THE OFFSHORE INTERFACE

The Offshore Interface Tax Havens in the Global Economy

Mark Hampton

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 978-1-349-25133-9 ISBN 978-1-349-25131-5 (eBook) DOI 10.1007/978-1-349-25131-5

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. 10010

ISBN 978-0-312-16412-6

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 978-0-312-16412-6 (cloth) 1. Investments, Foreign. 2. Tax havens. I. Title. HG4538.H322 1996 332.6'73-dc20

© Mark Hampton 1996

96--24880 CIP

Softcover reprint of the hardcover 1st edition 1996978-0-333-61697-0

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.

10 9 8 7 6 05 04 03 02 01

54321 00 99 98 97 96

To Joanna

Contents

List of Tables Xl

List of Illustrations xiii

Acknowledgements XlV

List of Abbreviations 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

viii Contents

Major players in the Eurocurrency market~ 45 UK bank regulation 1945-71 50

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

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 118

5 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 135

6 Jersey Case Study: Part 1 137

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 143 Phase I: Notional tax haven (1955-61) 146 Phase II: Functional tax haven and Sterling OFC (1962-71) 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 169

7 Jersey Case Study: Part 2 172

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

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 199

8 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

List of Tables

1.1 Main tax havens 4 1.2 Functional OFCs, 1994 6 1.3 Compound OFCs 7 1.4 Notional OFCs 8 1.5 A comparison of selected OFCs 13 1.6 Park and Zwick's typology of OFCs 16 1.7 Offshore vehicles and customer categories 20 1.8 Examples of offshore vendors 21 1.9 Offshore vehicles and reasons for use 23 1.10 Captives in largest island OFCs (1989 and 1993) 32 2.1 International banking activity in selected centres (end

September 1990) 41 2.2 Example A: a bank operating in Montreal with reserve

requirements 43 2.3 Example B: a bank operating in London without reserve

requirements 43 2.4 Major banks involved in the London Eurocurrency

markets (percentage share of business) 46 2.5 Total UK bank deposits (all currencies) 1960-70 46 2.6 Growth in total deposits in London non-clearing banks 47 2.7 Foreign bank offices in London 1950-80 55 2.8 Overseas branches of US banks 1964-73 58 2.9 Membership of the Offshore Group of Banking

Supervisors 61 2.10 Membership of the Offshore Group of Insurance

Supervisors (OGIS) 62 3.1 A comparison of US commercial bank lending by

activity, 1915 and 1929 83 3.2 Degrees of autonomy in islands using key features to

illustrate political status 87 5.1 Flying time from selected island OFCs to nearest GFCs 133 6.1 Estimated contribution of the 'primary sectors' to

Jersey's GDP 1970-94 141 6.2 Selected international growth rates 1960-9 144 6.3 Tourist expenditure as a percentage of GNP 145 6.4 Bank deposits in Jersey 1950-90 146

Xl

xii List of Tables

6.5 Bank deposits in Jersey 1960--71 151 6.6 Corporation tax companies and offshore funds in Jersey

1962-71 (totals) 156 6.7 Types of open-ended offshore funds 1965-71 157 7.1 A summary of the impact of the Jersey OFC 172 7.2 Population increase 1951-91 173 7.3 Surplus of trading committees, 1986 and 1990 174 7.4 Average profit per OFC employee 1989-93 177 7.5 Publicised abuses involving the Jersey OFC 179 7.6 Selected Jersey OFC bank profits 1989 181 7.7 Comparison of sources of government revenue, Jersey

and the UK, 1990 182 7.8 Average salary bill per OFC employee 1989-93 182 7.9 Employment in Jersey 1969-91 184 7.10 Employment in Jersey as a percentage of the

economically active population 1969-91 185 7.11 Total government expenditure by sector, as a percentage

of total expenditure for the UK, Jersey and The Bahamas (1990) 189

7.12 Government expenditure per capita for selected sectors in the UK and Jersey (1990) 189

7.13 Military expenditure for selected small economies 191 8.1 Present offshore activities in five new OFCs 215 8.2 Non OFC islands 218 8.3 Potential independent island OFCs 218 8.4 Potential non-independent island OFCs 221

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

112 126

97 139

30 35

110 117 149 216

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

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

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.