Don't blame the offshore centres

The financial crisis is set to bring in a wave of new regulations, including rules on offshore financial centres. During his election campaign President Barack Obama criticised "corporations that hide their profits offshore", specifically mentioning Bermuda.

Angela Merkel, the German chancellor, also has offshore centres in her sights: "We can no longer stand passively by as individual small countries attract financial institutions by ignoring internationally agreed upon rules."

In the UK, Gordon Brown has promised "very large and very radical changes" in financial regulation, while Alistair Darling, the chancellor, has spoken of "potential problems with overseas territories and crown dependencies". At the end of last year, the UK government launched a formal review into British offshore centres. A number of these have become popular domiciles for insurance companies ­ particularly Bermuda.

In announcing the review, Darling referred to the Icelandic banking collapse, which affected British investors with Landsbanki¹s Guernsey branch or with Kaupthing Singer & Friedlander on the Isle of Man. Many victims probably did not understand that these banks were outside the UK supervisory system.

While the promised review appears to be motivated by problems with these banks, it will be much wider in scope, investigating all crown dependencies and overseas territories with significant financial sectors.

It is worth giving the list of the offshore territories affected: Jersey, Guernsey, Isle of Man, Bermuda, Cayman Islands, Gibraltar, Turks and Caicos Islands, British Virgin Islands and Anguilla. So Caribbean offshore financial centres find themselves caught up in regulatory change caused by a collapse in Iceland. That¹s globalisation for you.

It is not clear what the review will cover. In announcing it Darling said: "Overseas territories and crown dependencies attract banking customers with lower taxes ­ without contributing to the UK exchequer. But at times of stress, depositors need to know who will compensate them. The British taxpayer cannot be expected to be the guarantor of last resort."

It seems the UK government is not considering introducing taxation in those territories, however. In subsequent statements it said the review would not look at changing the territories' constitutional arrangements, including their independence in fiscal matters.

The exclusion of fiscal policy must have come as a great relief to the territories concerned ­ and the insurers domiciled in them. And as for the UK government being a guarantor of last resort, investors in the Isle of Man and Guernsey may have misunderstood, but surely no investor in a Caribbean financial institution could make the same mistake.

What, then, is the UK government's purpose in launching this review? Perhaps it will increase the obligations for taxation disclosure on offshore centres, something that would help the taxman as he hunts down tax evaders.

The taxation advantages of offshore financial centres may remain unaffected, but their confidentiality may be reduced and the amount of red tape could increase. If so, this would be a long way from Darling's statement, but a perfect example of how political rhetoric ossifies over time into a strengthened bureaucracy.

Not only would it be unfair to blame offshore centres for the financial crisis ­ they had nothing to do with it ­ doing so distracts us from understanding the true causes of the crisis.

david.sandham@globalreinsurance.com