Resilient Public Institutions: Governance in International Financial Centers

• In Event: Global Rules and Illicit Economic Flows

Abstract

The transformation over 70 years of offshore regulatory and tax “havens” defined primarily by the absence of particular onshore laws, into international financial centers (IFCs), defined by the presence of different laws from onshore jurisdictions and robust regulatory regimes, is an example of the adaptation and transmission of legal innovations. IFCs’ transmutation of these legal forms enable them to add value by lowering transactions costs for their clients in business structuring, insurance, finance, and wealth management. This process in locations like the Bahamas, Cayman Islands, Curacao, Cyprus, Dubai, Gibraltar, Hong Kong, Jersey, Lichtenstein, Malta, and Singapore provides insight into the central role good government, a strong legal heritage, and robust institutions play in fostering innovation while enhancing cost-effective regulation, economic growth, and political development. We can also see where moves away from open government or decline in public support for the financial sector can slow down innovation and reduce competitiveness.

IFCs are sometimes portrayed as enabling money laundering of criminal proceeds and undermining national and international efforts to ensure sound banking, insurance, and financial practices. They are further portrayed as operating outside the rule of law and international regulation. These views fail to recognize the benefits that well-governed IFCs provide in strengthening government, law, and regulation not only in the financial sector, but also in global governance and the contribution their legal regimes make to economic development. What this paper examines is the investment in ongoing institution and capacity-building that occurs in order for these jurisdictions to maintain competitiveness. This human and organizational capital does not stay contained within national or sectoral boundaries, but moves and adapts to overcome the rigidities that challenge so many of the regimes attempting to govern in today’s globalized environment.

The paper will draw on two sets of information from which to generalize resilience in governance. The first draws on examples of legal innovation and transmission. IFCs have historically borrowed and adapted legal concepts and language from each other as well as from onshore jurisdictions, and have deepened the legal and regulatory structure of the global finance sector by doing so. The second source of material for analysis draws on the global network of tax-related treaties now in existence represented by a database of all double tax treaties (DTTs), tax information exchange agreements (TIEAs), and bilateral investment treaties (BITs). Treaties are an indicator of global engagement; treaty partners and subject matter can tell us about the expected capacity of a jurisdiction to carry out its treaty obligations and the quality of its governance. Treaty obligations can also carry specific operational requirements that may strengthen local governance. A closer analysis of this phenomenon in the context of IFCs might enable us to understand how various types of historical background, such as a global legal heritage and language may pre-condition success or failure of certain jurisdictions by facilitating their access to global treaty networks.

Sustaining the good government that ensures IFC success is crucial to a world economy where one quarter of all corporate activity is thought to pass through or reside there as does 20% of the world’s private wealth and 22% of worldwide bank external assets. It is key to the social and political well-being of these jurisdictions where the finance sector employs up to 20% of the population and generates the revenue for key public services like education. Do IFC transactions improve governance outside of the jurisdiction? Is the resilient governance observable in IFCs replicable outside of the finance sector and in larger more complicated political entities? This paper’s analysis seeks to answer these questions in order to understand the balance of incentives, opportunities, capacity, and necessity required to maintain the kind of resilient governance fit for today’s globalized world.

Authors

• Charlotte Ku, Texas A&M University

• Andrew Morriss, Texas A&M University

• Jakub Aleksander Bartoszewski, Texas A&M University

• Jesse Horton Sowell, Texas A&M University, Bush School of Government and Public Service