What makes a reputable offshore jurisdiction?

By I. N. LEGAIR, Barrister

A cursory look at leading financial centres such as Bermuda, the Cayman Islands, the Bahamas and the Channel Islands leads one to instantly detect certain underlying ingredients which underpin their international tax planning industry (often erroneously referred to by laymen as “offshore banking”). The most critical of these factors combine to form what I refer to as “jurisdictional profile” which is determined after a particular type of peer review. A jurisdiction is not reputable merely because its local inhabitants, government or regulator says so. On the contrary, the accolade is earned only when those countries which are already deemed “reputable”, admit this other jurisdiction as a “recognised jurisdiction” and gives its practitioners all the facilities and accommodations worthy of membership of this informal yet elitist club. Any country that “recognises” other jurisdictions, but is recognised by no other, is clearly at the bottom of the pecking order.

The factors referred to above are respectively:

  • The competence and reputation of the local regulator;
  • The level of technical expertise available on the private sector side of the industry;
  • The quality of the banking services and facilities available in the jurisdiction.

There are certain secondary factors which come into the mix, but only after the primary issues above have been properly satisfied. Such secondary factors include: (a) the quality and scope of the legislation (especially as this relates to companies and trusts),  (b) the level of taxation and the availability of a tax treaty network and (c)  the quality of the general infrastructure (airport access, schools, restaurants, conference facilities) etc.

Regulatory Regime

In virtually every reputable financial centre, the regulator has the statutory responsibility to: license, supervise, regulate, and discipline practitioners and entities which fall within the scope of its regulatory powers. In addition, the regulator has the responsibility of setting the standards and guidelines with which practitioners are expected to comply. It goes without saying that the regulator has to be ahead of the private sector, leading from the front as it were. The corollary of this is that the regulator must have the technical competence to lead. Any attempt to lead the private sector from a position of blindness will be met with resistance and hostility, especially as the private sector will invariably turn to the regulator for technical advice when confronting certain thorny or difficult issues which arise in their work from time to time.

Hence, in any reputable financial centre, the regulator is expected to be fully  versed in the laws of its own jurisdiction and simultaneously have a good commercial awareness of best international practice particularly in the areas of corporate and trust law, investment management, banking and captive insurance management. These competences can only be gained from rigorous training (much of it at postgraduate and professional level) and periodic secondments in other reputable financial centres. In reputable jurisdictions, the regulator leads the way, rather than bluffing its way into areas it does not understand.

The Private Sector

There is no reputable offshore jurisdiction that lacks a significant nucleus or pool of skilled professionals in the areas of trusts and corporate law, accountancy, investment advice and management and captive insurance management. Such a correlation is not fortuitous. However, such a skills pool does not always exist at the very outset. Where a deficit exists, governments (working in conjunction with the regulator) have sought to remedy the problem by importing expatriate professionals to fill the void, on the expectation (if not the condition) that these expatriates will train the local staff in the art and science of the industry.

Training is therefore a core component of success and the building of jurisdictional profile. Currently, the leading (by a very long way) professional body for practitioners in this field is the Society of Trusts and Estates Practitioners (“STEP”), which is based in the UK, but with branches in each and every reputable financial centre. The ICSA Certificate and Diploma in Offshore Administration and the Certificate in Captive Insurance from Caledonian University, Scotland are also highly sought after qualifications in this filed.

Availability of efficient banking services and products

Most clients use the services of an offshore financial certain to manage their financial affairs in a tax efficient manner. The most basic of the products available in these offshore centres is the international business company, which when used in a private wealth management or succession planning situation is a virtual private account formed under a corporate name.

An offshore company that is unable to open a bank account is of little use to anyone, since in order for the vehicle to be of maximum use, it must be able to disburse funds for the acquisition of assets, and receive funds when assets are disposed of.

It stands to reason therefore that a jurisdiction that is able (or willing) to open corporate accounts for clients is more likely to develop into a banking centre than one which is not. When coupled with the availability of additional services such as on-line banking, debit and credit cards, portfolio management (whether discretionary or advisory), back- to-back financing and secured lending which invariably involves the pledging of shares and securities, the scope for reputation building is enormous. Yet few jurisdictions grasp these opportunities. Why?

One reason is paranoia. Another is a lack of understanding of the requirements of the industry. Since the FATF black lists were published some years ago, some banks, particularly those in poorly regulated jurisdictions, have become very paranoid.  Those banks in reputable jurisdictions give preference for accounts to companies incorporated in their own jurisdiction and also to those incorporated in other reputable jurisdictions. Banks in non-reputable jurisdictions are paranoid even to opening accounts for companies incorporated in their own jurisdiction. In the result, a downward spiral has set in. If banks based in the country in which the offshore company is incorporated do not want such companies as clients, why should foreign banks? The prophecy has so far become self fulfilling and less business is being done. Meanwhile the reputations of poorly regulated jurisdictions have declined even further. In much the same way as success breeds success, so does failure breed failure.

Secondary factors

Assuming that the first hurdle is overcome these secondary factors could help to further boost a jurisdiction. Today, any jurisdiction that attempts to compete solely or primarily on legislation (as opposed to the core factors above) is bound to fail. Laws are easy to copy from one country to another. Application and creative use of these sophisticated laws requires a little more intelligence. A client will seldom part with his hard earned cash to a practitioner in a jurisdiction that boasts many sophisticated laws but few, if any, practitioners who can implement the sophisticated financial arrangements the client wishes to put in place.

On the matter of taxation, I know of no jurisdiction that is or has become reputable while simultaneously levying a high rate of direct taxation, though some jurisdictions (like Barbados) that have the benefit of a good tax treaty network may overcome this problem. The highly skilled bankers, accountants and investment advisers referred to earlier are quite averse to punitive direct taxes, and will not flock to live in those countries that levy a high charge.  The Isle of Man has recently come up with the most innovative idea of a charging zero rate on corporate earnings while simultaneously capping personal liability at ₤100,000. A variant of this scheme is being copied by the Channel Islands which up to now had a personal tax rate of 20%. The Cayman Islands and Bermuda have long been totally free of income tax.


Those countries that have followed the appropriate steps and made the initial investment have seen their economies exponentially transformed. They have notched up a contribution to GDP far beyond that made by, for example, tourism. The BVI is a case in point. It has in excess of 700,000 companies on its register, each of which pays a renewal fee of between $300- $400 per year to the government.  And that is just the beginning!

A high jurisdictional profile generates high rewards for those countries that are prepared to make the investment and adopt the correct policies and procedures in order to strengthen their regulatory regime, skills pool and banking industry.