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Offshore Finance Centres and Tax Havens

edited by Mark Hampton and Jason Abbot

A Review by A.M. Bellows

This is a collection of essays by different authors all related in different ways to Offshore Finance Centres. Three of these deal with the Channel Islands. The introduction "The Rise (and Fall?) of Offshore Finance in the Global Economy" by Hampton and Abbot, "A Legislature for Hire: The Capture of the State in Jersey's Offshore Finance Centre" by Hampton and Christensen, and "Financial Regulation and Supervision Offshore: Guernsey, A Case Study" by Le Marchant. This review will concentrate largely on these chapters, as being of most interest and importance to Channel Islanders.

"The Rise (and Fall?) of Offshore Finance in the Global Economy" by M. Hampton and J. Abbot

This summarises points made by the various contributors to the understanding of Offshore Finance Centres.

In the summary on the contribution by Hampton and Christensen, Jersey is cited as an example of how "small jurisdictions... may be captured by international financial capital", which can be seen in "the manipulation of that small state by powerful financial capital such as international banks and other transnationals including the largest accountancy firms", so that it passes "favourable, highly specialised offshore legislation" and permits "activities that may be forbidden onshore".

It is also remarked that "regulatory authorities" in OFCs comprise little more "than sleek buildings, glossy annual reports and well-paid bureaucrats", and "even in Jersey, the local regulators were proved embarrassingly ineffectual by events in 1996", and "the new (rebranded) Jersey Financial Services Commission has yet to prove that it is any better than the small civil service department that it replaced."

It is overlooked that the collapse of WorldCom in the USA, or Barings Bank in the UK, to cite just two of many recent examples, managed to slip the net of far more powerful and supposedly better staffed regulatory authorities, as correctly noted by Le Marchand. Le Marchant also comments that "one can seldom detect or prevent the determined, wilful fraudster". One might add - either with onshore or offshore regulation. To my mind, this provides sufficient evidence to falsify the thesis that regulation is sufficient to prevent fraud - a thesis which is not stated, but clearly functions as an underlying assumption in their dismissal of regulatory authorities as being "small" and inadequate.

I will come to deal with the matters raised in more detail in my review of the essay by Hampton and Christensen. For the moment, it will suffice to say that the impression given by this introduction is that Jersey engages in activities which would be seen as criminal elsewhere (" activities that may be forbidden onshore") and the regulatory authorities are basically an exercise in spin-doctoring, not backed up by stringent laws and regulations, and are in fact woefully insufficiently staffed.

There is clearly here either a wholesale dismissal or ignorance of the whole raft of stringent anti-money laundering legislation and the new tighter trust company compliance standards required by islands such as Jersey, which are in many respects more demanding that those onshore (as noted by Le Marchant).

"A Legislature for Hire: The Capture of the State in Jersey's Offshore Finance Centre" by Hampton and Christensen.

Hampton and Christensen present a general picture of OFCs as naive, floundering, minnows out of their depth in the global economy, easily directed by professional sharks. In an OFC, they comment that there is "limited experience of both politicians and civil servants in matters relating to financial services legislation"; this lays the OFC open to manipulation by "sophisticated legal and tax accounting professionals" who can persuade the goverments of the OFCs to "introduce a variety of devices which serve their special interests".

This argument is rhetorical and little consideration seems to have been given to alternative scenarios. It is taken as an assumption that the government of an OFC is naive, weak, easily influenced by the powerful professionals, and evidence of this is given by the legal devices stated (such as the protected cell company). It is equally possible that the relationship is symbiotic, that a government is fully aware of the possible advantages of providing professionals with financial devices not previously available in the OFCs. Moreover, the tendency in Jersey to appoint very senior civil servants from the U.K. , who have a wide range of domestic and international experience, would tend to mitigate both against this thesis, and against the view that OFCs are "insular and inward looking".

Again, with regard to regulation, it is baldly stated that "In recent years many OFCs have gone to considerable length to create an aura of regulatory sophistication by enacting a variety of legislative measures. Demand for such measures is largely driven by the financial sector itself, principally in order to create a veneer of respectability". Again an alternative scenario would be to see regulation as a means of fighting financial crimes, and money laundering. The recent case of the Coke-Wallis companies (when the directors were prevented from leaving the Island), and also the investigation of Aberdeen Asset Management indicate that the regulations are being applied, and that the regulators are alter to misdemeanors, and are prepared to take pro-active as well as re-active steps. Moreover, as I remarked above, if the USA can suffer the collapse of World Com, and the U.K. the collapse of Barings Bank, and the Maxwell empire, the same charges could be easily laid at their door. In what way do the regulations only provide a "veneer of respectability"? What precise failings do they have? No details are forthcoming, and the impression given is that the authors have dismissed the regulations without looking at them in depth, because the regulations do not fit the a priori assumptions which have been made. In particular, the necessity of an independent audit of trust company accounts, in place before Enron, ensures rigorous scrutiny for financial integrity.

The authors give a brief examination of the economic understanding of OFCs from the point of view of "neoclassical theory" and give a cursory glance at other theoretical frameworks, before returning to the "fractions of capital" analysis of which Hampton presented in his "Offshore Interface".

The neoMarxist terms "financial capital" and "industrial capital" are used as an framework for understanding the OFC economy (and the global economy). "Financial capital" is "characterised by its mobility and its continual search for high returns in the short term", while "industrial capital" is relatively mobile. In an onshore economy, these "compete" for profits or interest; there is a "struggle" between them for dominance (- a picture also presented in Andrew Leyshon (2003), "The Limits to Capital and the Geography on Money" ).

The "offshore" economy is then seen as a result of the strong dominance of "financial capital" in the City of London over "industrial capital", in which the capitalism is mobile, predatory and short-termist, stimulating the development of the "unregulated offshore markets", with "active participation" and marked "tolerance" to offshore finance.

This model appears to be very anthropomorphic in its presentation.. "Fractions of capital" are treated as if they were a real entities, although no means of quantification is given, and no mathematical and rigorous treatment of the means of "competition" between them is provided. It gives, to use the author's own turn of phrase, a veneer of scientific respectability. However, the lack of rigour in the presentation means that as a model for understanding, it is closer to Husserl's phenomenology, Heidegger's existentialist, or Hegel's historicism, where esoteric jargon replaces rational argument. Lastly, I would add that the model is used to describe events only after they have occurred, which makes it a mode of historical explanation, and I will argue that its explanation of events (as given in their Case Study) gives a simplistic and one-dimensional over-generalisation, which clearly has not been tested in detail against alternative explanations.

The next section of the paper is entitled "Case Study - the capture of the State in Jersey".

Here, one of the arguments of the authors is that the hosting of the OFC "has crowded out other industrial sectors, particularly agriculture/horticulture, tourism and light manufacturing industry", financial services are seen as a "cuckoo in the nest". Here they draw on Heeks' work on Brunei which expounds on potentially dysfunctional implications of a large minerals export sector for a balanced economic development., which is accepted as accurate. It is argued that by analogy, the large financial services sector of Jersey has a similar impact on the local economy - "although Jersey is a service based rather than a mineral based economy these economic insights are nonetheless applicable."

I would mention in the first instance that Heek's work has been criticised by Professor S.A. Anwar of the University of Brunei as being not " subjected to rigorous analysis. This neglect maybe attributed mainly to the non-availability of empirical data.", which seems a common failing in this kind of enterprise. However, leaving the possible pitfalls of the model aside, let us consider the historical problems.

Jersey tourism began to decline in the 1980s after a post-war boom (for more detail see here). In the latest manifestation of its decline (the late 1990s and onwards), there has been a move of hoteliers selling to the local property market and leaving the industry, as well as a lessening of the price differential between Jersey and the U.K. as regards what might be termed "holiday goods" - gifts, luxury items, drink etc. This may be caused by the increasing dominance of the finance sector, although the increase in population clearly also played some part in allowing the prices of shops and restaurants to rise because they could now survive on a local market alone. However, the main cause of the decline in the 1980s was the advent of low-cost package holidays with cheaper, more adventurous localities with better weather, which also caused a decline in UK tourism. I would content that it is likely that even if there had been no finance industry in Jersey, the historical evidence suggests that there would have been a decline in the market anyway. In fact, it could be argued that the financial sector allowed funds to flow into the Tourism department which has been able to retain its size despite the decline in the market and promote the Island more than it would otherwise have been possible.

Agriculture was also declining for different reasons (for more details see here). Two factors - subsidies of competitors and increased regulations required by the export market - seem to have played a more significant role than the finance industry in its decline. All agriculture across Europe is a protected industry, heavily subsidised, but in countries like Britain have seen a significant decline because the subsidies, while increased in time, have not kept pace with the rate of inflation. In real terms, a statistical analysis shows that Jersey's subsidies to farmers are half what they were 30 years ago! Again, it is difficult to see that the situation would have been much improved even if the financial sector had never gained such dominance. What was probably needed was an annual increase in subsidy in real terms to place Jersey farmers on a par with their market competitors, in other words, a greater degree of intervention in the market place.

The dismissal of neoclassical economics as a means of understanding Jersey mean that attention is focused upon the finance industry as a competing "fraction of capital" against tourism and agriculture, without, ironically for a book which uses the term "global" so frequently, looking at the influence of outside global markets and their competitiveness against Jersey. There is a "high cost base" which makes agriculture and tourism difficult, but it is not the only, or even the most significant factor, in the decline of those industries.

Turning to the examination of the government of Jersey, Hampton and Christensen note that there is only " the appearance of political stability" because of the "absence of party politics". However, they note that there is in fact "no formalised process for internal scrutiny other than through the intervention of individual States members", and an "absence of democratic checks and balances found larger polities", citing as an example "the lack of an independent civil service"; in particular, they refer to the Financial Services Department as being under the control of the Finance and Economics committee.

While these criticism may have some merit, they should have been updated to deal with the independent Financial Services Commission which has replaced the Financial Services Department. Moreover, for a book published in 1999, they seem singularly unaware of the consultation process underway in this period by Cecil Clothier into the machinery of Government, which addressed such issues as scrutiny. I have the impression that this is an old analysis, slightly revamped for 1999, with a certain lack of attention paid to current developments in case they spoil the picture. It should also be noted that Jersey is a democracy, and the ultimate check for politicians is the ballot box. Moreover, the citation of the House of Lords as an avenue for scrutiny in a note to this section does not consider its emasculation under the present Labour government, and the criticisms levelled at that!


The authors also comment on the "virtual absense of a free press", with the only organ of news, the Jersey Evening Post "controlled" by Senator Frank Walker. This is pure supposition, and in my opinion, is a mischievous comment without proof. The Jersey Evening Post maintains strict editorial independence, and has been encouraged to do so openly by Frank Walker. Obviously, this can be taken as a pretence if one is forging ahead with conspiracy theories, such as appears to be the case here. But there is also no mention of the excellent, impartial, and jealously independent BBC Radio Jersey news service, which by 1999 was reporting on stories in depth, questioning relentlessly politicians who fudged issues (in particular by Olaf Blakely), and providing an extra and popular source of news on island issues (with considerable audience share). Now, the launch in 2001 of a Television service and in 2002 of an internet news service ( provides even more access to Island news stories. Clearly the authors could not have knowledge of the latest development in 1999, but they should have noted that the critics such as former Deputy Gary Matthews received a fair and full coverage on the BBC, and that the media is not just confined to the press, but should also include other readily accessible means of reporting.

The idea, taken from Chomsky, that "public perceptions are manufactured" and comments that reportage is "trivia and bogus sensation" like the UK's "tabloid press" are pure rhetoric again, not backed up by hard evidence, apart from a comment from a Deputy who failed to gain re-election! Once more there is the hint of a conspiracy theory. This is seen even more clearly in the remarks that the OFC is seen by Hampton and Christensen as having "unethical attributes" (unexplained) with which a large proportion of the workforce are "complicit" accessories as they work in the financial services industry. The local media "avoid discussion of the nature of OFC activities" and "report events or personalities rather than explaining concepts and issues", so that the population "do not wish to express dissent publicly, or do not fully understand what is going on".

Paul A. Silverstein has noted that "conspiracy theories remain profoundly ambivalent: They desire final truth while questioning its very possibility; they seek ultimate agency and intentionality while doubting others' credibility and search for unmanipulated knowledge... Lacking any such unmediated knowledge, conspiracy theories attempt to map an over-profusion of information into a coherent narrative web or master plot--what S. Paige Baty refers to as a 'cartographic mode of remembering.' Viewed from a functionalist perspective, they represent, in Frederic Jameson's words, 'the poor person's cognitive mapping in the postmodern age...a desperate attempt to represent the late capitalist system" by those marginalized from it.'" I would concur, and would argue that what Hampton and Christensen have presented under the guise of fact, is in fact little more than another conspiracy theory, in which they know the truth about Jersey, but it is hidden, or suppressed or ignored in Jersey itself.

We turn now to the case of the Limited Liability Partnership Law. This, it seems to me, is the one case were there is a degree of substance in the accusation that Jersey's politicians are available for "hire". It is clear that the States of Jersey saw an opportunity to obtain new business if they could do so quickly, and the driving force behind the opportunity lay with Ernst & Young and Price Waterhouse, who also offered to cover much of the cost of preparing this legislation.

However, to describe an LLP as a "tax and/or 'regulatory haven' device" is again to overstep the mark, and avoid looking at the wider issues. In an increasingly litigious society, unlimited liability for partners, and particularly of the large accounting practices had become an increasing cause for concern in the light of:

For the partnership to continue as a viable entity in the 20th century and beyond, clear steps had to be taken to redress the balance. As a result, various States in the USA, such as Delaware, had already introduced such legislation well before Jersey; it was an onshore law rather than an offshore law. (Of course, I am aware that some commentators have termed Delaware "offshore within the USA", but to define "offshore" as is done there purely by virtue of the LLP, and then use this to define Delaware as "offshore" is an error of circular logic).

It seems likely that the motivation behind the accountancy firm's pressing for Jersey to adopt such a law was to put pressure on the British Government, which had been delaying such a law, although conceding its necessity, a fact which is mentioned by Hampton and Christensen. The success of this can be judged by the extreme rapidity in which, with no hint of the moral qualms about "national and international regulatory structures", the U.K. managed to bring in its own Act in 2000. The explanatory notes, from which I have taken verbatim points (a) to (d) above, make it clear that it was to remedy deficiencies which had come to light with globalised and large partnerships, and while mentioning Jersey, also notes that the LLP was has been long established in the USA. Curiously for an entity which Hampton and Christensen regard as an example of a "'regulatory haven' devices", no other offshore jurisdiction has been cited by them.

Another argument by Hampton and Christensen is that the advent of a Jersey LLP law meant that the UK had to bring in a more favourable law, rather than one on much "less favourable terms than those offered by the Jersey-variant LLP law". This is just baldly stated, with no evidence cited to substantiate it.

The impression is also given that two members of the States of Jersey attempted to criticise the matter and were silenced or lost their position in the States as a result. This is again, in my opinion not quite a fair picture.

Senator Stuart Syvret did justifiably criticise the almost manic haste with which the legislation was being "fast tracked", but his suspension from the States was technically due to an abuse of privilege - he accussed the then President of Policy and Resources Committee of colluding with the firm Mourant Due Feu and Jeunne to get the legislation passed on their behalf, but he was unable to substantiate his case with hard evidence (whatever the merits or likelihood of its truth) and refused to retract his accusations. This led to his suspension from the States. I imagine that such a matter would be as seriously dealt with in the House of Commons if an accusation was made by an M.P. relying upon the safeguard of Parliamentary privilege.

The other politician cited, Deputy Gary Matthews, attempted to raise the matter as an electioneering issue in a Parish, going out of his way to attract publicity with such stunts as standing on a soap-box with a megaphone; that such self-sought publicity was detrimental to his campaign can hardly give much substance to his claim that the press focused on "trivia and bogus sensation".

Finally on this matter, it should be noted that this is the only substantial example of a "legislature for hire" which is clear, which in the period post-war to the present day, is not too bad a record, when compared with, for example, the various financial scandals which seem to beset almost every U.K. Government in office over the same period of time.

In conclusion, I would like to propose an alternative scenario, which I think is more justified by the historical record. The post-war years saw a decline in the traditional bases of Jersey with agriculture and tourism for reasons discussed above. This economic vacuum was filled by an expanding finance sector. Filling a void is clearly very different from "crowding out". (Sources supporting this alternative are given here).

In terms of a "what if?" scenario to be placed against Hampton and Christensen, it must be asked: what would Jersey be like if the finance boom had never occurred? I would propose that the historical evidence suggests that it would have been an impoverished island, with a smaller population, where agrictulture would have declined much as it has, and tourism may only have held on by entering a market for holiday homes.

Only in the last decade of the 20th century did rising costs engendered, in part, by the finance industry cause serious problems and competition with the tourism sector. Yet these were not totally the fault of finance - even in the early 1980s, hoteliers and retailers were using the "boom" in Jersey tourism to increase prices beyond what could be considered prudent.

Agriculture, on the other hand, was beset by an entirely different set of problems, one of the most important probably being a major decline in subsidies in comparison with its UK and European competitors.

The one piece of legislation cited, the LLP, was undoubtebly an error of judgement upon the part of the Jersey authorities, but I would consider it much less likely rather than more likely that such legislation would ever be passed again.

The idea that Jersey's financial sector is "unethical" and that the laws in place are mere window-dressing does, in my opinion, give more real information about the attitude of the writers of the article; it is, in my opinion, a matter of ethical judgement which is entirely proper for the authors to hold, but it should not masquerade as economics.

"Financial Regulation and Supervision Offshore: Guernsey, A Case Study" by Le Marchant.


Appendix: Fractions of Capital

"Fractions of capital" is seen as an "alternative view" but no consideration is given to the issue of falsification. How can it be tested rigorously? What would invalidate it? What can it predict as an economic outcome that neoclassical theory cannot? What empirical work could be used with the theory to originate new hypotheses, or improve on the theory?

It treats "industrial capital" and "financial capital" as though these were two discrete, unchanging and easily differentiated entities, and yet no means of measurement is given. For what is, after all, a mathematical analogy, it is rather poor to talk of "fractions" and not be able to device a method for actually calculating these! As a mathematician myself, I find such an analogy very ill-defined.

It is applied as a descriptive mechanism for understanding historical events, but understanding events after they have happened is a poor basis for a scientific theory.

 I have read a number of articles by various writers using the idea of "fractions of capital" and I have yet to find a clear econometric means of determining how such an idea could be measured. Instead, I find that writers often resort to saying that "we cannot be over simplistic about this", which seems to be little more than a means of immunising the theory against possible falsification.

I would remark here that no amount of "evidence", no degree of refinement of elaborate structures, can replace the risky predictive testing of a theory in the scientific method. Following Popper, I would suggest that as a scientific theory, fractions of capital is like the classical theories of psychology (e.g. Freud, Adler); it may be "right" in the sense that it does describe real phenomena, but as long as it is not subjected to critical tests which have at least the potential to prove it wrong, it cannot be called scientific, even if it provides meaningful insights.