And while this may describe the circumstances that shaped the Cayman Islands and the British Virgin Islands two of the four jurisdictions that investors perceive to be the world most important offshore centers it certainly does not describe the conditions that characterized the other two locations they mention, as their histories as offshore centers were beginning.
The other two are not Caribbean islands, located within a convenient distance of their American investors cities of residence; they are not British Channel Islands either, or Swiss counties, or towns in Liechtenstein. They, like the wave of economic growth that far outstrips growth in any of the aforementioned regions, are in Asia. They are Hong Kong and Singapore.
In the early sixties, the Cayman Islands was not very different from the desperate scene described, and showed little promise of becoming one of the Caribbean wealthiest territories. It was a country plagued by mosquitoes, devoid of piped water and lacking a reliable power supply but, within a few decades, a chain of events had occurred that lead to its emergence as an offshore private banking center of considerable standing. Jamaica decision to become independent of the UK in 1962 played an important part in the Cayman Islands success story. When Jamaica, along with various other Caribbean territories, chose independence, the Cayman Islands, which had previously been administered through Jamaica, made the decision to remain a British Crown colony. The uncertainty caused by Jamaica split provoked a number of business people to relocate to the Cayman Islands, to invest their money and expertise there instead. Their arrival, the territory tax neutral status and its English common law system all set in motion the creation of a private banking center which could capitalize on the development of international finance in an era of post war financial liberalization.
In 1963, the Royal Bank of Canada set up a branch in the Cayman Islands, making it the country second commercial bank, after Barclays. By 1965, the Canadian Imperial bank of Commerce had opened a branch too, and that same year the Bank of Nova Scotia Trust Company (Cayman) became the country first trust company. 1966 brought important infrastructural changes, including the upgrading of the international airport runway and the introduction of telecommunications. This, along with the enactment of The Banks and Trust Companies Regulations Law, paved the way for the Cayman Islands to become a global leader in the financial services sector.
Just as uncertainty over Jamaican independence had benefited the Cayman Islands, political change in another Caribbean nation presented the stable Caymans in a more favorable light. In 1967, the Progressive Liberal Party came to power in the Bahamas, sowing the seeds of an independence movement. The Bahamas was already a well-established offshore financial centre, and the foreign banks doing business there did not wait around to see how things panned out; many of them looked to nearby jurisdictions from the late sixties, a few years before the Bahamas actually broke away from Britain.
The Cayman Islands found itself the new domicile for many of the US-owned banks which had left the Bahamas, partly by virtue of the territory political stability, and partly because of its appealing location just an hour flight from Miami, and within the same time zone as New York. This signaled a shift in the jurisdiction predominant clientele which, until now, had been British, largely due to the fact that two of the men credited with the territory establishment as a private banking center the Cambridge-educated attorney, William Walker, and the Oxford-educated businessman, John Maples were, between the two of them, connected to most of the influential business people in London. The active promotion of the jurisdiction to Americans and the influx of US and Canadian business helped to initiate a construction boom in the 1970s, which gave both the financial services industry and tourism a major boost.
While the Caymans introduced major legislation including the Insurance Law in 1979 and the Mutual Fund Law in 1993 in an effort to expand its private banking role to offer a more diverse range of financial services, another British Overseas Territory in the Caribbean was emerging in the industry. The British Virgin Islands had found a way to benefit from a double taxation relief treaty that existed with the United States. The British Virgin Islands, previously an impoverished country with an economy that centered on agriculture, incorporated its first American company in the mid seventies, and within the space of a few years, hundreds of other companies had followed suit.
Despite an initially successful entry into the offshore sector, the British Virgin Islands was forced to change course slightly when the United States government revoked the double taxation treaty in 1981, causing the British Virgin Islands to lose much of its offshore business. In 1984, legislation that offered offshore companies certain tax exemptions, in an effort to recover some of the lost business, was only partly successful. In 1991 in circumstances that were reminiscent of the way in which the ill fate of the Bahamas had led to the Caymans rise to prominence in the financial services sector the United States invasion of Panama spelled good fortune for the British Virgin Islands. Many of the businesses in Panama booming financial services industry fled to nearby jurisdictions, one of which was the British Virgin Islands.
Both Caribbean jurisdictions success has been phenomenal. In a 2000 survey, KPMG reported that over 41 percent of the world offshore companies were formed in the British Virgin Islands, accounting for more than half of its government revenue. Today, the Cayman Islands, along with Switzerland, dominates the global market for offshore banking, in terms of total deposits, and is considered to have the world fifth largest financial services sector.
The Cayman Islands and the British Virgin Islands have both been dramatically transformed since their beginnings as centers for private banking and offshore company formation, respectively. Before their financial services industries became lucrative, both British Overseas Territories had modest maritime and agriculture economies, with very little in the way of industry or infrastructure; tourism arrived later, and was a by-product of their success as offshore centers. This is, perhaps, the most notable difference between theirs and Hong Kong and Singapore development as offshore centers.
Caribbean islands have become to some degree synonymous in people minds with offshore finance, and in the context of American wealth being central to these countries success, this is understandable. In an era of unprecedented economic growth in Asia, however, it is unsurprising that the two jurisdictions which are expected to overtake their Caribbean predecessors are Singapore and Hong Kong.
Like the Caymans and the British Virgin Islands, both have British colonial pasts, and their colonial history and subsequent independence from Britain have played a part in creating the cosmopolitan, English-speaking metropolises that are present-day Singapore and Hong Kong.
Singapore took its first steps towards becoming a financial center a few years after independence, when former Prime Minister, Lee Kuan Yew, sought advice on creating a Eurodollar market from the Bank of America in London in 1968. Soon afterwards, Singapore established itself as an Asian hub for offshore Eurodollar markets, focusing mainly on South Asian business. The new Eurodollar markets also benefitted from the considerable US dollar spending in the region during the Vietnam War, which lasted until 1975. Apart from the absence of liquidity and reserve requirements, Singapore strategy was also complemented by benefits such as the abolition of withholding taxes on interest earned by non-residents, and an absence of exchange controls.
The proactive approach that Singapore adopted in order to emerge as a global financial center was insofar as being deliberate and methodical not unlike that of the Cayman Islands and the British Virgin Islands. It differs, however, from that of Hong Kong, where the development of the wealth management industry has been described as largely market driven, with its growth being left to the efforts of market participants and the providence of market forces. By 1911, British policy in Hong Kong was already dominated by finance, rather than trade and manufacturing, and Hong Kong history of wealth management includes a presence by Swiss firms UBS and Credit Suisse, as well as international banks such as Standard Chartered bank and HSBC.
Regardless of the UK effort to develop Hong Kong financial industry, it was China Open Door Policy, initiated by Deng Xiaoping in 1978 during which time Hong Kong was still under British control that marked its real emergence as a financial center. Since then, China economy has seen one of the most remarkable turnarounds in history, and Hong Kong, with its competitive tax rates and wide range of offshore services, has been the destination for plenty of mainland capital. Hong Kong status as a Special Administrative Region of China has also been seen as a crucial ingredient in its growth as a financial center, and has been likened to Britain links with its Overseas Territories a relationship which has helped to facilitate the creation of plenty of offshore financial centers in the past.
Apart from advantages such as a competitive tax regime and a sound regulatory environment, Hong Kong, like Singapore, has its own robust onshore financial industry too, and is a trade hub in its own right. The two city states have been likened to a bridge between onshore and offshore, occupying niches in the financial industry. This is, perhaps, the capacity in which where they differ most from their Caribbean counterparts: territories which, without the advent of financial services, were very unlikely to have established a place for themselves in the global business arena.
Geography is on Singapore and Hong Kong side. The growth that Hong Kong private wealth industry has seen in recent years is a direct consequence of an economically booming mainland China, where the number of high net worth individuals is increasing at a rapid pace. The lack of private wealth management facilities in the mainland makes nearby Hong Kong abundance of private banks an obvious destination for their funds. The recent relaxation of renminbi settlement regulations in the mainland has led to greater ease of access to renminbi-denominated products in Hong Kong, while offshore vehicles now make it possible for Chinese nationals to use their own currency for investment purposes.
Although Singapore does benefit from its geographical proximity to South Asian countries, it also significantly eclipses Hong Kong for whom mainland China wealth is closer in the private banking sector. The Boston Consulting Group estimates that Singapore has US$500 billion in private banking assets, compared to Hong Kong US$200 billion. Singapore is arguably the world fastest-growing centre for private wealth management, and is predicted to be the world top wealth management centre by 2013, followed by Switzerland. It seems that the shift in the world wealth is very likely to be followed by a shift eastward of its offshore financial centers too.
