Offshore British tax havens start tackling financial crime to maintain autonomy

Offshore accounts

A recent investigation conducted by the Guardian dubbed the “Uber Files” has drawn global attention.

It revealed that Uber sought to gain access to high-ranking politicians around Europe to obtain favourable legislation and tax statuses. Outrage stemming from the reports quickly rippled across the continent, with taxi drivers taking to the streets in protest across Italy while opposition parties in France have channelled popular discontent by pushing for a parliamentary enquiry.

As well as blowing the lid on a secret deal Uber crafted with Dutch tax authorities, the leaked documents show how the California-based company went to great lengths to divert scrutiny away from its tax arrangements in the fiscal paradise of Bermuda. For decades, Bermuda, alongside the other British Offshore Territories (BOTs) such as the Cayman Islands or the British Virgin Islands (BVI), has been the jurisdiction of choice for billionaires and corporations to park their wealth, without too many questions asked and without paying their fair share of tax.

In the last few years, however, a string of financial leaks – from the Panama to the Pandora Papers – has placed these fiscal paradises under growing critical scrutiny for their lax financial rules and acceptance of dirty money. More recently, the need to enforce economic sanctions on Russian oligarchs has prompted greater scrutiny by the British government, which had traditionally turned a blind eye to the opaque financial dealings in its overseas territories. Confronted with the threat that the UK may suspend their constitutionally autonomous status, BOTs have therefore started cracking down on financial crimes and embracing a programme of reform.

Changing tides

Tax havens had already become a hot topic when proposals were brought forward to adopt a 15% global minimum corporate tax in every financial jurisdiction in the world. However, following the Russian invasion of Ukraine – and attempts by Western countries to seize the wealth of Putin-affiliated oligarchs – calls for fiscal paradises such as British Overseas Territories to adopt a tougher approach to financial wrongdoing and dirty money have gotten louder.

But perhaps the biggest source of pressure on BOTs has become the British government. A recent inquiry, led by British judge Sir Gary Hickinbottom, into corruption on the BVI found “gross failures of governance” and recommended that the British government should impose direct rule in order to drive urgent reforms. Foreign secretary Liz Truss stopped short of taking this extraordinary measure, giving the BVI’s new administration a two-year window in which to make urgent progress, while at the same time changing the rules to simplify the procedure to impose direct rule.

The very real threat of direct rule has caused authorities in BOTs, including the courts, to take a more dogged approach in prosecuting financial crimes, leading to a wave of breakthrough rulings. The BVI’s highest court, for instance, recently dismissed an attempt by former Nissan CEO Carlos Ghosn to strike out claims of fraud brought against him by his former company. Ghosn, who made international headlines in 2019 with his audacious escape from Japan inside a musical instrument box, is being sued in the BVI by Nissan for the repossession of a $32 million yacht they say was bought with misappropriated company cash.

In a similar vein, another recent judgement by the Supreme Court of Bermuda concluded that global bank giant Credit Suisse had “turned a blind eye” towards the criminal behaviour of one of its employees. These sorts of rulings are meant to prove that British Overseas Territories are willing to take on major corporations and billionaires in their pursuit of financial crimes.

Breaking ground

The Cayman Islands are also taking the direct rule threat seriously, as evidenced by recent developments in a legal battle that has seen several high-profile stakeholders – including the Kuwait Port Authority (KPA), the Public Institution for Social Security (PIFSS) and the Gulf Investment Corporation (GIC) – sue the former manager of the Port Fund (TPF), for fraud. The globe-trotting case has become something of a sensation in recent years, involving institutions not only in the Caymans, but also Kuwait, Dubai and the Philippines.

The Cayman decision, however, is especially consequential, as it is the first time in the history of the Cayman Islands when a court has allowed investors to file claims against a fund’s management on the fund’s behalf. While the move could prove to be a game-changer for fraud cases in the region, it certainly embodies the apparent shift in the way BOTs are approaching financial wrongdoing.

The change in direction towards a more serious approach has also been confirmed earlier this month through the court’s decision to strike down TPF management’s request to have the charges dismissed. Many of those who have grown accustomed to the labyrinthine inner workings of BOTs legal systems might soon find out that their old tricks no longer work.

Avoiding direct rule

A wind of change is blowing through the British Overseas Territories. And while most of those places are well versed in resisting both literal and metaphorical storms, they are now facing overwhelming odds: Reform or lose your autonomy.

Two months ago, the BVI premier, Andrew Fahie, was arrested in the US on drug trafficking charges. An embarrassed assembly quickly voted him out and elected Natalio Wheatley as the head of a coalition government. Sworn in a month after the recommendation to impose direct rule was made public, it was only this government’s assurances that stopped the UK government from stepping in. Its entire mandate now depends on changing the status quo.

Alongside the Wheatley government’s formal commitment to conduct reforms in the BVI, the recent steps taken by the judiciary across the region seek to give the UK confidence that BOTs are starting to clean up their act without the need for extraordinary constitutional interventions. Maintaining those reforms will prove crucial to the region’s future autonomy.