It is time to clear away misconceptions about offshore financial locations such as the British Virgin Islands, argues BVI citizen Michael Riegels, a former long-serving chairman of the jurisdiction’s Financial Services Commission as well as a prominent lawyer.

It is time to clear away misconceptions about offshore financial locations such as the British Virgin Islands, argues BVI citizen Michael Riegels, a former long-serving chairman of the jurisdiction’s Financial Services Commission as well as a prominent lawyer.

At the outset I must confess to some bias in writing this article since I am a citizen of the British Virgin Islands, I was the former senior partner of a major law firm in that jurisdiction and I was for many years chairman of the Financial Services Commission which is the Financial Regulatory Authority for the BVI.  It baffles and angers me to read the rubbish that appears in the national media concerning international financial centres like the BVI.  I was shown a recent article published in Paris Match, a widely-read glossy magazine in France, which devoted a two-page spread to the BVI.  It explained how post office boxes (which are in fact used by everyone in the BVI since there is no mail delivery) are in fact secret lock boxes for offshore companies.  It shows a photo of the sign for the local branch of an Inter-Caribbean Chain of Shops called “Little Switzerland” as further evidence that the BVI is a regime of Swiss-like secrecy. 

I have read letters to the Guardian from Global Witness, Christian Aid, Oxfam and Save the Children UK suggesting that a registry of who owns companies, foundations and trusts in the UK and elsewhere “will recover billions of dollars which could transform the lives of millions of people living in poverty”.  You have to shake your head in dismay at statements like these which range from the blatantly misleading to the totally naive. 

Part of the problem seems to be that the political climate is content to view everything which relates to an IFC through a dark prism. When details of thousands of offshore accounts were recently leaked to journalists and published in newspapers this was justified on the basis that if people used companies and accounts in IFCs then they must be doing something wrong, without any need to provide proof or justification for such a belief.  Had a newspaper published similar details of bank accounts in the US or the UK there would have been outrage.  Similarly when ActionAid, a charity, recently alleged that half of all investment into emerging markets is routed through IFCs this was reported as a terrible and shameful thing, rather than the more obvious interpretation that IFCs provide a useful conduit for countries with under-developed legal infrastructure which desperately need foreign capital.

The G8 summit saw more rhetoric demonising IFCs without a word on the shortcomings of the G8 members themselves.  We live in a world where virtually all the ground rules for international finance are written by the Group of Eight members. However, when the world’s fraudsters, terrorists and confidence tricksters continue to flourish, (mostly within the G8 jurisdiction) then the blame has to be shifted to somewhere else. So why not blame the IFCs. 

There used to be a time in the law when judges with eminent common sense subscribed to the view that governments make the laws and that providing citizens comply with such laws they are not obliged to order their affairs in such a manner as will provide maximum revenues to the Government and minimum revenues to themselves.

The famous American Judge Learned Hand put it thus:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.  Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.  Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

There was a clear bright line between tax evasion on the one hand, which involves breaking the law by not paying taxes that are legally due and payable, and tax avoidance on the other hand which involves conducting one’s business in a perfectly lawful way but in a way which minimises taxes as much as possible.  If governments see potential tax revenues draining away through tax avoidance then the answer is simple, all they need to do is amend the law.

Nowadays, however, the line between tax evasion and tax avoidance has been blurred to the extent of non-existence. The two concepts are spoken of in the same breath as being acts of illegality and moral turpitude. Global companies such as Apple, Google and Starbucks are castigated in the press and abused by politicians for not paying as much tax as they should have paid, based not on the laws of the land but on some vague moral concept that they have not paid enough.

Company directors, however, owe a duty to their shareholders, many of whom are pension funds for retired workers at all income levels, to maximise profits and minimise costs which include taxes.  If G8 countries believe that their citizens are avoiding tax by lawfully using offshore structures and they wish to stop this then all they need to do is change the law.  If they believe their citizens are dishonestly evading taxes by using offshore structures then they should make use of the numerous tax disclosure treaties that are in place. 

It is not so different with the growing thicket of rules and regulations that now govern international and even domestic commerce with anti-money laundering and anti-terrorism rules, “know your client” regulations and due diligence requirements imposed by FATF and all its off-shoots.  Today you cannot open a bank account, instruct a lawyer, buy an insurance policy, or make an investment without answering a multitude of highly intrusive questions and producing a host of documents from utility bills to copies of your passport.

It is hardly surprising that identity theft is proliferating with the amount of personal information which now has to be produced for the simplest transaction. I doubt if the staggering cost of all this compulsory due diligence has ever been accurately estimated but I suspect it is a very large number, much larger than the numbers that are regularly bandied about as the estimated loss of taxes allegedly occasioned by the existence of IFCs.

I would be surprised if there is anyone who cannot recite numerous instances of the utter pointlessness of much of the regulation to which we are now subjected.  I was asked by my old law firm of which I was the senior partner for some 20 years to produce copies of my passport and utility bills before they could accept instructions from me on a minor matter. My wife was asked to produce two letters from persons vouching as to her integrity and good standing in the community before she could withdraw as a signatory on a bank account.  I recently had to take up the appointment as an executor of a good friend of mine upon his untimely death, only to find that the bankers of a company owned by him wished to do due diligence on every beneficiary of his will, and the investment managers of investments held for more than 10 years by a company of which I am a director are refusing to release the proceeds of the investment until new and more extensive know your client obligations are fulfilled.  Other examples, I am sure, abound in plenty.

The BVI has subscribed to every initiative of the OECD, the FATF and the United Nations.  It has been meticulous in following through with legislation and regulations.  The BVI presently has subscribed to 23 tax information exchange agreements, or “TIEAs” (including the most recent one with Canada) covering over 45 per cent of the population of the globe, and carries out regular audits on regulated entities.  If all these processes sometimes fall short, do not blame the IFCs but give some thought as to how regulation can be improved.

It is impossible to prevent every fraud or recognise every villain, but the answer is not to keep pointing the finger at IFCs but to work together to see how the system can be changed to make it less burdensome for the man in the street and much better at identifying and weeding out fraudsters and other criminal elements early on.  The BVI does not encourage tax evasion or money laundering – in fact it does its level best to discourage them as they are intrinsically bad for business as well as being morally wrong, but the G8 countries need to work with the IFCs instead of bullying and slandering them. 

Exchange of information

There is much talk about automatic exchange of information, an initiative to which it has to be said the BVI has voluntarily subscribed. These initiatives require banks to supply information about their customers to their home jurisdiction, such information to include names, addresses, dates of birth, account numbers, account balances and details of payment into these accounts.  I am not entirely convinced that this additional investigative and reporting burden placed on banks (who will undoubtedly pass the cost on to all their customers) will deter serious criminals who are nothing if not ingenious. 

It will, however, certainly add to the inconvenience and difficulties endured by the general public.  Because I am a British Citizen, albeit resident and domiciled in the BVI, I am not sure how my bank is to determine if I am a UK tax payer or not without embarking on a long complicated and expensive investigation which will require a sophisticated knowledge of my lifestyle and sources of income and the tax laws of the UK.  The position is admittedly different for US citizens, who pay US taxes by virtue of their citizenship regardless where they live and work.

There is further talk of maintaining central registries for the beneficial ownership of companies – another impractical idea which will only have meaning if it is of universal application.  It is notable that no country in the world, and certainly none of the G8 countries, presently has any such requirement.  However even if accepted, the logistical problems are substantial - beneficial ownership is not a straightforward concept - a company may be said to be “beneficially owned” by either its shareholders or its creditors depending upon the states of its books of account.  And even shareholding is a complex concept, frequently dividing economic ownership from control.  And that does not begin to touch upon issues like discretionary trusts or life interest settlements.

All this would require complicated and artificial definitions which ultimately may not resolve the perceived problems and its effectiveness can be circumvented by the simple process of lying.  There are already stringent requirements imposed on registered agents in the BVI concerning beneficial owners.  It would make far more sense if, instead of creating more registers and reporting requirement, energy is instead focused on ensuring that the existing requirements are improved upon and strictly followed.

Finally there is the subject of confidentiality or - if you are a pressure group like the Tax Justice Network talking about IFCs - secrecy. Confidentiality, or the right to privacy, has been respected for centuries and ironically more and more laws are being passed in almost every modern state to protect their citizens from unwarranted interference with their right to privacy.  However, it would appear that anyone with dealings in any way connected with an IFC must expect to have every detail of such dealings revealed to the world or the IFC concerned will be accused of secrecy, i.e. the suppression of all information whatever may be the rights or wrongs of revealing such information. 

For the record I wish to state that the BVI has never, ever had any legislation requiring secrecy.  Confidentiality in the BVI is entirely governed by the common law which protects every citizen from unwarranted enquiry into his private affairs.  It is undeniable that confidentiality can be, and often is, abused but there is no reason to suggest that for this reason it has no place in commerce.

Every person in the world who has a bank account would be rightly appalled if the contents of those banks accounts should suddenly become public for all to see.  All around the world banks have safe deposit boxes, cell phone companies sell prepaid cell phones, both of which have conclusively been proved to be used frequently in criminal activities but no one suggests that these convenient services should be discontinued because of occasional use by criminals.

So I say let’s get off the IFC bashing band wagon and get back to common sense and co-operation. IFCs in common with all major developed countries have a shared interest in promoting world trade, reducing poverty and fighting fraud, money laundry and terrorism in all their guises. Sensible journalists and politicians recognise this and encourage a joint approach to the difficult issues involved. Irresponsible and inflammatory journalists, politicians and taxes zealots only exacerbate the problem with their rhetoric and do absolutely nothing to produce practical and sensible solutions thereto.