By John Kay
Published: March 20 2009 20:00 | Last updated: March 20 2009 20:00
By the pool of my French house in Menton, I often contemplate the economic consequences of the least-known uprising of Europe's year of revolutions in 1848. The citizens of Menton and Roquebrune wrested independence from the neighbouring principality of Monaco. The rebellion ended six centuries of Grimaldi rule. The result deprived the state of its agricultural hinterland and cost the Grimaldi dynasty the major part of its revenues.
Prince Florestan hatched a scheme with the entrepreneur, François Blanc, to restore the family fortunes. Blanc built a casino on the hills of Monte Carlo opposite the royal palace, where punters could indulge in games of chance that were illegal in France and many other European states. The venture had a shaky start, but a new railway brought visitors from across the continent. Gambling made the tiny state prosperous.
Florestan and Blanc brought the concept of the sanctuary, or haven, to economic policy. A small jurisdiction attracts business by implementing a more liberal fiscal or regulatory regime than its neighbours. Smugglers and pirates had occupied territories for centuries, but their activities were outside the law, and anyone who dealt there did so at real risk to their property and person. The haven provides the apparatus of the legal state while enabling its clients to escape the inconveniences of regulation and taxation and unwanted attention to their affairs.
Doing business in a haven is expensive. In the 19th century, the rail fare to Monte Carlo was substantial. Today the costs of establishing an offshore company or trust put such arrangements out of the reach of ordinary people. So the clients, individuals and corporations are necessarily affluent. Since the disreputable simply disregard the law, and the morally upright observe its spirit as well as its letter, the customers of the haven are respectable, but not very respectable, citizens – the gambling aristocrats of the 19th century, the tax exiles of today. Monaco has never shaken off Somerset Maugham's tag of "a sunny place for shady people".
From its inception, the existence of the haven depended on the hypocrisy of its larger neighbours, which tacitly acknowledged the utility of the haven as a safety valve. Their politicians could denounce excesses of wealth and proclaim the need to regulate improper or immoral behaviour, but their rich and famous citizens could always ensure that the restraint on them did not become too onerous.
Governments can make life difficult for the havens or for the people who use them. But they rarely do. After decades of pontification, only mild bullying was needed to persuade Switzerland, the most respectable and most powerful of havens, to modify its banking secrecy. The Monaco casino project would have been stillborn if there had been genuinely principled opposition from neighbouring states. Monaco, then and now, is completely dependent on France for its physical infrastructure and on the European financial system for its financial infrastructure. Minor harassment of returning visitors, and a more determined refusal to co-operate with companies that did business in the haven, would have ended the project.
People are willing to make agreements under the laws of Bermuda, not just because they know that the laws of Bermuda are not very different from the laws of England, but also because they also know that the consequences of agreements made under the laws of Bermuda will be enforced by the courts of England. Such formal recognition is the essential difference between dealing with a haven and dealing with smugglers, and a difference that exists because we choose to facilitate it.
Few managers of hedge funds based in St James's in London or Connecticut could locate their registered offices on a map. Many havens are islands, which is why we use the term offshore. Most are under present or former British jurisdiction, accidental relics of empire and naval power. The territories have been allowed, even encouraged, to reduce their dependence on British government aid by attracting global financial services activity. With great success, in many cases. The tiny population of the Cayman Islands has a per capita income well above that of the mother country.
So when the haven falls into disrepute – as recently in the Turks and Caicos Islands – it falls to the British government to sort it out. If you operate in the penumbra of legality, as havens do, it is easy to slip outside the bonds of legality altogether. Where there is legal avoidance of tax and regulation, illegal avoidance of tax and regulation is rarely far behind, and often hard to distinguish: where there is secrecy the motive is frequently impropriety; where there is impropriety, criminality is rarely far behind, and hard to distinguish. To turn a blind eye to avoidance of the law is to undermine all law.
Today's political outrage is humbug. Havens exist only because larger states allow them to exist, and larger states allow them to exist because the customers of havens are the rich and powerful. In the 1860s, the typical client of a haven was a patron of Blanc's casino: in the years after 2000, the typical client of a haven was a hedge fund registered in Grand Cayman. Plus ça change, plus c'est la même chose.
Prince Florestan hatched a scheme with the entrepreneur, François Blanc, to restore the family fortunes. Blanc built a casino on the hills of Monte Carlo opposite the royal palace, where punters could indulge in games of chance that were illegal in France and many other European states. The venture had a shaky start, but a new railway brought visitors from across the continent. Gambling made the tiny state prosperous.
Florestan and Blanc brought the concept of the sanctuary, or haven, to economic policy. A small jurisdiction attracts business by implementing a more liberal fiscal or regulatory regime than its neighbours. Smugglers and pirates had occupied territories for centuries, but their activities were outside the law, and anyone who dealt there did so at real risk to their property and person. The haven provides the apparatus of the legal state while enabling its clients to escape the inconveniences of regulation and taxation and unwanted attention to their affairs.
Doing business in a haven is expensive. In the 19th century, the rail fare to Monte Carlo was substantial. Today the costs of establishing an offshore company or trust put such arrangements out of the reach of ordinary people. So the clients, individuals and corporations are necessarily affluent. Since the disreputable simply disregard the law, and the morally upright observe its spirit as well as its letter, the customers of the haven are respectable, but not very respectable, citizens – the gambling aristocrats of the 19th century, the tax exiles of today. Monaco has never shaken off Somerset Maugham's tag of "a sunny place for shady people".
From its inception, the existence of the haven depended on the hypocrisy of its larger neighbours, which tacitly acknowledged the utility of the haven as a safety valve. Their politicians could denounce excesses of wealth and proclaim the need to regulate improper or immoral behaviour, but their rich and famous citizens could always ensure that the restraint on them did not become too onerous.
Governments can make life difficult for the havens or for the people who use them. But they rarely do. After decades of pontification, only mild bullying was needed to persuade Switzerland, the most respectable and most powerful of havens, to modify its banking secrecy. The Monaco casino project would have been stillborn if there had been genuinely principled opposition from neighbouring states. Monaco, then and now, is completely dependent on France for its physical infrastructure and on the European financial system for its financial infrastructure. Minor harassment of returning visitors, and a more determined refusal to co-operate with companies that did business in the haven, would have ended the project.
People are willing to make agreements under the laws of Bermuda, not just because they know that the laws of Bermuda are not very different from the laws of England, but also because they also know that the consequences of agreements made under the laws of Bermuda will be enforced by the courts of England. Such formal recognition is the essential difference between dealing with a haven and dealing with smugglers, and a difference that exists because we choose to facilitate it.
Few managers of hedge funds based in St James's in London or Connecticut could locate their registered offices on a map. Many havens are islands, which is why we use the term offshore. Most are under present or former British jurisdiction, accidental relics of empire and naval power. The territories have been allowed, even encouraged, to reduce their dependence on British government aid by attracting global financial services activity. With great success, in many cases. The tiny population of the Cayman Islands has a per capita income well above that of the mother country.
So when the haven falls into disrepute – as recently in the Turks and Caicos Islands – it falls to the British government to sort it out. If you operate in the penumbra of legality, as havens do, it is easy to slip outside the bonds of legality altogether. Where there is legal avoidance of tax and regulation, illegal avoidance of tax and regulation is rarely far behind, and often hard to distinguish: where there is secrecy the motive is frequently impropriety; where there is impropriety, criminality is rarely far behind, and hard to distinguish. To turn a blind eye to avoidance of the law is to undermine all law.
Today's political outrage is humbug. Havens exist only because larger states allow them to exist, and larger states allow them to exist because the customers of havens are the rich and powerful. In the 1860s, the typical client of a haven was a patron of Blanc's casino: in the years after 2000, the typical client of a haven was a hedge fund registered in Grand Cayman. Plus ça change, plus c'est la même chose.
John Kay's latest book, The Long and the Short of It, was published in January
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