AS THE WORLD has sought to understand the cause of the global financial crisis, international financial centres have naturally found themselves under fire. Taking much of the flak have been the smaller centres, whose offshore jurisdictions have raised the eyebrow of suspicion.
Described as tax havens for avaricious bankers and secrecy jurisdictions for shady figures in the international business community, many believe they should shoulder part of the blame for shortcomings in the financial markets.
That the debate over the role of small financial centres has been so one-sided is unfortunate, as it would be unwise to write-off such jurisdictions before any commensurate attempt has been made to understand their role in the wider economy. Indeed, it is in the UK’s vital interest that we take a dispassionate view of such centres in light of the benefits they can offer our nation.
There seem to be four distinct myths that have gone unchallenged. The first is that international financial centres have a negative impact on growth in the global economy. In reality, many of the small centres have stable, well-regulated and neutral jurisdictions that can facilitate international business. Investment channelled into the small centres can, in turn, provide much-needed liquidity and can further investment opportunities, competitiveness and access to capital markets.
The second myth is that they engage in harmful tax practices. The Foot Review, an examination of the UK’s relationship with international financial centres, suggested that the potential for tax leakage from full tax jurisdictions towards low-tax or zero-tax regimes is relatively limited.
A third myth suggests that small centres have a negative impact on transparency, regulation and information exchange. There is a huge difference between cooperative and uncooperative jurisdictions, between transparent and well-regulated centres and between the opaque and less well-regulated. In the fight against money laundering and terrorist funding, offshore centres such as the Isle of Man are currently among the highest rated jurisdictions globally for complying with international standards.
Finally, it is often thought that small international financial centres support capital flight from developing countries. But the Commonwealth Secretariat has suggested that small centres often play an important role in boosting development by enabling such nations effectively to ‘rent’ financial expertise from other countries, while developing financial centres of their own.
This debate matters to the UK. Through our Crown Dependencies and Overseas Territories, we have a constitutional relationship with half of the top thirty offshore financial centres. Acting on a hub and spoke basis, the massive capital flows between these centres and mainland UK aid market liquidity and investment, while our legal and constitutional similarities allow the transfer of skilled professionals.
To put some perspective on this, in the second quarter of 2009, Guernsey, Jersey and the Isle of Man provided £209bn of liquidity to the UK market. With ever-darker clouds gathering in the eurozone, many anticipate a second credit crunch as 2012 dawns. The UK’s access to offshore money will undoubtedly prove vital in weathering the storms to come.
Put simply, when it comes to our naked self-interest, it would be foolish of the UK to ignore the proven benefits provided by small international financial centres as part of the City of London’s world-class operation. Reasoned debate on their role is valid, but let it not descend into myopic criticism that conveniently ignores those benefits.
Mark Field is MP for Cities of London & Westminster