For some time the term “offshore” has been something of a dirty word in financial services industry circles and, in the tabloid headline writers’ vocabulary, it appears to be synonymous with secrecy, tax evasion and money laundering.

For some time the term “offshore” has been something of a dirty word in the financial services industry circles and, in the tabloid headline writers’ vocabulary, it appears to be synonymous with secrecy, tax evasion and money laundering.

It is no surprise therefore that there has been a desire from the well-regulated offshore jurisdictions to rebrand themselves as “international finance centres”.

I would suggest that this re-terming exercise has been largely unsuccessful, for a number of reasons. Not least is that those working within the finance industry have continued to use the term offshore themselves. Secondly, even the term “finance centre” is received with some condemnation in this post-financial-meltdown era when anything perceived as related to banking is held in low esteem by the wider public.

Another attempt to change the perception of the IFCs has been to highlight the high levels of compliance with international rules and standards that exist, including clean bills of health from a number of respected reviews and agencies such as the Edwards Report, Financial Action Task Force, Organisation for Economic Co-Operation and Development and the IMF.

Although drawing on such endorsements is arguably more successful, the message is communicated and understood better by senior policymakers in the financial capitals of the world than the wider public; therefore, this interpretation leaves us exposed. Also, there is the diversionary tendency of some onshore politicians to claim that the financial plight of their citizens is not the result of their own incompetence but somehow the result of evil IFCs leeching tax revenue from mainstream economies.

The IFCs have attempted to challenge such negative connotations by arguing that the biggest financial scandals, such as Madoff, Enron and the global financial crisis itself, occurred onshore rather than offshore. Whilst this is true, the argument has some downfalls: It attracts further negative attention to the financial services industry; generally it is drowned out by the noise of the wider global financial problems and, most crucially, there are often “offshore” vehicles involved somewhere in the structuring related to these headline crises. Whether or not any offshore element is relevant to the cause of the particular crisis it confuses the message that “offshore” is innocent.

Others have sought to protest that traditional so-called “onshore” locations are, in fact, the biggest “offshore” locations. For example, Delaware as a centre of incorporation of anonymous entities; and the UK as a tax haven for non-UK domiciles. However, it is evident that it is counter intuitive for commentators to describe, and readers to think of, large jurisdictions as “offshore” – don’t let the facts get in the way of a good story!

Putting the record straight

Each of the above attempts to put the record straight have been, at best, only partially effective. Therefore, it may be time now to refocus through an approach that argues why IFCs are good for the bigger, developed, indebted, recession-recovering economies. A fitting campaign strap line could be: “Your economy needs IFCs”.

This case rests on IFCs providing a tax neutral platform for the free movement of capital - not least from the surplus economies of Asia to the deficit economies of the developed world. Also, it relies upon the corporate sector, which internationally is largely very healthy with strong balance sheets and surplus cash to invest around the world including “in a recovering economy near you”.

Capital in the developed economies is restricted: sovereign states are in debt up to their ears (or in the case of Ireland and Greece over their heads) and the banks are busy re-building their balance sheets after the global financial crisis and, as a result, Basle III and their regulators' increased capital requirements, all of which are contributing to a shortage in lending.

Therefore, anything which impedes the free flow of capital or increases the costs of its movement puts at risk recovery and jobs in the developed economies.  Investment funds based in IFCs are a good example of vehicles which provide a tax neutral means of routing funds from investors in Country A to investments in Country B.

This is where tax neutrality provides a positive benefit. That is, the investors in Country A will continue to be taxed in Country A as if they were investing there, whilst income generated in Country B will continue to be taxed according to Country B’s rules. No additional tax burden is suffered as a result of the transaction being a cross-border investment.

In conclusion, it is unlikely that we will ever truly shake off the hostility from some quarters towards “offshore”, but it remains in the interests of all reputable, well-regulated and endorsed IFCs to continue to challenge and correct wherever possible the ignorant and inaccurate interpretation of what should be a relatively innocuous and ordinary little 8 letter word.