Conduits of Capital

heavily on the size and strength of their domestic market
while London relies on its position as home to many
international markets, in particular the international bond
markets. It is worth noting however, that despite their size
and importance, neither New York, nor London are typical
destinations for the administration of many capital market
products such as loans, private equity funds or hedge
funds. These are often booked and administered from
administrative financial centres while the teams managing
them are located in global or regional centres.
Alongside these are Regional Financial Centres. These
include cities such as Singapore, Dubai, Hong Kong and
Frankfurt. They draw their competitive strength from their
location to service a particular region such as in the case
of Dubai, or to service a particular industry in the case of
Singapore which is a hub for the regional commodities and
banking industries. Each of these financial centres lack the
scale and breadth of New York, London and Tokyo but they
deal in many of the same markets and have managed to
attract many of the leading financial institutions.
As mentioned, these centres are currently smaller than the
truly big global centres but they have the potential to match
them or even usurp them. Their importance is sometimes
backed up by their location (e.g., Frankfurt located in
Europe’s largest economy, or Hong Kong as the gateway
to China), but each one of them had to put significant effort
into establishing the lifestyle infrastructure required to
attract financial professionals (most notably in Dubai where
additional tax incentives are offered). This infrastructure
generally includes a transport hub that connects financial
centres to the rest of the world. 2
What all of these financial centres have in common is a
legal and regulatory environment that is considered highly
developed and stable (Dubai, the most recent entrant into
the club of regional financial centres, has largely opted to
provide stability by adopting a more soft touch approach to
regulation). Most of the regional financial centres (with the
exception of Frankfurt) have provided tax incentives to the
financial industry (e.g., Dubai) or are generally considered
low tax jurisdictions (Singapore, Hong Kong).
Regional financial centres have all of the regulatory and
institutional factors already in place and they are seen as
attractive destinations for leading financial institutions and
their staff. However, in Europe, Frankfurt does not currently
match the scale of London and, in Asia, Hong Kong does not
match the scale of Tokyo. But these positions can change. It
is important to realise that each centre must be aware of the
need to compete in order to preserve its position. It is the
key competitive factors that are important to understand.
A third type of financial centre is best described as an
Administrative Financial Centre. Their objective is to
provide a tax neutral location for handling of financial flows;
i.e., in the first instance they do not add a separate layer of
taxation to that imposed in the source country of capital and
the investment destination. These include historic examples
such as the Cayman Islands and Luxembourg but also
comprise more recent additions such as Mauritius. These
financial centres have become important jurisdictions for the
legal incorporation of investment funds, funding operations
or trading arms of international banks and / or fund
managers. These centres then attract the financial and legal
infrastructure that is needed to provide the administrative
and legal services; but in general they do not attract the
financial professionals that carry out many of the ‘front
office’ financial activities of global markets. Administrative
financial centres such as Mauritius, Cayman, Luxembourg
and others do not generally serve as operational base from
which the major financial institutions carry out their core
activities (lending, trading, M&A).
In the debate between ‘onshore’ and ‘offshore’ centres it is
these ‘administrative financial centres’ that are generally
defined as ‘offshore’ centres. The strong implication is that
these offshore / administrative centres are using favourable
tax regimes as their main means of competing. It is also
asserted that they have much less stringent standards on
transparency, due diligence and as such can be host to
investors or other actors whose business practices would
not be accepted in the world’s largest financial centres. The
very term “offshore” evokes a sense of remoteness and
therefore opacity.
There is a certain amount of rhetoric behind many of
these assertions. For example, many European centres
such as Luxembourg, Switzerland and others have also
used favourable tax regimes and certain privileges of
secrecy for investors and clients to support their financial
2
A characteristic of the financial services industry is a fly-in fly-out culture. Financial business is both personal (i.e., face to face) as well as fast pasted.
Being able to reach your clients by direct flight is critical for any financial centre. (It is not surprising that Dubai and Singapore have put so much effort
into promoting global airlines).
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