Global Policy Forum

By Tom Buerkle

The past year has seen the biggest coordinated attempt to regulate offshore financial centers with an international crackdown on tax evasion and money laundering and an attempt to promote tighter financial supervision.

The initiatives, launched by the Organization for Economic Cooperation and Development and the Financial Stability Forum of the Bank for International Settlements, initially provoked protests by offshore centers that the major developed countries were unfairly targeting their livelihoods. But the suspicion has gradually given way to cooperation as many centers have begun working actively to address the regulatory concerns.

The new mood sees the regulatory moves as a potential competitive advantage. Bankers and officials in offshore centers say that obtaining an international seal of approval of good conduct and proper supervision should help attract legitimate business to leading centers and major banks at the expense of those who are still seen to operate in the shadows. ''It certainly hasn't done us some harm,'' said Richard Pratt, director general of the Financial Services Authority of Jersey, referring to the Channel Islands' success in being ranked in the best category for financial supervision by the Financial Stability Forum. ''It should be helpful.''

In the past year, investment funds domiciled in Jersey have grown by 50 percent to pounds 90 billion (dollars 131 billion), while bank deposits have grown nearly 9 percent to pounds 115 billion. ''It's a very good way of ensuring that banks like ours can play on a fair playing field,'' said Andrew Fisher, chief executive of Coutts & Co., the British private banking arm of Royal Bank of Scotland. ''It plays to the advantage of major institutions who are there to take advantage of fully legitimate tax structures.''

The regulatory initiatives reflect growing concerns in the leading industrial countries about the threat of illicit financial activity in offshore centers, and the risk that inadequate supervision could pose to the global financial system. The sheer amount of funds invested in offshore centers ''suggests that the problem is big and it's growing,'' said Jeffrey Owens, the OECD official who is heading the agency's work on harmful tax competition. He said the number of offshore funds has grown by 1,400 percent over the past 15 years and the size of individual funds has also surged to an average of around dollars 32 billion. ''There's a major outflow of funds from the developing countries to the tax havens and it is hindering their development.''

As for the developed countries, authorities fear that the spread of Internet banking could turn the use of offshore centers for tax evasion from a niche activity to a mass-market phenomenon. ''If offshore tax evasion goes retail, the problem will become much more serious,'' said a U.S. Treasury official, who spoke on condition of anonymity.

OECD officials insist that they are not seeking to dictate tax rates to offshore centers. Instead, they say the aim is to ensure that offshore tax regimes do not offer special breaks to nonresidents, effectively inducing tax evasion, and that authorities in offshore centers will cooperate with investigators from other countries. Many centers still grumble about the initiatives, reflecting a widespread perception that the industrial countries have made judgments without sufficient consultation. ''We have some qualms about the fairness of the process,'' said Munro Sutherland, general manager of the Bermuda Monetary Authority. Bermuda was placed in the second of three categories by the Financial Stability Forum, suggesting some deficiencies in its supervision of financial firms, without having a chance to argue its case, he said, and the forum has made no commitment to reviewing its ranking to upgrade countries such as Bermuda.

Despite the reservations, however, Mr. Sutherland said Bermuda was committed to cooperating with the International Monetary Fund, which is implementing the forum's suggestions on supervision, and was ''very firmly behind meeting international standards.''

THAT attitude appears to be spreading. Of the 41 offshore centers cited by the OECD this year as having harmful tax practices, six have made advance commitments to end those practices by 2005 and two-thirds of the remainder have begun a dialogue on compliance with the organization, officials said last week. ''We're very pleased with those numbers,'' said Phil West, a U.S. Treasury official who sits on the OECD committee on harmful tax practices.

The Cayman Islands, for example, has promised to lift its banking secrecy laws for investigations of tax matters of a criminal nature by 2003, and for matters of a civil nature by 2005. Bermuda has promised to extend the agreement it has with Washington to exchange information with tax investigators to other OECD countries. The OECD's Financial Action Task Force on money laundering, which cited 15 offshore centers for failing to comply with rules against laundering, said earlier this month that seven centers had passed legislation to combat laundering and others had promised measures, but it said it was too soon to remove any center from the list.

It is far too early to say what impact the three initiatives will have on offshore centers as a whole. Much of the regulation on tax competition and money laundering relies on self-regulation, such as requirements that offshore banks know the ultimate beneficiaries of the funds they hold. In the 15 years that Bermuda has had an agreement with the United States to exchange information on tax investigations, Bermudan authorities have provided information in fewer than 50 cases, according to John Hughes, an official of Bermuda's Ministry of Finance.

There also appears to be some inconsistency between the potential risks posed by offshore centers in the eyes of international regulators, and the claims that offshore centers will not be hurt by compliance. ''We've seen no evidence that they're going to be affected by a loss of business,'' the U.S. official said. But any suspicion that the initiatives posed a direct challenge to the future of offshore centers appears to have faded. ''There are some very strong, legitimate reasons why people would want to hold assets offshore,'' said Mr. Fisher of Coutts & Co., citing the desire of individuals with nonresident tax status in countries like Britain to shelter their assets. ''I don't think that's ever going to go away.''

TOM BUERKLE is the International Herald Tribune's correspondent in London.