Transparency has been lauded as a solution to the 'dirty tactics' of tax avoidance some critics say is rife in international financial centres. Robert Duggan wonders whether they're on to something…

It is perhaps unsurprising that mass media outlets in the UK have increased their focus on tax avoidance by large corporations as well as by private individuals, not least as we begin to feel the pinch from the government's austerity package and as politicians start to limber up for the next general election. Hearts and minds are to be won, and the legality and morality of tax mitigation are hot topics with a plentiful diet of opinion.

The voice of the international financial centres (IFCs), which are criticised for their use of attractive rates of taxation to entice business, is often quieter than the voice of their critics. This is particularly the case for the smaller IFCs among the UK's crown dependencies (CDs) and overseas territories (OTs), but what they have to say is of merit and should be listened to. 

Indeed, in many areas of tax transparency as well as compliance and anti-money laundering, standards are higher in the more sophisticated and well-regulated offshore centres than in their counterparts onshore. Furthermore, with IFCs contributing to the efficient flow of capital between developed and less-developed economies through direct and indirect investment, their role in promoting trade is well-established.

But one of the myths that colours the debate on transparency is that the OTs (such as the British Virgin Islands and the Cayman Islands) and the CDs (such as Guernsey and Jersey) are resistant to co-operation. This is in fact far from being the case: one notes their embrace of the European Union's Savings Directive and the OECD's Model Tax Convention. 

And the tax information sharing debate is not static, with the OTs and CDs at the leading edge of global moves towards the establishment of a proportionate and fair international approach. This includes a notable commitment by the Cayman Islands to participate in the G5 pilot on multilateral automatic exchange of information.

Transparency on matters of taxation is not the only item on the agenda, as financial regulators in the IFCs seek to ensure transparency in respect of the products that they regulate.

The most prominent of the regulatory transparency debates has focused on the independent director model adopted by hedge funds, with some directors sitting on the boards of – arguably – too many funds for them to be able to discharge their fiduciary duties properly. The focus on directors' capacity and their duties has been more acute following notable fund failures or frauds, including Madoff and Weavering, and has become something of a hobby horse for due diligence professionals and others in the funds industry.

Hobby horse or not, the Cayman Islands Monetary Authority (CIMA) has responded proactively on the question of directorships and fiduciary duties with a public consultation regarding how it might approach regulating – or introducing some form of regulatory structure around – the provision of director services to hedge funds and to other financial businesses.

Although CIMA has offered the most public response so far from the regulators in the OTs and CDs it is not the only such body to address industry concerns, with several examples of others taking steps to tighten their oversight of fiduciary services providers.

With bated breath

We now await the outcome of CIMA's review of corporate governance standards in Cayman's financial services industry, as well as what the database of service providers will reveal. That, and whether it really will facilitate a more transparent industry and whether the transparency that it produces is worthwhile.

Not everybody accepts that transparency will be constructive. The requirement for food packaging to detail the ingredients of the product it contains is a good example of the marginal utility of such transparency: it is all well and good if you know what you are looking for but for the most part few care about the detail nor do they understand the impact of what they read.

Nevertheless, there is an argument that transparency will deter negative behaviour because of the fear among wrongdoers that they will be flushed into the open and exposed to scrutiny. If this is the eventual outcome then it will be welcome, because none of the OTs and CDs want illegal or immoral behaviour. But nor do they welcome ill-considered conclusions of an incomplete debate to be foisted upon them without due process or regard to fairness and keeping things in proportion.  

And so the debate rages on, as much in the CDs and OTs as it will have at Lough Erne in Northern Ireland when the G8 leaders met this month. And with the CDs and OTs taking a constructive and leading role in the debate and in shaping and implementing solutions to tax evasion, money laundering, terrorist financing and risky governance practices, the OECD, Financial Action Task Force, International Organization of Securities Commissions and G8 leaders should take comfort that they are not campaigning alone.

Robert Duggan is a partner at Mourant Ozannes.