A Quarterly Newsletter from UAE and Oman Offices

VOL 12, Issue 1 January 2010

Offshore Update

Transparency In Offshore Financial Centresan Open Secret?

A cursory glance at the popular site – Wikipedia, throws up a very interesting definition for ‘TRANSPARENCY’. It says Transparency, as used in the humanities and in a social context more generally, implies openness, communication, and accountability. It is a metaphorical extension of the meaning a “transparent” object is one that can be seen through. There could not have been a more apt definition for the term.

The ongoing turmoil in the global financial markets has led to calls for greater transparency in the activities undertaken in offshore financial centers. This was to be expected, as the major offshore jurisdictions have always played a significant role in the global financial market place. They are important contributors to global capital movements and, it can therefore be said to a reasonable degree they help to run the market mechanism. Enhanced transparency is rightly seen as important for effective financial regulation, for anti-money laundering and combating the financing of terrorism, for the fight against corruption and for dealing with harmful tax practices.

The need for a global approach to transparency has increased with globalization and the interlinking of economies, the burgeoning in international capital flows, the need for evidence of a level playing field to encourage the international application of international standards [accounting and environmental, amongst others] and the need for a greater understanding of increasingly complex activities making up financial markets worldwide. To that end, the most desirable characteristics of ‘transparency’ would need to be listed as access, timeliness, relevance and quality of information.

The offshore world recognizes that with their cross-border role they have an important role to play in the enhancement of transparency on a global basis. Firstly there is both an increased commitment to international standards of financial regulation and anti money laundering guidelines and also to the principles of information exchange and transparency, as well as, a wish to be seen to be compliant in the application of those standards and principles.

To this end, we have seen a slew of Tax Information Exchange Agreements [TIEAs] being signed between numerous offshore centres and other regulated jurisdictions as an obvious gesture of sharing information for keeping the faith. A TIEA allows the signing parties to request information from each other that is relevant to a tax investigation. As is provided in a typical agreement, such information would typically relate to bank accounts or the beneficial ownership of companies or trusts. Case in point being offshore centres like the BVI, the current leader with 17 TIEAs [including the recently concluded ones with Ireland and China], the Isle of Man, Guernsey and Jersey, among others who are keen to surpass the international standard of 12 TIEAs set by the Organisation for Economic Co-operation and Development [OECD].

Thereby there has been a considerable enhancement in the degree of transparency of activities undertaken in offshore centres. Much information has also been gathered and published in reports issued by the OECD Global Forum on Taxation. The latter provide a comprehensive source of information on the domestic laws that permit information exchange, the access to bank information and the availability of ownership information. This come close on the heels of the G20 Summit in April 2009, where a black list, grey list and white list were prepared, based on offshore jurisdictions’ ‘transparency’ and ‘exchange of information’ as per OECD standards.

Offshore centres will look for evidence of equivalent application of international standards and principles by others. There is competition in the market place, particularly when economic conditions are not so favourable, and a natural desire by many to protect their privacy, not because they are engaged in financial crime but because of the natural desire to hold to themselves the details of their financial circumstances and activities. It is therefore important that there should be a level playing field and that transparency is not held back by competitive pressures arising from inequity and the promotion by practitioners of the fact, that they are not required by their jurisdictions, to be as transparent as some other locations.

A major gap is also the lack of information on ultimate beneficial ownership and an inability to have access to that information. For many aspects of the international standards set, beneficial ownership information is of key importance, but there remains reluctance on the part of many jurisdictions to grasp what needs to be done to ensure that adequate, accurate and current information on beneficial ownership is obtained and is accessible in a timely fashion.

When examining transparency in offshore and non offshore jurisdictions, the more telling challenges are:

  1. Reconciling transparency with the protection of legitimate confidentiality for reasons like protection of commercially confidential information of financial service businesses for competitive reasons and protection of the right of the individual’s civil rights.
  2. Safeguarding economic interests by protecting competitiveness.
  3. Ensuring that there is a greater understanding of how information can be obtained.
  4. Improving the dialogue, particularly in response to the problems faced in exchanging information between regulators and law enforcement authorities in various regulated jurisdictions.
  5. Information sharing is accepted as important, but for many authorities have not been considered as a high priority compared to the practical efforts required to ensure compliance with international standards.

In looking to the future, it is pertinent that there is a need to focus on filling the current gaps in transparency.

In summary for transparency to be further enhanced in offshore jurisdictions, there is a need for a global approach, and a greater understanding through the enhancement of relationships between all relevant authorities. In all these respects the offshore jurisdictions have shown the willingness to play an active and positive role. However they are more likely to continue to do so if they are not discriminated against and they are treated as equal partners on a global level playing field.

(This article is written by S.D. Pereira, Partner and Chaitanya Kirtikar, Senior Consultant, Offshore Department).