Wednesday, July 16, 2008

IMF to Abolish Offshore Financial Center Assessment Program

"IMF to End Offshore 'Stigma'"
"IMF Executive Board OFCAP with FSAP"
"IMF Background Paper"

On July 9, the International Monetary Fund (IMF) announced it will no longer classify offshore financial centers (OFCs) as separate from onshore financial centers. On May 30, 2008, the Executive Board of the IMF approved integration of the OFC Assessment Program into the Financial Sector Assessment Program (FSAP). This move effectively eliminates the divide between offshore and onshore financial centers. The IMF directors stressed that the combination will not lead to diminished focus by the IMF on the OFC’s compliance with international standards.

The directors noted that because of the integration of the world’s financial systems, the distinction was no longer relevant. In 2000, the IMF originally defined an OFC as 1) jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents, 2) financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies, and 3) centers which provide some or all of the following services: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity. The IMF stated that the globalization of finance has blurred this definition and made it difficult to draw the line in a credible manner.

Forty small countries view the elimination of the OFC Assessment Program as a victory. They have complained that the distinction has unfairly discriminated against their financial systems. The Society of Trust and Estate Practitioners, which represent business in many OFCs, have referred to the definition as a “discriminatory stigmatization.” The IMF even noted that a motivating factor was a desire to “eliminate the need to maintain a potentially discriminatory list of OFC jurisdictions.” The IMF also noted that the nine or ten OFCs that account for the overwhelming volume of financial transactions will be assessed more often to insure compliance.

1) With the current credit crisis in the world, most countries have called for more regulation and transparency in the financial markets. Will this move by the IMF lead to less transparency and regulation of OFCs?
2) How much of an impact can the IMF have in removing the stigmata associated with OFCs? Will this integration make any difference or will investors still associate these financial centers with the OFC stereotype?

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