Offshore centres: trade in secrecy is big business for small islands

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Offshore financial centres specialise in low-profile ownership arrangements for the wealthy. They cannot be enjoying their current blaze of publicity. Scrutiny is high because Russian oligarchs habitually use offshore centres. Enemies of UK chancellor Rishi Sunak have also asked whether these bolt-holes feature in his family’s controversial finances.

Providing sophisticated legal and financial services — and protection from tough onshore disclosure rules — are a big business for some small islands. The British Virgin Islands, for example, derived more than half of last year’s budget from fees of $196mn from setting up off-the-shelf companies.

The BVI crop up repeatedly in debates over offshore centres. The threat of blacklisting, pressure over transparency and last year’s Pandora Papers data leak cast a pall over the islands’ financial sector.

The benefits for host jurisdictions are not always obvious. In South Dakota, a US onshore secrecy hotspot, trust companies paid fees and tax of $6.5mn in 2021. That is despite soaring demand. In the decade to 2020, trust assets there went up more than fivefold to more than $500bn.

Jersey benefits more obviously from its trust industry, which holds about £1.1tn in assets and employs more than 4,000 people. The sector was expected to pay £3.4mn in regulatory fees in 2021 as well as corporate tax at a 10 per cent rate.

One big Jersey trust company, JTC, paid £692,000 in corporate tax in 2020. It brags that its private client business is becoming fashionable. The number of JTC clients paying fees over £100,000 increased by a quarter in 2020. The FTSE 250 company is highly valued at 21 times forward ebitda.

Some trust providers have grown by acquisition. But they should beware of liabilities. In a court case last year involving Angola’s sovereign wealth fund, Jersey trust provider LGL was fined for missing red flags.

Jersey can still claim to be better regulated than many financial centres. Critical scrutiny now focuses on hubs such as Dubai. Jason Sharman, a University of Cambridge professor, expects it to benefit as disclosure-averse Russians take their money there. But this is hardly a feasible option for the families of UK politicians.

The Lex team is interested in hearing more from readers. Please tell us what you think of offshore centres in the comments section below.

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