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On the eve of the 2008 financial crisis, a dinner at the Mansion House in the heart of the City of London celebrated the increasingly close relationship between Britain’s financial hub and the Isle of Man. “You are indeed a core asset of the City,” said London’s then Lord Mayor David Lewis, toasting the financial centre established on the small island 60 miles off the coast of northwest England.

The five years that followed have been a torrid time for offshore financial centres. Amid growing anger over tax dodging from a public wearied by austerity, critics have accused tax havens of destabilising the world economy, helping to hide money in secret accounts and facilitating corporate tax avoidance.

But throughout, the City of London has valued its symbiotic relationship with Britain’s offshore centres, particularly the Crown Dependencies of Jersey, Guernsey and the Isle of Man that provide liquidity to UK-based parent banks. Roger Gifford, current Lord Mayor of London, recently described Jersey as “a fantastic adjunct” to the UK economy. “They gather funds in a tax-efficient way and send them on to London. That’s a great advantage to the UK,” he said.

Jersey is the custodian of £1.2tn of wealth, nearly half of which is funnelled into UK assets that support about 112,000 jobs, according to Capital Economics, a consultancy that conducted a study of Jersey’s finance sector. It found that the City of London would lose business to rival financial centres such as New York, Hong Kong or Dubai if the Crown Dependencies did not exist.

But the notion that Britain benefits from offshore centres cuts little ice with critics, not least because their reach extends far beyond the UK. Christian Aid, the charity, calculated that $1 in every $10 of foreign direct investment to developing countries is routed through the UK’s Overseas Territories and Crown Dependencies.

Kofi Annan, the former UN secretary-general, has raised concerns that the use of offshore companies “facilitates tax evasion and, in some countries, corruption, draining Africa of resources that should be deployed against poverty and vulnerability”. The Organisation for Economic Co-operation and Development cites estimates that developing countries lose three times as much money to tax havens annually as they receive in aid, although it notes the data are “unreliable”.

However, offshore centres argue they have a positive impact on developing countries. Tax-free jurisdictions play an important role in deals involving investors from different countries who require “tax-neutral” structures that avoid additional layers of taxation. In 2009, the World Bank’s private sector arm, which invested about £2bn through centres such as the Cayman Islands, Mauritius, Guernsey and Jersey, pledged to step up its scrutiny of transactions but said many projects would not be sufficiently economically viable to attract capital investment without the use of these intermediaries.

Jason Sharman, an Australian academic and expert on offshore centres, believes the relative openness of China and India to flows of capital is “a key factor that has previously been ignored” in explaining how they have lifted millions of people out of poverty. He says investment flows in and out of China are mostly routed through offshore centres to benefit from more efficient incorporation and listing procedures, rather than to dodge tax bills.

He also challenges the view that offshore centres are havens for illicit wealth plundered from developing countries. Industrialised countries often provide a higher level of corporate secrecy than is available in offshore centres. The US, Switzerland and Britain topped the rankings of corporate bank accounts involved in corruption cases examined by the World Bank.

Even so, Britain’s offshore centres are under pressure to become more transparent in the wake of new US legislation – the Foreign Account Tax Compliance Act – that requires them to hand over tax information on US clients. The US law opened the door to the British government insisting on a similar measure, which is due to be rolled out by other European countries as well.

The UK government’s insistence on greater transparency from Overseas Territories and Crown Dependencies paved the way for a global push for openness at the G8 summit in Northern Ireland. Paul Collier, the development economist who advised the prime minister on the G8 agenda, says: “Britain started with the biggest problem. London is the epicentre of law and accountancy firms and has the most overseas territories. The fact we have stepped up to the plate and tackled this puts us in a strong position.”

Some offshore centres fear for their position if privacy-conscious investors move to less transparent regimes. Ahead of the G8 summit, Orlando Smith, premier of the British Virgin Islands, said there was a risk of “irreparable harm” to their economies if they were forced to implement transparency ahead of other countries.

John Christensen, director of the Tax Justice Network and a fierce critic of offshore centres, agrees that: “There is a real danger that measures taken in one part of the world but not replicated elsewhere will lead to a displacement,” he says.

The increased transparency and co-operation over tax are unlikely to silence all the critics. Governments may reserve judgment until they have evidence of the new transparency measures working.

Nor will the new measures protect offshore centres from the kind of global media storm that broke when a data leak exposed the identities of thousands of BVI investors this year.

Rival financial centres such as Switzerland and Luxembourg are likely to continue to criticise what they view as opaque trust structures available in offshore financial centres.

The biggest offshore centres emphasise their strong record at meeting international regulations and standards. Geoff Cook, chief executive of Jersey Finance, says: “It cannot be reiterated enough that Jersey has no interest in fostering abusive tax practices or money laundering.”

Allan Bell, chief minister of the Isle of Man, is comfortable with the move to transparency, which is not a new agenda for the island. It is time to stop the criticism, he says, and “give places like the Isle of Man some recognition”.

The City of London has long been receptive to this message – although its close links with the offshore centres have served to intensify the suspicions of its critics. Opinions will remain divided about the role played by offshore centres, but as they make strides towards transparency, their international standing can only improve.

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