I mentioned last week that my discussant at the World Bank did not much like my paper, and made comments for which i received fulsome apologies from the organisers. Even he though said that my definition of secrecy jurisdictions is a major contribution to thinking in this area. I define them as follows:
Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also 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.
It it notable that the term ‘tax haven’ is hardly used in serous debate of this issue now: even the OECD were using the term secrecy jurisdiction last week. I think this a major step forward.
It’s easy to see the use of this language. Take this from the FT today:
Nearly half of the UK’s hedge funds are likely to move abroad if new EU regulations are passed, according to a comprehensive new study of the alternative asset management industry due to be released on Monday.
The findings — based on a survey of 121 managers, looking after $384bn (£236bn, €261bn) of client assets, the bulk of the European industry — come as UK and American politicians step up their efforts to modify the EU’s controversial draft alternative investment fund manager directive.
The EU directive proposes greater transparency, restrictions on leverage and higher capital requirements for hedge funds, but has come under fire for being unworkable and heavy-handed.
According to the survey by the think tank Open Europe, just over 42 per cent of UK managers said the rules would be likely to force them abroad if the draft directive was passed in its current form.
So what are these people going to do? They’re going to use secrecy jurisdictions to undermine EU regulation.
As Stephen Timms said this morning:
People also deeply resent the small minority, who use their resources to move money offshore without paying the tax due. Those who enjoy all the rights of living here, but don’t want the responsibilities. Here too we are on the case.
We need to be. The definition of a secrecy jurisdiction shows what these people are doing. And as Timms said:
[E]ffective government has to factor in the international scene.
¬? Regulatory reform won’t succeed if businesses can play countries off against each other.
¬? Effective action on tax havens requires a shared resolve.
Good government requires an international perspective, not an isolationist one.
True. Beating hedge funds on this issue is a test of this resolve. Using the definition I have proposed of a secrecy jurisdiction underpins it. The term tax haven has to go.
Changing the rules on tax residence for companies will stop this abuse.
Now let’s see action on both issues.
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Richard,
But hedge funds are one of the few sectors of the economy that could “properly” move offshore. After all, the real business of many hedge funds is carried out by computers, programmed by 1 or 2 hyper-nerdy types. It is quite feasible for such a company to move to a third country. You just need a decent telecommunications pipe and a secretary to set up anywhere. In that case, “residence” issues fall away: the 2 whizz kids can take their terminal anywhere and quite reasonably argue that jurisdiction is the residence of the company.
And then you get into the business, which the EU is trying to do, of saying that investors in the EU should only be permitted to invest in hedge funds created in the EU. Well, isn’t that pure protectionism? And how do you think that a major EU pension fund would respond to such a restriction? Answer: by setting up a subsidiary in a third jurisdiction outide of the EU to invest in funds established outside of the EU (whether in Cayman, Jersey, New York or Tokyo).
And thus the legislation actually has (ironic) the effect of encouraging hedge funds to move outside the EU and those who wish to invest in hedge funds setting up vehicles to do so in third countries.
It has nothing to do with “secrecy jurisdictions” seeking to undermine anything. If the EU drafts legislation that says EU hedge funds must follow certain requirements and EU investors must only invest in EU hedge funds that is for the EU. But just because other jurisdicions (in fact, every other jurisdiction in the world) thinks the proposals are wrong-headed and protectionist does not mean they are seeking to undermine the EU.