18 April 2012
It is an honour to have been asked to talk to the Institute of Directors, and the subject seems to me to be particularly topical in the aftermath of Low Value Consignment Relief (LCVR) and so on.
Where are we, and where are we heading so far as our relations with the international community and the outside world are concerned?
Legal framework
The legal framework is probably well understood, but it is important to appreciate that this is the starting point. We are not an independent state. We are a Crown Dependency with substantial autonomy, but we are not responsible in international law for our relations with foreign countries.
The UK is the sovereign state with responsibility for our external relations. We cannot be a party to multilateral treaties or agreements like the European Convention on Human Rights (ECHR) or the UN Convention on the Rights of the Child because we are not a state. The obligations of these conventions can be extended to us, if we so request, but the way in which that is done is by the UK ratifying the convention on behalf of Jersey.
The ECHR was ratified on our behalf in the 1950s and ever since we have had the obligation to comply with the terms of the Convention. Nor can we enjoy the benefits of international agreements like those under the umbrella of the World Trade Organisation unless the UK agrees to ratify the agreement on our behalf.
That is the strict legal position so far as treaties and conventions are concerned, although there is nothing in law to prevent a non-sovereign state like Jersey from entering agreements with other sovereign states and engaging with international organisations if they are willing to treat with us.
International engagement
We first began this kind of engagement in about 1998 when the Organisation for Economic Cooperation and Development (OECD) issued a report on harmful tax competition. The UK accepted that its own interests on this issue were different from those of the Channel Islands, and the Islands began to negotiate on their own behalf with the OECD.
In due course that led to a commitment by Jersey to comply with the OECD’s “harmful” tax initiative – a commitment in effect to effective exchange of information, transparency and non-discrimination, and of course to compliance with international standards. That was really the first time that we entered on to the world stage without the oversight or protection of the UK.
In the last 15 years things have moved on apace, with the support, to an extent, of our sovereign state. If I qualify the statement in that way I am not suggesting that there has been any opposition from the UK to this assertion of international identity, but the requirement to represent our own interests internationally has been driven in part by the UK’s withdrawal from its constitutional responsibilities to protect those interests.
Budget cuts in the UK have resulted in a significant reduction in the number of officials who were, a few years ago, charged with responsibility for the interests of the Crown Dependencies. The UK recognized the difficulties and agreed that it was appropriate for the Channel Islands to represent their own interests to a much greater extent.
Framework agreement
In 2007 the then Lord Chancellor and Secretary of State for Constitutional Affairs, Lord Falconer, signed a Framework Document with the Chief Minister of Jersey. That Framework Agreement acknowledged, inter alia, that:
- the UK would not act internationally on behalf of Jersey without prior consultation
- Jersey had an international identity which was different from that of the UK
- the UK supported the development of that separate international identity and had a role to play in that respect: its role was one of support and not interference
- Jersey and the UK would work jointly to promote the legitimate status of Jersey as a responsible, stable and mature democracy with its own broad policy interests and which was willing to engage positively with the international community across a wide range of issues
Recognition of that separate international identity is very important from a business perspective because the international community, through the G20 and other global groupings, is increasingly setting standards for the conduct of business. When one considers the widespread prejudice against so-called tax havens, it is vital that Jersey should not only conform to those international standards, but also be able to persuade the world that she is conforming.
The 2007 Framework Agreement underlined the importance of such compliance. It stated at para 6 “International identity is developed effectively through meeting international standards and obligations which are important components of Jersey’s international identity.”
I think that Jersey had in fact been aware of the importance of meeting these standards long before 2007; our commitment to the OECD’s initiative at the turn of the century is evidence of that.
Constitution Review Group
In June 2008 the Chief Minister presented to the States the 2nd Interim Report of the Constitution Review Group which had been established to examine the constitutional relationship between the UK and Jersey. The report can be found on the website of the States Assembly and it concludes that, if it were necessary or desirable for Jersey to become a sovereign state, the Island would be able to cope.
The 2nd Interim Report recommended, inter alia, that Jersey should develop a capacity to conduct international affairs. If we were to become independent, such a capacity would be a necessity. But even if we remained a Crown Dependency, the acquisition of diplomatic and administrative skills relevant to the conduct of foreign affairs was important for protecting our international interests.
International Affairs
Last year a small department with responsibility for international affairs was set up within the Chief Minister’s Department and an Assistant Minister, the then Senator Cohen, with accountability for that department was appointed. After the elections I was appointed by the Chief Minister to fulfil that role.
So Jersey now has a small department of 7 officials, including a number of young graduates, to look after Jersey’s international interests. We supervise the joint Channel Islands office in Brussels, and I hope that we shall shortly establish an office in London. Our relationship with the UK is the most important of our international relationships, and a London office would help us to develop better contacts with officials in Whitehall, with politicians at Westminster, and of course with the City.
International relations are not very different in essence from personal relations. In our private lives, if we pay no attention to our friends, those friendships will wither. If we cultivate friendships and contacts at all relevant levels across national boundaries, we are more likely to achieve the objectives of diplomacy, which are essentially to get our own way as often as possible, and to avoid collisions.
Building relationships
The collision that resulted in the cancellation of our health agreement with the UK a few years ago was entirely avoidable. It represented, at root, a failure on our part to have in place the necessary relationships to prevent a collision of opposing interests from occurring.
What can one say about our current place in the international community? I think that we are recognized in many quarters as a country that is not only committed to international standards not only in theory but also in practice. Our regulation and enforcement of standards are as good as anywhere.
Perhaps I might interpose in passing that I make no apology for describing Jersey as a “country”. Some people mock the idea that Jersey is a small nation or country. I think they are wrong. If you look the words up in the dictionary you will find that they are entirely appropriate.
If we are going to continue to succeed economically and socially, if we are to absorb all the different cultures in the Island, we need to get more people to think of themselves as Jerseymen and Jersey women. It does not matter where they were born. If they have a commitment to Jersey, they are, so far as I am concerned, fellow countrymen or women.
International standards
The key milestones for meeting international standards in the last four years can be summarised as follows: -
- In 2008 the IMF assessed the Island for its compliance, and the results were published in September 2009. The conclusion was that Jersey’s financial sector supervision and regulation were of a high standard and compared favourably with the performance of other countries, including all the EU member states.
- In November 2009 the Foot Review, commissioned by HM Treasury, not only strongly endorsed Jersey’s high standards of regulation but also highlighted the significant contribution made to the liquidity of the UK financial markets.
- Earlier in 2009 Jersey was included in the OECD’s list of “white” jurisdictions that had substantially implemented the internationally agreed standards on tax transparency and information exchange.
- In October 2011 the assessment of Jersey by the Global Forum on Transparency and Exchange of Information for tax purposes recorded “ ... a legal and regulatory framework for the exchange of information which generally functions effectively to ensure that the required information will be available and accessible… “
- In November 2011 the Financial Stability Board – one of the entities set up by the G20 – included Jersey in Group 1, that is one of a group of jurisdictions “demonstrating sufficiently strong adherence” to the relevant international standards.
In short, in all areas upon which the G20 are focussing in relation to international standards – Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT), financial regulation and tax information exchange – Jersey scores very highly and bears comparison with all EU member states and all G20 countries.
So what, one might think, is the problem? If Jersey is this model of probity in so many ways, why do we not attract praise and plaudits? Why do we continue to be described as a “tax haven” and so often find ourselves to be the subject of negative publicity?
Transparency
The short answer, I am afraid, is that life is not fair. Prejudices, particularly political prejudices, die hard. My discussions with officials in the European Commission, and with ambassadors and high commissioners representing many EU countries, suggest that at the level of officialdom there is a fairly widespread recognition that Jersey is a transparent and cooperative jurisdiction.
In the media and amongst the political class, there is however much work to be done. Sometimes it is just not politically expedient to destroy ancient myths.
And sometimes politicians abroad will seek to draw attention away from their own policy shortcomings by suggesting that problems faced by their electorates are the result of actions by wicked tax havens of which Jersey is one.
And sometimes critics and pressure groups like the Tax Justice Network will distort research in order to arrive at the desired conclusion.
These political prejudices cause the Island real problems. When we seek to gain acceptance by EU member states that our AML and financial regulation are at least equivalent to provisions in force in those member states, there ought, objectively speaking, to be instant agreement. But some member states find it difficult to overcome the hard-wired political prejudice that Jersey is a tax haven.
As a result, breaking down barriers and gaining access to European markets is not simply a case of meeting objective criteria. There are strong political preconceptions and prejudices to overcome.
Breaking down barriers
What can we do about it? Well, the work of the International Affairs Department is geared to travelling as much distance on a litre of petrol as is possible, and I mean that metaphorically as well as practically. There is a London engagement programme designed to build up relationships not only with the UK but also with many other countries with representatives in the capital.
Jersey Finance Ltd and the Jersey Financial Services Commission in its international activities need support. Inviting ambassadors and high commissioners of relevant countries to Jersey to explain how the Island works is another important way of gaining influence. The more that we can put the correct facts into the public domain and into the minds of policy makers, the more difficult will be the task of our detractors.
We must stand up for our interests internationally because experience has shown that no one else will do it for us. That does not mean that we should be aggressive or violent in the defence of our interests. We have no army or navy, so that would hardly be practical. But the pen can be mightier than the sword, and reasoned argument will eventually prevail over prejudice and ignorance.
European Union
We do of course have a significant disadvantage in Europe in that we are considered to be, because of our relationship as set out in Protocol 3, a “third country” so far as the EU is concerned. On the other hand, as a dependent territory of the UK, we lack the ability of other third countries like Liechtenstein and Switzerland to have our voice heard and to negotiate directly with the European Commission.
The European Union is currently discussing its relationship with the sovereign non-EU small states of Europe, viz. Andorra, Liechtenstein, Monaco and San Marino, but Jersey does not have that international capacity. Our discussions have to take place through the UK. The UK agreed in the 2007 document to which I have referred that Jersey’s interests may differ from those of the UK and that the UK has a duty to represent Jersey’s interests internationally.
These may be early days, but so far, I am afraid, the record has not been encouraging. One of the purposes of the London engagement is to see whether a more positive approach can be developed.
Sometimes Prime Ministers and Presidents of the United States make fine speeches about the “special relationship” between the UK and the USA, as if they were brothers and sisters of one English speaking family. What these leaders mean is not that either country will always support the other, but that they will support each other when they can. If the interests of the USA and the UK clash, you cannot expect the USA to put UK interests above its own, and vice versa.
Protecting interests
I believe that the same can be said, broadly speaking, about the current relationship between the UK and Jersey. Some people still nurture the comfortable notion that at the end of the day the UK will always look after us. If that makes you feel better, then dream on, but I would prefer to have a reality check. The sadness of this illusion is that people then feel disappointed when the UK government acts in an entirely reasonable way from its perspective, and protects the interests of UK citizens.
If we want the UK government always to protect our interests, we would need to be part of the UK. If we do not want that, then we should understand that UK politicians will always act to protect the interests of their electorate, and that sometimes those actions will prejudice Jersey’s citizens and businesses.
The LVCR dispute was only an extreme example of this protectionism. Our case before the English High Court was not a complaint that the UK had no right to change its own tax rules to protect its own revenues; it was essentially a complaint about the discriminatory nature of the proposed tax change.
In other words, the Channel Islands were being singled out, with probable severe social consequences, and this, we said, was unfair. We lost because the judge held that the UK government was entitled in law to discriminate against any third country.
What lessons can we learn from all this as to our place in the international community? The first lesson, as I have said, is that we must defend our own economic and political interests because if we do not they are likely not be defended at all.
Playing to our strengths
That is not a call to arms, or an encouragement for belligerent statements. On the contrary, we should be subtle, diplomatic, and play to our strengths. The professional skills of our finance industry are a strength. Our compliance with international standards is a strength.
Our lack of debt and financial reserves are strengths. We provide value to the City of London, and therefore to the UK, in terms of liquidity. We need to explain ourselves and to persuade opinion formers and leaders that we are an asset and not a liability. We need to speak our truth clearly and frequently and resolutely.
In order to defend our interests, we need to be given greater authority by the UK to conduct our international affairs. We need entrustments to negotiate and secure international agreements outside the area of tax, in asset sharing, and social security and so on. We need to be trusted more generally in the conduct of our affairs, both external and internal.
We cannot expect to be given a licence to act contrary to UK interests, but we should expect, following our own special relationship, to get UK support when our political interests coincide, and when our interests and those of the UK do not clash.
To gain that kind of support from the UK would, I think, overcome at least some of the disadvantages of our current status as a Crown Dependency. Such a change in our constitutional competence is entirely consistent with the recommendations of the House of Commons Justice Committee under the chairmanship of Sir Alan Beith which reported on the Crown Dependencies in March 2010.
If we cannot achieve those kinds of changes, then Jersey has a stark choice. We can reconcile ourselves to being, as I put it recently, a satellite of the UK, always toeing the line of UK interests, and accepting for our industries and businesses a straitjacket that would inhibit innovation and initiative.
Or we could take the comparatively small step of taking responsibility for our destiny as an independent state. For my part, I am not in favour of being a satellite, but I also think that a sensible and mutually satisfactory solution could be found if the UK were to place greater trust in the Channel Islands to conduct their international affairs properly, diplomatically and with good sense.
Senator Sir Philip Bailhache
gov.je