For years, the Channel Islands have faced being on one blacklist or another. Is this a fight they will ever win - and are blacklists really such a big deal?
Blacklist. The word hardly sounds appealing, and sure enough a blacklist is not a comfortable place to find your name. Just look at Guernsey"s reaction when it was erroneously placed on an EU list of non-cooperative jurisdictions in June this year. The States furiously denied the charge, and the relief was palpable when the UK and OECD stepped up in its defence.
Both Jersey and Guernsey have spent time on and off blacklists in the past, but are they as ominous as the name suggests? Would people really stop doing business with the Channel Islands simply because its name appeared on the same piece of paper as Panama?
It seems that they would. When Jersey found itself on a unilateral French list following a tax dispute in 2013, the result was felt keenly across the trust and fiduciary sectors for the few months it took to fix the mess. “Lots of French companies with subsidiaries in Jersey said their head office would make it very difficult to continue to do business with Jersey while it was on the list,” explains John Harris, Director General of the Jersey Financial Services Commission. “It becomes a reputation issue for the company back home, and it can very quickly translate to a commercial disadvantage for the jurisdiction in question.”
Neither Jersey or Guernsey currently sits on a collective blacklist put in place by bodies such as the EU or OECD, but France isn"t the only individual nation to have made pariahs of the Channel Islands. Italy, Spain and Argentina are among the countries that currently include the islands on unilateral lists. Yet it"s probably not as bad as it looks. The rationale for lists varies from country to country, and many will single out jurisdictions for nothing more than having a lower tax rate than they do.
“It can be as blunt as that,” says Harris. “You find yourself on a list simply because your tax rate means people would rather put their money with you as opposed to at home. But it makes no sense - that world ended 25 years ago.”
Ongoing battle
Perhaps small low-tax jurisdictions have to accept the fact that blacklists and the associated "tax haven" slur are a cross they simply have to bear. It may even be that these lists have limited effect. The threat of life on an Italian or Argentinian blacklist is hardly enough to give the Channel Islands" financial services community sleepless nights, and one would naturally assume that if people want to do business with the islands they will have done their reading first and know that they are highly regarded.
Yet that may not actually be the case. “We still see individual LPs who can"t invest in Guernsey because of tax blacklists,” says Jo Gill, Director at Private Equity Administrators in Guernsey. “Especially Italian investors.”
Harris has a similar point of view, labelling blacklists a "very blunt instrument". “Any third party looking at a centre on a blacklist won"t do any further research,” he says. “They"ll just see a body with repute like the EU putting you on a list and assume there must be something to it. But the lists very rarely follow objective criteria and are often an exercise in political power. They are very problematic for smaller jurisdictions that may find their way onto them. A blacklisting may drive a bus through years of work that has been done to prove you are the same as the EU and others in terms of regulatory standards. Market access could be fatally undermined by these arbitrary decisions.”
One key point is that despite the broad brush term, which carries a uniformly negative perception as soon as it"s applied, not every blacklist has the same effect. A tax blacklist may simply mean that while business is allowed to continue, the jurisdictions in question are subject to a different rate of withholding tax from the country in question, while a regulatory blacklist will prevent businesses working with those countries at all.
“Each country has its own criteria for a list,” says Gill. “There are no agreed standards, and some lists are not updated, even when tax treaties are put in place. Or they simply copy and paste their neighbour"s list.” Indeed, Harris names the Italian list as an example of one that"s just old and never updated.
Fiona Le Poidevin, CEO of the Channel Islands Securities Exchange, cites an interesting case from her time as head of Guernsey Finance. She points out that Guernsey is deemed a tax haven for Brazilian tax purposes, despite its transparency, because its tax rate is lower than 20 per cent. Meanwhile Luxembourg, which is not on the list, has a headline tax rate of 35 per cent, but you would never see anyone actually paying that much because of the various deals available that don"t require transparency. “Do they understand the islands sufficiently to make a good judgement when compiling these lists?” she asks.
Changing perception
The other significant impact blacklists have is on public perception. Here, the media has a major role to play. And if you wonder how the mainstream press tends to approach its coverage of blacklists, here"s a clue: it"s generally not about explaining the nuances.
“When a taxi driver in London hears that you"re from Guernsey, he"ll immediately say it"s a tax haven, with images of people lying around under palm trees and ripping off Joe Public tax payer,” says Gill. “It would be great if the papers could say: "Guernsey is on a list but these lists are flawed". The average reader will just take the headline that it"s a haven, so lists do affect public perception. Guernsey is still trying to shake off its tax haven status, and anything that affects that status needs to be taken seriously.”
Of course there"s always an upside to lists. For a start, instead of bashing your head against the wall trying to get off an irrelevant blacklist, a jurisdiction can focus on qualifying "white lists". For example, both Guernsey and Jersey appear on the OECD"s white list for tax transparency.
In the end, though, the EU"s list of non-cooperative jurisdictions didn"t do Guernsey any harm - the support it received from the OECD wound up publicising how far it had come. Then there"s the fact that your rivals may appear on a blacklist and you don"t - Le Poidevin cites an example of a fund that recently moved from Cayman to Guernsey because the latter wasn"t on the blacklist that Cayman was.
Yet despite the occasional positive, it seems the islands are engaged in a never-ending battle to avoid being lumped in with other less well run jurisdictions. Sure, someone who wants to hide their terrorism money will know where to do it, but there"s no reason that should continue to have an impact on jurisdictions that have proper standards.
“Lots of hard work is being done so people understand that we don"t belong on these lists,” says Harris. “Despite those efforts we"re still vulnerable to an individual political event.
“When the economy minister in the French government was found to have a secret account in Switzerland a few years ago, there was a virulent reaction in French politics. Certain voices there started having a go at everyone who could be seen as a low-tax jurisdiction. And everyone gets tarred with same brush. So even though the problem didn"t involve Jersey at all, we still became part of the target. We get increasingly frustrated if, despite all the work in achieving equivalence with other jurisdictions, these ministries turn around and say: "We put them on a tax blacklist". These lists are easy to get on, but can take years of jumping hurdles to get off.”
The bad news is that those hurdles are likely to make their presence felt for quite a while yet.