Offshore finance centers also called off shore jurisdictions form an integral part of international finance and trade. The concept of offshore does not mean smallness or largeness of a financial center but it categorically stands for whether the clients who receive the finance are non-residents of jurisdiction offering the financial services. This particular credit arrangement is advantageous in many areas to both individuals and corporations by allowing legitimate risk management and financial planning.
Offshore financial centers are not only used by major industrialized countries but also the emerging economies whose financial systems possibly are very vulnerable to reverse capital flow negative impacts like short-term debts and unhedged exposure to currency fluctuations among others. The credit crunch has really affected the investor confidence. For instance in Jersey, investors are considering investing in Media Finance, Fine Art and sports right because of mistrust and jittery that investors have developed on investments surrounding real estates and securities (Pinel, 2009).
Background exploration Offshore finance refers to the process of providing financial services by banks among other agencies to non-residents. The financial services include borrowing money from non-residents and lending to non-residents. The Island of Jersey emerged as a significant Offshore Finance Center (OFC) in the 1960s. Offshore Finance Center is a jurisdiction that conducts itself as a financial services hub enabling financial services firms to conduct financial transactions with non-residents (McCann, 2006).
Ideally, the location of an OFC pegs on issues of taxation or regulatory differentials, bank secrecy and the stability of political regime. Both UK and Jersey fortunately possess favorable factors listed above. Offshore finance centers are described as states that have deliberately made attempts to attracting international trade related activities through creation of conditions that attract investors like minimization of taxes, reduction or elimination of regulation in the jurisdiction aimed at attracting non-resident to performing international trade with institution,.
Offshore finance centers hosts financial activities and is separated from major regulatory units for instance states by geography and legislation. In this case, the separation could be physical separation for instance an Island situation like Jersey or being within a city like London (Hamptom 1996 p. 52). The global credit crunch has affected financial market. The negative impact not only relates to the downward movement of stock prices but also the jittery investors have developed (Pinel, 2009).
The wide believe is that the ‘opaque environment’ characteristic mode of operation of Offshore Finance Centers (OFC) particularly in the hedge funds was abused into leading to irresponsible mode of operation in financial handling that eventually is responsible for the present credit crunch (Houlder 2008 p. 1). Financial institutions are said to have opened holding companies that operated in tax havens. The notion to adapting operations in tax havens was that firms made huge profits under such arrangements. The Current impact of Credit crunch on offshore financing
The present credit crunch is really posing a challenge in the offshore financing sector. For instance, the EU has issued a directive to have introduction of regulations on the hedge funds and private equity funds. As described, this is part of the European Commission unique response to the financial crisis that has bedevils the financial industry. According to the European Commission, the directive issued is a bold move that is leading in reduction of systematic risks that often caused by non-retail funds (Jersey evening post, 2009).
According to the jersey finance chief executive, the Jersey Island has played a significant role in assisting reduce the impact of credit crunch. Among other measures, the Island has reduced the impact through sending money upstream through the London city. The Island of Jersey is categorical on its operations related to financing. The onshore businesses in the city of London and New York link to exploiting offshore benefits from Jersey and Cayman, a move that the companies reckon has been assisting them optimize tax efficiency.
In this case, the optimization process in all aspects seems controversial. The onshore businesses have been repackaging debts in addition to cross border lending all facilitated by offshore financing in Jersey (Houlder 2008 p. 1). The Offshore finance centers like Jersey deny being the cause of the credit crunch. Their notion is that getting the blame for the credit crunch is like blaming a car manufacturer for a road crash. Jersey flaunts that it has played enough precautionary measure in reducing the credit crunch.
In this case, the island flaunts playing a significant role in reducing the impact of the credit crunch. One way of doing so is said to have taken the process of signing a number of bilateral Tax Information Exchange Agreements (TIEA) with a number of key states like United States, Germany and UK (Mathiason, 2009). Offshore finance concept is facing criticisms because of the suspected contribution to the global financial meltdown,. The concern of IMF has been building a regulated global financial system that is less vulnerable to abuse through loopholes.
Offshore finance centers pose some dangers to the international monetary system (Piccitto 2007 p. 2). Financial crisis has some contribution from across the border movement or short and long-term capital usually from mutual funds. Mutual funds form the central concern operations in the offshore finance. There are a number of financial crisis link to the functioning of the mutual funds. For instance, the 1994/5 Mexican peso financial crisis was due to the movement of short-term capital from the United States mutual funds.
The Asia crisis of 1997 too triggered by the withdrawal of the short-term loans that previously channeled through a chain of international financial intermediaries, a process that was courtesy of financial freeing and deregulation (Hampton 1996 p. 61). Financial system reforms The need for reform is an order called to curtail a repeat of the credit crunch that grabbed the global attention for the better part of 2007/2008 years. Analysts blame the offshore financing deregulation to the crisis. Among the particular characteristic of offshore financing is the confidentiality that must be maintained, significant reduction of taxes.
This enables banks to take deposits and extending loans to non-residents. The reputation of Offshore Finance Centers stands to improve with necessary regulations, which would enhance transparency and accountability (Haitt & John, 2007 p. 47). This bold step would allow them shed the bad picture tag of ‘tax havens’ into foreign investment destinations. The World Bank and IMF are always on the front row in issuing regulations to the Offshore Finance Centers (OFC). However, the regulations have less impact on challenging the existence of tax havens and OFC.
The main concern to issue regulations by IMF and World bank have been on addressing the issue of money laundering that is ripe in tax havens (Piccitto 2007 p. 3). The OFC provide financial services to non-residents both individuals and corporations. The tax evasion issue versus the relation with the OFC links with the legality of creating entities. In this case, persons have been transferring their assets to legal persons, holding companies, and registering them in Offshore Financial Centers like Jersey and the onshore places like the city of London.
The secrecy of tax regimes in OFC has made international tax evasion a possibility for individuals well conversant with legal loopholes. The OFC get blame of utilizing the notion of confidentiality and opaque corporate operations into lucrative business operation deals at the expense of sanity in the global financial system (Houlder 2008 p. 1). The future of offshore finance in Jersey The Group 20 (G 20) most industrialized and developed countries are not happy with the tax havens that OFC has been creating. Jersey is adamant that their Offshore Finance Center is the most controlled in the world.
In this, they claim that their accountants and tax officials are Britain educated and the law is effective in noticing and reporting on Tax evasion. The G-20 does not want verbal assurances but a legislative correction of the tax secrecy that characterizes the Offshore Finance Centers (Houlder 2008 p. 1). The Organization for Economic Co-operation and Development, European Union and the Inter-governmental Finance Action Task Force are among bodies that are pressuring and plan to pile excessive pressure on Tax Havens through their bold steps of countering money laundering and terrorism financing ethical roles (Peel, 2007).
The fights against tax evasion analysts observe double standards application especially by the US. For instance, Delaware State where the US vice president resides is notorious for this crime. The state according to sources has 850,000 inhabitants compared to the over 600,000 registered companies, making the state notorious tax have (Houlder 2008 p. 4). President Barrack Obama is an avid crusader against evasive use of tax havens. In 2007, he personally launched the Stop Tax Haven Abuse Act. The president also led the launch of the Incorporation Transparency and Law Enforcement Assistance Act (Houlder 2008 p.
2). The two legislations form the basis that the globe will bring sanity in the Offshore Financing giving the investigators ability of critical analysis of opaque corporate ownership structures. The legislations too will hinder the flow of offshore funds to destination United States from hedge funds and private equity that are questionable (Houlder 2008 p. 2). In future, when offshore finance centers get sanity, the global financial operations may improve greatly. The issue of blaming some loopholes to credit crunch epitome would rest matters.
The offshore finance is among the hypotheses for the credit crunch that grabbed the global financial system for the better part of 2007/2008. Among the reasons for the collapse of the banking industry and the credit crunch that befell the global financial sector is the uncontrolled speculative behaviour of Hedge funds. This in future will be an outdated practice when the above legislations get enactment. Specialists in the industry argue that when the introduction of sanity into the offshore finance through controls then in future credit crunch would be outdated.
Offshore financing is a concept that had entered the business world at an alarming rate before the credit crunch that has grabbed the global financial industry. Jersey is UK’s most prominent tax havens and the present credit crunch has subjected to international pressure to reduce confidentiality in its offshore financing business (Mathiason, 2009). The authorities in the island point out that theirs is the regulated offshore finance center in the globe. The commitments of the Island are building a self-sufficient financial hub that is free from harmful tax practices that don other Offshore Finance Centers.
Tax havens, which categorize offshore financing, have played a role in events that led to the present credit crunch. One of the events that led to the present credit crunch is the assumed debt that corporate and individuals obtained through the offshore financing deal. Jersey, considered as one of the states that have opaque collatorised debt obligations (Haitt & John, 2007 p. 65). In this case, the state often gets the wild accusations of even making the regulations so stooped low that companies can change their domicile as fast as possible.
However, Jersey in future commits to countering the proliferation of tax havens. The Island has been instrumental effecting the necessary changes to streamline public finance. The crusade by the European Union and the Organization for Economic Co-operation and Development (OECD) against Tax Havens has targeted both the secrecy of operations in Jersey. In so doping, Jersey in 2007 rested some provisions of secrecy of its operation of the offshore finance a move that increased transparency in the operations (Peel, 2007).
The Island possesses more pipeline plans of making the Island a role model Offshore Finance Centre. The world’s 20 powerful countries are not happy with the tax haven regimes. The offshore finance centers most that are located in some Islands are touted as harboring more than $6000bn (? 3,895bn equivalent to €4725bn) in offshore assets (Houlder 2008 p. 3). Group of twenty (G-20) leading industrial and developing states are not happy with the tax secrecy that characterize offshore financing.
The deficiency of happiness evidently gets demonstration through the continuous meeting that addresses the correction of the tax loopholes. Through the finance ministers of the states, they resolution was categorically that the confidentiality of tax needs urgency in tackling to eliminate the possibility of another credit crunch in future (Houlder, 2008 p. 1). The crusade to lax the secrecy of tax in Jersey among other Offshore Finance Centers by the Group 20 of the most industrialized and developed countries have seen individuals and corporations on a massive transfer and move to Switzerland.
Offshore financing and tax evasion One of the raised criticisms against offshore financing are the criminal practices that accompany offshore financing environment. Offshore financing and the incentives that an host country offers to world be investors like significantly reduced taxes and regulations is known to fuel the sprouting of illegal practices like tax evasion and money laundering among others. The proliferation of offshore financing in UK and Jersey and the time consuming protocols have made that some of illegal activities like tax evasion and corruption often go unnoticed.
To show the contribution of offshore financing in Jersey to crime, in the year 2007, about 45,000 individuals admitted to having evaded tax in UK by utilizing a number of offshore trust and accounts originating from Jersey. Ideally, even the infamous former Nigeria president Sani Abacha utilized a number of accounts in Jersey, Switzerland and Luembourg to hide loot (Mathiason, 2009). This has made authorities to pressure Jersey to lift confidentiality that surrounds the offshore financing. The issue of international tax evasion is tagged to offshore financing (Haitt & John, 2007 p.
56). Overtime the debate on offshore financing raises the issue of money laundering and tax evasion each time. The creation of tax havens that are out to offer legal refuge or protection of beneficiaries from legislations from other states is a seen as the hindrance of Offshore financing to returning sanity to global finance (Goodman, 2002). If individuals can obtain funds and invest in the form of trust without fear of disclosure of their practices through the tax havens makes financial crime rive.
President Obama is adamant about his conviction against the corporatism using offshore jurisdiction for international tax planning. The practice of utilizing offshore finance centers as for tax planning by firms accounts for about a third to half of the tax evasion in Washington. The historical existence of Offshore Finance Centers (OFC) is traceable to after World War 1 where individuals hide their monies and well-informed international corporations handle their tax affairs (Houlder, 2008 p. 1). this time round the world’s powerful countries under the banner G-20 plan to address the issue of tax secrecy.
It allegedly that through elimination of taxes and the reduction in regulations, major OFC like Jersey and the City of London have been able to attract very huge number of investments from individuals and corporations (Bowe et al, 1998 p. 80). Jersey as a leading OFC is among the great examples of states, tax havens that have passed jurisdictions that make them more transparent to assist in eliminating harmful tax practices crafted specifically to woo foreign investors (Peel, 2007). Recommendations Jersey has indeed emerged as a significant Offshore Finance Center.
The Islands faces mounting criticism over it being a tax haven that individuals have been utilizing for tax evasion and avoidance. The single allegation seems to be tearing the reputation of the Island a lot. This way the Island should clearly demonstrate its commitment to [preventing the proliferation of the crime. Secondly, another weakness that the Jersey Offshore Finance Center seems to be struggling with is corruption and money laundering. For instance, the former Nigerian presidents Abacha allegedly hide its money in trust investments vehicles that only Switzerland blew the whistle.
This indicates a regime that is doing little to eliminate the abuse of tax haven notion. The Jersey state requires moral support and legislations to ensure those kinds of abuses never occur again. In so doing, the Island must enter into international treaties that make the Island in the forefront in fighting crime especially that is related to financial system (Goodman, 2002). In this case, Jersey must demonstrate future steadfast commitments to ending the harmful tax regimes lest it becomes impossible for the state to woo foreign investors.
Good reputation and transparency dealings form vital issues that investors rely on. There is need to develop harmony on the operations of Offshore Finance Centers for the good of the global economy. Right now, Offshore Finance Centers carry the blame for fueling the present credit Crunch. Sanity in the offshore financing may only return when issues receive a transparent attention and address. In this case, the hedge funds are to blame for the abuse by companies that led to ultimate credit crunch. The G 20 together with representatives of Offshore Finance Centers must share a table to see amicable solution.
This would be to the benefit of both the global economy and the Offshore Finance Centers. Conclusions UK and Jersey have demonstrated the impacts that offshore finance centre can have to the economy. Although Jersey becomes an Offshore Finance Center in the 1960s, over the years it has grown to a force to reckon with. The OFC has entered into the league of the leading OFC the likes of Dubai and Switzerland among others. However, some factors are undoing the offshore financing business in Jersey. The proliferation of Money laundering and corruption is threatening the Island.
For instance, as seen above, over 45,000 pleaded guilty of using the offshore financial loopholes to evading tax. Ideally, even politicians have used the investment vehicle to shelter their stolen monies from their countries. This has prompted the G 20 to discussing the secrecy of tax in offshore Finance Centers. The main cause of disagreement is the negative impact the elimination of secrecy on offshore finance deals would make on the economy of Jersey. Already, the debate has made some investors consider transferring money from the Island to Switzerland.
Finally, small Offshore Finance Centers observe that the new directive of enhancing the scrapping of the secrecy on the operations of OFC has negatively influenced their operations while big OFC are having business as usual mode of operation. References Bowe, M et al, 1998, Banking and finance in islands and small states, Routledge Goodman, M 2002, Jersey ‘Tax Haven’ has Led the Way in Offshore Banking, Accessed 29 July 2009 < http://www. telegraph. co. uk/expat/4180658/Jersey-Tax-haven-has-led-the-way-in-offshore-banking. html> Hampton, M. P, 1996, Sixties child?
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