What the 2009 World Economic Forum meeting in Davos lacked in consensus it certainly made up for in doom-mongering. One clear message came through from world leaders: the need for greater regulation and transparency in the new financial system. Although offshore centers are a thorn in the side of the newly corporative vision, they still have an important role to play in the global financial world.
Speaking at the World Economic Forum held in Davos, Switzerland, Stephen Green, CEO of HSBC, called for "global co-operation", "economic balance" and "transparency and simplicity" as the central tenets of a new financial world. Despite the knee-jerk protectionism that is currently being demonstrated, many commentators have stated that the global economy will struggle to recover without this sort of co-operation.
However, the existence of offshore centers, or tax havens, goes against all of the principles outlined by Green, and indeed the spirit of global co-operation embodied by the World Economic Forum. These so-called havens have traditionally benefited from lax regulation and legal loopholes, being specifically designed to allow companies and affluent individuals to bypass tax legislation. They are the very opposite of transparent and simple as they run against global co-operation due to their secrecy and opacity.
It is this opacity that causes the greatest criticism, particularly with the growing government investment in the banking system. In the UK, for example, the money used to rescue the financial sector is coming from tax payers who want to see a drastic change to the set-up of the financial system. Hence the media outcry over banks controlling numerous subsidiary companies in tax havens, of which the nationalized Royal Bank of Scotland has almost 240.
The future for offshore centers is unclear, with many wanting to bring an end to their current covert practices. President Obama has been widely critical of tax havens since coming to power, and increasingly negative views are being echoed in the UK. However, offshore centers can offer genuine benefits to those, such as expatriate communities, who need their services. They have also been hotbeds of innovation and evolution for the fund industry due to the less stringent regulation. As regulatory regimes are tightened across financial markets in the wake of the credit crises, offshore centers may be the only source of higher risk, higher return investments for those willing to take such risks.
A complete and global transition away from offshore centers appears extremely remote, as they are ingrained in the fabric of the financial world, leaving a more regulated offshore market the most likely outcome. However, this is not an isolated case; the entire financial system is clearly in need of tighter regulation which suggests that, rather than hot-beds of corruption, offshore centers are integral parts of a system which has more overarching flaws.