The success of the Virgin Islands’ financial services industry has raised the territory’s profile in world affairs, underscoring the importance of its international engagement and presence abroad to advance the economic and commercial interests of the society.
The VI is widely recognised as the pre-eminent offshore jurisdiction for company incorporations and an important fixture in the architecture of the global economy. However, the territory’s success has brought it greater international scrutiny. The universal use of VI companies to facilitate cross-border trade and investment and corporate transactions is a concern for those who do not support the VI’s business model or have strong reservations about it or simply do not understand it.
As a consequence, the VI’s role as an international financial services centre (IFC) has become one of the subjects of international debate on the future of the world economic system. This debate is largely centred on tax and transparency and is taking place against the backdrop of the Great Recession induced by the 2008-09 financial crisis from which the world economy is now emerging after several years of sluggish economic growth.
The crisis did severe damage to many of the advanced economies in North America and Europe that saw a collapse of their banking systems, the wiping out of numerous small and medium-sized businesses, sharp increases in unemployment, and the rapid deterioration of public finances. While a number of these economies are enjoying an economic recovery, many of these problems persist in part as a consequence of the handling of the crisis and, in its aftermath, the policy responses by some governments that have failed to deliver sufficient economic growth or to correct the underlying structural problems holding back their economies.
Public resentment
The economic hardship experienced by many people in developed societies as a result of the crisis has generated a groundswell of public resentment that has led to the scapegoating of offshore jurisdictions in some quarters. Some politicians and campaigners in these societies are seeking to shift blame away from the national governments whose pre-crisis policies and regulations permitted excessive risk-taking by banks and other financial institutions, which eventually destabilised and nearly collapsed the global financial system. They contend that the source of developed countries’ current economic woes lies in the erosion of the state’s tax base by legally sanctioned tax planning that involves the legitimate use of offshore structures to reduce liabilities and protect assets. However, proponents of this argument seldom mention the benefits that offshore vehicles bring to developed countries by channelling much needed capital to vital sectors of the economy such as infrastructure and housing, which in turn generate economic development and create jobs.
These anti-offshore arguments have been carefully packaged and broadcast over the media, which has helped to create a sense of unfairness among the general public, which feels certain elements of society are not carrying their fair share of the tax burden. This is despite the fact that their societies’ existing tax systems were put in place by the national authorities of their own countries.
Transparency
Human rights campaigners have seized on this public discontent to press their case for greater corporate transparency by arguing that their anti-poverty agenda is being undermined by offshore jurisdictions whose corporate structures mask corruption and money laundering in poor countries. They, too, conveniently omit the role of offshore vehicles in channelling capital to developing countries, which has helped to reduce poverty. Also dismissed is the legitimate need for confidentiality and the right to privacy, which are respected in other sectors such as banking where account holders’ personal data and account information are largely protected from illegitimate intrusion.
The hostility that has emerged from this milieu of negative sentiment, amplified by elements of the media, has enmeshed the VI in the international debate on tax and transparency, despite the fact that the jurisdiction has been largely compliant with international regulations and in fact exceeds the standards of other jurisdictions in most cases.
These circumstances have made it even more important that the VI engage the outside world to ensure that the territory’s voice and own message is heard internationally and that the jurisdiction’s role in the global economy is not misconstrued by the self-serving or misguided who see the territory as an easy target.
The VI must press on with a sustained campaign of international engagement, particularly in the centres of power in North America, Europe and Asia, to counteract any negative impressions that have been created about the territory and to maintain the jurisdiction’s reputation as a highly reputable international financial centre.
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