offshore banking

The Tax Haven of Norfolk Island

With just 13 square miles and 2,142 residents, Norfolk Island is not large. Lying 900 miles off Australia and 600 miles from New Zealand, it is also very remote. But Norfolk played a key role in the British colonization of the Austral realm. Extensive groves of tall, straight Norfolk Island pine (Araucaria heterophylla, now a common houseplant) carpeted the uninhabited island when James Cook happened upon it in 1774, as did thickets of New Zealand flax (Phormium tenax).The British Navy, concerned about the declining supply of masts from North America and hemp from Russia, took a deep interest in the island’s resources, contributing to the decision to found a settlement on the Australian mainland. Through the early 1800s, Norfolk maintained close contact with New South Wales; it too served as an early penal colony.

Although unpopulated when discovered by the British, Norfolk had been settled by Polynesians six to seven hundred years ago. It is not known what happened to the settlement – Norfolk was one of a number of Pacific islands that were only temporarily occupied by Polynesians. The Polynesians did leave their rat, however, along with an ecologically simplified island.

The human geography of Norfolk was transformed in 1856 with the arrival of 192 settlers from Pitcairn Island, a magnificently remote outpost east of French Polynesia. Pitcairn, a volcanic island slightly larger than Norfolk, had been settled in the late 1700s by the famous mutineers of the Bounty along with their Tahitian wives. It was not an idyll, with drunken violence decimating the men, but the population grew nonetheless. When the community threatened to outgrow Pitcairn, a contingent was relocated on Norfolk. Along with the settlers came their distinctive dialect, usually described as a blend of eighteenth-century English and Tahitian. Today the Norfolk language—Norfuk—has official status along with English on the island. Local officials fear that it is falling into disuse but are trying to encourage it. (To hear the language spoken, visit the Norfolk Language website.)

Norfolk is under the sovereign authority of Australia, but it is legally autonomous. The inhabitants have made money by doing the same thing that the legally autonomous islands attached to Britain (Man, Jersey, and Guernsey) have done: set themselves up as a tax haven. Norfolk’s government has further tried to leverage its autonomy into becoming an offshore banking center, but here it has found little success, as such moves have been resisted by the Australian government.

Norfolk controls its own immigration policy, demanding that Australians come with passports. It sometimes refuses permanent residency even to wealthy outsiders. According to the Wikipedia, Norfolk rejected singer Helen Reddy, despite her roots on the island. Norfolk’s anomalous geopolitical situation sometimes gets noticed in the North American news. In February 2010, The Vancouver Sun reported on its role in a complex legal battle over the estate of Eldon Foote, a Canadian-born entrepreneur and philanthropist, that pitted Foote’s widow and children against two charitable foundations. The heirs wanted to argue the case in a Canadian court, but the charities insisted “that Norfolk Island, a sun-drenched tax haven and self-governing territory of Australia, was the philanthropist’s legal home.” An Alberta judge ruled that this was the case, thwarting Foote’s wife and children.

Geopolitically anomalous islands – including Norfolk – occupy significant positions in the global financial order, serving as refuges from standard legal systems. Island governments take advantage of such irregularities, as do wealthy individuals and corporations. Whether the global economy as a whole gains from such stratagems is a different question.

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The Finances of Man

Sometimes the most obscure news article reveals significant processes that have the potential to reshape global geography. A case in point is a January 13, 2010 article from Transfer Pricing Weekly, all of seven sentences long, entitled “MAP Established between the Isle of Man and Australia.” The first sentence, which outlines “the mutual agreement procedures for transfer pricing adjustments,” promises a real snoozer of a story. The meat comes at the end: “ The Isle of Man government has signed a series of tax cooperation agreements which have helped to demonstrate the island’s commitment to international standards and to the global effort to establish a system based on cooperation between countries, transparency, and effective exchange of information.” In other words, one of the world’s first offshore banking centers—site of many monetary shenanigans in the past—is scrambling to reform itself as the crisis-battered global financial system comes under increasing scrutiny.

“Offshore banking” originated in, and indeed acquired its name from, the islands of Guernsey, Jersey, and Man. Banking secrecy, tax evasion, and other dubious practices of the offshore system were made possible by these islands’ anomalous geopolitical status. As “crown dependencies” they ultimately fall under the sovereign umbrella of Britain, yet they are not part of the United Kingdom (or the EU), regardless of what of our maps may indicate (see map). As a result, they have their own legal systems, tax codes, and regulations, which their governments long ago realized could be used to their advantage in international finance. The business is large; according to some experts, up to half of the world’s capital flows through offshore centers. Although pioneered by Guernsey, Jersey, and Man, the practice eventually spread to other British dependencies, such as the Cayman Islands and the Bahamas, and then to sovereign states. Panama, for example, might now be regarded as an onshore-offshore banking center.

The Isle of Man is actually thought to be one of the more secure and reputable of the offshore banking centers. It is not immune to crisis, however.In the financial disaster of 2008, among the few savers who lost their funds entirely were those who had invested in an offshore branch of an Icelandic bank in the Isle of Man. The Isle of Man Compensation Scheme is trying to ensure that such losses are eventually recouped.

Finance aside, the Isle of Man is plenty interesting in its own right. Its Celtic language, Manx, supposedly went extinct in 1974, but is being revived and now boasts around 100 fluent speakers. Its current head of state is officially Elizabeth II, but not as queen: her title here is “Lord of Mann.” (She is toasted as “The Queen, Lord of Mann.”) Also of note is the island’s symbol, the ancient triskelion: bent legs in a pattern of threefold rotational symmetry (more on this in the next posting).

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