Due Diligence

Offshore Perceptions: Where Are We Now?


By George Hodgson, Chief Executive, STEP, London (01/10/2018)

In 2016, STEP published a major research report which evaluated how both onshore and offshore practitioners viewed the outlook for the offshore world. Over 1,000 participants, equally split between onshore and offshore took part.

The results were immediately clear. An overwhelming majority of 77 per cent of offshore respondents identified compliance as a rising burden to a ‘great’ or ‘large’ extent, and the picture the survey painted was that compliance was a major factor driving up costs and charges. The combined effect of escalating charges and more rigorous reporting requirements was having a significant impact on clients.

Another interesting result from the survey, which was conducted shortly after the so-called ‘Panama Papers’ story broke, was that offshore respondents seemed relatively relaxed compared to their onshore counterparts regarding the impact of the scandal on the offshore world generally. Only 12 per cent thought it would have a ‘great’ or ‘large’ impact on their business. In stark contrast, 48 per cent of onshore participants thought it would have a ‘great’ or ‘large’ impact on the offshore world.

Events over the intervening two years since the survey have largely validated the caution shown by onshore practitioners. There is little doubt that the Panama Papers saga has added significantly to the political momentum around some of the most recent major developments. Moves to require registers of beneficial ownership, EU blacklists and the ever more onerous obligations being placed upon advisors, trust and company service providers (TCSPs), and other so called ‘gatekeepers’, can all be seen as part of the policy response from the onshore world to the revelations of what was going on at Mossack Fonseca.

This all means that the cycle of rising compliance burdens, rising costs, rising charges and subsequent pressure on clients that was identified so clearly two years ago, continues today.

What may be starting to change are the options available to clients in terms of how they can respond to this environment. There was clear evidence in our original research that onshore practitioners, in particular, felt that clients were looking to move away from offshore centres. Onshore centres offered less reputational risk and, in centres such as the US, more limited reporting requirements. Since then the move into the US has been a major feature of the market place.

Almost inevitably we are now starting to see policy respond to this market shift. In the US various legislative proposals, such as the draft House Financial Services Committee’s Counter Terrorism and Illicit Finance Act, are being worked on to enhance beneficial ownership reporting in the US. These proposals are meeting stiff opposition, particularly from the legal profession, with the American Bar Association, for example, arguing that the bill would ‘impose burdensome, costly, and unworkable new regulatory burdens on small businesses and their lawyers’. The direction of travel in policy terms is nevertheless clear.

Similarly, the OECD has published its proposals for ‘Mandatory Disclosure Rules for Addressing CRS Avoidance Arrangements and Offshore Structures’, clearly aimed at attacking those moving funds to the US or elsewhere with the aim of avoiding CRS reporting. As with the US proposals, the legal professions have been highly critical of the proposals. STEP, for example, in its response to the OECD consultation, focused among other issues on the undesirability of retrospective legislation and the attack on legal privilege. As in the US, however, the direction of travel at the OECD level is clear.

Whether tougher US approaches to beneficial ownership and the OECD’s initiative to attack the avoidance of CRS reporting will do anything to reverse the recent flow of clients away from offshore centres and into the US remains to be seen. Even two years ago, it was notable that, in spite of the challenges, our survey respondents were far from despondent about the outlook for the offshore world, with 81 per cent of offshore respondents at least moderately positive about the future prospects for their jurisdiction.

What the client looks for from the offshore world has probably changed in recent years. In our survey both onshore and offshore respondents agreed that issues such as client confidentiality and tailored legislation (traditionally key parts of the offshore offer) were now less important to clients. What remain important are issues such as ease of doing business, reputation with the public and political stability.

As one survey respondent put it: “the world is becoming fully compliant. It’s the same for our clients, or else we will ‘exit’ them.” In that respect many of the most successful parts of the offshore world might well be described as ‘mid-shore’. That ought to mean, however, that in reality they are relatively well placed to cope with a fresh wave of initiatives, from beneficial ownership registers to blacklists and on to TCSP regulation, changes which are well on their way.  

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