The Channel Islands (Jersey and Guernsey) and the Isle of Man squeaked in before a meeting of G20 countries in London in April, where tax dodging was on the agenda. The Cayman Islands and British Virgin Islands (BVI), with eight and ten TIEAs respectively, are still on the grey list. All have gone the Nordic route to get TIEAs in a hurry: wooing the Nordic block brings seven TIEAs at one blow, including tie-ups with the Faroe Islands and Greenland.
These tiny outcroppings of British authority-dependencies and overseas territories-are a motley crew. They range from the Channel Islands, the Isle of Man and Bermuda, which have legal and financial frameworks roughly like Britains, to archipelagos with a reputation for corruption. All have made a living by enticing the tax- and publicity-shy through their discretion and low tax rates. All are now under pressure from the OECD, America and the European Union to raise standards of transparency and financial vigilance.
For Britain, which exercises at least nominal sovereignty over these tax havens, their survival matters. The Channel Islands argue that their proximity and similar legal framework bring business to the City of London. More concretely, if a dependency were to fail, Britain would almost certainly have to bail it out. How far British obligations could extend is unclear: Michael Foot, a former British regulator, is due to report on the matter in October.
Many in these havens accept that transparency is coming. The question is when. If they do not pull up their socks, they will lose business. They are the first places foreign governments or private-sector gumshoes look when they are tracking down tax evasion or ill-gotten gains. Several companies have decided to quit Bermuda recently. One of them, a consulting firm called Accenture, cited among other reasons the continued criticism of companies incorporated in Bermuda. But if the tax havens clean up too fast, they also stand to lose business, to slower-moving rivals such as Liechtenstein or Switzerland, or newly attractive islands in the Pacific.
How much have Britains far-flung islands to fear in the long run from tougher rules Jersey is the domicile of choice of many trusts and investment funds; Guernsey and Bermuda are home to insurance firms (Bermuda has the worlds biggest cluster of reinsurance companies and the second-biggest of captive-insurance companies). Those businesses will face more big-country competition with the convergence of international standards but are unlikely to be killed, say local sources, because they have other advantages such as greater efficiency. Bermuda, for example, is ahead of most countries in implementing the EU solvency rules for insurance companies that are soon to come in.
But the BVI, which is a postbox for hundreds of thousands of companies, may prove less popular if new American demands for transparency begin to bite. And the Cayman Islands 9,000 or so hedge funds could well be hit by draft EU rules on alternative-investment managers, which threaten to bar funds registered in offshore places, even well-regulated ones, from being sold into the EU for a bit.
The biggest question for Britains offshore tax havens, especially those closest to its coast, is how to deal with the EUs savings-tax directive, which requires members to exchange tax information automatically. Jersey says it will comply when its foot-dragging EU rivals-Austria, Belgium and Luxembourg-do too, which they must by the end of 2011. Switzerland and Liechtenstein may fall in line then as well. In the meantime the Channel Islands and the Isle of Man, like the foot-draggers, are deducting withholding tax from EU-resident savers anonymously, and answering specific requests for information.
The Cayman Islands, for its part, went for automatic exchange of information from the beginning, after assurances that this would not affect its hedge funds. Liechtenstein is negotiating a more co-operative TIEA with Britain now. Signs, perhaps, that times are truly changing.
The Economist Newspaper Limited 2009