The Economist and offshore finance

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The Economist published a review of offshore finance as a supplement with last weeks edition (24 February 2007). Most is not available free on the web, but the lead article is, here. As with KPMG's recent efforts, this is a poor piece of work. To put it another way, it's quite clearly designed as an apology for the fact that the Economist carries advertising for the tax haven operators of the world.

Some things in the supplement are just wrong. For example, the claim that Jersey regulates its trusts (page 10 of the report) is incorrect. It's true that the trust administrators are regulated, but that's very different. No one has any idea how many trust there are in Jersey. That's no indication of regulation. As another example, the 'tutorial' on the bases of taxation of companies is simply wrong: it takes no account of 'controlled foreign company' legislation for a start. The list could go on, and on. Whoever wrote this stuff clearly did not know their subject.

More important though are the unsubstantiated claims which show this whole thing to lack objectivity. Try these:

Many successful offshore jurisdictions keep on the right side of the law, and many of the world's richest people and its biggest and most reputable companies use them quite legally to minimise their tax liability.

How does the Economist know that? The very essence of secrecy is that this is not known, and secrecy is the essence of tax havens. This claim could never be proven.

Or take this:

In Cayman all regulated or licensed professions, including lawyers, auditors, fund administrators and auditors, insurance providers and service providers for trusts are required to blow the whistle if they suspect that something untoward is going on. This is separate from the money-laundering rules.

Well, that might be the law, but surely a good journalist would ask 'how often has it happened?'. Those from the Economist appeared to have overlooked this obvious point.

As they have overlooked the obvious corruption that these places promote. For example, they say:

Some jurisdictions still ply [a] trade [as passive depositories of the cash of large companies, rich individuals and rogues]today and should be put out of business. But the best of them for example, Jersey and Bermuda, have become sophisticated, well-run financial centres in their own right, with expertise in certain niches such as insurance or structured finance.

That's non-sensical. Jersey promotes the facilities to undertake tax evasion through its new trust laws. That's what these places, even the 'best' of them, are all about.

But the biggest unsubstantiated claim in the whole piece comes in the conclusion:

This special report will argue that although international initiatives aimed at reducing financial crime are welcome, the broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system.

And yet, the whole supplement fails to prove this in any way, always finding negatives to counter-balance any claimed benefit, and finding no evidence that it can quote anywhere that tax competition is in any way beneficial to the world as a whole. Put simply, this supplement is like an article of faith, but not of reason. Richard Dawkins should give up arguing with those who believe in God and take on economists of this sort instead - they're an easier target and he's likely to have a lot more success in proving that their 'science' is in fact nothing of the sort, but is simply wishful thinking promoted in support of self-interest.