I have explained why sanctions against tax havens are ethical.

I have explained why this is economically appropriate, and equitable.

I have suggested a list of tax havens that should be blacklisted.

I have suggested some sanctions that might be imposed upon them, and will suggest some more in due course.

Before doing so let me suggest the criteria that I think should be used to let a tax haven of any blacklist that is created. This seems to me one of the most important issues that must be addressed if we are to really make progress on this issue. Having a stick is, of course, one very important weapon. Carrots work quite well too.

I am not going to apologise for offering the definition of a secrecy jurisdiction again. It provides an essential insight into the problem that we are tackling, which must in turn provide the basis for getting these places off any sanctions list:

Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction and that, in addition, create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

There are three issues implicit in here:

1. Regulatory abuse;
2. The residents of other jurisdictions;
3. Secrecy.

Regulation can in turn be split into several parts:

1. Tax
2. Legal entities registered in the jurisdiction
3. Banks
4. Other financial services entities selling primarily to the public
5. Hedge funds and private equity funds with an informed clientele.

Information exchange criteria

I have no doubt at all that the OECD will promote an approach to blacklisting which will revolve around the number of double tax treaties and tax information exchange agreements that a place might have. News to this effect has already leaked. It is immediately apparent from looking at the above list that this would be a wholly inadequate criteria, by itself, for creating a list of tax havens to which sanctions should be applied, or for letting secrecy jurisdictions off any such list.

First of all some places, like the Isle of Man, which have been enthusiastically creating tax information exchange agreements, none of which have probably given rise to any data being supplied to anyone as yet, might be off a sanction list as a result. That would be absurd. The Isle of Man has had a bank fail in the credit crisis, unlike most places, and depositors have lost their money. It is clear that its regulation is not good enough. It is also refusing to exchange information with the UK and other EU states under the terms of the EU savings tax directive, under which it has exercised the option to allow tax withholding by those using its banks to evade their obligations to pay tax in their home states.

Having a commitment to tax information exchange agreements is clearly useful, and I would give it weight in any criteria for getting off a sanctions list, but it is very far from enough.

There is another excellent reason for saying this. If the target for getting off the list was, say, 10 tax information exchange agreements you can guarantee that almost overnight most secrecy jurisdictions would enter into such agreements with each other. Each of them would have a network of 20 or so within weeks. The whole process would become a mockery. There is a very real danger of this. Something more is needed.

With regards to information exchange there seem to me to be four criteria that must be met before sanctions could be lifted:

1. There must be a commitment to participation in multilateral information exchange agreements that is evidenced by action within six months of the commitment being made. The multilateral information exchange agreements must be offered to any state who asks to participate (bar those on a ‘blacklist’ where human rights abuse is likely), not just a few selected places like the UK, USA, Germany and Scandinavia as well as other tax havens, as has been the case to date. In particular, middle income and developing countries must have opportunity to enter into such agreements. There must be a population test to cover the effectiveness of the agreements entered into i.e. sufficient people in sufficient countries (some of which must in the developing world) should be covered by the agreements. The number of agreements by themselves will not be enough to meet the requirement for being off the list.
2. In addition, the criteria set for requesting information must be lowered and the criteria for refusing information requests must be raised;
3. For those secrecy jurisdictions covered by EU savings tax directive there must be a commitment to withdrawing the withholding tax option and there must be a commitment to comply with the revised requirements tabled in November 2008;
4. An undertaking to enter into automatic information exchange when this becomes commonplace within the EU and between EU member states and the USA should be given.

If support is required to fulfil any of these objectives then OECD member states should provide it.

Legal entity criteria

A lack of trust created the credit crisis that was the precursor of the current recession. That lack of trust between banks was the result of their having little or no idea about the composition of each other's balance sheets, a fact exacerbated by the very large number of offshore subsidiaries that many of these banks have on their books. Almost 30% of all Barclays subsidiaries are in secrecy jurisdictions. Nothing is known about its subsidiaries bar their name and place of incorporation and yet numerous investigations have shown that in many cases billions of pounds are committed to them for onward lending or to facilitate complex tax driven mechanisms.

It is vital for regulation of the banks, and for recreating of confidence in that sector, that the accounts of all subsidiary companies of all banks the world over be on public record, and this requires that this action be undertaken in tax havens, without exception.

If that is agreed to be the case, and no restoration of confidence in this sector will be possible without it, then it follows that the same information should be made available for all legal entities registered in such places. At a minimum, the data put on public record in the UK must be available, and the use of nominee arrangements should be banned (as it should also be banned in the UK). Then another element in the secrecy that surrounds these jurisdictions would end.

It is stressed, this could be done remarkably little cost.

Without this process being put in hand none should come off the sanctions list.

Financial sector regulation

The problem of regulating the financial sector in any tax haven is simply stated, and almost always ignored. Take a place like Jersey, population 90,000 or Cayman, population 48,000. Now imagine that you are a regulator living in such a place. You will be a senior member of the government administration. You will be well paid. You will want to enjoy the local social life. As an expat (and it is inevitable that you will not be a local) that would have been one of the major attractions of moving to the place. And there is not a hope that you can do so without meeting, everywhere you turn, those that you are meant to regulate. They will be your peer group in society. They will dominate your society because financial services does in these locations.

How can you avoid conflicts of interest? How can you be objective in case? How can you impose sanctions on people who have the ability to make your life a misery by ostracising you every single day in every single social circle in which you, your partner and your children wish to participate? Only the most robust of individuals could face such a situation. Those individuals will not be working at offshore regulators, I can tell you.

In other words, whatever local regulation there might be that requires monitoring within the financial services sector, and what ever procedures put in place, there is no prospect of effective regulation or sanction upon those who wish to ignore the rules in such locations. They can only be regulated from outside their own domains simply because they are too small to host both a financial services sector and a regulator at the same time.

It is unsurprising as a result of this observation that there had been almost no prosecutions of people involved in the financial services sector in the British Overseas Territories and Crown Dependencies and those that there have been would appear to have been of social outsiders.

This point is the obvious direction in which regulation must move if the territories that of the blacklisted are to have sanctions removed. They have to accept that any entity undertaking international i.e. offshore business within their domain must be regulated by an international regulator or, in the case of a bank, by the regulator in its parent company jurisdiction. Only such a move can provide the confidence that these spaces will be regulated as required. It also removes substantial risk from them: if something goes wrong they can blame the regulator elsewhere.

There is one final issue: no entity engaged in financial services in the spaces must be exempt from regulation as are some hedge funds in Jersey, for example. One can argue that the investors in such funds are sophisticated. So they might be, but many also seem remarkably unaware of the consequences of their actions and that means they must be regulated.

Pulling it all together

I am not suggesting that what I say here is a complete answer to the problem that I pose: it is a first stab at that answer. It does, however, suggest that there are at least the following tests that must be met before a place comes off the sanctions listing, and I suggest that every test must be met before this happens:

1. Meet a sufficiency requirement on information exchange agreements
2. Commit to multilateral exchange agreements
3. Commit to participate in automatic information exchange when certain criteria are met
4. For those covered by the EU STD commit to full membership of the new proposed arrangements without a withholding tax option
5. Put details of the ownership, management, constitution and accounts of all legal limited liability entities on public record and ban the use of nominees
6. Allow external regulation of all entities servicing international financial services clientele.

These would change regulation and most importantly shatter secrecy. 

Do that and these places can come in out of the cold. But if they don’t they need to be sanctioned, for the good of us all.