The release of the Panama Papers highlights the chasm between those who want to eliminate the offshore financial industry and those who see it as critical in facilitating international trade and investment.
For the industry’s detractors, the Panama Papers are another nail in the coffin. But for the industry’s supporters, these leaks are an important part of necessary cleansing. The industry takes a painful hit with each exposé. But these purges bring the industry closer to recognition for its role in knitting together global economies and facilitating cross-border trade.
We must not forget the role of Panama in this process. It has consistently lagged or resisted joining the rest of the international community in bringing laws and regulations in line with global standards. Until recently, some Panamanian service providers advertised that the nation had not changed its laws for decades, differentiating themselves from operators in Jersey, the British Virgin Islands (BVI) and other areas that have reformed their regulations.
Too many offshore financial centers compete for business. Currently they number more than 30, and other nations are trying to enter this space. Many of the smaller centers have not kept pace, either due to cost or resourcing constraints, with the regulatory change required to operate in the “new normal” of greater transparency. This includes the development of central registries of beneficial ownership information.
The future of the industry lies in fewer, better-regulated jurisdictions with mechanisms that balance the need for both privacy and transparency. Consolidation needs to take place not just at the jurisdictional level but also among service providers operating at the point of sale.
In too many major jurisdictions, including the U.K., U.S., and Hong Kong, corporate-service providers operate in an unregulated environment where they are not required to be licensed and compliance standards are not policed. While the vast majority of providers do the right thing, the door is open to potentially unscrupulous operators. It is incumbent on the industry to work with governments and regulators to ensure laws capture both ends of the value chain.
What remains poorly understood is that the leading offshore centers—including the BVI, Cayman Islands and Jersey—now have in place regulations and systems that few of the industry’s detractors foresaw. These jurisdictions are at the forefront of international transparency and antimoney laundering. But the industry’s stubborn critics refuse to concede this point.
The real issues are curtailing money laundering, preventing terrorist and drug financing, and ensuring that corrupt politicians and businesspeople are not pillaging societies and corporations through illegal activity.
British Prime Minister David Cameron recently said it is right to tighten the law and change the culture around investment to further outlaw tax evasion and discourage aggressive tax avoidance. But schemes designed to artificially reduce tax should be clearly differentiated from those that encourage investment.
The issue of privacy versus secrecy remains a fundamental difference of opinion between industry supporters and detractors. At its heart is the question of intent. People have a right to maintain some privacy, and the mechanisms emerging across the leading jurisdictions balance individuals’ privacy and authorities’ access to information on the beneficial owners of companies.
The industry’s critics are demanding that public registers be implemented for transparency, a step that is being taken in the U.K. The industry has resisted this elsewhere and for good reason—lawbreakers will not self-report entities that are created for criminal purposes. The Puppet Masters report, a World Bank study on corporate vehicles, found that a beneficial ownership regime based on licensed corporate service providers is a better solution than one based on registries of beneficial ownership.
Where is all of this heading? Those who have something to hide have left, or are leaving, the offshore financial industry, and this may lead to a decrease in its overall size. But for those who legitimately transact international business across borders, the industry will become better-regulated, more transparent and more resilient than ever. The short-term pain may be just what the industry needs to go through to receive the recognition it deserves for enabling globalization and providing the plumbing to the international financial system.
Jonathan Clifton is the Hong Kong-based group managing director of the company formation services of Vistra Group, a leading global provider of corporate services. To view the original article, visit The Wall Street Journal here.