EDITORIAL – Offshore finance: Its crucial role in global commerce

An aerial view of the business area of downtown George Town, Grand Cayman
An aerial view of the business area of downtown George Town, Grand Cayman. – Photo: Chris Court

Cayman’s elected elite, plus their aides, can be found this week not on our sunny isle but, once again, in the shadow of Westminster in London where recently the House of Commons, with the tacit support of the House of Lords, passed an amendment to legislation that has the potential to do great harm to these islands.

We refer, of course, to the parliamentary command (not too strong a word) to implement a “public register” of beneficial owners of companies registered in the Cayman Islands.

To be both clear and unequivocal, this action by Parliament, voted into law by a coalition – both unlikely and unseemly – of Tory, Labour and other minority party members, was not “regulatory” in the common understanding of the word. However, it was “punitive,” by any understanding of that word.

The Cayman Islands, and other U.K. offshore financial territories, it must be said, bear some of the responsibility for the situation in which we now find ourselves. For decades, these islands have been ineffective, if not somnambulant, in explaining and promoting the irreplaceable benefits that offshore centers bring to the world economy.

As the voices of opposition to offshore finance have gathered and grown, both in number and in stridency, the Cayman Islands and our reputable offshore brethren have responded largely with sotto voce voices or diplomatic smiles. Mimes might be entertaining but, to our knowledge, they have never won a serious argument.

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That is why we are especially pleased to print a column by Dan Mitchell, Ph.D., an internationally known and highly regarded economist. Mr. Mitchell, we are both pleased and proud to say, also serves (as he has for years), as an editorial board member of Cayman Financial Review, a sister publication of the Cayman Compass.

In this single column, citing the underlying work of Diego Zuluaga titled “The Offshore Bet: The Benefits of Capital Mobility,” Mr. Mitchell and Mr. Zuluaga present a persuasive and cogent justification for the role that offshore jurisdictions and tax competition play in the modern world economy.

In one research paper, and one derivative column, Mr. Zuluaga and Mr. Mitchell have managed to articulate, simply and persuasively, the legitimate need for offshore financial centers.

It is disheartening that with very few exceptions, the offshore community for decades has been so inarticulate in fashioning and promoting its own raison d’être.

Using hard facts and astute analysis in his report, Mr. Zuluaga, who was trained at Oxford, skewers the myth that offshore centers somehow siphon revenues from high-tax jurisdictions or drive a “race to the bottom” (on the contrary, he demonstrates that corporate tax revenues as a share of all tax revenues have increased in the average OECD country since 1980).

In fact, he demonstrates, offshore centers are associated with better economic outcomes in surrounding countries, as our jurisdictions are important facilitators of increased aggregate investment.

He corrects the record about tax collection in offshore financial centers, a global gripe that is as common as it is ill-founded.

He summarizes offshore centers’ central importance thusly: “The popular account of offshore centres is an outdated caricature that bears little resemblance to how OFCs in fact operate. Undermining their existence would harm investment, economic growth and international capital flows, while the promised benefits from intervention are unlikely to materialize.”

For years, offshore financial centers have been a convenient scapegoat for revenue-hungry politicians, class warfare crusaders and sour-grapes socialists who would rather hobble global capitalism than take a lesson from its success.

Telling the true story of offshore financial centers and our modern economy is one critical component of our challenge going forward. It is a reminder not only of what we are fighting against – but what we are fighting for.

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