Date: April 13, 2016
By: Nigel Green
Offshore investors are not just the uber rich highlighted by the Panama Papers. Many are hardworking people looking for better returns and more flexibility
The leak of 11.5m confidential documents from the Panamanian firm Mossack Fonseca has brought the international financial services industry under global scrutiny as never before. The furore is hardly surprising. The Panama Papers suggest that the firm might have facilitated money laundering, sanctions busting and/or tax avoiding by its mega-wealthy clients, who include heads of state, senior politicians, business leaders and celebrities, on an unprecedented scale.
It all makes for compelling headlines and I’m sure there is more to come. This is probably the biggest scandal to hit the global financial services industry. However, the murky, hidden world that has been portrayed over the last two weeks is not the global financial services business that I recognise. It is simply not representative of the wider industry. Just because some individuals may have used offshore financial centres for illegal purposes does not mean that everyone does. Clearly.
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The overwhelming majority of the offshore sector provides products and services that are entirely compliant and legal and are used by law-abiding people. Many of the files that were leaked date back decades and the past few years has been an era of unprecedented disclosure and transparency. Indeed, the notion of a tax haven, in the traditional sense, is now somewhat outdated. We live in a world in which financial information is being automatically exchanged with tax authorities globally all the time. It’s nearly impossible to hide assets for long. Stashing cash on treasure islands and not expecting to be found out would be foolish in the extreme.
Why, therefore, do millions of people across the world use offshore financial hubs? My experience of dealing with expatriates and international investors suggests that one major reason they might hold money in an offshore account – which is simply an account in a jurisdiction different to the one in which the person resides – is convenience. These accounts offer centralised, safe, flexible and international access to funds no matter where an individual lives and no matter where they may move to in the future, at the same time as offering a wide array of saving options in many currencies. This is important as those who live outside their country of origin often lead fairly transient lives.
Those using offshore investment products are not, typically, out to break the law in any way, shape or form. Nor are the vast majority of them the uber-rich and powerful that they are often imagined to be. These investors are, largely, hard-working people who, quite sensibly, are simply looking at all the alternatives for better returns, more options and greater flexibility.
International financial hubs also offer tax neutrality. This means that they can protect companies that operate in multiple jurisdictions from double taxation, as they would only pay the taxes that are required in their home countries. Many global investors favour these centres as they can provide a flexibility of corporate structures, simple incorporations, the issuance of different share classes and a sound legal system.
A point that is all too often overlooked is that offshore centres offer legitimate financial refuge for those in countries where there is economic and political turmoil, such as extremely volatile currency and expropriation of assets. And some extremely high net worth individuals who live in countries where there is economic, political or social unrest do indeed value another characteristic offered by some such hubs: privacy.
There is a real danger of kidnap in some parts of South America – financial privacy is vital for safety
For example, there is a real danger of kidnap in some parts of South America for these individuals and their loved ones. Financial privacy is therefore needed to keep them safe. However, there is an important distinction to be made between financial privacy and financial secrecy. Exchanging information between government authorities for relevant tax matters is, generally, wholly legitimate. Sharing financial information with anyone else is not. Privacy can be crucial. Secrecy isn’t.
Most international financial centres are now well regulated and transparent, and the global financial services sector provides a much needed and in-demand service for individuals, businesses, organisations and charities all over the world. It is a sector that is set to grow exponentially as the world becomes increasingly globalised.
The recent leak of documents demonstrates that more can still be done to improve co-operation between some jurisdictions, but the whole offshore world should not be tarred with the Panama Papers brush.