Tuesday, October 8, 2013

Morriss and Freyer: Creating Cayman as an Offshore Financial Center

Andrew Morriss and Tony Freyer recently posted an article, "Creating Cayman as an Offshore Financial Center: Structure and Strategy Since 1960," in which they trace the development of the fiscal regime that made the Caymans the tax haven everyone loves to hate. The authors document the regime's roots in intense and purposeful transnational collaboration between British and Cayman government officials and private sector professionals. Like Morriss' previous work with Craig Boise on the Netherlands Antilles, this is a well-researched account of the political, institutional, social, and cultural factors at work in tax competition, and a must-read for everyone working on international tax policy issues.  From the abstract:
The Cayman Islands are one of the world's leading offshore financial centers (OFCs). Their development from a barter economy in 1960 to a leading OFC for the location of hedge funds, captive insurance companies, yacht registrations, special purpose vehicles, and international banking today was the result of a collaborative policy making process that involved local leaders, expatriate professionals, and British officials. Over several decades, Cayman created a political system that enabled it to successfully compete in world financial markets for transactions, participate in major international efforts to control financial crimes, and avoid the political, economic, racial, and social problems that plague many of its Caribbean neighbors. Using archival sources, participant interviews, and a wide range of other materials, this Article describes how the collaborative policy making process developed over time and discusses the implications of Cayman's success for financial reform efforts today.
There is so much in the paper it is difficult to extract effectively but he conclusion sums things up well:
Understanding how constitutional structure shaped the history of the Cayman financial center offers a response to critics’ preoccupation with actual or imagined abuses. OFC critics generally ignore the role of the United States and European nations in tax avoidance policies used by multinational corporations and wealthy individuals and those nations’ own roles as tax havens. ...  
The Cayman global competitive advantage thus did not originate in corrupt practices; it grew instead, from a history of social and constitutional stability sustaining collaborative policymaking among elected officials, legal professionals, and UK and Cayman civil service authorities like CIMA. 
... There is no question that the UK, the EU, and the United States have the power to [eliminate Cayman's tax policy autonomy] if they chose to do so. But if international relations are more than the exertion of brute force, there are important issues that need to be addressed in the development of international financial law with respect to OFCs. This requires broadly inclusive international consultations, not narrow efforts at defining best practices through rich nations’ clubs like the OECD or unilateral, asymmetric measures like the United States’ efforts through FATCA to force other countries to comply with U.S. regulatory measures. 

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