Offshore centres frequently find themselves actually applying higher standards than their onshore cou...
New draft legislation for the licensing and supervision of corporate service providers (CSPs) has been prepared on the Isle of Man and is beginning its passage through the legislature. The new regime will rely on accepted principles governing the fitness and properness of those owning and managing CSPs, the conduct of business, due diligence in looking after client companies' affairs and the segregation of client monies. The new regime is expected to come into effect during the second half of this year.
The first stage of the process started in the early 1990s. The Isle of Man recognised the need to introduce a licensing and supervisory regime for CSPs in line with its policy of keeping regulatory practice at the forefront of international standards. Specific proposals were prepared and consulted on with the industry.
By the time of the Edwards' review in 1998, the fact the island had already made its intentions clear was duly recognised by the ensuing report to the UK Home Secretary. The review also suggested a move among the Crown dependencies to bring trust service providers (TSPs) within the regulatory framework. As the CSP proposals are already at an advanced stage, the Isle of Man decided first to finish its work in the corporate sector before including trust operation. However, it seems most trust operations are also CSPs, so in practice a large number of them will be covered anyway.
These new regulations will apply to the island's significant company formation and administration business which services a wide range of corporate, leasing and asset holding structures. This business embraces not just Manx companies and trusts but also foreign companies administered there.
In parallel with this work, the Companies Registry function is to come under the wing of the Financial Supervision Commission (FSC). This will consolidate responsibility for a broad range of corporate governance issues under the FSC from April. Following this, it is planning a review of the Island's insolvency and company law.
To tackle the criticism from onshore sceptics at its root, we need first to ask why there should even be an offshore market. For this we need to revert to basics.
The distinction made between onshore and offshore centres is often misleading. London, home of the Eurobond market and a major global centre for currencies, securities and corporate transactions, is one of the largest offshore markets in the world. Financial services comprise a significant portion of the UK's invisible exports, as do non-resident clients of the UK's financial institutions.
Dollar-wise, London conducts much more offshore business than smaller, more concentrated offshore centres could ever hope to do. This can apply to most other so-called 'onshore' centres, such as New York. There are sound and legitimate reasons for using centres offshore and for a variety of purposes. For example: Providing flexible financial services to non-resident clients. International corporate structuring which may be most conveniently situated in a neutral location. Efficient tax planning - that is tax planning and not tax evasion. Management of global funds that typically require a gross roll-up environment. Asset holding and protection for a variety of purposes.
With globalisation of markets and an increasing mobility of labour and business, it is frankly naïve to believe that offshore business does not have a bona fide role to play in world markets. The plain fact is that offshore business is here to stay and will keep on growing.
The real question to be addressed is: Is it going to be encouraged to grow in responsible, well regulated and co-operative centres, or is it going to be driven to places where there is much less regulation and limited or no co-operation? Obviously, it is in everyone's interests that the former should prevail. It is also important to dispel another notion that is sometimes held - you most certainly do not need to turn a blind eye to illicit business in order to grow as a financial centre.
However, it is important to be realistic at the same time. Part of the growth in offshore business over the last 10-15 years has, unfortunately, included some undesirable elements. Involvement in tax evasion and, latterly, money laundering has occurred in some places. Combined with often misplaced allegations of secrecy and a lack of co-operation for investigations, this has regrettably tarnished the offshore image in some quarters.
But while remaining realistic, we must also be honest. This is not just an offshore issue. How often do we hear of an alleged money laundering transaction only involving an offshore jurisdiction? Rarely, mainly because money laundering has now moved well beyond the paying-in of suitcases of cash. Sophisticated techniques now focus much more on corporate layering, with the offshore element just part of a chain normally spanning a number of large onshore centres.
Nor must it be forgotten that most offshore centres do not have their own payments and clearing systems, so they are hardly going to be in a position of doing on their own what is often alleged they do. The fact is, however, that a number of fringe offshore centres may find themselves in a vulnerable position and facing rather a stark choice. They will need to make sure their house is in order or they could find life difficult.
The effect of this is that there is a growing distinction of quality being made between different jurisdictions, essentially being those which match up to international standards and those which do not. The distinction is likely to grow in significance and have important consequenc
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