From Boom to Doom to Boom: Offshore Financial Centres and Development in Small States

During the 1990s tax havens and offshore financial centres (OFCs) were subject to a string of initiatives designed to raise their tax and regulatory regimes to accepted international standards. Many commentators forecast that this would lead to the demise of OFCs, a worry for the many small states whose economic well being depended heavily on the provision of offshore financial services. Despite this regulatory onslaught many small state OFCs have prospered in the new millennium. This paper seeks to explain this apparent paradox by arguing that (1) international initiatives were riddled with loopholes and exceptions that have been gleefully seized upon by the fertile minds of international tax planners (2) that powerful states and groups, most notably the international tax planning industry, successfully diluted the original proposals. Consequently OFCs have been able to garner the reputation benefits of being compliant with international standards without having to fundamentally alter the secrecy and regulatory provisions at the heart of their competitive advantage. Moreover, a similar story is being played out in the aftermath of the recent financial crisis. The original opponents of financial transparency have been bolstered by new players from the emerging economies. This coalition of forces is likely to blunt efforts by the G20 to “end the era” of banking secrecy.