International finance & Mauritius’ offshore

Mauritius should cease to play on the defensive side if it wants to give more substance to itself

Once Mauritius embarked on the provision of international finance as a new area of economic activity, it took all precautions necessary to stand up as a financial centre of good repute. We did so by changing the framework of our laws, rules and regulations to adapt them to the bigger canvass being drawn up with the coming up on stage of international financing activity.

There have been hot discussions at times between the official side and the operators when it was sought to introduce higher levels of accountability and to require operators to put up the amount of resources, systems and structures in place to comply with upcoming prudential and other rules. All this was necessary to ensure that our platform was kept safe and to enhance the credibility of the financial centre itself. This level of work has now been proceeding for years. It will continue in years to come so as to keep pace with evolving local and international requirements and also to ensure the safety and soundness of financial operations from the country.

An important aspect of international finance is that it is quite dynamic. Operators have to adjust fairly fast to the profiles of new products coming up on the market. They have to comply with more incisive international rules with time, with added and sometimes cumbersome reporting requirements. But complying with rules will not be enough. One also needs to be smart enough to get to business opportunities when they arise. Having the necessary skills is paramount in this context.

Let us digress a bit by considering the example of the very beginnings of the more sophisticated type of international finance as we know it today. It serves to depict the overall environment in which so-called “offshore” activities take place around the world today. In the early 1960s, America had introduced what was called Regulation Q which limited interest rates paid on dollar deposit accounts in America. As a result of international trade, a lot of dollars were generated but these were not going back to America in view of the interest ceiling being imposed over there. This resulting pool of dollars outside of America constituted the basis of what became known as the Eurodollar market from which we ourselves borrowed in the late 1970s and early 1980s when we ran out of international reserves to pay for our imports.

This situation of a lot of freely available un-invested dollars on markets gave rise to the Eurobond market which was engineered by clever accountants, lawyers and merchant banks operating from the city of London. They made it possible for the surplus dollars sloshing around in the international market to be productively employed. In the new set-up which emerged from this situation, the first Eurobond was issued in Amsterdam to avoid paying British stamp duty thereon. The interest coupon of the Italian company which issued the first of those bonds was domestically exempt from tax as it was in the form of coupons. The coupons themselves on the Eurobonds were paid in Luxemburg to avoid high British income tax.

This kind of assemblage of typical Eurobond activity thus overcame the limited scope of the financial market due to the operation of the various restrictions, taxes, duties and registration fees. Investors, on their part, got a safe haven where to profitably keep their surplus funds duly employed by companies in need of funds through the agency of offshore market operators. There was nothing unlawful in arranging international financing of the sort. Rather, the activity proved to be an ‘enabling’ route for putting available funds to their most efficient and productive use in diverse geographies, irrespective of where they were originated from. It was also the model on which multinational companies which globalised international markets found their most significant support. It is still part of the model on which international financing business is founded to this day.

Coming back to our subject, the G8 and now perhaps also the G20 have been putting pressure on what they call offshore ‘tax havens’. This kind of situation inevitably means that there will be further restrictions in time to come on the operation of international financial centres deemed to be depriving the rich and poor countries alike of their tax revenues. A country like Mauritius will have to show, as it has done several times in the past that it is continuing to operate by the highest standards of international good governance.

This may come in the form of new rules to amply prove to the countries feeling aggrieved due to the operation of offshores that we are having clean hands. This will not be difficult to do provided we are sufficiently proactive to make it extremely unrewarding for our operators to indulge in loose behaviour in defiance of codes of acceptable market conduct. The editorial of this newspaper, in its edition of 5 July 13, pointed out that Singapore has already taken at least one action on this front. It has decided to penalize its financial operators who help citizens of other countries in tax evasion as if they have indulged in a money laundering offence.

Actions like this carry conviction that the jurisdiction “means business” and is not minded to offend powerful counterparties with which it is engaged in economic activity. For us to be able to maintain pace like this, our authorities need to be always alert as to where exactly the shoe is pinching at the level of international susceptibilities. That should necessarily be followed up by taking timely pre-emptive action. We have, in other words, to carry on with the laid down platform so as to abide by the strictest principles in our international financial operations.

On the other hand, decision makers need not take such drastic actions, unwarranted by what is expected of us by the international community, to kill the scope of the sector. It is necessary to control so long one has an eye on expanding the scope. The example of how the Eurobond market came in place shows that we have to be on the constant lookout of opportunities to do more and favourable international financing business. This is necessarily grounded in a nice base of skills in the country. But it is also based on perceived constraints in the international flows of finance.

Suppose Europe were to impose a per transaction tax on financial transactions; that will have the same impact on Europe’s financial sector as Regulation Q had on the outflow of dollars from America. We need not ape Europe at the risk of foreclosing a business opportunity to ourselves. As things are happening at the level of the G8, there are opportunities opening up for the smarter financial centres. Positioning at the right edge of the market is key to fostering our international financing activity. If we don’t know how to place ourselves advantageously in the circumstances, Hong Kong and Singapore will not fail to do so and yet come out with the cleanest of hands. Mauritius should cease to play on the defensive side if it wants to give more substance to itself.

* Published in print edition on 19 July  2013