Wednesday, 9 December 2015

Jersey: A Premature Burial?

“The fall of Jersey: how a tax haven goes bust” is indeed a dramatic headline. The piece opens with John Christensen, one of the chief critics of Jersey’s economy, waxing lyrical about the past: “There were fantastic beaches, a strong sense of fun, because of the tourism industry. The Beatles played at Springfield in 1963, stuff like that. It was cool.”

The article blames finance largely for the collapse of the tourism industry and quotes Ted Vibert as blaming finance – “It pushed up prices, attracted the best talent, and drew the government’s attention away from tourism”. But in fact the collapse of tourism mainly came about largely because low-cost airlines and cheaper foreign travel arrived, and the traditional “bucket and spade” economy vanished like morning dew.

From 1984, the article describes Jersey like this: “The Island was a miracle of plenty, which somehow combined a comprehensive welfare state with tax rates to satisfy enthusiastic libertarians”

Now up until the 1980s, tourism was as large as engine for economic growth as the finance industry. It was only during the 1980s that the cheap package trips to sunnier climes and the relatively high cost of travel to Jersey impacted on tourism. Thereafter it was in decline and shrinking. That also had a knock on effect on the economy and meant finance became more important. Increases in duty has also meant that Jersey is no longer attracting those looking for cheap booze and drink.

Tourism was also not helped by John Rothwell, the Tourism Committee President who pushed for the Island to move more upmarket very rapidly from basic accommodation. This lead to costly conversions for those that stayed in the business (and rising charges as they tried to recoup the capital expenses) and drove others out of it. The decision to not allow charter flights or any kind of subsidised seasonal flights was a political one, and that did not help at all either. Neither of these really had anything directly to do with the finance industry.

It is important to bear that in mind, because the argument being put forward is that Jersey owes its current problems to recent events post the financial crash of 2008. Parts of the economy were shrinking, and while finance was filling the gap, that decline in hotels and guest houses also impacted down the chain to other industries such as building industry. In farming, Jersey was under pressure from European countries as British membership of the EU opened up new opportunities for EU growers in the UK, and challenged Jersey's rural economy.

The article is also being rather sly in highlighting how money travelled in Jersey during the past. It notes that “When officials in Moscow wanted to hide the Communist party’s funds in the last days of the Soviet Union, they put them in Jersey. When post-Soviet oligarchs wanted to obscure their ownership of assets, they structured them through Jersey. When South Africans wanted to avoid apartheid-related sanctions, they did so through Jersey.”

That money laundering took place – illicit flows of funds – was certainly true, but the article fails to mention the regulatory framework put in place to prevent any tax evasion, and changes like signing up to FATCA in the past year. Anti-money laundering is now not just for a dedicated employee, but everyone working in the finance industry has to be aware of it.

Any reader of Private Eye in recent years will notice how money laundering has been taking place not in Jersey but in the UK. Around 2013-2014, over £100 million of criminal cash was laundered through central London branches.

Their money-laundering service was discovered by HM Revenue and Customs during an investigation into two London cocaine traffickers. It was not reported by the banks, who seem not to ask questions about large sums of cash being deposited.

And the Independent comments that “the great British money launderette: criminals and corrupt officials from around the globe take advantage of Britain’s lax corporate rules, including money which was routed from Russia, and where companies incorporated in Britain – not Jersey - were instrumental to transit the funds.

"New York and London," says Martin Woods, writing in the Guardian (but not in this article)"have become the world's two biggest laundries of criminal and drug money, and offshore tax havens. Not the Cayman Islands, not the Isle of Man or Jersey. The big laundering is right through the City of London and Wall Street.”

Anti-money laundering legislation has come in Jersey together with regular training which all staff in finance industry companies have to undertake. It teaches you that to fail to report a suspicious transaction or activity or source of funds to your compliance officer would render you liable for criminal prosecution, should it transpire that you looked the other way.

The Jersey Financial Services Commission operates look through basis on company registries to identify final beneficial owners of companies, and finance companies are not only expected to complete due diligence, but as part of that to check names against a list of notifiable names. While the register is not public, neither is it in other jurisdictions. Jersey companies and trusts are checked by the JFSC rigorously to ensure they comply with the best due diligence.

Now from January 2016, UK companies have to register “people with significant control” of companies, albeit also in a register held by Companies House, and it is stated at present that this will be made public by 2017, although that remains to be seen..

Other EU countries are also due to introduce central registers of corporate beneficial owners by 2017 as part of their implementation of the EU's Anti-Money Laundering Directive. But like Jersey, these registers will probably only be accessible to what are termed “competent authorities” and not the wider public.

By purely focusing on the past, and not looking at the regulatory framework today, the article does give a distorted picture of Jersey today. There is no mention of these changes, and anyone reading the article would be forgiven for thinking that earlier transgressions and the lax regulatory framework of the 1980s still applies. There is no mention of a clean bill of health from the IMC and compliance with the OECD on tax regulation, and signing up for the automatic exchange of tax information (FATCA) with the USA and the UK

But there is no doubt that the introduction of 0/10 has seriously impacted the island’s finances. It has shifted the burden from companies to individuals, picking up the slack with GST. This is the result of compliance with EU rules which need external and internal tax regimes to be the same for companies. Gibraltar tried to work out a way round that and failed.

However, the EU rules themselves are causing considerable problem to their own market. It is clear that there are distorting effects because if a company is managed outside of the jurisdiction in which it trades – Amazon, Google, Apple etc – the tax take for the country in which it does retail business can be very low.

There are two probable solutions: to standardise tax rates across the EU, which is likely to meet formidable resistance, or to introduce some kind of territorial tax so that a retail company pays tax on its profits proportionate to the jurisdiction in which it is trading. That it to say it can be taxed by the jurisdiction in which it sells goods on point of sale. If that comes about, that would provide a framework for Jersey to reintroduce a tax on companies with a retail presence in the Island. But it should be noted that Jersey cannot do this on its own: it has to play a waiting game.

It would be facile to admit that there are not severe budgetary problems within the local economy. But that’s not just something facing Jersey as a result from the banking crisis. Richard Murphy has been warning that the UK under George Osborne is facing fiscal Armageddon.

What is more, while the scale was not identified, and appears to be something of a movable feast, the fiscal black hole in Jersey’s economy was first raised in a Scrutiny hearing by Deputy John le Fondré in the summer of 2014, and swept dismissively under the carpet by Senator Philip Ozouf, who resolutely denied there were problems. He suggested Deputy Le Fondré was exaggerating – until after Senator Ozouf was elected, of course.

The current malaise in Jersey politics certainly comes from a lack of trust between public and politicians. Either a number of politicians who were members of the previous Council of Ministers knew about the black hole and said nothing about it until they were elected, or forgot to feign ignorance when they discovered the magnitude of its extent. Filling the hole by ad hoc supplementary taxes – health, sewage etc – seems more like fire fighting a blaze than a careful thought out strategy.

The article focuses on the low turnout in St Helier, and conveniently ignores the higher turnout in other Parishes. To say that there is “almost no popular involvement” with Jersey politics and to cite the Parish with the lowest turnout is deceptive.

The writer of the article also puts in judgements such as “members are chosen from a talent pool slightly smaller than that of Crawley borough council” which is a nice if sneering rhetorical flourish, but fails to say what talent looks like. I am sure that Times Readers might make a similar jibe about Jeremy Corbyn and the Labour Shadow cabinet. Viewers of “Yes Minister” will have no doubt that the UK cabinet is not necessarily a collection of the brightest brains in the country either. As with Jersey, there are politicians of varying calibre.

It is true that the change to 0/10 at the more or less the same time as the banking crisis could not have come at a worse time, and there is no doubt that Jersey faces significant challenges to overcome the crisis. It is also true that Jersey rushed into 0/10 following the lead of the Isle of Man and Guernsey, without thinking about the long term and the revenue loss. The fudge to claw back some tax from companies – by so-called "deemed dividends" – was correctly identified by Richard Murphy as a problem with the EU rules on taxation, and it duly went.

As the fudge meant local shareholders could be taxed even if they didn’t take profits out of the company as dividends – being taxed on “deemed” and not “real” dividends – the loss of this strategy meant companies could simply retain profits, and with no capital gains tax, and be sold with accrued revenue without incurring any tax on that sale.

With the public sector, part of the problem was acutely pointed out by Kevin Keen, whose summary recommendations and post-employment interview showed a businessman struggling to interpret the different and overlapping lines of responsibility within the States, and had trouble putting a picture of its operation together.

As former Senator Sarah Ferguson found out, no States Department had an organisation chart showing chains of command, and links between different employees. For the Health Department, she eventually had to construct her own.

It is hard to see how efficiencies can be made if such a situation exists. A lot of current cutbacks look set to displace workers at the coal face, not middle management, which is precisely the opposite of what Kevin Keen advised. But without any chart showing positions, the outsiders, that is to say, the general public are in the dark.

There are areas of the States which are done inefficiently and could be done more efficiently in the private sector, and could be outsourced. But there are also layers of management which add to cost of front line. It appears, for example, that budgetary arrangements for the central market mean that as well as the cost being for a market manager and two much lower paid employees, the higher rungs of the ladder above also cost their oversight as part of the budget for the market.

What is also apparent is that Ministerial budgeting is in some ways less transparent than old style Committee budgets. In the old days, the Committees would invariably run out of money and seek to bring what were termed “supply day” requests to the States. Now, most of the shuffling about of money to fix budgets goes on without States scrutiny, by Ministerial decision. While these are published, they are not exactly transparent, and the wonderful term “contingency fund” appears with alarming frequency.

It is also worth commenting on “The Jersey International Finance Centre”, which the article describes as a project which “looks extraordinarily speculative for a government already facing a cash crunch.”. The Scrutiny Panel’s evaluation show that it will not return the profits to the States but it will nonetheless break even. It is in many ways more of a Keynsian building scheme, aiming to encourage new business by investing public capital (including the value of the land). But it is important to upgrade existing office space available and retain existing companies, who might relocate off Island. Larger companies from mergers are often spread out in different offices in St Helier, and this provides an opportunity for them to consolidate and make savings.

What the article does not say is that this kind of scheme is profitable enough for private enterprise, such as Dandara, to also be engaged in the same market. The success of Dandara in turning a profit given they had to buy and develop land would suggest the private sector would be better than the States at this kind of project.

However John Christensen is surely right in his criticism of the failure to diversify the economy. Diversification has been on every politician’s lips, but unfortunately lip-service is all Jersey seems to get. There has been some diversification into different forms of financial markets, but none into non-financial markets.

Part of the problem is that past engagement with filling niche spaces in Jersey’s long history has largely been driven by the private sector, and Jersey seems to lack entrepreneurs who can come up with innovative and workable ideas, and spot the gap in the market. That is not to say there are not some seeds being sown, such as Digital Jersey, but they are a long way off germinating into large scale crops.

One asset of Jersey is however still present. The article quotes Colin Powell:

“They know that Jersey has political stability, doesn’t have political parties. It’s not going to be faced with a sudden swing to the left, or swing to the right, or whatever direction, a change of tax arrangements. It’s also got fiscal stability.”

The political stability has not changed, and that certainly is one factor which must apply when considering whether or not to base operations in a locality. In an increasingly turbulent world, Jersey’s geographical location and political system, which has changed by evolution rather than revolution, still has something to offer.

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