Offshore and the new international political economy

Author(s): Jason Sharman

Source: Review of International Political Economy, Vol. 17, No. 1 (February 2010), pp. 1-19
Published by: Taylor & Francis, Ltd.
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 ij Routledge
Review of International Political Economy 17:1 February 2010:1-19 SV Tay|or&Francis Group

Offshore and the new international political

economy
Jason Shamtan
Centre for Governance and Public Policy & Griffith Asia Institute, Griffith
University, Australia

ABSTRACT
Offshore finance provides an incubator and testing ground for proposi
tions concerning fundamental debates in international political economy.
The common feature among offshore financial products is calculated ambi
guity: the ability to give diametrically opposed but legally valid answers to
the same question from different quarters. Thus offshore allows individu
als and firms to enjoy simultaneous ownership and non-ownership, to be
high profit and loss-making, heavily indebted but also debt-free, and for
investment to be foreign and domestic. The advantages conferred to indi
viduals and firms, however, tend to undermine the stability of the financial
system. Using indirect governance techniques, transnational networks of
regulators have sought to coercively simplify offshore finance, with mixed
results. Focusing on ambiguity as central to offshore finance complements
earlier theoretical treatments of this realm from law, anthropology and inter
national relations. Empirically, the recently enhanced surveillance of offshore
centers has produced new data facilitating future quantitative studies, which
complement more anthropological approaches to this subject.

KEYWORDS
Offshore finance; tax havens; calculated ambiguity; transnational networks.

In August 2007 financial markets across the world were roiled by a cris
originating in the US sub-prime mortgage sector. The global credit sys
tem threatened to seize up as wary banks suddenly hoarded liquidit
Central banks across the world poured billions of dollars of emergen
credit into the inter-bank market, and a slew of major financial institu
tions went bankrupt or were nationalized. Closely associated with th
crisis, but also the preceding long boom, were financial innovations pio
neered in Offshore Financial Centers (OFCs), also known as tax haven

Review of International Political Economy

ISSN 0969-2290 print/ISSN 1466-4526 online ? 2010 Taylor & Francis
http: / / www.informaworld.com
DOI: 10.1080/09692290802686940

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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

Although the exact causes and consequences of the global financial cri
sis will be argued long after it has passed, the growth of securitization,
collateralized debt obligations, hedge funds and off-balance sheet vehi
cles have been key. The offshore finance industry proved so successful
at repackaging debt and diffusing risk that no one could be quite sure
who owed what to whom. It is impossible to understand this process and
these devices without a proper understanding of the offshore locales in
which they were created and traded. This article will undertake just such
an analysis, but will also argue that the importance of the offshore world
runs much deeper than any particular crisis or finance industry fad. De
spite their tiny populations and diminutive geographic presence, OFCs
have a hugely disproportionate presence in global finance and the world
economy more generally. Studying these centers provides new insights
into existing and emerging issues at the heart of international political
economy (IPE).
Despite the variety of offshore products and services provided by dis
parate financial centers, this article is focused on a common thread running
through many manifestations of the offshore phenomenon: the pursuit of
a calculated ambiguity. This idea refers to the ability to give diametri
cally opposed but legally valid answers when responding to the same
question from different audiences. In this manner individuals and firms
can perform such sleights of hand as taking on the advantages of own
ership while divesting themselves of the liabilities, borrowing without
taking on debt, simultaneously reporting high profits and none at all, and
'round-tripping' domestic capital as foreign investment. This ambiguity
can provide handsome dividends for a variety of actors. Wealthy elites
in the West, increasingly mobile expatriate professionals, as well as the
new rich of formerly Communist Europe, Asia and the developing world
more generally have all been able to reduce their tax liabilities as well as
safeguard their wealth from the consequences of divorce, litigation and
political instability. Predictably, Western multinational corporations have
also been beneficiaries as they have built up more and more Byzantine
offshore structures to defer tax liabilities and flatter their balance sheets.
Also among the more enthusiastic new consumers of offshore products are
pension and sovereign wealth funds. Although the prominence of banks
and the Big Four accounting firms in marketing offshore finance would be
expected, the central role of international law firms in cross-border finance
must also be kept in mind (Picciotto, 1992,1999). Specialized offshore ser
vice provider firms have often privatized a core governmental prerogative
in drafting their own banking, company and insurance legislation and
then scouring the globe for amenable parliaments to rubber stamp this
quintessentially commercial law.
Less well understood by market actors, regulators and scholars, how
ever, are the collective and systemic consequences of these ploys designed
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

to cultivate calculated ambiguity. These may well include the sort of

pervasive ignorance and mistrust that can lead to crises of confidence
in the financial system and the global economy more generally. Speaking
of the exotic financial vehicles behind the sub-prime crisis (in the United
States carefully structured to fall outside the remit of the Securities and
Exchange Commission, Office of the Comptroller of the Currency, Federal
Deposits Insurance Commission and the Federal Reserve), the Chairman
of the Fed noted with obvious frustration: Td like to know what those
damn things are worth' (Schwartz, 2007). Twelve months later equiva
lent concerns were argued to have brought the global financial system
perilously close to collapse.
This article is divided into three main themes. The first argues that
the best way to understand the essence of offshore finance is by looking
at how offshore products provide the calculated ambiguity referred to
above. Specifically, Asset Protection Trusts provide ownership and non
ownership; chains of offshore shell companies facilitate reporting of si
multaneously high and low profits; Special Purpose Entities are used so
corporations can borrow without taking on debt; and, finally, 'foreign' di
rect investment can in fact be domestic money exported and re-imported
through offshore centers. The second theme relates to the response to
offshore from transnational networks of regulations generally based in
and representing large, core states. This response has come in the form of a
number of overlapping multilateral initiatives with the common goal of co
ercively simplifying the ambiguity provided by offshore, usually premised
on the self-interest of core states. But rather than being the direct imposi
tion of these powerful states, governance in this sphere is at least as much
an indirect process of socialization and classification effected by interna
tional organizations and transnational networks of regulators. Progress
has been uneven. Despite some significant achievements, the interests of
powerful parties within OECD countries benefiting from access to off
shore services, and even more so worries about incurring competitive
disadvantage in a global market place, mean that offshore centers have
continued to thrive. The final section looks at how to integrate and ad
vance the interdisciplinary study of offshore centers and offshore finance
in both theoretical and empirical terms, once again working from the ba
sis of calculated ambiguity. This draws on the insights of three scholars
from diverse disciplinary perspectives: Ronen Palan (international rela
tions), Sol Picciotto (law) and Bill Maurer (anthropology). Empirically, one
successful change effected by the multilateral initiatives is to generate
much more data on offshore finance than were previously available, cre
ating new opportunities for scholars to pursue this research program.
While this shift is particularly helpful for quantitative treatments, the
methods of anthropologists and geographers should also continue to be
fruitful.

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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY
DEFINING OFFSHORE

The definition of Offshore Financial Centers or tax havens has proved trou
blesome in the past, the condition of 'offshore' may be very much in the
eye of the beholder (Doggart, 2002; Orlov, 2004). A US Internal Revenue
Service report simply states: 'The term "tax haven" may be defined b
"smell" or reputation test: a country is a tax haven if it looks like one and i
it is considered one by those who care' (Gordon Report, 1981:26). Often it is
a case of 'small place, big money': 400 banks housed in a single shed in th
South Pacific island of Nauru, over 80 percent of the world's hedge fund
domiciled in the Cayman Islands, or, perhaps, 200,000 companies legally
resident at 1209 Orange Street, Wilmington, Delaware (Spencer and Shar
man, 2008; van Fossen, 2003, 2009). While the stereotypical picture is of a
tropical island paradise, an IMF publication classified the UK as an offshore
center in 2007, and others have argued the United States should qualify a
well (Langer, 2002, 2005; Zorome, 2007). Most definitions of offshore cen
ters and tax havens have commonly included characteristics like low or
no taxes, tight financial secrecy, and light regulation. The rough working
definition adopted here is that an OFC or tax haven is a jurisdiction that
has designed its financial regime to offer international financial services t
non-resident firms and individuals. In the last decade 'offshore' and even
more so 'tax haven,' have become pejoratives, thanks to purported link
with a variety of financial crimes, including money laundering, corruption,
the financing of terrorism, as well as tax evasion.
Although jurisdictions have deliberately structured their tax and le
gal codes to attract commerce from abroad since ancient times, offshore
centers are a recognizably modern phenomenon (Palan, 1998, 2003). In
the early part of the twentieth century the growing divergence between
fiscally modernizing European states and their conservative micro-state
neighbors had the unintended consequence of making places like Monaco
and Liechtenstein havens for tax avoidance and evasion (Donaghy, 2001,
2002). Immediately after the Second World War, the Bank of England delib
erately ignored certain colonial offshore centers' efforts to illegally entice
much needed US dollars into the newly impoverished British Empire. The
unanticipated rise of the Eurodollar market gave another fillip to offshore
centers. By the 1970s, however, the pioneering offshore centers had be
come the subject of deliberate emulation by small countries with few othe
options for economic development as they sought to attenuate their for
mer imperial dependence (Chavagneux et al., 2009; Palan, 2003; Picciotto,
1992). Depending on the definition employed, there are now somewhere
between 40 and 70 offshore centers (Errico and Musalem, 1999). This group
is divided into a small number of successful exemplars that have garnered
a majority of the business and attention, and a much larger number of
marginal players aspiring to emulate the success of the former. The value
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

of assets offshore has been estimated at over $11 trillion (Tax Justice Net
work, 2005), and is growing rapidly. However, trying to specify the amount
of wealth in various offshore centers is in many ways profoundly mislead
ing. For in keeping with the fundamental ambiguity that is in many ways
its defining characteristic, money held offshore is usually simultaneously
held onshore as well, rather than being piled up under lock and key in
vaults and safes.
The best way of understanding what the dozens of offshore centers do is
briefly to examine what they sell. The main attraction of new products, but
also more traditional offshore wares, is the calculated ambiguity provided.
Individuals may preserve the advantages of asset ownership while divest
ing themselves of the liabilities; offshore subsidiaries may allow firms to
report high and low profits; firms may raise loans but avoid taking on
debt; and the same investment can be foreign and domestic. In general,
offshore products allow investors and firms to have their cake and eat it
too, in Ronen Palan's apt phrase (Palan, 1998).

Enjoying ownership and non-ownership

The first offshore product considered to illustrate the idea of calculated
ambiguity is the Asset Protection Trust, first created in the Cook Islands in
1984. Here the aim is to maintain practical control over assets and income,
while also establishing a legal separation that insulates the agent exercising
control from legal liability. A trust is conventionally more like a contract
than a company: having no legal personality of its own, a trust is instead
a legal relationship between a party conditionally alienating assets, the
party enjoying conditional benefits of these assets, and a party to manage
the assets and ensure the conditions are adhered to (ITIO, 2002; Lorenzetti,
1997; Marcus and Hall, 1992; Silets and Drew, 2001; Sterk, 2000).
In 2004 the peer-to-peer music file-sharing network Kazaa was sued by
record industry bodies in the United States and Australia. Having earlier
been driven out of the Netherlands and observed the fate of Napster, Kazaa
had set up corporate defenses. It split and re-combined ownership, control,
assets and revenue in intersecting chains of companies. Some companies
were subsidiaries, others acted as corporate directors of other members of
the group. The strands came together as Sharman Networks with a trust
legally based in the South Pacific island state of Vanuatu (Woody, 2003).
The success of legal action against Kazaa depended on penetrating the
network of companies and trusts to discover the true ownership. Kazaa
had set up a corporate structure whereby for the purposes of being sued
the ultimate beneficiary of the trust was the International Committee of
the Red Cross (unbeknownst to them), but for the purposes of exercising
practical control and collecting profits the beneficiaries were Kazaa exec
utives. As the legal hosts of the structure, the ni-Vanuatu authorities levy
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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

no income taxes, have no tax treaties, and impose prison terms on any
party disclosing financial information. Not being a member of the World
Trade Organization or TRIPS, Vanuatu does not have any modern intel
lectual property rights law. Although the court case succeeded in taking
down Kazaa's website, despite legal pressure and extensive surveillance
of the Kazaa executives, the question of ultimate ownership was never
solved. As a direct result, control of the advertising revenue that had been
generated (valued at up to $60 million annually) remains a mystery.
Even apart from systemic consequences, the use of ambiguity offshore
can and does sometimes go awry. A prominent example is the Marcos
family, who established several Liechtenstein foundations (Doggart, 2002;
Jeeves, 1998; Wanger, 2005), in order to create a state of ownership/non
ownership of assets looted from the Philippines during Ferdinand Mar
cos's presidency in the period 1965-1986. At one level these mechanisms
were a great success. In terms of non-ownership, the foundations first
concealed the scale of the former president's massive corruption while
he was in office, and then successfully insulated the money against the
17-year campaign of successive Philippines governments to recover the
stolen assets. However, the legal fiction of non-ownership overlaying the
presumed reality of Marcos family ownership took on a life of its own.
The supposed front men on the foundations' governing councils were able
to successfully capture the assets in question, escaping the claims of both
the Marcos family and the Filipino government, and disappearing with
several billion dollars (Chaikin, 2005).

Being high profit and low profit

One of the most striking disparities in offshore centers is often the huge
number of resident companies relative to the number of resident people,
e.g. 446,000 companies versus 22,000 people for the British Virgin Islands
(BVI FSC, 2008: 1). Although there are a wide variety of uses for offshore
companies, a prominent example is the use of multiple offshore subsidiary
companies for onshore firms. In their ideal world, firms would be able to
exhibit high profits for investors and low (or even negative) profits to tax
authorities. The use of offshore financial centers and products has greatly
assisted many firms in achieving this ideal world. The point of entry is
when firms report their profits to two different audiences, tax authorities
in private, investors in public, using two different procedures, creating 'tax
profits' and 'book profits' respectively. When corporate income tax was first
introduced, it was assumed that these two values would be similar if not
identical. In fact, however, thanks to opportunistic accounting lurks the
two values have diverged, and at an accelerated pace over the last decade.
Depending on the year, between a third and a half of large US corporations
pay no tax on their profits (GAO, 2002). The most extreme examples see
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

corporations simultaneously reporting massive profits to investors but

substantial losses to tax authorities. Describing the situation as one of
'parallel universes', Desai (2005) attributes this increasing divergence to
the growth of information and communication technology that allows the
generation and functioning of massively complex corporate structures,
but also the availability of tax haven-based subsidiary companies (Desai,
2005:188). These allow profits to be moved across space, from country to
country, and across time to bring forward book profits while pushing back
tax profits. Thus the chains of hundreds of companies in jurisdictions like
Delaware, Luxembourg, Hong Kong and the Bahamas to hold intellectual
property, perform treasury functions and manage intra-group debt for the
same onshore parent.
Returning to the systemic implications, the benefits to firms of being
able to be high and low profit to different audiences creates serious tax
avoidance problems. Beyond the contribution of corporate tax itself, this
kind of systematic avoidance reduces the legitimacy of the tax system as
a whole, which in turn causes compliance problems with other aspects
of the tax code (Rawlings and Braithwaite, 2003). Furthermore, the use of
chains of offshore subsidiaries severely degrades the quality of information
available to the market. Veron et al (2006) provide a stylized illustration
of these and other techniques with reference to their fictional company
Smoke and Mirrors, Inc., before then applying these lessons to a string
of contemporary corporate scandals. Their damning verdict is that using
these schemes and scams makes 'it possible to "manage" the accounts
for a given year by making them say almost anything one pleases' (2006:
44). Beyond threats to proper market function, the degraded quality of
information available again threatens the legitimacy of capitalist systems
based on public companies in the eyes of the general public (Cloyd et al,
2003; Tweedie, 1983).

Borrowing without incurring debt

Companies face the conflicting demands of raising capital through borrow
ing, while also seeking to preserve their credit rating and share price by
minimizing indebtedness. A particularly stark, and in the end disastrous,
illustration of an offshore strategy employed to reconcile these conflicting
imperatives is Enron's use of Special Purpose Entities (SPEs) to borrow
while keeping the resulting debt off its balance sheet (to be sure, Enron
also used these Entities for other important tasks, e.g. artificially inflating
its own share prices, and smoothing out volatile earnings and avoiding
tax) (Caitlin-Brittan, 2005; Schwarcz, 2002; Veron et al, 2006).
To legitimately keep borrowings off its balance sheet and hedge in
vestments, Enron had to substantively transfer risk to another party (the
SPE), which in turn had to have at least three percent independent equity.
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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

Through a series of complex transactions involving offshore SPEs, for a

while Enron succeeded in having its cake and eating it. It kept borrow
ings off its balance sheet by ostensibly transferring risk to a third party,
while avoiding the costs of securing genuinely independent equity by
guaranteeing the value of its own shares with those very same shares. The
vehicles for this process of transfer were more than 600 entities based in
the Cayman Islands and 800 in Delaware. As long as the share price kept
on rising all good things did indeed go together, but once the share price
began to decline the reverse occurred. Enron's share price fell; the SPE's
value fell as a result and it was unable to perform its hedge; this triggered
Enron's guarantee of the SPE's value; the off-balance sheet liabilities were
brought back on to Enron's balance sheet, further reducing the share price
(Schwarcz, 2002:1310-11).
As noted above, on an individual basis this calculated ambiguity, own
ing and not owning, borrowing without taking on debt, can be highly
advantageous. But systemically the consequences may be far from benign.
If the use of these and other offshore products means that no one is sure
who owes how much to whom, or who is bearing what risks, some shock
can trigger a crisis of confidence and liquidity. This seems to be exactly
what happened with the freezing up of inter-bank lending from August
2007.

Foreign investment with domestic money

The final incarnation of offshore ambiguity is especially important for the
developing world: foreign investment using domestic money sent on a
round-trip via offshore centers. The failure to appreciate the importance
of offshore conduits has considerably warped understandings of foreign
direct investment (FDI) in developing countries, especially with regards
to China. China is held up to others as an example of economic devel
opment and poverty reduction on the basis of its ability to attract FDI.
Even taking into account its vast population and size, China has received
a disproportionate share of FDI in the developing world. There is good
reason to think that China's success in this domain has been significantly
overstated, however, in that much of this 'foreign' investment is in fact
local money sent out of the country and then returned via offshore shell
companies (Vlcek, 2007,2008). In such a manner, domestic money acquires
the foreign status (and associated benefits) of the intermediating offshore
company.
The top ten investment sources for mainland China in the first five
months of 2007 (jointly providing 86 percent of total FDI) in descending
order are: Hong Kong, the British Virgin Islands, Japan, South Korea,
Singapore, the United States, the Cayman Islands, Samoa, Taiwan and
Mauritius (http://www.china-embassy.org/eng/gyzg/t340052.htm). It
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

comes as no surprise that the United States, Japan and Korea are among the
leading investors, and Hong Kong has long been recognized as a conduit
for investment between the two Chinas. But the British Virgin Islands
(population 22,000), the Cayman Islands (47,000), Samoa (214,000) and
Mauritius (1.25 million) need further explanation. One answer would be
that investment from the British Virgin Islands, for example, is re-labeled
investment from some other foreign country, in which case the implications
for understanding investment in China and the Chinese economy overall
are slight; either way, the investment is still foreign. But with the exception
of the three OECD states and the Republic of China on Taiwan, much of the
rest of the investment (including that from Hong Kong) is in fact domestic
Chinese money sent out of the country and reintroduced using offshore
companies. The investment becomes legally foreign, and therefore qual
ifies for special regulatory and tax concessions. Illustrating the outbound
leg of the journey, China is the second-largest foreign investor into the
Cayman Islands, placing ten times more investment there than in the
United States (Vlcek, 2008). Thus a substantial share of China's 'foreign'
investment is in fact local funds 'round-tripped' through offshore centers
(for an extended treatment of this question, see Vlcek, 2007). Further
reinforcing this conclusion is the fact that more BVI companies are created
for Chinese investors than for those of all other countries combined,
approximately 40,000 new companies every year (BVI FSC, 2008).
The same dynamic may also exist elsewhere in the developing world.
For example, Mauritius is the largest source of FDI into India, raising sus
picions that the same practice of 'round-tripping' may be common there
also. Beyond China, however, caution is in order, as it is common for 'con
duit' or 'turn-table' offshore centers to make indirect foreign investment
more profitable than the direct route from exporting to receiving countries
(Doggart, 2002; Langer, 2002; Rawlings, 2007). Sorting out quite what is
genuine foreign investment that happens to be routed through offshore
centers, versus round-tripped domestic money masquerading as foreign
is difficult, precisely because the latter will try to mimic the former as
closely as possible. Developing country governments try to guess whether
they are really gaining substantial foreign investment, or just losing out
on tax revenue on domestic wealth. But courts and governments in India,
South Africa and Indonesia have made plain their opinions in restricting
or terminating tax treaties with various havens over the last six years on
the grounds that they facilitate domestic tax evasion more than genuine
FDI (author's interviews, Mauritius, 2005; Bell, 2005).

GLOBALIZATION AND TRANSNATIONAL REGULATION

If any part of the global economy should have escaped the control of states
(individually or collectively), it is offshore finance (Avi-Yonah, 2000). Yet
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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

the structural globalization account of unstoppable capital and straight

jacketed states fails to explain the significant, but partial, governance suc
cesses recorded in this area. Thanks to overlapping multilateral initiatives,
offshore products enabling a simultaneous relationship of ownership and
non-ownership have come under sustained pressure. In relation to the par
tial governance success, those scholars that have convincingly made the
retreat of the state a conventional target have themselves tended to overem
phasize the impact of powerful states in setting global standards (Drezner,
2007; Krasner, 1991). Transnational networks of regulators and interna
tional organizations have instead exercised a powerful and autonomous
influence, albeit indirectly. But there has been no such willingness to tackle
either the divergence between book and tax profits, or the facilities allow
ing off-balance sheet borrowing. This pusillanimous attitude is the result
of powerful vested interests in core states, but perhaps even more so the
resonance of a policy narrative emphasizing the danger of hobbling na
tional firms competing in a global market place with tough regulations and
high taxes. Because of their marginal presence in the formal institutions
and informal networks of global economic governance, developing states
have not been able to take any coordinated action against round-tripped
'foreign' investment.
In terms of those looking to govern the offshore world, perhaps more
than any other domain this exemplifies two trends in global governance:
the rise of transnational regulatory networks, highlighted by Anne-Marie
Slaughter (2004), and the importance of international organizations' in
defining, classifying and labeling, as explicated by Barnett and Finnemore
(2004). Over the last decade in areas such as anti-money laundering and
prudential regulation, international organizations have not so much de
fended existing standards as successfully ratcheted them up. These bodies
have had some success in acting to narrow the range of ambiguity provided
offshore with regards to ownership/non-ownership by picking and fixing
certain technical and normative meanings. How can this be explained?
Confirming Slaughter's version, regulators certainly have been the new
diplomats when it comes to the governance of offshore. It is notable that
a great many of the institutions Slaughter sees as exemplifying the 'new
world order' have been the main players in regulating offshore. Exam
ples are the Financial Action Task Force (on money laundering), the In
ternational Organization of Security Commissions and the International
Association of Insurance Supervisors (on the exchange of financial infor
mation), the Basel Committee (banning offshore shell banks), the OECD
(an initiative to stop 'harmful' tax competition), the Commonwealth (de
fending its member tax havens), the Financial Stability Forum (through
its Offshore Working Group). Most of these bodies have regional and
offshore equivalents also (the Asia-Pacific Group on Money Laundering,
the Offshore Group of Banking Supervisors, and so on). These networks
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

achieve influence by exchanging information, building trust among their

members, and effecting socialization. For those studying the efforts of
transnational regulatory networks to practice global governance in rela
tion to de-territorialized economic flows, there is simply no better place to
look than offshore.
The extent to which these and other international institutions have been
successful re-establishing a clear dichotomy between owning an asset and
not owes a great deal to the sort of power identified by Barnett and
Finnemore in their analyses of international organizations (1999, 2004).
Through their classifications, these institutions have to some extent re
made and simplified the offshore world. Rather than relying on economic
sanctions or binding legal judgments (still less military force), international
organizations use less direct but often no less effective means of influence.
Their bureaucratic, rational-legal authority and association with norma
tively valued ends enables international organizations to regulate, but also
constitute, the social world. The ability of international regulatory institu
tions to extend or withhold positive and negative labels or classifications,
to either whitelist or blacklist jurisdictions depending on their compliance
with standards, has been a powerful tool. Deciding precisely which ju
risdictions are categorized as being offshore stands out as a prominent
example of this sort of exercise. Few offshore centers have been willing to
suffer the reputational damage associated with defying international orga
nizations. Those that have, have often suffered debilitating disinvestment
as a result (Sharman, 2005, 2006, 2009).
In terms of concrete (but incomplete) success, a variety of standards
have been propagated by the FATF, OECD and others mandating that it
must be possible to establish at least one specific individual who owns or
controls each corporate vehicle (company, trust, partnership, etc.). Mak
ing particular individuals responsible in this way helps to solve the type
of problem music companies faced in taking legal action against Kazaa:
finding the ultimate beneficial owner. The principle is referred to as 'Know
Your Customer' (KYC). This new standard of establishing ownership has
so far only partially been fulfilled, with core countries reluctant to them
selves adopt the standards they urge on others. But it is now much harder
for corporate vehicles to access international banking networks without
explicitly identifying at least one person who is clearly in charge. Countries
like the United States and United Kingdom have had a deeply ambivalent
attitude to these new rules; sympathetic in principle, but reluctant to di
rectly confront powerful industry interests (Webb, 2004). As a result, most
of the running in this area has been made by the surreptitious activity of
networks of regulators - often frustrated with the foot-dragging of their
own governments - that constitute the main standard-setting bodies.
Corporate interests have been even more effective in defending the 'par
allel universes' of book and tax profit, as well as debt-free borrowing. In
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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

terms of defending the stability of the global financial system, it is prob

ably this last that is the most important, while fiscally the corporate tax
accounting dodges cost much more in revenue terms than secret bank
accounts. Policy-makers in OECD countries have often seemed to be in
thrall to the notion that a radical simplification of these kinds of offshore
facilitated calculated ambiguity gambits would severely compromise the
competitiveness of national firms in international markets. Despite its im
plausibility to IPE scholars, the structural globalization policy narrative
centering on the dangerously futile nature of efforts to ratchet up stan
dards affecting internationally mobile economic activity seems to exercise
a powerful hold over many in government (Hay and Rosamond, 2002;
Radaelli, 1999). Predictably, corporations have been quick to play up these
fears in equating their sectoral interests with those of the nation.

ADVANCING AND INTEGRATING THE STUDY

OF OFFSHORE
This final section seeks to demonstrate how an account of offshore politi
cal economy, centered on the notion of calculated ambiguity, meshes wit
existing theoretical treatments of the subject, as well as indicate produc
tive avenues for future research in this field. It does so first by looking
at how offshore has been previously theorized in international relations,
law and anthropology, before then turning to empirical challenges an
opportunities.
As noted earlier, Palan's characterization of offshore as providing the
ability to have one's cake and eat it too is very apposite. But in contrast
to the relatively restricted focus of the argument presented above, Palan
paints on a much larger canvas (1998,1999, 2002, 2003). For him, offshore
represents a pragmatic and substantially accidental manner of amelio
rating the increasing tension between two conflicting historical master
processes. The first of these is the strengthening of states' sovereign pre
rogatives from the nineteenth century, the second, which tends to run
counter to the first, is the development of an increasingly global marke
and system of capitalism. Rather than a deliberate strategy by core states t
negotiate this tension, the first germs of offshore were initially unintende
quirks of local law, gradually and haphazardly entrenched and diffuse
as their value became clearer. More and more states began to bifurcat
their sovereign space by creating judicial exclaves within which their au
thority and regulatory powers were deliberately relaxed. In doing so, th
aim has been to minimize the cross-cutting pressures of competing in a
globalized economy while also preserving the state's legal sovereignty
within the remainder of its domain. The more mobile and globalize
the sector, the more likely it is to be in the process of relocating int
the virtual extra-territorial spaces created as states segment themselves in
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

establishing offshore realms of attenuated, commodified sovereignty. Ac

cording to Palan, offshore is thus fundamental to both the maintenance of
the state and accompanying nationalist ideology, as well as the opposing
forces of transnational capitalism.
Sol Picciotto begins from a similar premise that offshore has helped
to dislocate and reconstruct the state system (1999: 43). Writing from the
discipline of law, Picciotto foregrounds a related set of 'legal fictions,' in
particular legal personality but also nationality, residence, income, juris
diction, and even the state itself. It is the abstract, indeterminate and hence
malleable nature of these concepts that over the last hundred years has
allowed rich individuals and later corporations to escape tax obligations
at home. Aided by their legal advisors, they have done so by establishing
legal entities in convenient jurisdictions happy to provide the most room
for this inherent flexibility. These entities then function as conduits for
international income or assets and the round-tripping of domestic monies
(Picciotto, 1992, 2007). The combination of abstract monetized relations
with abstract legal forms, or fictions, allows agents to negotiate the degree
to which they are located within a jurisdiction or jurisdictions. Because
transactions with the same economic substance can be structured in sev
eral different legal forms, legal means can be found to avoid tax liabilities
and regulatory restrictions. Querying the specific jurisdictional location of
offshore activities such futures trading, reinsurance and hedge funds is
a mistaken preoccupation. Instead Picciotto suggests that regulators and
tax authorities must take a global approach rather than state-by-state ap
proach. More generally, Picciotto shares Palan's conviction that offshore
developed as a result of deep historical forces, but also in a groping and
undirected manner owing a great deal to local legal improvisations, con
tested redefinitions and unforeseen effects. Once again, it is the interaction
and friction between the system of states and international market that has
been crucial for the expansion of offshore.
Turning from law to anthropology, Bill Maurer has pioneered the 'social
study of finance' applied to offshore (along with geographers like Hudson,
1998, 2000, Cobb, 1999, 2001, and Roberts, 1995), building from fieldwork
in the British Virgin Islands (1997). Like Palan, Maurer emphasizes that
the study of offshore should be at least as much about processes as about
places, such as specific offshore centers (2008:157). A further congruence is
the observation that while there is a tension between offshore markets and
state sovereignty, the former may in practice work to shore up the latter.
Like Picciotto and Palan, Maurer sees offshore as being highly 'fictional,'
but goes further is saying that seeking to separate economic realities from
fictions is misplaced effort. As far as its contemporary significance, Maurer
goes so far as to say that 'Far from a marginal or exotic backwater of the
global economy, offshore in many way is the global economy' (2008a: 160).
The recent multilateral regulatory efforts to rein in offshore are described as
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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

'a new discourse of virtue for offshore finance' (Maurer, 2005:476). Despite
the differences between the various initiatives, 'due diligence' is said to be
central to all of them. Very similar to the principle of Know Your Customer,
due diligence refers to the responsibility of private financial intermediaries
to take reasonable precautions to find out that their customers are who they
say they are. As a strategy of risk management, this is said to have relatively
little to do with economics per se and nothing to do with quantitative
models. Instead, it is a deliberate effort to re-ground and re-contextualize
offshore activity in a social setting. Rather than a setting of anonymous
individuals interacting on a basis of equality within the market, hierarchies
of rank within a community defined by reputation are held to be key (2008a;
see also 2008b).
How does the work of these authors relate to the theme of calculated am
biguity developed above? Irrespective of their different disciplinary back
grounds, these accounts have important similarities. The first of these is
that offshore is characterized as an essential aspect of the macro-historical
development of the system of states and the global economy, and even
more so the relationship between the two. Rather than being just a useful
ploy and corporate dodge, the calculated ambiguity that defines offshore
products reflects the conflicted and contradictory nature of the offshore
realm itself. Impelled by deep historical forces, actualized by chance, and
only then exploited for profit and deliberately diffused, offshore products
defined by their flexibility and malleability allow for the simultaneous ex
istence of mutually opposing statuses. Yet even according to these authors
there are major conceptual gaps. Maurer holds that further progress in the
social study of finance depends on a better appreciation of hierarchies of
regard and esteem (2008b: 76). In other important instances, conceptual
obstacles are tied to empirical problems. Speaking of the ever-elusive def
inition and list of OFCs, Palan et al. argue that rather than being a dry
exercise in taxidermy, the lack of a settled definition has been an impor
tant factor compromising the policy effectiveness of multilateral initiatives
aimed at offshore (2007: 4). Picciotto see this problem of definition as first
and foremost a problem of incomplete data (2007:16), leading to the ques
tion of methods and empirical material in the study of offshore.
Because offshore finance and tax havens have been associated with se
crecy, definite limitations have been set on the study of offshore political
economy. The sort of generally accepted economic data employed in study
ing growth, inflation, currency trading and so on are often absent when
it comes to offshore centers. This problem has eased somewhat in recent
years with the publication of more data, but qualitative approaches also
provide a compelling alternative or complementary strategy. Previously,
rather than hiding information, tax havens simply may not have had key
economic data on the number of offshore banks, companies or trusts, let
alone the combined assets held by each. Similarly offshore bank accounts
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 SHARMAN: OFFSHORE AND THE POLITICAL ECONOMY

were not only secret from prying outsiders but also from local govern
ments and regulators. The campaign to increase financial transparency,
especially that associated with countering money laundering, has sub
stantially changed this situation. The offshore centers themselves have a
much better idea of their own financial sectors. Furthermore, at least the
leading centers are now prepared to publicly release more information.
The Caymans, Jersey, Guernsey, the Isle of Man, the Netherlands Antilles
and others now report quarterly to the Bank of International Settlements.
Forty-two offshore centers have been assessed by the IMF in terms of their
compliance with anti-money laundering, insurance, securities and bank
ing standards with the results published on the IMF website. Even with
recent progress, however, substantial gaps remain. Important elements
like hedge funds and off-balance sheet vehicles are not bound by the strict
reporting requirements that apply to banks and publicly listed companies.
And obviously important semi-legal or illegal practices like tax avoid
ance, capital flight, tax evasion, money laundering and hiding corrupt
monies will always be difficult or impossible to quantify, not withstand
ing the huge guesstimate figures thrown around to grab media attention
(UNODC/World Bank, 2007: fn. 9).
While keen to expand the statistical coverage of offshore centers, the
international organizations themselves have been surprisingly reliant on
conventional qualitative techniques. In their work on onshore centers,
groups like the IMF, World Bank, FATF and OECD have tended to rely on
qualitative questionnaires, case studies and fieldwork and interviews. Like
IPE scholars, international organizations are interested not only in what
should happen according to the laws, but what does happen in practice.
To get at this, staff from these institutions rely above all on traveling
to the countries in question and conducting semi-structured interviews
with regulators and private sector representatives. Turning to the issue of
illegal activities, these same bodies rely on indicative case studies, referred
to as typologies. Thus in examining grand corruption, the World Bank
commissioned a report comprised of 25 case studies of such. In seeking
to understand trade-based money laundering, the FATF adopted a similar
approach. Beyond these mainstream techniques, some of the work done
by the few anthropologists in this field (Maurer, 2005; Rawlings, 2005; as
well as the geographers Hudson, 1998, 2000 and Cobb, 1999, 2001) has
also provided very original and stimulating insights. Issues of identity,
community, image and standing are surprisingly dominant in the offshore
industry in a way that is not captured by the notion of hard-nosed rational
dollar-maximizing individuals.
Perhaps the most under-researched area of the offshore political econ
omy relates to the consumers of offshore services, a gaping hole in our
knowledge. Analyses tend to concentrate on the nature and changes in the
supply of offshore services, but there is very little written on the demand
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 REVIEW OF INTERNATIONAL POLITICAL ECONOMY

side. Attending to this lacuna is urgent because the very fragmentary evi
dence available indicates that there have been major shifts in the demand
for offshore services in the last 15 years. It seems likely that newly rich in
dividuals and firms from China, India, formerly Communist Europe and
those countries enjoying a windfall from high energy prices now comprise
the most rapidly growing sector of the market for international finan
cial services. Aside from indicating the relative rise of developing world
economies, this trend would also tend to undermine the control core West
ern states can exert over global economic governance. For if OFCs can
sell their wares to non-OECD customers, OECD attempts to enforce stan
dards through regulating access to rich world markets are outflanked. An
exception to the lack of knowledge concerning demand-side factors is a
study suggesting US firms at least are more likely to use tax havens as the
amount of intra-firm trade and research and development increases (to
benefit from transfer pricing and deferral of US corporate tax of foreign
income) (Desai, 2005; see also Graham and Tucker, 2005). Again, because of
the secrecy aspect there are methodological issues in pursuing such issues,
but given the huge volume of research on illicit behavior like corruption,
the obstacles to much more investigation of the demand-side of offshore
should not be insuperable.
Beyond empirical factors, scholars are also challenged even by the ethical
ambiguities that define the offshore world. Scholars and policy-makers
share a basic normative uncertainty: are offshore financial centers and
offshore finance as a whole legitimate features of the global economic
system? Or, is the offshore world a problem, to be studied with an eye
to an eventual solution? Despite the technical character of a great deal of
research on offshore finance, in line with growing scrutiny from critical
social movements, scholars are increasingly drawn to take a stand for
or against offshore. Fortunately, however, there is no reason why these
unresolved normative concerns cannot proceed concurrently with further
scholarly investigation of offshore finance.

NOTES ON CONTRIBUTOR
Jason Sharman is Associate Professor at the Centre for Governance and
Public Policy, Griffith University, Australia. Sharman's current research
interests include the global regulation of tax and money laundering, as
well as questions of sovereignty.

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