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Home > Blogs > Anthony Harrington > Offshore havens, part 1: Riding out the frenzy

Offshore havens, part 1: Riding out the frenzy

Finance Blogger: Anthony Harrington Anthony Harrington

Two completely different motives, one paranoid and one somewhat justified, seem to have been at work in the outpouring of outrage against offshore tax havens at the height of the 2008/2009 crash. The paranoid line, voiced by a number of European and US politicians, sought to put offshore-based hedge funds, and the supposedly lax offshore regimes that allowed them to operate, at the heart of the disaster.

There was an assumption that offshore-based hedge funds, outside the scrutiny of “decent” regulatory authorities, had concocted a witches’ brew of toxic investment vehicles which had somehow led honest bankers into disaster. Worse, the hedge fund community had then profited from all this by shorting the very banks they had ruined, hastening the collapse of their share price.

In reality, of course, in a piece of irony of cosmic proportions, the truth is closer to the complete reverse of this picture, and in the quaint American phrase, the politicians had got it exactly ass-backwards. It was the honest bankers who concocted the CDO squared vehicles, with toxic tranches of securitized sub-prime residential mortgage assets as the content.

And it was the honest, onshore bankers, under the benign and indifferent gaze of the banking regulators, who added credit default swaps to the mix. It was these same bankers, if the coming wave of lawsuits by hedge funds against banks are to be believed, who persuaded the hedge funds that the premiums the funds got from providing CDS “insurance” against the failure of residential mortgage backed securities were “safe.”

Be that as it may—and the coming court actions promise to be hugely edifying—the political ranting undoubtedly left the tax havens, which tend to be small, island nations plus a sprinkling of British Crown protectorates, feeling hugely vulnerable. Which brings us to the second line of attack on the tax havens, namely that they constitute “black holes” in the well-regulated financial landscape and facilitate tax evasion.

The tax havens’ unanimous response to this second line of attack has been to recognize that the days of private, anonymous accounts are well and truly gone. They are all now quite well advanced in signing tax transparency agreements with nation states who want to “repatriate” the fortune in dodged taxes lying in offshore accounts.

Tax authorities from London to Washington have launched various “amnesty” deals to enable guilty taxpayers to regularize their affairs before the various regimes of tax inspectors start combing through the offshore books.

In point of fact, even before the politicians began to roar, havens such as the Cayman Islands, the British Virgin Islands, and the Channel Islands had gone a long way towards upgrading their regulatory regimes in response to the International Monetary Fund’s campaign against money laundering. None of them wanted to be on the IMF’s black list of money laundering hot spots, and all of them wanted to be on its “white list” of well administered financial centers.

What we will see in 2010 will be a continuation of the opening up of offshore havens, but the big unanswered question is whether the determination to visit tougher, outside regulation on these centers will fade, or whether it will gather steam. These are worrying times for the offshore communities. All of them are hard at work trying to reposition and reinvent themselves in a fashion that will defuse attacks from the economic powerhouses whose goodwill they most certainly need if they are going to survive as profitable operations.

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Tags: hedge funds , offshore financial centers , regulation , tax havens
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