Competition from OFCs benefits the global economy by driving financial and regulatory innovation both onshore and offshore
FOR IMMEDIATE RELEASE: May 2010
Offshore financial centers (OFCs) bring to mind shady financial dealings (money laundering, autocratic looting, and even the financing of terrorism) in glamorous Caribbean islands or secretive Swiss banks. The recent UBS tax scandal reinforces the troubled reputation of OFCs for enabling tax evasion. Yet, in the just-published Offshore Financial Centers and Regulatory Competition (AEI Press, May 2010), a group of leading international law and finance experts, led by University of Illinois law professor Andrew P. Morriss, demonstrate that--despite their negative associations--offshore financial centers have become key players in corporate finance and certain insurance markets and play an essential role in the world economy.
While fears of criminal activity have prompted many governments to restrict offshore competition, the authors critically examine the evolving role of OFCs in the world marketplace and warn that over-regulating OFC activity presents a serious risk of destabilizing the entire global financial system.
Morriss and his coauthors make the case for a balance between popular--but potentially misguided--regulatory efforts, and offshore financial centers' ability to produce wealth-enhancing benefits. To illuminate the important economic role of OFCs, the authors ask the following:
Is international regulatory competition a race to the bottom (when nations are given increased incentives to do away with existing regulations) or a race to optimal regulation? Corporate law scholars Jonathan R. Macey and Anna Manasco Dionne argue that international regulatory competition between OFCs and developed economies leads to increased innovation because onshore jurisdictions are forced to offer more competitive transaction costs through the reduction of regulations and the use of financial innovations.
Do OFC reform proposals respect established international legal principles? University of the West Indies professor Rose-Marie Belle Antoine, an expert on financial privacy laws, points out that international legal principles, common to all nations, require treating offshore financial privacy laws with respect. International conflict of law principles require recognition of offshore jurisdictions' laws, many of which are different expressions of shared principles rather than ideas alien to the common heritage of Western legal systems.
What are the impacts of multilateral international institutions, and how can they foster rather than restrict competition? Richard K. Gordon, a leading expert on international organizations and a former International Monetary Fund (IMF) official, examines the role of the IMF in the debate over regulatory competition. He shows how institutions have played a constructive role by channeling onshore pressures into the creation of neutral principles that foster efficiency-enhancing competition, while at the same time serving as an enforcement device for onshore jurisdictions' efforts to cartelize the law market, which would enable them to coordinate efforts against OFCs.
What policies conflict in tax competition? International tax expert Craig M. Boise explores the efforts of onshore jurisdictions to use the transnational organizations they influence, such as the Organisation for Economic Co-operation and Development (best known as OECD) and the European Union to regulate competing international tax systems. He argues that tax competition is not a question of rates alone, but implicates a wide range of policy interests. Falling back on charges of "unfair" competition or demands for a "level playing field" is unlikely to lead policymakers to discover ways to enable the coexistence of tax systems built on different assumptions. Rather than asking if a particular tax regime is unfair, we should instead seek to identify both the conflicting policies and the points of friction caused by conceptual differences.
How do offshore jurisdictions change the nature of regulatory competition? Andrew P. Morriss contends that OFCs positively change the nature of competition by introducing innovations that onshore competitors are forced to mimic, in areas such as captive insurance law (where insurance companies insure the risks of their parent company) and international finance. By providing the means for citizens of autocratic nations to move their finances offshore, such competition reduces the ability of autocratic governments to expropriate citizens' assets.
Morriss and his coauthors also demonstrate how OFCs play a critical role in streamlining foreign direct investment and create legitimate business opportunities for countries with weak financial systems by providing access to global capital and sophisticated courts.
As the ongoing financial crisis produces new regulatory regimes aimed at eradicating money laundering and other white-collar crimes, the authors of this volume demonstrate that legitimate offshore competition must be allowed to flourish. OFCs are no longer the shady tax havens portrayed in popular media, and onshore governments must recognize and protect their important contributions to the global economy.
For interview requests, please contact Andrew P. Morriss directly at [email protected] (217.244.3449). For all other media inquiries, please contact Véronique Rodman at [email protected] (202.862.4871) or Sara Huneke at [email protected] (202.862.4870).
Andrew P. Morriss is both the H. Ross and Helen Workman Professor of Law and Business, and a professor at the Institute of Government and Public Affairs at the University of Illinois at Urbana-Champaign.
Contributors: Rose-Marie Belle Antoine, Craig M. Boise, Anna Manasco Dionne, Richard K. Gordon, Jonathan R. Macey