From Financial Times

Fifty years ago, many of the small islands that now play a central – and controversial role – in the global economy, were desperately poor. The mosquito-ridden Cayman Islands was dependent on remittances from seamen. The Isle of Man, threatened by an exodus of young people, saw a future ravaged by depopulation.

In the decades that followed, the explosive growth of international finance transformed the fortunes of the Crown Dependencies and the Overseas Territories, those relics of empire that decided not to seek independence but to keep the Queen as head of state.

Their burgeoning finance industries were encouraged by the Bank of England which viewed tax havens as useful conduits for foreign capital flows and the Ministry of Overseas Development, which saw offshore finance as a means of avoiding aid dependency. But from the start, the Inland Revenue was concerned about a murkier side of the offshore industry that ran alongside its legitimate activities: its role in abetting tax evasion.

They carved out different niches: the British Virgin Islands became synonymous with international business companies. Bermuda became one of the world’s leading insurance centres. The Caymans is a leading hedge fund centre and became a big wholesale banking centre, with huge volumes of overnight banking business from the US. The islands also helped multinationals minimise and defer corporate tax bills.

The big western countries became increasingly concerned about their impact on tax revenues. In 1996, the Group of 7 leading economies launched a crackdown on harmful tax competition. This initially stalled, largely because it focused on small operators while ignoring shortcomings in some industrialised countries. In the wake of the financial crisis, big western countries are taking a harder line. The offshore centres that retained their links with Britain have faced the greatest pressure of all.

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