Nick Shaxson ■ Guernsey milking and the offshore stock exchange


The International Advisor magazine has just reported:

“Guernsey chief minister Peter Harwood resigned today, in the wake of publication of a critical article in the current issue of the British satirical and investigative publication, Private Eye.”

This refers to an excellent report entitled “Milking in Guernsey” by The Eye into the scandal-plagued Guernsey-based Channel Islands Stock Exchange (CISX,) which has just rebranded itself as the squeaky-clean “Channel Islands Securities Exchange (CISE,) complete with new regulator. As the article notes:

“Legacy problems can now be met with that reliable “that was then but this is now” mantra.”

Indeed, we have seen that one many times, often wielded along with the ‘just a few rotten apples’ excuse. And in this particular case, despite its claims to have high standards of disclosure, we cannot find any disclosure on its website that there has been even a hint of scandal- even though has been quite some huffing and puffing in Guernsey about it. CISX chair (and private equity veteran) Jon Moulton had earlier called Private Eye’s investigation “highly regrettable” – and do enjoy the comments under that particular article.

We have often criticised offshore centres not just on for their secrecy and their business model of facilitating tax abuses, but for their deliberate laxity in applying appropriate financial (or other) regulation. Stock exchanges are usually concerned with raising capital for local business. Offshore stock exchanges are often concerned with providing escape routes from stock exchange regulation, elsewhere. It’s the usual offering:

‘If the requirements are too stringent in a normal democracy, come to us, and we’ll shape the laws to suit you! We can get this done fast; we don’t have to get past pesky local stakeholders.’

This general model is an invitation to the world’s hot money. The “Ratchet” chapter of Treasure Islands lays this out in great detail; or see this – particularly Chapter Four.

So what, exactly, are the particular problems with CISX / CISE?

The story describes a long(ish)-running investigation into the exchange, which found that not only did members ” ‘forget that CISX is their regulator,’ but also the exchange itself ‘forgets that it is the regulator.’ ”

This is an example of the laissez-faire (or, to be more accurate, lazy-faire) approach that suffuses the offshore world, and is increasingly infecting supposedly ‘onshore’ jurisdictions. John Christensen, TJN’s Director and a former Economic Adviser to the government of nearby Jersey, said this morning:

“I was involved in some of the discussions in the early days when the idea of a Channel Islands stock exchange was being mooted. The people who were enthusing about it were carpet-bagger kind: they were not at all interested in local companies or local capital markets: they saw an opportunity for offshore Eurobonds. The consensus was: there will be very little need for serious regulation because the kinds of investors will be ‘sophisticated’ and won’t need anyone dabbling in their affairs.”

Which quite fits the pattern.

What we have also found, again and again, is what Private Eye calls the ‘incestuous’ – and therefore likely to be more structurally corrupt – goldfish bowl culture of small (and, sometimes, larger) offshore jurisdictions. Harwood, it notes, was not only a shareholder and director of the CISX company – but he was also the chair of the Guernsey Financial Services Commission (GFSC) overseeing its regulation! It’s the public disclosure of this problem that seems to have prompted his resignation.

So what has this stock exchange been up to, then? Private Eye:

“For several years the CISX provided a highly valuable legal loophole for UK tax avoidance through listing rarely (if ever) traded corporate Eurobonds. These enable offshore investors in loans to British companies to receive interest without deduction of the normal 20 percent withholding tax; the loan interest can be offset against corporation tax.”

This has been a common wheeze, especially for private equity companies – whose business model tends to consist stubstantially of buying up reputable businesses then engineering them offshore to harvest all the possible tax subsidies. It’s yet another wholly unproductive offshore racket. The tax authorities in the UK, which has been suffering tax losses of some #200 million pounds per year to this loophole, reportedly moved to close the loophole in 2012 – then backed off after extensive lobbying.

The story cites one ‘hideous example’ involving the abuse of UK Gift Aid rules, where the regulator didn’t bat an eyelid at a 1,900 percent sudden ramping up of one company’s share price, for example. Private Eye cites the investigation as saying:

“That the price movements on, or shortly after listing, were not investigated beggars belief. Serious questions should have been asked of the sponsor and the market maker . .  the responses were seemingly accepted uncritically and filed without challenge or analysis.”

Leave it all to the magic of the market, and let’s go and play golf!

The article ends:

“The CISX has always been the creature of the Guernsey/Jersey financial establishment. And that financial establishment is a powerful element of both islands’ equally incestuous political establishment – withness the trio of roles held by now chief minister Harwood. No wonder the GFSC investigation is still wrapped in secrecy and without any decision naming or shaming those to blame at the CISX.”

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