Comment: Is there more to the EU's tax haven blacklist than meets the eye?
The Caribbean is not the most obvious place to look for the new front line in the battle over Brexit. Nevertheless, it's hard to escape the suspicion that in adding the Cayman Islands to its tax havens' blacklist, the EU is trying to make a point. By Monique Melis and Malin Nilsson
As one member of the European parliament put it: "This sends a clear signal that the idea of turning the UK into a tax haven will not be acceptable to the EU." In other words, the EU would not make any move to turn London into Singapore-on-Thames lying down.
The EU introduced its list of "non-cooperative jurisdictions" in 2017 in the aftermath of the Panama Papers and other scandals. Some of these revealed the use of offshore centres to avoid tax, breach sanctions and launder money. The list already included American Samoa, Fiji, Guam, Oman, Samoa, the Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu. The latest additions were Palau, Panama and the Seychelles, as well as the Cayman Islands.
In the longer term, the EU Council has provided guidance to EU member states to impose “administrative measures” against countries on the blacklist: reinforcing transaction monitoring and increasing audit risks for taxpayers who benefit from, or use, arrangements in listed jurisdictions."
Within that list, the last seems a poor fit. The Cayman Islands has a good legal system and solid insolvency laws. Its section 4.3 funds under its Mutual Funds Law provide a sensible set up for sophisticated investors and private funds. They are free from investment restrictions and by domiciliation are tax neutral. They are highly efficient, but that doesn't mean they seek to avoid tax. Investors still have to pay tax on redemption in their own country of residence.
In fact, the Cayman Islands does not look so very different to a couple of other jurisdictions within the EU, which are not subject to the blacklist—namely Luxembourg and Dublin. Cynics might think the latest move doesn't just provide leverage in Brexit negotiations; it also does not harm in bolstering the EU's fund havens.
Does it matter?
In the short term, not much changes for those included on the list. Those in a blacklisted country are subject to enhanced due diligence by EU-based organisations, as employed when dealing with a new firm. That should prove a formality in most existing relationships, though. After all, it's still the same entity, so if due diligence was done properly first time around, it's hard to see how the absolute risk has increased.
In the longer term, the EU Council has provided guidance to EU member states to impose "administrative measures" against countries on the blacklist: reinforcing transaction monitoring and increasing audit risks for taxpayers who benefit from, or use, arrangements in listed jurisdictions. They can also—but don't have to—impose legislative measures, including withholding tax measures.
Crucially, there's a delay in the application of these sanctions until January 2021, though. That gives time for jurisdictions deemed to be making progress in meeting the EU's deadlines to be removed from the list. This happened to Bermuda, another British Overseas Territory, which was put on the list in March 2019, but removed in May and downgraded to the "grey list" of jurisdictions under review as they implement reforms. (It was finally taken off the grey list with the latest update.)
Jurisdictions such as the Cayman Islands, which has already implemented reform, will hope for a similarly speedy exit from the list.
The precautionary principle
Despite this, other fund havens should not be complacent. Whatever the ulterior motives, the inclusion of a jurisdiction such as the Cayman Islands on the list sets a precedent and a new benchmark for the standards that others must meet. It's also another sign that there will be no let-up in the pressure for greater transparency, which we're already seeing, for example, in the Fifth Money Laundering Directive and its push for public beneficial ownership registers.
Action from the EU tends to come only after warning signals by policymakers. Any jurisdictions on the receiving end should therefore take these seriously and engage properly with the transparency agenda.
But the EU would also be wise to be careful, for two reasons. First, any boon for the likes of Luxembourg and Dublin from its moves could prove fleeting if it leads to regulatory scrutiny from those outside the EU turning on these jurisdictions. Politicising the crackdown on tax evasion would be unwise.
Second, and more seriously, regulators should be wary of over-reach. Undermining stable and well-run offshore centres could prove counter-productive if fund managers simply move to jurisdictions that are less susceptible to international pressure. Ultimately, that won't help the drive for fairness and could also undermine investor protection.
Monique Melis is the global head of Duff & Phelps' Compliance and Regulatory Consulting practice, based in London.
Malin Nilsson is a managing director in the Duff & Phelps Compliance and Regulatory Consulting team and is based in Jersey.
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