The recent fallout from the “Panama Papers” data leaks have not only thrown the use of offshore tax havens and fiscal transparency back into the spotlight, but also highlighted the threat of data security breaches and associated compliance risks to corporates, including law and accountancy firms.

The debate needs to move on from “offshore bad” to “offshore OK”, provided it is compliant with international standards on disclosure and enforcement such as those promulgated by such matters as the FATF 40 recommendations and OECD’s common reporting standards.  Offshore jurisdictions which don’t meet these standards may then be perceived as very bad indeed, and we may now see their ilk becoming pariah states in contrast to jurisdictions such as Jersey or Guernsey.

In some cases, investors have expressed preferences to avoid structuring investment vehicles in offshore jurisdictions and some investors will simply not invest in vehicles established in certain offshore jurisdictions because of the perceived reputational risk. However, the position is not as simple as ‘onshore good; offshore bad’ and it is important to emphasise the variety of legitimate reasons to structure funds, holding companies and investment vehicles offshore.

These include:

1. Regulatory considerations (particularly with respect to the AIFM Directive),
2. Structural considerations (range and flexibility of vehicles) and
3. Legitimate tax planning (seeking to put indirect investment on a par with direct investment in tax terms).

These factors account for the popularity of, for example, Jersey and Guernsey vehicles in both “upstream” fund structures and “downstream” investment holding structures.

From a UK perspective, using an offshore vehicle located in a low or no tax jurisdiction to purchase UK property or to hold UK investments remains perfectly legal in and of itself and is understood by the authorities as such (despite recent changes the UK tax system has been for many years and to some extent remains favourable to non-residents principally in order to attract inward investment). Further, many offshore jurisdictions are subject to high regulatory standards of which they are rightly proud. For example, the Know Your Client anti-money laundering requirements in Jersey / Guernsey are more stringent than those in many onshore jurisdictions.

While no-one would argue against steps being taken to prevent the use of offshore vehicles for illegitimate purposes, such as money laundering, it would be a pity if these purposes and the legitimate reasons to use offshore vehicles were wrongly brought together. Were that to happen, the losers would be investors, including retail investors, pension funds and insurance companies, whose returns would be impacted by the loss of flexibility.