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Article Courtesy from
Trust Services S.A.
OFFSHORE PILOT QUARTERLY
Commentary on Matters Offshore
September, 2005 Volume 8
Number 3
Bridges, Bombs and Bureaucrats
The second bridge to be built over the Panama Canal at a cost of $100,000
million, and called the Centenary Bridge, is a fine sight. It promises to
contribute significantly to both the residential and commercial development of
the former Canal Zone, once a fiefdom of the United States of America. The
problem is that the gleaming new suspension bridge is close to an old US
military weapons testing range which the Panamanian government says remains
unsafe because the US military has failed to meet its obligation to clear the
area of any potential unexploded bombs, mortar rounds and artillery shells. The
presence of access roads and plans for low income housing near the Centenary
Bridge makes the situation a precarious one and talks continue between both
countries.
Building bridges and unexploded bombs – admittedly, of a
different kind – can also apply to offshore financial planning when a person
decides to traverse the divide between onshore and offshore. The hypothetical
bridge that’s built between the two must be able to be crossed in safety and
should be sturdy, not some flimsy foot bridge made of rope and likely to not
stand the test of time. When I meet with potential clients I always remind them
of how important it is to ensure that they satisfy themselves that any offshore
structure put in place will not have any unintended, and unfortunate,
consequences; that they don’t create, as it were, a mine field in which by
taking a wrong step, they see their plans blow up in their faces.
It’s all about proper planning by people who know what
they’re doing. Speaking of which, my remarks about onshore regulators in the
March issue of the newsletter (under the heading: “Blind Men”) drew supportive
comments from some international practitioners. It was suggested, however, that
the root of the problem, namely, a lack of practical experience, extended, in
some cases, to offshore regulators as well. It’s fair comment and does not
surprise me, particularly when often the choice of an offshore regulator does
not rest in the hands of those competent to choose, but is dependent on the
decision, perhaps, of a panel of bureaucrats with little understanding of the
important issues. Such a situation can especially arise where the regulator’s
jurisdiction is a dependency of a country in Europe.
Some onshore bureaucrats, in attempting to tackle offshore regulation, realise
that they don’t know enough to make the right decisions but then take the
illogical approach of either not seeking guidance or, if they do, failing to
heed the advice given. It is, therefore, no surprise to me to read
comments written by Jim Dougal who headed the European Union Commission’s office
in Belfast between 1997 and 2002 and then became head of its United Kingdom
representation from 2002 until 2004. Most readers of this newsletter appreciate
the importance which the European Union has had (and continues to have) in
shaping policy towards many of the major offshore financial services centres and
so Mr. Dougal’s remarks are worth noting. He speaks of being “horrified and
mystified” and to being exposed to the EU Commission’s “outrageous lack of
common sense”. Coincidentally, the Commission’s headquarters are in Brussels,
capital of Belgium, and a city referred to by the English poet, Matthew Arnold,
as “a cheerful, wicked little place”. The American writer, Herman Melville,
described Brussels thus: “a more dull, humdrum place I never saw”. It seems to
me that the EU Commission is ideally located.
Monarchs, Mandarins and Mess Ups
On King Charles Street in London, where the UK’s Foreign Office (which I used to
visit on official business) is located, you will find statues of both King
Charles I and Oliver Cromwell. Cromwell, a fine military leader, headed the
uprising which eventually brought about the king’s downfall and his execution.
Seneca said that the “foremost art of kings is the power to endure hatred”. The
Stuart monarch who firmly believed in the divine right of kings, lacked
endurance but was able to mismanage the royal affairs so completely that his
conflict with Parliament, and therefore Cromwell, brought about three civil
wars. This reserved, stammering and self-righteous king had dissolved Parliament
three times and at one point chose to rule without summoning Parliament for
eleven years. Oliver Cromwell, a convert to a strong puritan faith that eschewed
the ceremonial ostentation of the Catholic church would change all that. He came
from the middle ranks of English society and was a force in Parliament where he
represented the interests of the Puritans, middle class merchants and tradesmen.
The King’s supporters, on the other hand, were the peasantry and the nobility.
The statues of both men on King Charles Street are reminders of Lord
Palmerston’s view that a country has no permanent friends or enemies, only
permanent interests. So do bureaucrats. Expediency is a given: today’s and
tomorrow’s friends may not be the same people and the mandarins (named after the
nine ranks of officials of the Chinese Empire) of Whitehall are masters of the
game. They are the first to understand the usefulness, at given times, of both a
ruler and a rebel, be they self-righteous sovereigns or puritanical
parliamentarians. How right, then, for those statutes to be on King Charles
Street where the civil servants readily appreciate the proverb of the fox and
the hedgehog. It was used by the 7th century BC Greek poet, Archilochus, to
illustrate how diverse traits can be of equal importance. Archilochus said that
the fox devises many strategies; the hedgehog, however, knows one great and
effective strategy. King Charles was most certainly a fox and Cromwell, (who
would become Lord Protector of England, Scotland and Ireland), was a hedgehog.
But, of course, Whitehall is not the exclusive territory of mandarins and, in
various guises, along with their acolytes, they can be found in the ranks of the
Organisation for Economic Co-operation and Development, as well as the EU
Commission. In the case of the Brussels-based bureaucracy, mandarins have found
bureaucratic bliss. There are three main EU bodies: the European Council
(representing governments); the European Commission (the executive arm that
proposes legislation); and the European Parliament representing the peoples of
the member states. So the Commission proposes laws which must be approved by the
Council and Parliament. It is unlike any other form of government previously
known and its uniqueness – and sometimes its obliqueness – leads to a mystique
only pierced by the bureaucrats themselves. It should not be surprising,
therefore, that the European Union Savings Tax Directive, which came into effect
on 1st July this year, has created a stir in some offshore financial services
centres. Bermuda was not affected when the directive came into force and
Gibraltar was compliant except that the directive does not apply between itself
and – believe it or not – the United Kingdom which has sovereignty over
Gibraltar. Now, there are blunders and there are blunders. Those of the instant,
spontaneous kind can perhaps be more readily forgiven, such as when, in 1998, a
Salomon Brothers trader leant an elbow on a computer keyboard which activated an
order to sell around US$1 billion’s worth of French government-bond futures; or,
more recently, when a trader at a bank keyed in the wrong number of shares on
his trading screen with the result that a sell order for a basket of shares
worth around US$50 million was changed into one valued ten times that. The
London stock exchange saw the FTSE 100 index plunge by 2.2% in the final moments
of trading on that particular day. In the case of the European Commission,
however, it
has had five years of planning to get it right and slips by fingers or elbows
cannot be blamed for the Bermuda and Gibraltar mess.
The directive, in some instances, forces offshore
financial services centres to disclose details of certain types of income an EU
national has earned to the tax authority in the EU country in which he resides,
or deduct a retention tax. The directive does not affect persons who are
resident in the offshore jurisdiction, nor those who are not resident in any one
of the 25 EU countries. It was intended to also extend to dependencies of one or
more of the 25 EU countries and the British government has found itself in a
spot. The blunder, once realised, caused a cornucopia of contentious issues to
be raised – especially by some of the other leading offshore jurisdictions
already foaming at the mouth over having to comply. Bermuda is the only British
dependent territory (Gibraltar is a Crown dependency enjoying more legislative
freedom) that was not included in the directive. How did its name disappear from
the list? Was this the work of the Bermuda triangle? It may take time, but
Bermuda can be sure that the issue will be something that doesn’t disappear. The
same goes for Gibraltar.
That Magnificent Seven
This month the annual Catholic feast day known as the Seven Sorrows of Our Lady
is celebrated. Its purpose is to reflect on the sadness endured by the Virgin
Mary because of the suffering and death of her Divine Son. Not just sorrows, it
seems, come in sevens. The offshore financial services industry was told by the
OECD at its meeting in Switzerland in May, 1998, of its grand design to stamp
out tax havens within seven years. You will have noticed that the deadline has
recently expired and that most of the so-called tax havens are alive and well –
and prospering. Offshore private banking – a main ingredient of offshore
services – certainly seems set to grow with one research source estimating that
more than 8.3 million people worldwide had over $1 million in financial
assets in 2004. This is an increase of (here comes that numeral again) 7 per
cent over 2003 and doubtless a number of those millionaires will be looking for
investments and strategies beyond their domestic markets.
You might ask why the OECD decided to set a target of seven
years. It would be a mistake to automatically assume that it followed a period
of considering the logistics and practicalities of the objective. Proper
planning, in other words. It was probably chosen for the same reason that many
of us are drawn to that special number. What brought about this septimal
obsession has its roots over 40 centuries ago in Sumeria (once part of
Mesopotamia) which was conquered by Sargon I, King of Akkad, who instituted the
first ever recorded seven-day week. Actually, we owe not only the week to
the Sumerians but also the 60-minute hour. Subsequently, Babylonians, Greeks and
Romans adopted the seven-day week; Europe and the Americas were to follow. The
week reached India from Mesopotamia more than 2,000 years ago and about 1,000
years later, even China capitulated. Seven was significant for the
Sumerians because they worshipped seven gods that could be seen in the sky and
they decided to name the days of the week for these heavenly bodies. Today we
know these gods as Sun, Moon, Mars, Mercury, Jupiter, Venus and Saturn. The
future of the OECD’s grand design to stifle tax havens is in the lap of the
gods, but one thing is for sure: that organisation is at sixes and sevens over
how to achieve its goal.
War of the Worlds
Panama’s railway, inaugurated in 1855, is celebrating its 150th anniversary. A
lot has changed since Mark Twain, who travelled on the
railway, wrote an article for the Chicago Republican in 1868. He described his
train journey across Panama and how he spent two or three hours travelling
through “a tangled wilderness of tropical vegetation”. The hapless Jim Dougal,
who abandoned the EU Commission, spent seven years negotiating a tangled
wilderness in the byzantine, bureaucratic depths of the EU headquarters before
his journey came to an end. Even he succumbed to the number seven after coming
unstuck mainly because of a poor communication system, smothering rules and
incompetence. As an ex-regulator myself I can sympathise with him.
Much like the EU Commission, the OECD has similar problems.
It has often been too ambitious and has suffered from failures of grand design,
two subjects that not only Oliver Cromwell and King Charles I understood, but
also Adam Smith and Macbeth. One sometimes feels that the OECD’s offshore tax
campaign is built on the scepticism of Adam Smith. In Wealth of Nations he
wrote: “Commerce sinks the courage of mankind. The minds of men are
contracted, and rendered incapable of elevation”. Honoré de Belzac,
however, said that bureaucracy was a giant mechanism operated by pygmies:
surely, then, that’s where you would find an abundance of “contracted minds” and
a scarcity of elevation? There is no doubt that a war of the worlds is raging.
One world is onshore and the other is offshore, but it is nothing like the war
that H. G. Wells wrote about. I suspect that H. G. Wells would have had some
sympathy for those combatants offshore and, certainly, no mandarin would have
agreed with his sentiment that in politics the best way to play your cards is to
lay them face upwards on the table. Who will be triumphant and how the OECD tax
and other anti-offshore initiatives will end is not known.
In 1660, eleven years after the execution of his father
and with Cromwell no more, Charles II ascended the throne and The Restoration
was complete. The poet, John Dryden, described the son’s reign as “a very merry,
dancing, drinking, laughing, quaffing and unthinking time”. Another
Charles is waiting in the wings today to assume the British throne. But just as
things have changed for monarchs, so they have for money managers – particularly
those offshore. There will be no Restoration for either and the merry times of
the past have gone forever.
Offshore Pilot Quarterly has been published since 1997 by
Trust Services, S. A.
which is a British- managed trust company licensed under the banking laws of
Panama. It is written by our Managing Director who is a former member of the
Latin America and Caribbean Banking Commission as well as a former offshore
banking and insurance regulator. He has over 35 years private and public sector
experience in the financial services industry. Our website provides a broad
range of related essays.
Engaging an offshore representative is an important decision and we advise all
persons to seek appropriate legal and tax advice from professionals licensed to
render such advice before making offshore commitments.
Article Courtesy of Trust Services S.A.
Physical Address: Suite 522, Balboa Plaza, Avenida Balboa, Panama, Republic of
Panama.
Mailing Address: Apartado 0832-1630, World Trade Centre, Panama, Republic of
Panama.
Telephone: +(507) 269-2438 – Telefax: + (507) 269-4922
E-mail: fiduciary@trustserv.com
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