Heart of the Matter

PHILIP SINEL, a senior partner at Jersey-based litigation firm Sinels, gives the pros and cons of offshore regulation. It’s never simple, always challenging — and does it have enough upsides to make it worth the hassle...?

A tale of regulators, gift-wrapped fraud and smoke-detectors in hell

ONE view of offshore regulation, recently expressed to me by a former regulator, is that it is like fitting smoke detectors in hell.

Offshore clients like tax breaks, the absence of transparency, the secrecy and the stability. After all, what else is there for an offshore firm to provide beyond secrecy and sunny weather?

As one client once put it, the point is to ensure activity is off the balance sheet and out of sight. Added to this is the fact that “offshore” now includes Delaware and the City of London. Offshore should really be re-defined as “in another place”. Leaving that to one side, this article is written on the basis of personal experience in the Channel Islands. After the Edwards report, the islands cleaned up their act. Evasion out, avoidance in. The evaders went off to do business in Switzerland, Mauritius and Panama, at least until the world started to twig to the fact that not paying tax is illegal everywhere.

The benefits of offshore structures remain: no published accounts, no publicly available list of shareholders and beneficial owners — that’s the foundation for multi-billion-pound businesses. The quid-pro-quo imposed on the Crown dependencies in return for these benefits was to stop taking clearly dirty money and stop selling tax-evasion schemes.

That means that anybody wanting to provide services in Crown dependencies (those with which I am familiar, anyway) has to have rigid KYC procedures so they know who the clients are, where the money came from. Any politically exposed persons (PEPs) must be flagged, and woe betide the provider who does not carry this out. If there were a similarly well-enforced regime for lawyers in the City of London, pandemonium would break out overnight.

Unfortunately, problems remain. The regulators offshore have two sets of standards; the first — the unwritten manifesto — is to exterminate the smaller provider. This is done by aggressive compliance visits, skulduggery, underhand tactics, pressure and weight of numbers.

This has side effects, and a number of the offshore providers now have private equity capital behind them. This means the pressure on profits goes up, so the ability of somebody with a legitimate reason for wanting an offshore trust — their ability to find an old-fashioned trustee in the proper sense of the word, for example — is becoming limited.

There are legitimate functions for businesspeople who are exposed to the vagaries of irrational or arbitrary regimes, or where there is a danger posed by spendthrift family members. Finding an oldfashioned trustee for a small client can be very difficult.

There is also an unwholesome — and, to my mind, unlawful — community of interest and absence of delineation within the regulator executive making the decisions and the enforcement arm. The result? Allegations of partial or improper behaviour by the enforcers will go nowhere because the executive will not hear of it.

I have watched legitimate, honest, well-run small trustees face obliteration because of the unwritten manifesto. I have seen the human toll of bullying by a well-financed regulator.

On the other side of the equation is the “too big to fail” syndrome. I remember some years ago “gift-wrapping” for the Regulator and the Attorney General in a $40m fraud case. When I say gift wrapping, I mean that parts of the case had been through a New York court and could be proven.

It was an obvious fraud; the offshore service provider had a valuable asset and two clients; it decided to give the asset to the favoured client, without telling the other. Nothing came of it; not a word from the Attorney General or the regulator. So, offshore regulation: does it work? After a fashion… Skulduggery, underhand tactics, pressure and weight of numbers