Mauritius: Budget Highlights 2016/17 - Financial Services - Impact

1. GBC 2 will now have greater scope of operations and such initiative will give a boost to our capital markets
2. Provision of 8-year tax holidays to ‘Global Headquarters Administration’ will enhance the use of the Mauritius platform for regional and global investments and increase substance in the country. Such a measure will help to attract a number of big regional companies from various sectors of activities to use the Mauritius platform for their RHQ
3. The introduction of a 5-year tax holiday in specific financial activities will attract value added activities to the portfolio of financial services and enlarge employment opportunities.
4. Setting up of a ‘Mauritius International Derivatives & Commodities Exchange’ (MINDEX) will boost links between commodities and finance, and make the commodity sector more efficient and competitive.
5. Developing Mauritius as a Renminbi  hub for Africa would further strengthen positioning of Mauritius as an international financial centre, especially in capturing the trade, investment and financial flows between Africa and Asia.

Could Mauritius be the new African hub?

This is a nation that has all of the key ingredients for investor confidence: economic diversity, a highly competitive tax regime, investor-friendly regional trade and tax arrangements – all underpinned by a working democracy, independent judiciary and a global reputation for transparency. During such unpredictable times, Mauritius is an island of stability and reliability.

WEF: Could Mauritius be the new African hub?

Mauritius is only 65km long, 45km wide and 2,000 km away from Africa. Yet there are strong indicators that this small island in the Indian Ocean may be the ideal gateway to Africa. In a period of great economic uncertainty right across the world and the collapse of commodity and extractives prices, investors need to work harder to find strong returns. We need to analyze what it is about Mauritius that makes it stand apart.

Trinidad and Tobago IFC – Handling Negative Publicity

What should a financial centre in danger of being perceived as a ‘tax haven’ do to manage the outpouring of potentially damaging headlines? The Global Financial Centres Index (GFCI) indicates that the ratings of these centres tend to rely largely on the perceptions of people involved in financial services. These perceptions are affected by press coverage and the work of the Organization for Economic Co-operation and Development (OECD) and other international bodies.

In GFCI 19, published in March 2016, the Caribbean centres of the British Virgin Islands, the Cayman Islands, Bermuda and the Bahamas all suffered significant declines in their ratings with Panama showing a larger decline than any of them. The British Crown dependencies of the Isle of Man and the Bailiwicks of Jersey and Guernsey had a similar experience with Gibraltar, Malta, Monaco and Liechtenstein completing the picture with downgrades of their own. Looking back over the last three years, almost without exception, all of the Caribbean centres and the Crown dependencies have moved in the same direction in the GFCI – moving up together and down together clearly affected by the feelings and perceptions of the industry at the time of the survey.

If this were not unfortunate enough, the recent scandal has undoubtedly led to the deepening of these negative perceptions. In the light of the recent adverse publicity as a result of the ‘Panama paper’ leaks, what should a financial centre, which is likely to be drawn into the debacle do? There are three obvious options:

1. Lie Low and stay under the radar – it is likely that many centres will decide that in the face of such a media storm, it is best to lie low and stay out of the news as much as possible. This is perhaps understandable and may be a viable short term strategy.
2. Protest – several centres proclaim their innocence. In the current climate these protests of “it’s not us!” do not gain much sympathy. Several of the centres protesting the loudest do not deserve much sympathy!
3. Differentiate – a valid longer term strategy is to become a different type of financial centre. Encourage finance for good purposes and make it much harder for money launderers and tax evaders to operate in your territory so that when the next wave of bad publicity arrives (as it surely must), you can genuinely hold up your hand and claim that you are different.

It is pleasing to note that a newly formed financial centre is genuinely setting out to be different. Trinidad and Tobago offers global investors unparallelled access to markets within the Latin American and Caribbean region. Already recognised as the financial hub of the Caribbean, Trinidad and Tobago holds great potential for international growth with a highly qualified talent pool, well-established business infrastructure, global connectivity and a wealth of investment opportunities. The Trinidad and Tobago IFC is being developed using global standards and best practices and will have a modern, principle based regulatory framework which will be supported by enforcement action against firms that breach the legislation and regulations. This model has already been used to successfully establish the Dubai International Financial Centre. The legislation for the Trinidad and Tobago IFC has been drafted and is awaiting approval by legislators. 

"I am pleased to see that Trinidad and Tobago are doing what they can to make sure that they are not confused with other, less scrupulous Caribbean centres. Creating a truly modern financial centre with the repution that will attract international investors require is a great challenge in today's uncertain times."

Mark Yeandle, Associate Director, Z/Yen Partners Limited.

ADB: Commercial Reforms Needed to Boost Pacific State-Owned Enterprises

State-owned enterprises (SOEs) are a significant drain on Pacific island economies, with the returns from most countries’ SOE portfolios not even meeting their capital costs, according to a new report from the Asian Development Bank (ADB).

The Finding Balance 2016 report  finds SOE portfolios in the eight Pacific countries examined contributed only 1.8% to 12% to gross domestic product, despite their very large asset base, ongoing government cash transfers, and monopoly market positions. It also finds productivity levels of the SOEs tend to be well below developed country benchmarks.

“Low SOE returns are not unique to the Pacific but are common throughout the developing and developed world,” said Christopher Russell, SOE Expert with ADB’s Pacific Private Sector Development Initiative (PSDI), which produced the report. “They reveal a fundamental flaw in the SOE model: it is not an effective long-term ownership structure as politicians will avoid commercial decisions that may have short-term political costs.”

The report assesses the performance of SOEs in Fiji, Kiribati, Marshall Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu, as well as Jamaica and Mauritius. It finds many countries have made significant progress through commercially-oriented reforms. Solomon Islands’ SOE portfolio’s return on equity jumped from -11% in 2002-2009 to 10% in 2010-2014. In Tonga, portfolio returns have increased to 6% from a low of 0% in 2009. Overall, seven of the 10 countries examined had seen improved SOE profitability since 2010.

The report also highlights that, while improvements had been achieved, sustaining them has proven impossible in most countries, both developed and developing. Drawing on the experiences of New Zealand and Singapore, the report concludes that increased private sector ownership and operation of SOEs is the only way to lock in reform gains.  

Finding Balance 2016: Benchmarking the Performance of State Owned Enterprises in Island Countries is the fifth report in the Finding Balance series, which identifies strategies to guide reforms of SOEs, highlighting the importance of finding the right balance between public and private sector roles.

PSDI is a technical assistance facility cofinanced by the Government of Australia, the Government of New Zealand, and ADB. It supports ADB's 14 Pacific developing member countries to improve the enabling environment for business and to support inclusive, private sector-led economic growth. The support of the Australian and New Zealand governments and ADB has enabled PSDI to operate in the region for almost 10 years and assist with more than 280 reforms.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB in December 2016 will mark 50 years of development partnership in the region. It is owned by 67 members—48 from the region. In 2015, ADB assistance totaled $27.2 billion, including cofinancing of $10.7 billion.

FSC Mauritius issues communiqué - FSC Mauritius Member of the L'Institut Francophone de la Régulation Financière

L’Institut Francophone de la Régulation Financière (IFREFI) was established at the initiative of French regulators in 2001 to strengthen cooperation and exchanges between regulators members by promoting training, coordination, technical cooperation and that the study of any matter relating to financial regulation.

At the last Annual Meeting of the IFREFI held from 1-3 June 2016 at Beyrouth, the FSC Mauritius was admitted as a member of IFREFI together with Andorra (INAF) and Vietnam (SSC).

R (on the application of Bancoult (No 2)) (Appellant) v Secretary of State for Foreign and Commonwealth Affairs (Respondent) [2016] UKSC 35

BACKGROUND TO THE APPEAL

The Chagos Islands are part of the British Indian Ocean Territories (“BIOT”). In 1962 they had a settled population of 1,000. In 1966 the UK Government agreed to allow the USA to use the largest of the Chagos Islands, Diego Garcia, as a military base. Pursuant to this arrangement, the Commissioner for BIOT made the Immigration Ordinance 1971 (the “Ordinance”). Section 4 of the Ordinance made it unlawful for a person to be in the BIOT without a permit and empowered the Commissioner to make an order directing that person’s removal. Between 1968 and 1973 the UK Government procured the removal and resettlement of the Chagossians by various non-forceful means.

In 2000 the appellant, Mr Bancoult, obtained a High Court order quashing section 4 of the Ordinance. The then Foreign Secretary announced that he accepted this decision, such that the prohibition on the resettlement of BIOT was lifted. He also announced that work on the second stage of a feasibility study into the resettlement of the former inhabitants would continue.

The second stage of the feasibility study was published in 2002. Part B (the “2B report”) concluded that the costs of long term inhabitation of the outer islands would be prohibitive and life there precarious. In 2004 Her Majesty by Order in Council made the BIOT Constitution Order (the “2004 Order”) which introduced a new prohibition on residence or presence in BIOT.

In 2008, the appellant’s challenge to the 2004 Order by judicial review was dismissed by a majority of 3 (Lord Hoffmann, Lord Rodger and Lord Carswell) to 2 (Lord Bingham and Lord Mance) in the House of Lords (R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 2) [2008] UKHL 61) (the “2008 judgment”). In separate litigation concerning the Government’s declaration of a Marine Protected Area (“MPA”) around BIOT, the respondent in 2012 disclosed certain documents relating to the drafting of the 2B report (the “Rashid documents”). The appellant seeks to set aside the 2008 Decision on the grounds that (i) the Rashid documents cast doubt on the reliability of the 2B report and should, pursuant to the respondent’s duty of candour in public law proceedings, have been disclosed prior to the 2008 judgment, and (ii) four heads of new evidence have come to light, constituting independent justification for setting aside the 2008 judgment.

In 2014-15 a new feasibility study concluded that, assuming for the first time possible re-settlement of Diego Garcia itself, scope existed for supported resettlement of BIOT (the “2014-15 study”).

JUDGMENT

The Supreme Court dismisses the appeal by a majority of 3 to 2. Lord Mance gives the majority judgment, with which Lord Neuberger agrees. Lord Clarke gives a separate judgment, concurring with Lord Mance. Lord Kerr gives a dissenting judgment, with which Lady Hale agrees in a separate dissent.

REASONS FOR THE JUDGMENT

The Supreme Court has inherent jurisdiction to correct injustice caused by an unfair procedure which leads to an earlier judgment or is revealed by the discovery of fresh evidence, although a judgment cannot be set aside just because it is thought to have been wrong on points unrelated to such procedure or evidence [5, 154, 190]. The authorities indicate as the threshold for setting aside a previous judgment whether a significant injustice has “probably occurred” in case of non-disclosure or whether there is a “powerful probability” of significant injustice in case of fresh evidence. But Lord Mance leaves open the possibility of the egregiousness of the procedural breach and/or the difficulty of assessing its consequences militating in favour of a lower threshold, and considers the application on that basis too [8]. An applicant must also show that there is no alternative effective remedy [6].

As to the non-disclosure, the essential questions are (i) whether due disclosure of the Rashid documents would have led to a challenge by Mr Bancoult’s representatives to the 2B report in the original judicial review proceedings, and, if so, (ii) whether it is likely that such a challenge would have resulted in a different outcome to the 2008 judgment [61].

Assuming without deciding that (i) was satisfied, Lord Mance concludes as to (ii), after reviewing the 2008 judgment [16-19] and the Rashid documents [20-64], that there is no probability, likelihood, prospect or real possibility that a court would have seen, or would now see, anything which could, would or should have caused the respondent to doubt the conclusions of the 2B report, or made it irrational or otherwise unjustifiable to act on them in June 2004 [65]. As to the alleged new evidence, the first head consists essentially of analysis and submissions which the majority takes into account, the second and third heads consist of material outside the respondent’s knowledge at the relevant times and neither they nor the fourth provide any basis for setting aside the 2008 judgment [66-71].

Even if the threshold for setting aside were crossed, circumstances have changed in the light of the 2014-15 study and/or governmental confirmation that the MPA does not preclude resettlement [72-75]. It is now open to any Chagossian to mount a fresh challenge to the failure to abrogate the 2004 orders in the light of the 2014-15 study’s findings, as an alternative to further lengthy litigation and quite possibly a fresh first instance hearing about the factually superseded 2B report. [72-76, 78-79].

Lord Kerr, with whom Lady Hale agrees, would have set aside the 2008 Decision. Although the appellant accepted that it must be shown that the non-disclosure probably had, or may well have had, a decisive effect on the outcome [155], Lord Kerr would have held that it is enough for there to be a real possibility that a different outcome would have occurred had the information been available at the time of the original hearing [160-163]. The Rashid documents might well have caused the 2008 Decision to be different [168, 193]. Lord Kerr disagrees with the majority that the conclusions of the 2014-2015 feasibility study render the present application moot. The mere possibility that the Chagossians might be allowed to resettle is insufficient. It would be necessary to demonstrate that they would achieve the same result as would accrue on the successful re-opening of the appeal [179]. Moreover, there is no question of pragmatic justice being done here as the Supreme Court in this appeal is unable to vindicate the appellant’s right to resettle in the BIOT [180].

References in square brackets are to paragraphs in the judgment

How the Brexit vision of UK freedom risks turning sour

Radical change has been the dream of the UK’s triumphant Brexiteers, but what, beautiful or not, will be born? An absence of clarity about the impact of Brexit on the UK, the rest of Europe, and worldwide will last for a decade at least. The notion that Britain can neatly cut the links binding it to continental Europe will quickly prove absurd, as will the idea that the surgery will be painless and only local.

Giles Merritt was named by the Financial Times in 2010 as one of 30 'Eurostars' who most influence thinking on Europe's future, along with the European Commission's president and the secretary-general of NATO. For 15 years a Financial Times foreign correspondent, Merritt has reported and commented on European affairs since the early 1970s. He went on to found Friends of Europe, one of the leading think tanks in Brussels, and the policy journal Europe's World, of which he is the Editor-in-Chief.  He is the author of Slippery Slope: Europe's Troubled Future. His previous books include World Out of Work, an award-winning analysis of unemployment issues, and The Challenge of Freedom, on the difficulties facing post-communist Eastern Europe.

Mauritius - Wave Energy Project: Deployment of a wave monitoring device

A wave monitoring device, aiming to explore the prospects of developing wave energy for the Republic of Mauritius and harness the potential of ocean energy, was deployed yesterday during a launching ceremony held at Le Batelage Restaurant, in Souillac.

This initiative follows the Collaborative Agreement signed in June 2015 by the Mauritius Research Council (MRC) with Carnegie Wave Energy Ltd on the prospects of developing wave energy for Mauritius.  Based in Australia, Carnegie Wave Energy Ltd is a leader in wave energy technology and harnessing wave energy for the production of electricity and desalinated water.

Following the signature of the Agreement, Carnegie Wave Energy Ltd in partnership with the MRC began in November 2015 the project ‘High Penetration Renewable Energy Roadmap, Wave Resource Assessment and Wave-Integrated Micro grid Design in Mauritius’. The project is being jointly funded by Carnegie (19%) and the Australian Government (81%).

The Minister of Ocean Economy, Marine Resources, Fisheries, Shipping and Outer Islands, Mr Premdut Koonjoo, and the Minister of Civil Service and Administrative Reforms, Minister of Environment, Sustainable Development, and Disaster and Beach Management, and the Australian High Commissioner to Mauritius, Ms Susan Coles, were present at the deployment of the wave monitoring device at Souillac. The event was organised by the MRC in collaboration with the Australian High Commission in Mauritius.

Five potential locations that are no further than 3 km from Souillac have been identified for the deployment of the wave monitoring device. The aim is to use the site closest to Souillac for the deployment of the device.

It is recalled that the Republic of Mauritius has a total area of 2.3 million square kilometres of Exclusive Economic Zone and is geographically well positioned to harness ocean energy. This may be in the form of offshore wind, ocean wave, ocean current, ocean thermal and ocean saline energy.

Wave energy

Wave energy possesses unique characteristics that offer an advantage over other renewables such as wind and solar energy. These include:

• Less variable and with the variability being more gradual and with notice;
• More predictable: Wave energy is estimated to be at least three times more predictable than wind energy;
• The proximity of favourable wave energy sites to ultimate end users, thereby minimising transmission issues.  Notably, approximately 60% of the world’s population lives within 60 kilometres of a coast.

Mauritius: Workshop focuses on rigorous standards of Corporate Governance

Companies must demonstrate a strong commitment to the development and enforcement of rigorous standards of corporate governance so as to maintain public confidence. These standards must encompass the relationship between a company’s board of directors, its management and its shareholders. Corporate leaders are required to be faithful to shareholders interests and act with both competence and integrity. 

This statement was made by the Permanent Secretary of the Ministry of Financial Services, Good Governance and Institutional Reforms, Mr Jugdish Dev Phokeer, at the opening of a workshop on Corporate Governance held yesterday in Ebène.

Mr Phokeer pointed out that Government has demonstrated its commitment to fighting fraud and corruption and to introducing good governance best practices by creating a Ministry dedicated to good governance.

“Corporate governance has become the sine qua non for any business which cares about its reputation”, he said.

Government has recently passed the Good Governance and Integrity Reporting Bill the objects of which are to promote a culture of good governance and integrity reporting in both the private and public sectors, to disclose malpractices and recover unexplained wealth.

The workshop’s focus is on Corporate Governance and good governance and is borrowed from the Cadbury Report in 1992. UK Corporate governance is the system by which companies are directed and controlled. Some 175 participants from different departments and organisations attended the workshop.

It served as a platform to provide an understanding of the nature of corporate governance and the vital role that leaders of organisations have to play in establishing effective and good governance practices. For most organisations, those leaders are the board directors who decide the long-term strategy of the company in order to serve the best interests of the owners, members, shareholders and, more broadly, stakeholders, such as customers, suppliers, providers of long-term finance, the public the financial community and regulators.

FSC Mauritius issues communiqué - Update on Velankani Companies

The Supreme Court of Mauritius has, on 28 January 2016, delivered its judgment (2016 SCJ 31), inter alia, refusing leave to Mr K. C. Reddy to apply for a judicial review of the decision of the Financial Services Commission, Mauritius and setting aside the application with costs.

IFC Economic Report: The Truth Behind The Headlines - Business In The IFCs

In the first issue of the IFC Economic Report we considered how IFCs are important to the world economy – what they offer to the economy, with case studies considering examining in particular their contribution to emerging markets.

In this edition of the Report we look at what IFCs must do to protect their existence and their business model in light of EU, OECD and US rhetoric on stopping the use of so called ‘tax havens’ and ‘offshore’.

In our lead article, Prof Gilbert Morris considers the need for an Organisation of IFCs to speak on behalf of IFCs in the international forum, research, explain and foster the role of IFCs in the global financial system, whilst working towards fair cross border tax regulations and against tax harmonisation. 

Andrew Morriss, Chair in Law & Professor of Business, University of Alabama, considers the damage that could be caused to the world economy if IFCs are eradicated and the role IFCs play in pushing regulatory competition. 

Professor Philip Booth, Economist and Director of the Institute of Economic Affairs looks at the repercussions of the financial crisis and considers why IFCs are the scapegoats for bad government policy and one by one counters the arguments brought up time and again against IFCs.

While IFC Forum members provide case studies with examples of what IFCs are doing in practice to adapt their business models to the changing global economic and political demands.

THE BIG DEBATE: Can and should morality be applied to corporate tax planning?

We put this question a wide spectrum of people involved with the wealth management industry: With opposing statements on the subject from NGO Action Aid and private practitioner Anthony Travers, followed with sound bites from academics, economists, tax planners, the EU and the OECD.

RESEARCH: Professor Vera Troeger questions the legitimacy of the recurrent hypothesis that tax competition results in a race to the bottom. She highlights the many factors that influence an economy that make this statement nothing short of a myth.

INTERVIEWS: The IFC Economic Report includes interviews with Monica Bhatia, Head of the Global Forum on Transparency and Exchange of Information for tax Purposes, OECD; Philip Kermode, Directorate General of Tax at the EU Commission; and Helene Anne Lewis, STEP Chair.

Also in this edition: FATCA unveiled – US FATCA and the EU sons and daughters of FATCA; Francoise Hendy takes on the OECD and the aftermath of the email leaks scandal.

After the Panama Papers: How to dismantle tax havens (and bring justice to 99 per cent of the world)

Welcome to the secret world of offshore. Your goal is to navigate this parallel universe and hide your cash away. Don't worry! Lawyers, wealth managers and bankers are there to help you. Pick a character and don't get caught.

Mauritius: Ministerial Committee set up to look into repercussions of Brexit issue

Ministerial Committee under the Chairmanship of the Minister of Finance and Economic Development, Mr Pravind Jugnauth, was set up following Cabinet meeting on 24 June 2016 to look into and make recommendations on the repercussions of the exit of the United Kingdom from the European Union (EU).

The Minister of Finance and Economic Development met with representatives of both the private and public sectors on Friday regarding the issue of the exit of the UK from the EU. A communiqué issued on the same day by the Ministry of Finance and Economic Development says that Brexit will undoubtedly have repercussions globally and in Mauritius. 

Article 50 of the EU Treaty provides for a transition period of 2 years for the UK to negotiate the terms and conditions of its exit. It stipulates the following:

“ the Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification, unless the European Council in agreement with the member state concerned, unanimously decides to extend this period. “

The Committee noted that it would be left to the next UK Prime Minister to initiate any action to trigger Article 50. Hence, it is expected that a status quo would be maintained for at least the next three months.

Further, it was highlighted that Mauritius will thus be able to retain its current preferential market access and will continue to trade on a duty free and quota free basis during that period since the transitional period of two years would only begin after the UK notification.

The share of our total exports to the UK has dropped from 34 per cent in 2008 to 12.6 per cent in 2015 stemming, inter alia, from our market diversification strategy. Mauritius’ export denominated in UK Pound Sterling which was 18 per cent in 2008 has declined to 6 per cent in 2015.

The Committee pointed out that Brexit may weaken the UK economy in the medium term with implications for some sectors of the Mauritian economy. In this context, the Joint Public-Private Sector Technical Committee agreed to pursue its assessment of Mauritius trade with the UK in various sectors with a view to identifying areas which may be vulnerable.

On the other hand, the Bank of Mauritius (BOM) is monitoring closely all developments in the international financial markets. The BOM has re-affirmed that it stands ready to intervene and take measures, if necessary, to protect the economic interest of Mauritius.

Government will continue to monitor all developments related to Brexit very closely through the inter-Ministerial Committee.

Mauritius: Joint Press Statement from the British High Commission and the Embassy of the United States of America

BBC Capital: How Brexit could hit your wallet

BBC Capital considers how a vote from the UK to leave the EU might impact your budget.

Tit-bits: More DTAA revision?

Since the signed and Cabinet-approved revision of the long-standing DTAA treaty between India and Mauritius, there has been a lot of comment on the potential downsides, the significant economic impact analysed by Moody's, the difficulties of a short transition period for operators, the imbalance with other international centres channelling FDI into India and many other aspects. The MOU signed off in July 2015, and approved by our Cabinet, signalled a major triumph of powerful revenue and finance Indian bureaucrats who, at last, held the upper hand and a signed outcome, publicly praised by our own negotiating team, that even Indian political overlords, had they wished or desired a different outcome, would have found extremely difficult to pitch for. In essence, India could not be “plus royaliste que le roi”.

Excerpts:

“True also that our offshore sector and political nexus may not have done enough to thwart the growing negative perception of Mauritius by entrenched top-notch Indian bureaucrats, while several other competing centres were lying low and were spared the onus. The status-quo ante was probably harder to maintain against such a rising tide but where we may have lost out, through a largely inexperienced negotiating team, are on far better treaty renegotiation terms...”

“Was inexperience of international poker-pressure negotiations the only reason that facilitated the cardinal July 2015 outcome? We understand that the apparently generous tied-in grant of 350 million$ India waved in front of a political team that had been actively scouting the world for international investors in the property deal dubbed Heritage City, could have been judged extremely rewarding and was duly announced as such by Minister Bhadain. A great prize but, as it turned out later, little better than the 200 million offered ten years previously to former Minister Sithanen...”

Mauritius Times

The Panama factor: offshore investment in an era of unprecedented tax transparency

Offshore centres should be more proactive in presenting their case to the public, the Legal Week Offshore Investment Forum heard. The Panama papers featured heavily during Legal Week's inaugural Offshore Investment Forum in London.

Legal Week

Global Business: Mauritius sets to woo international investors

The Financial Services Promotion Agency (FSPA) has undertaken a promotion mission in London in order to attract international players to Mauritius.

Offshore Pilot Quarterly (June 2016, Volume 19 Number 2)

Into the Light

The first several hundred words were meant for my Private Client Adviser blog which I have been writing for almost 3 years. But as with so many specialist publications competing for market share, the PCA has succumbed to market forces and is no longer being published.

The blog topic I was to cover, not surprisingly, was the sensational Panama Papers scandal which centred on the Mossack Fonseca law firm and which revealed in May more than just client names. What have we learned from it? That Panama is the Mecca of malfeasance to which the corrupt, rather than the faithful, look towards? Hardly. Anymore than because the British Virgin Islands features prominently in the revelations, can you suggest that companies formed there should be avoided by those with honest intentions. T.S. Eliot, the 20th-century essayist and poet, said that April was the cruellest month; for Panama, May turned out to be.

As this year is the 400th anniversary of Shakespeare’s death, one of his most famous plays, Hamlet, will be celebrated. It is, in fact, a play-within-a-play in which the player Queen is thought to protest the reality of the situation too much and so loses her credibility in the eyes of Hamlet’s mother, the real Queen of Denmark. As for the Mossack Fonseca affair, reality points to the law firm being only the play-within-the-play; in other words, it is not the big story. The first thing to understand is that what has transpired is not a unique Panamanian phenomenon; one only has to scroll through the names and places professionally linked to discover that. Importantly, when noting how far back so much of the activity occurred, a line must be drawn between the relative international regulatory climate and due diligence laxity existing in the last century versus today.

Having spent almost 40 years in several offshore jurisdictions, including 3 of them as a banking regulator in the Caribbean for the United Kingdom government, I know the reality whereof I speak and so I hope to avoid opprobrium similar to that meted out by Hamlet’s mother as you read on. But the truth is, thanks to the Mossack Fonseca affair, light has been shed in some dark corners beyond Central America; I shall point out some of the most egregious examples which prompt me to quote John Milton, England’s 17th-century poet: “neither man nor angel can discern hypocrisy, the only evil that walks invisible”.

The swingeing attack on secrecy made at the recent Anti-Corruption Summit in London, which brought together 12 heads of state and included more than 40 countries, was itself revealing by displaying, unashamedly, the double standards which exist, especially on the part of the United States of America. A report, for example, by the Institute on Taxation and Policy entitled “Delaware: An Onshore Tax Haven” has said that the state’s tax code made it “a magnet for people looking to create anonymous shell companies, which individuals and corporations can use to evade an inestimable amount in federal and foreign taxes”. I am sure that the vice president of the US, Joe Biden, is cognizant of the problem, considering he was the senator for the state between 1978 - 2009.

And yes, in fairness to him, I know that two huge hurdles need to be overcome to remedy the situation: Congress and the powers enshrined in each state’s constitution. I need not dwell on the difficulties of a consensus in Congress (where lobbyists can shape laws), and especially when dealing with a state’s finances.

Much can be blamed on Britain (often the case) for the US legal system because states applied principles developed by Sir William Blackstone, England’s famous 18th-century jurist, and which, in the words of chief justice Lemuel Shaw of the Massachusetts Supreme Court in 1852, empowers state politicians to enact “wholesome and reasonable laws, statutes and ordinances… as they shall judge to be for the good and welfare” of the state. Historically, the federal government and the states were organised according to distinct principles, allowing each state to make laws and regulations for the benefit of their communities. Clearly, Delaware, which has more companies than people sees the “wholesomeness” of corporate business.

The Panama Papers are the start, one hopes, of a cleansing process where only the fittest and the compliant, wherever they operate from, will survive. Thanks to the exposure brought about by this incendiary gigantic leak, the Organisation for Economic Cooperation and Development’s card hand has been weakened; some speak of righteous hypocrisy. During the summit in London at which a global standard on the automatic exchange of beneficial ownership information was debated, the premier of the Cayman Islands, Alden McLaughlin, made comments which reminded me of Hans Christian Andersen’s emperor who wore no clothes. John Kerry, America’s secretary of state, had said it was vital to show a zero-tolerance approach but that his country was not in a position to sign the Summit Communiqué which had been agreed to by the other participants and this made Mr. McLaughlin say that without the US on board no standard could be described as global. The Cayman Islands’ financial services minister, Wayne Panton, has reminded us that there were more companies without oversight at  just one address in Delaware than all of those registered in the UK crown dependencies and overseas territories, with the exception of the British Virgin Islands; I have not independently verified that, but believe, if anything, it probably understates the facts.

The Black Holes of South Dakota

President Obama said at the London summit that some countries would want to step in and fill the demand for secrecy if others were persuaded to abandon total secrecy; his already has. And whilst like most commentators I have tended to direct much of my fire on Delaware in the past, this would be a mistake. Trusts touting anonymity and privacy are increasingly being set up in Wyoming, Nevada and South Dakota. Assets held in trusts in South Dakota, for example, have gone from US$32.8 billion in 2006 to over US$226 billion in 2014 according to state records; there were 20 trust companies in 2006 and now there are at least 86. International interest in America is growing as foreign practitioners experience the vice-like grip of non-US regulation and see the attractiveness of the US, encouraged by the comments of Heather A. Lowe, the legal counsel and director of government affairs for Global Financial Integrity, a research and advocacy group in Washington. She argues that those 3 particular states, which market themselves internationally, are the tip of an iceberg because “You can create anonymous companies anywhere in the United States”.

The US is the world’s fastest growing offshore tax haven, and any efforts to reverse this process will have to overcome Sir William Blackstone’s influence. I have written about particular Latin American concerns regarding public disclosure of wealth, and you can expect a lot more of it to move to the US to stay under the radar. One estimate suggests that 90 per cent of the registered trust companies in South Dakota have, basically, a post office box or a token office. Somebody will come twice a year to hold board meetings to meet regulatory requirements. There are 40 trust companies sharing one address at a two-storey nondescript white building in Sioux Falls; inside it is estimated that US$80 billion in trust assets is administered. One definition of a black hole is a place where people or things, especially money, disappear, without trace. Up to now we’ve been more aware of the Black Hills, rather than the black holes, of South Dakota.

The Maroon Private Trust Company is in another building in Sioux Falls which shares a receptionist with a roofing company on the same floor and, I am sure, that it needs no help from its neighbour to shelter its activities. Besides hypocrisy, John Milton famously wrote about paradise lost and regained, but for the trust company it remains comfortably marooned in splendid isolation, sheltered (at least for now) from the madding crowd baying for blood and railing against, in its view, and egged on by a hostile press, practitioners of perverse practices ensconced in offshore financial services centres whose fate it is to have, if only metaphorically, an albatross around their respective necks. In the 21st century – at least in the West – they have upset the reformed economic order of the universe, and let us hope that they will not travel a slow and thirsty path toward madness, tormented by an albatross, like the hapless sailor described in Samuel Taylor Coleridge’s epic poem, “The Rime of the Ancient Mariner”.

The Biggest Little Secret

Public dissemination of beneficial ownership is “a reckless violation of personal privacy and stands to put in physical danger law-abiding individuals and their relatives around the world”. Those were not the words of a practitioner in Panama or anywhere else offshore; they were spoken by the president of Reno’s Alliance Trust Company in Nevada. Obviously, the “biggest little city in the world” is trying to protect the biggest little secret in the world about Nevada’s, and other states’, friendly approach to secrecy. He is perhaps emulating the Las Vegas boast: what happens here stays here; CRS, which stands for Common Reporting Standard, is an acronym for Can Remain Secret in the US and Nevada, known for its gambling, is betting on things not changing.

The International Consortium of Investigative Journalists doesn’t share the value system of the head of Reno’s Alliance Trust Company. According to its moral compass, public interest trumps any twinges of conscience over theft, violation of secrecy laws or the illegal access of a data base. Let’s detour, at this point, and consider Antoine Deltour. He is the mild, former auditor with PricewaterhouseCooper, an international firm of accountants, who has gone on trial in Luxembourg. Called “LuxLeaks”, it was the biggest financial leak before the one in Panama, when, in 2012, he passed on 28,000 pages of documents to a French journalist, much of which has been put online by the ICIJ. If found guilty he could be heavily fined and face up to 10 years in prison (although prosecutors are asking for an 18-month sentence).

The government’s lawyers argue that Mr. Deltour revealed tax arrangements that were legal while the accused says that his action was in the European public interest; the ICIJ gave the same reasoning in respect of the Panama Papers, and which has also revealed legal arrangements (ask the UK prime minister), although it did not restrict itself to European concerns. It is true that LuxLeaks could assist the OECD’s plans for closing its Base Erosion and Profit Shifting loopholes, but this ignores the impact on those exposed. I must agree with Luxembourg’s justice minister who says his country’s secrecy laws do not permit persons such as Mr. Deltour to “denounce everything and anything according to his own moral values”. Quite.

In its defence, the ICIJ has said that it took legal advice before disclosing the Mossack Fonseca information and upon being questioned on the issue of receiving the stolen data, the ICIJ implication was that you can do some things in the US (where the consortium is headquartered) that can’t be done elsewhere. We know that this is a fact, not just in the case of transparency, and to explain why requires more space than I have to spare, except to mention again (see the March Offshore Pilot Quarterly) the sad case of the collapsed Caledonian Bank in the Cayman Islands, brought low by a US Securities Exchange Commission investigation that produced no indictment of the bank but impelled the judge in the US to castigate the prosecution council.

The nomenclature, Panama Papers, deflects geographic attention from practices in other countries that need to be put under scrutiny. With Panama’s colourful history and its past battles with the OECD, it is far too easy to parade Panama as the whipping boy of wayward practices. To do so ignores the central role played by Mossack Fonseca in only supplying companies incorporated for others to operate, with wealth directed from offices in the UK, Hong Kong, Switzerland and elsewhere. You can only, however, sweep so much dirt under Panama’s carpet before lumps begin to show, prompting inconvenient questions. Where were the majority of illicit acts actually performed and by whom? Regardless of the past, why has Panama now been put on the Financial Action Task Force’s white list? The play-within-theplay.

America has been called the new Switzerland. As a professional trustee I find it astounding to read that only in 2016 does the US Treasury Department intend to issue a rule compelling banks in the US to identify the people behind shell-company account holders following the international uproar over hidden wealth disclosed in the Panama Papers. In 2011 the Florida Bankers Association told Congress there were hundreds of billions of foreign deposits in US banks because for nearly a century the government has enticed foreigners by exempting their deposits from taxes and reporting. The Boston Consulting Group reckons that up to US$800 billion of offshore wealth is in the US, with nearly half of it coming from Latin America; I have little doubt that the material contribution towards its management made by Mossack Fonseca will have been minimal.

The cat is out of the bag. And what of the self-appointed arbiters of moral and public interest judgements? When the ICIJ on its Panama Papers website assures us that there are legitimate uses for offshore companies and trusts and that it is not implying that persons, companies or other entities mentioned “have broken the law or otherwise acted improperly”, this comes with no guarantee that others who read its Leaks Database will not break the law or otherwise act in an improper manner themselves to the detriment of the innocent exposed on the website.

Offshore Pilot Quarterly (independent writing for independent thinkers) has been published since 1997 by Trust Services, S. A. and is written by Derek Sambrook