Tax Havens in the Light of the Current Crisis Ronen Palan

Tax Havens are specialists jurisdictions offering facilities for tax and regulatory avoidance Tax Havens are specialists jurisdictions offering facilities for tax and regulatory avoidance So far the focused of discussion had been on tax So far the focused of discussion had been on tax In the light of the current crisis, their role in security regulatory avoidance and opacity in the financial system is under discussion In the light of the current crisis, their role in security regulatory avoidance and opacity in the financial system is under discussion

Tax Havens and Euromarket The Euromarket, or offshore financial market, emerges in London in 1957 The Euromarket, or offshore financial market, emerges in London in 1957 Certain international financial transaction are ‘unregulated’ or ‘deemed’ by the bank England to be taking place elsewhere. Certain international financial transaction are ‘unregulated’ or ‘deemed’ by the bank England to be taking place elsewhere. Transaction between two non-residents and in a foreign currency Transaction between two non-residents and in a foreign currency

By the early 1960s British banks set up branches in the Channel Islands, Jersey, Guernsey and Island of Man By the early 1960s British banks set up branches in the Channel Islands, Jersey, Guernsey and Island of Man American and Canadians set up branches in Cayman Islands, Bermuda, Bahamas American and Canadians set up branches in Cayman Islands, Bermuda, Bahamas In the 1970s, Luxembourg, Switzerland, Benelux. They are specialists type of finance In the 1970s, Luxembourg, Switzerland, Benelux. They are specialists type of finance

International Financial Centres, 2008 All countries$29,164.7 bn% share All countries$29,164.7 bn% share 1. UK6, UK6, US3, US3, France2, France2, Germany1, Germany1, Caymans1, Caymans1, Switzerland1, Switzerland1, Netherlands1, Netherlands1, Ireland1, Ireland1, Italy1, Italy1, Belgium Belgium Japan Japan Singapore Singapore Luxembourg Luxembourg Spain Spain Hong Kong SAR Hong Kong SAR Bahamas Bahamas Jersey Jersey Canada Canada Portugal Portugal Sweden Sweden Guernsey Guernsey Bahrain Bahrain Isle of Man71.9 Other Other

Offshore financial centres All countries$29,164.7 bn% share All countries$29,164.7 bn% share Caymans1, Caymans1, Switzerland1, Switzerland1, Netherlands1, Netherlands1, Ireland1, Ireland1, Singapore Singapore Luxembourg Luxembourg Bahamas Bahamas Jersey Jersey Guernsey Guernsey Bahrain Bahrain Isle of Man71.9 Isle of Man71.9 Total Total Source: BIS Source: BIS 2008.

Tax Havens as Offshore Financial Centres Fundamentally ‘booking centres’ Fundamentally ‘booking centres’ Corporation of London, 338,000 Corporation of London, 338,000 London, 1.2 million work in financial services London, 1.2 million work in financial services Jersey 12,000 Jersey 12,000 Cayman Islands 5,400 Cayman Islands 5,400

European havens, Ireland, Benelux, to a degree Switzerland are specialist ‘coordination centres’. Harvesting profits accruing from intangible property, logos, etc. European havens, Ireland, Benelux, to a degree Switzerland are specialist ‘coordination centres’. Harvesting profits accruing from intangible property, logos, etc.

Financial stability and OFC First discussed during the East Asia financial crisis, 1997 First discussed during the East Asia financial crisis, 1997 Conclusion, offshore hedge funds accelerated the crisis Conclusion, offshore hedge funds accelerated the crisis Not much was done Not much was done

Northern Rock and Granite Northern Rock was a UK mutual building society that was converted into a public limited company in 1997 Northern Rock was a UK mutual building society that was converted into a public limited company in 1997 After demutualization Northern Rock became a bank, and in early 2007 became the fifth largest mortgage lender in the UK. After demutualization Northern Rock became a bank, and in early 2007 became the fifth largest mortgage lender in the UK.

Distinct from conventional commercial banks in that it had a small deposit base and relied heavily on wholesale money markets for funding (75%). Distinct from conventional commercial banks in that it had a small deposit base and relied heavily on wholesale money markets for funding (75%) accounts show that it raised just 22% of its funds from retail depositors, and at least 46% came from bonds accounts show that it raised just 22% of its funds from retail depositors, and at least 46% came from bonds.

SPV Bonds issued by Jersey Special Purpose Vehicle (SPV) called Granite Bonds issued by Jersey Special Purpose Vehicle (SPV) called Granite Granite was a charitable trust Granite was a charitable trust The trust never paid a penny to charity The trust never paid a penny to charity Granite is legally separated from NR so NR can get rating from the rating agencies for its structured debt Granite is legally separated from NR so NR can get rating from the rating agencies for its structured debt It was also a way of transferring profits to low tax Jersey It was also a way of transferring profits to low tax Jersey When NR collapsed, Granite had £50 debt but no personnel When NR collapsed, Granite had £50 debt but no personnel

Northern Rock nationalized Northern Rock nationalized What is the status of Granite? What is the status of Granite? ‘Granite is not owned by Northern Rock; nor will it pass into the hands of the public sector’ ‘Granite is not owned by Northern Rock; nor will it pass into the hands of the public sector’ Yvette Cooper, chief secretary to the UK Treasury

Granite is an independent legal entity owned by its shareholders… Northern Rock owns no shares in Granite’ Granite is an independent legal entity owned by its shareholders… Northern Rock owns no shares in Granite’ Alistair Darling

‘Granite is part of the funding mechanism for Northern Rock and it is on the bank’s balance sheet’ ‘Granite is part of the funding mechanism for Northern Rock and it is on the bank’s balance sheet’ Yvette Cooper

Ambiguity of ownership, debt, lack of transparency, all generate mistrust and in bad time, lack of confidence Ambiguity of ownership, debt, lack of transparency, all generate mistrust and in bad time, lack of confidence The international credit market simple ‘froze’ The international credit market simple ‘froze’ Over the counter (OTC) and offshore have made things much worse. Over the counter (OTC) and offshore have made things much worse.

Do we need tax havens/OFCs Do they serve any social or economic purpose? Do they serve any social or economic purpose? They evolved as ‘booking centres’ primarily for tax purposes They evolved as ‘booking centres’ primarily for tax purposes They offer ease of transaction, particularly syndication They offer ease of transaction, particularly syndication But they add little value, but add considerable amount of risk to the system But they add little value, but add considerable amount of risk to the system