Centres initiated, encouraged and supported the use of low tax jurisdictions as banking options but also as sources of corporate vehicles that were flexible enough to submit to jurisdictions other than that of their domicile. The International Business Company and the so called “offshore trust” were devised as a means of providing just the privacy, confidentiality and tax efficiency that such markets demanded. The wave was sustained right through to the Global Financial Crisis in 2007, but while growth slowed, it can nowhere be said that demand has atrophied – it may have mutated somewhat, but the real demand for financial services has not dried up.

A significant industry leader, the VISTRA Group of Hong Kong, has for the last five years conducted a survey of the financial services industry in offshore financial centres. In their 2014 report “Looking Forward: an industry on the move”, respondents were split 50/50 between Asia and the rest of the world. The report asserts that:

“When asked to name the top 10 locations for client origination over the next five years, 40% of respondents opted for China, well ahead of the United States (US) and the United Kingdom (UK) in second and third, with 13% and 10%, respectively”.

The report notes that the survey results are not skewed because of a heavier Asian response. It is clear from an analysis of the respondents that industry practitioners from the Middle East as well as the Caribbean share the views of their Asian colleagues that more and more business will come directly from China. Journalists from serious magazines such as GQ, The Economist and Forbes all agree that the number of new millionaires and billionaires in China will continue to outstrip those in Europe, the USA and Latin America annually over the next five years.

The VISTRA Group believes that:

“Part of staying relevant means engaging with China, still the fastest-growing source of new business yet a constituency that is now looking to put capital to work overseas as much as find ways to bring it in. This amounts to a more global opportunity, which can be tapped by industry participants almost irrespective of their location.”

Nor is China the only growth market. Most global economic indicators show a great surge in wealth in Africa, the Middle East and Latin America. Notwithstanding political instability, business development is progressing rapidly across Africa with clear indications that burgeoning wealth will see increased demand for financial services in those jurisdictions where legislation does not yet provide the sort of flexible succession planning options with which most of us are familiar.

So there are markets, but the burning question is, can Caribbean IFCs provide what these markets want? Confidentiality is gone, but notwithstanding the diminishing returns on selling confidentiality, the products and services of IFCs are still very much in demand and will continue to be. It is undeniable that a wealth of technical expertise resides in all the various facets of the industry in Cayman, Bermuda, Bahamas and BVI, so perhaps then a key to success in the new paradigm is for that expertise to be innovative and assertive – offering new products, better quality services and generally diversifying from the narrow niches that have come to define each of us.

Just as those service providers who predicted the present environment became nimble enough to adapt whether by downsizing, outsourcing, consolidating or even expanding, so too jurisdictions must become more nimble and proactive rather than reactive to the winds of change.

The VISTRA Group says:

“Jurisdictions face a similar battle to (service providers) to prove they are relevant in an increasingly complex commercial environment. A number of offshore financial centres have already carved out niches for themselves… and it is difficult to see them being supplanted. Others must identify a unique selling point and invest in it, or face extinction.”

I believe that deeper and closer collaboration with the private sector is needed in order to assist governments to develop and introduce legislative regimes that will win new business and service the demands of longstanding clients. Collaboration must be real not cosmetic. Legislators and civil servants must have significant buy in to the mission of every government to preserve and upgrade the jurisdiction in order to ensure ongoing success. Facilitating the improved growth and development of the financial services sector in any IFC will require a genuine effort that will involve the entire population. Governments must be willing to reach across the aisles to embrace their colleagues on the opposition benches in order to solidify leadership in a common goal. Westminster model democracies do not tend to do that very well, but Caribbean IFCs (perhaps all the nations of the Caribbean) need only look eastwards to Singapore for an example of how to ensure the success of an IFC.

Taking advantage of such fortuitous factors as location, opportunity and timing, the late Singaporean President Lee Kuan Yew built a nation from scratch – retaining the fundamental legacies of colonialism that he found advantageous but ruling in a disciplined way, he emphasised a few things that made Singapore an enormous success, and solidified his legacy. Firstly he took steps and made huge investments, as he put it, “to develop Singapore’s only significant resource, its people”. He invested in education. In eulogising Lee Kuan Yew recently, a former Executive Vice-Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, said: “it should be emphasised that Singapore’s education system was not designed de novo by Lee Kuan Yew and his colleagues. Rather, it was built on the very solid foundations inherited from Singapore’s British colonial past. In contrast to many of his contemporaries among post-colonial leaders, Lee Kuan Yew was not afraid to embrace whatever elements from that past that would prove useful to the nation-building enterprise. Nowhere is this approach more evident than in education.” Today, Singapore with a population of five million people, boasts among its several tertiary and specialist level institutions, two universities that consistently rank among the world’s top 75 institutions of higher learning – the same as China, Japan and Germany. Singapore’s tertiary level institutions span the gamut of relevant training needs for the entire society and specialisation is not only encouraged but fully supported.

IFCs wishing to be successful in the coming decade need to do the same thing. Emphasise education from the cradle to the grave. The general population must learn, know and understand the industry and its significance to the jurisdiction and be willing to support their governments’ commitment to enhancing opportunities for the industry – especially where the industry is the main revenue earner. Programmes must be introduced at primary and secondary school level that expose young people to the sector. In Singapore, teachers’ salaries are so structured as to attract only the best graduates for the jobs on offer. In all IFCs, Community Colleges must develop curricula that equip students for successful entry into the industry. Organisations like ICSA, CLT and STEP can help with that. STEP certifications are now the gold standard for every employer in the industry from Bermuda to Brazil and all points in between.

The new realities that impact all IFCs demand highly specialised services. Clients are no longer bound by old loyalties but go shopping for jurisdictions that can offer such services not only at the right price, but most often from a single shop. Service providers are increasingly becoming multi-jurisdictional so as to serve their highly mobile global clients from wherever they choose to reside. Practitioners too have become more mobile and flexible. More and more people are willing to step outside their inherent comfort zones and move across oceans three or four times in a career in order to take advantage of opportunities offered in every recognised jurisdiction from London to Uruguay and Zurich to Shanghai. Therefore the successful IFCs must do everything to attract, empower and retain highly trained work forces.

The second characteristic that Singapore emphasised was discipline – not only moral and ethical discipline, but fiscal discipline. Singapore began as a poor nation and Lee Kuan Yew taught his people to act poor. A former head of the Singapore civil service and now a significant business leader in Singapore, Lim Siong Guan spoke of Lee Kuan Yew’s legacy at a Business Times conference on March 31st. He told delegates that the starting mind set of Singapore in the 1960s was that of a poor man: “life is uncertain, earn what you can, save what you can, spend on what you need, we never know what tomorrow will bring, so be prepared and save for the rainy day.” The attitude to wealth persists even now that Singapore is perceived to be a rich nation. Although Singaporeans may have become more relaxed in their consumer habits, on the part of the government there is a fierce determination not to spend the country back in to poverty. According to Mr Lim, they are “understandably, concerned that Singapore could be setting itself up to fall into a situation where the country is in fact poor, but the Government provides for the people as though they are rich”. Perhaps Caribbean governments and IFCs need to pay attention.

Finally in relation to Lee Kuan Yew, his eulogists have placed great emphasis on the value of integrity and a virtually corruption free society. One of them describes the secret of Singapore’s success this way:

“What explains a willingness on the part of so many foreigners to park their funds and their wealth in Singapore? The explanation lies in an ability to trust Singapore as a place where promises are kept, the rule of law maintained, justice is assured, government policies are predictable. Singapore offers reliability, integrity, quality, hard work and trustworthiness. These are what make for long-term relationships. Trust is the root of relationships, and honour is the foundation of trust, where the people, businesses and government deliver on their word of honour. Singapore’s place in the community of nations obviously depends not just on trust, but on being able to mobilise talent, and to synergise the efforts of workers, employers and government under superior leadership. But honour has to be the starting point and the abiding foundation.”

Alongside Singapore at the top of the successful IFCs of the future sits Hong Kong. Benefitting from its special relationship with and close proximity to China, Hong Kong enjoys an enviable position. It is the IFC most likely to benefit most directly from the explosion of wealth in China. It has become the destination of choice for most expatriates seeking to work in offshore financial services and the last ten years have seen unprecedented levels of migration from Europe and the Caribbean to Hong Kong. Global trust corporations and law firms are making huge investments in their Asian operations and setting up in Hong Kong has become an imperative to success for many heretofore traditionally conservative and quintessentially Western entities such as the “magic circle” accounting and law firms. So globalisation is another key to success for IFCs.

The global application of new and more inflexible regulatory standards affects all IFCs. Jurisdictions that were once secure in their niche markets must now re-invent themselves to create new attractiveness; . the things that worked for us all in the 90s are no longer the only reliable characteristics for the new millennium. Location, legislation, political stability, public private partnerships, and soft selling, must now all be supplemented and underpinned by expertise, dynamism, assertiveness, client focused products, synergies between governments and service providers, sophisticated infrastructure and superior leadership. It’s not enough simply to be user friendly. Jurisdictions now have to work much harder to motivate their populations both indigenous and expatriate to develop and maintain hospitable environments for healthy survival of their industry. It will not be enough to introduce innovative legislation, it will be necessary to train the resources that will support the management and sale of those products from within their jurisdictions. Ramping up educational opportunities at every level, insisting on high standards of qualifications for all industry practitioners and facilitating, genuinely and reliably facilitating, the transplanting of expertise into their jurisdictions in order to enhance the global offer – all these things must simultaneously impact the policies geared to sustaining growth and development of the financial services sectors of all IFCs.

Success then will be defined not only by longevity but by the key indicators that keep an IFC recognised and recognisable as a “major player”:

Is it a stable, reliable, honest environment in which to do business?

Is the legislation modern, flexible and innovative?

Is the expertise available to facilitate use of the jurisdiction?

Are the “products” relevant and attractive?

Is regulation appropriate and accommodating?

Are services world class and efficient?

Is the judicial system trustworthy and reliable?

Can the jurisdiction provide everything the client needs?

Competition is fierce. But imagine the possibilities if we faced adversity together rather than letting old school philosophies impact our policies. Is there really still room for “divide and rule” in the 21st Century? Caribbean IFCs so often allow themselves to be picked off hoping that winning brownie points with the FCO will ensure some secure position, But all that does is ensure that even harsher measures will be adopted sooner rather than later. Imagine if we’d all held hands and run the course together! We might have saved confidentiality! But again here we are: Recognisable brands cannot continue to rely on traditional trade ties. Everyone must engage in more direct interface with the leading players in the target markets –including the governments – in order to secure viable commercial relationships advantageous not only to the seller but to the buyers as well. Clients too will need to be educated to the need for substance over form. Advisers will need to become far more closely involved with all aspects of clients’ operations in order to deliver more comprehensive practical advice. Cross disciplinary practices will continue to emerge as lawyers, accountants and estate planners will need to work closely together across disciplines as well as across borders. There is much work to be done but for those who are willing and able to reinvent themselves, the rewards are possibly larger than ever. Just remember: Hell is where the regulators are in Singapore the marketers are BVI and the products are from Gibraltar but Heaven is where the regulators are Guernsey, the products are BVI and the marketers are Bermuda.