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October 23, 2007
Offshore Explorations: Jersey
by Martin A. Sullivan

Full Text Published by Tax Analysts®


Document originally published in Tax Notes Today
on October 23, 2007.

This article examines the financial sector of the island of Jersey, paying special attention to data that could shed light on the potential for individual tax evasion. The objective is to estimate as well as possible with existing data the extent of tax evasion facilitated by the Jersey financial sector.

We have divided Jersey's financial business into six categories: (1) banking, (2) funds (including mutual, hedge, and private equity funds), (3) trust services, (4) investment management, (5) insurance, and (6) special purpose vehicles (SPVs) used in securitization. By far the most important categories are the first three. Banking and trust services are long-established. The funds sector has grown rapidly over the last decade. Overall, the Jersey financial sector is fully recovered from its 2003-2005 slump in profits and employment. (See Figure 1.)


___________________________________________________________________

SIDEBAR: Jersey Facts




Location: 14 miles west of the Normandy coast

Population (Dec. 2005): 88,200

Size: Approximately 45 square miles (slightly larger than Boston)

Gross Domestic Income (GDI) (2005): £3.2 billion ($5.8 billion)

Unemployment Rate: 2.3 percent

Per Capita GDI (2005): £36,000 ($65,500; 56 percent larger than U.S. per capita GDP)

Median House Price (2006): £358,000 ($659,900)

Size of Financial Sector (2005): 50 percent of the economy's gross value added. In June 2006, about one quarter (25.9 percent or 12,170 people) of Jersey's workers were employed in financial and legal services.

Status: Independent of the United Kingdom in fiscal and legislative matters. Not part of the EU.

Source: States of Jersey, Jersey in Figures, 2006.



___________________________________________________________________


Most of the data in this article are from the Jersey Financial Services Commission (JFSC, online at http://www.jerseyfsc.org), the island's chief financial regulator and source of financial data, and from Jersey Finance, the official body that promotes the island's financial sector (http://www.jerseyfinance.je).

This article, second in a series, uses many of the same estimating methods as the first installment, "Offshore Explorations: Guernsey."

Our conclusion here: At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned by non-Jersey individuals who were likely to be illegally avoiding tax on those assets in their home jurisdictions. We estimated the comparable figure for Guernsey to be $293.1 billion.


Banking


The Jersey banking sector is large and growing. Figure 1 shows that over the eight-year period from December 1998 through December 2006, deposits more than doubled, from $171.4 billion to $371.8 billion. During the first six months of 2007 they jumped another 14 percent to $423.5 billion. A wave of consolidations drove down the number of banks in Jersey from 79 at the end of 1998 to 48 as of October 2007.

It is in particular worth noting that the European Union savings directive, which came into effect on July 1, 2005, and resulted in a 15 percent withholding tax on interest paid by Jersey banks to individuals residing in the EU, may have temporarily slowed the growth of deposits in Jersey, but that its overall effect appears to be negligible. Similarly, the U.K. government's stepped-up enforcement efforts in early 2007, which included gaining access to information on offshore accounts from U.K. banks, has had no noticeable impact.

The Bailiwick of Jersey (Neale Clark/Robert Harding World Imagery/Corbis)At the end of 2006, approximately 32 percent of Jersey bank deposits were denominated in British pounds. This is only a small reduction from the 34 percent figure for the end of 2000. There is a wide geographic distribution of ownership in Jersey deposits, as shown in Figure 2. It is important to remember that bank records will not record the residence of beneficial owners of bank deposits if those deposits are made in the name of a trust or shell corporation.

Interbank and Swiss Fiduciary Deposits

Data from the Bank for International Settlements (BIS) indicate that at the end of 2006, approximately $147 billion of deposits in Jersey banks were held by other banks. Interbank deposits are not a concern in a study of individual tax evasion except when deposits are made by other banks on behalf of foreign individuals and trusts. This is the case for Swiss fiduciary deposits — deposits made by Swiss banks on behalf of their customers who wish to avoid Swiss withholding tax. According to the JFSC, they make up the bulk of the category labeled "Europe, Non-EU" in JFSC statistics. (See Jersey Finance, "Financial Services Industry Quarterly Statistics — Quarter Ending June 2007,"Aug. 28, 2007, p. 3.)

At the end of 2006, that category totaled $98.3 billion. We will assume here that 80 percent ($78.6 billon) of that total are Swiss fiduciary deposits held on behalf of individual investors with deposits in Swiss banks. The difference between the BIS total for interbank deposits ($147.4 billion) and our estimate of Swiss fiduciary deposits ($78.6 billion) is our estimate ($83.7 billion) of interbank deposits that are not made on behalf of customers and therefore are not a potential source of individual tax evasion.

Domestic Deposits

As shown in Figure 2, at least $45.1 billion (12.1 percent) of deposits in Jersey banks are from depositors recorded as resident in Jersey. Although these are Jersey resident companies and individuals, nearly all of these deposits are attributable to Jersey's offshore sector (for example, trusts and shell corporations domiciled in Jersey). In the United States, the average bank deposit per capita is approximately $28,000. Bank accounts in Jersey held by Jersey depositors amount to approximately $511,000 per person. If we assume that accounts related to domestic residents and business are equal per capita in Jersey and the United States, Jersey (with a population of approximately 88,200) would hold approximately $2.47 billion (£1.26 billion). On the basis of the U.S. data, we assumed that 0.7 percent ($2.47 billion) of total Jersey deposits are held by Jersey residents and businesses related to the domestic economy.

Other Accounts

We would now like to explain the ownership of the remaining 55.7 percent of accounts in Jersey that are not interbank (22.5 percent), Swiss fiduciary (21.1 percent), or purely domestic (0.7). In particular, we want to know whether they are (a) personal accounts for which evasion would be likely or (b) institutional and business accounts for which evasion would be unlikely.

There are a lot of business uses for bank deposits in offshore financial centers like Jersey. A domestic business may put excess cash in offshore "sweep accounts" (so called because at the end of each business day, unneeded cash is automatically swept to offshore banks or money market funds). Also, a corporation with a number of foreign subsidiaries will often establish an offshore treasury management company to consolidate various foreign exchange and cash management activities in a low-tax jurisdiction with a flexible regulatory environment.

No data are available directly on this point for bank deposits in Jersey. From the Bank of England, however, data are available on the composition of deposits in Jersey, Guernsey, and the Isle of Man (combined) for depositors resident in the United Kingdom, Jersey, Guernsey, and the Isle of Man. Excluding deposits by banks, the division of ownership, according to the latest data, is: nonbank financial corporations — 29 percent; private nonfinancial corporations — 20 percent; public sector — 1 percent; and households — 50 percent. (See endnotes for details.)

Using the data from the Bank of England, we assume that 27.84 percent ($103.5 billion, one half of 55.68 percent) of deposits are held by households that are likely to be evading their home countries' taxes.



Figure 1. Employment and Profits at Jersey Institutions,
1998-2006






___________________________________________________________________


Source:
States of Jersey, Statistics Department, Business and
Economy _ Financial Institutions _ Data, "Profits" and "Employment,"
available at

http://www.gov.je/ChiefMinister/Statistics/Business+and+Economy/Financial+Institutions.


 Table 1. Summary of Findings on Jersey Bank Deposits
 -----------------------------------------------------------------------------
                           
Millions    Millions               Evasion
 
                              ($)         (£)      Percent    Assets?
 -----------------------------------------------------------------------------

 Total Deposits              $371.8      £189.7     100.00%
 Swiss Fiduciary              $78.60      £40.1      21.14%     Yes
 Other Interbank              $83.70      £42.7      22.51%     No
 Domestic (Jersey) Resident    $2.47       £1.3       0.66%     No
 Other -- Individual         $103.52      £52.8      27.84%     Yes
 Other -- Institutional      $103.52      £52.8      27.84%     No

 -----------------------------------------------------------------------------
 
Source: Calculations described in text.

Combining the 21.14 percent figure for Swiss fiduciary deposits with the estimated 27.84 percent for other deposits to be beneficially owned by individuals yields 48.98 percent of bank deposits. Multiplying the corresponding fraction by the data for total Jersey deposits as of December 31, 2006 ($371.8 billion), yields $182.1 billion in potential tax evasion assets (PTEA). The modifier "potential" is used because there is no proof that these assets and the income they generate are related to tax evasion. To the extent that taxpayers are honest and report their foreign earnings to domestic tax authorities (despite the lack of information reporting by banks to tax authorities), the potential will not be realized.

Jersey Funds

The rising star of the Jersey financial sector is its funds business (which includes conventional mutual funds, private equity funds, and hedge funds). As shown in Figure 5, in the three years from the end of 2003 to the end of 2006, total funds grew a remarkable 92 percent, from $182.3 billion to $350.9 billion. And during the first half of 2007, the total grew another 20 percent, to $421.6 billion.

From the end of 2003 to the middle of 2007, the number of funds more than doubled, from 602 to 1,212. Many of these funds are "umbrella" funds that have a number of subfunds. The total number of investment pools, including subfunds, as of June 2007 was 2,758.


Figure 2. Bank Deposits in Jersey, 1998-2007




Source:
Jersey Financial Services Commission, "Growth of Banks
and Bank Deposits," updated October 2007, and Bank for International
Settlements, Locational Banking Statistics, Table 3A, available
at
http://www.bis.org.


Jersey funds are licensed in either of two categories. There is no bright line in the requirements for each, but Collective Investment Funds (CIFs) are more oriented toward small investors, while COBO funds (named after the Control of Borrowing Order of 1958) generally have a small number of investors. As shown in Table 2, 80 percent of all fund assets were in CIFs at the end of June 2007. Of the CIF total, $255.4 billion were in open-ended funds, and $128.6 billion were in closed-end funds. Of the COBO total, $15.3 billion were in open-ended funds and $22.3 billion were in closed-end funds.

Innovation, flexibility, and specialization are the hallmarks of the modern investment funds business. Jersey funds, managed mostly out of London and New York, reflect this global trend. In general, the composition of funds has shifted from the more highly regulated retail funds with conventional investments in bonds and equities. The slowdown in the retail fund business is in large part attributable to Jersey not being part of the EU and the ability of EU-domiciled funds to be easily marketed throughout the EU. Offsetting the decline in funds with traditional investment has been the growth in demand by institutional and high-net-worth individuals for funds undertaking "alternative" investment strategies. These funds include hedge funds and private equity funds.

Advantages of Jersey as a Fund Domicile

The rapid growth of funds in Jersey is also caused by marketing and, in part, nimble changes in regulatory rules. Industry and government work hand in glove. For example, the Expert Fund made its debut in February 2004 at the behest of the financial sector, which wanted to catch the wave of growth in alternative investment funds. Under this regime, if investors in a fund were restricted to institutional, professional, and high-net-worth investors, the fund could receive regulatory approval in three days. In June 2005 there were 98 Expert Funds in Jersey holding $9.2 billion of assets. By June 2007 there were 432 Expert Funds with assets totaling $38.3 billion. (JFSC, "Quarterly Report 30 June 2005," Appendix E; and Jersey Finance, "Financial Services Industry Quarterly Statistics — Quarter Ending June 2007,"Aug. 28, 2007, p. 12.) Most newly formed hedge funds in Jersey are Expert Funds.


Figure 3. Geographic Distribution of Ownership of Jersey
Bank Deposits (December 2006)

(amounts in billions of dollars)



Source:
Jersey Financial Services Commission, "Quarterly
Analysis of Deposits," Dec. 2006.

Figure 4. Composition of Jersey Deposits, 2006, BIS Data
(Total from JFSC: $371.8 billion)




Source:
Bank for International Settlements. "Location Bank
Statistics," Tables 3A and 3B, Oct. 2007, available at
http://www.bis.org.


More recently, Jersey has announced a "zero regulation" regime that will take effect in January 2008 for funds to which an investor must contribute a minimum of $1 million. (Alistair MacDonald, "Island of Jersey Offers Funds a New Regime: Will It Start a Trend?" The Wall Street Journal, Sept. 29, 2007.)

Changes in foreign laws, particularly in the United Kingdom, have a large effect on the Jersey funds sector. In July 2004 the British government ended the exemption from the 4 percent stamp duty available for the transfers of limited interests in partnerships holding real estate. This pushed a ton of U.K. real estate transactions into Jersey property unit trusts (JPUTs). The British government shut down this loophole in March 2006, but there are residual tax benefits to U.K. real estate investors, and, according to Jersey sources, the JPUT is still attractive. The rapid ascent of Jersey property funds is shown in Figure 6.

Jersey officials argue that stepped-up enforcement efforts by the United Kingdom will make Jersey a more attractive domicile compared with the Caribbean (in particular, the Cayman Islands) for U.K.-managed offshore funds. Unlike under U.S. law, offshore status under U.K. law is determined not by legal domicile but by the facts and circumstances related to actual headquarters activity.

Another factor adding to the popularity of Jersey funds was the creation of the Channel Islands Stock Exchange in 1998. Based in Guernsey, the exchange provides a low-cost avenue for obtaining status as a listed security. Many institutional investors are severely restricted in the amount of investment they can make in unlisted securities.

Finally, as in many offshore centers, Islamic finance in Jersey is a fast-growing business line. The Middle East has become a target for offshore business because of the repatriation of assets from New York and London after the terrorist attacks of September 11, 2001, and the massive increase in liquidity resulting from high oil prices. Jersey officials and business leaders have made numerous trips to the Middle East to drum up business. Jersey companies are now launching funds that are consistent with Sharia principles. These principles include no payment or receipt of interest and no investment in businesses considered unethical, such as alcohol, pork, pornography, or weapons.


Figure 5. Jersey Funds (Mutual, Hedge, Private Equity, etc.),
2003-2007




Source:
JFSC, "Funds and Securities Business Statistics
_Summary of Statistical Survey of Funds Serviced in Jersey as at 30
June 2007," Oct. 2007, available at
http://www.jerseyfsc.org/funds_securities_issues/statistics/collectiveinvestmentfundsstatistics.asp.


 Table 2. Jersey Mutual Funds, June 30, 2007
 -----------------------------------------------------------------------------
                           
Net Asset Value       Number of
 
                             (billions)            Funds
 -----------------------------------------------------------------------------

 CIFs Closed                    $128.6                399
 CIFs Open                      $255.4                573
 COBO Funds Open                 $15.3                 43
 COBO Funds Closed               $22.3                197
 
Total                          $421.6              1,212

 -----------------------------------------------------------------------------
 
Source: Jersey Finance, "Financial Services Industry Quarterly
 Statistics — Quarter Ending June 2007, Aug. 28, 2007."


View From IMF Data


At the end of 2005, the IMF's Coordinated Portfolio Investment Survey (CPIS) indicated that $76.3 billion in securities were held by reporting Jersey mutual funds. This is only a fraction of total mutual fund assets ($350.9 billion) reported to the JFSC. This discrepancy is in part due to funds' holding of nonsecurities (for example, real estate and derivatives) and domestic securities (both not included in the CPIS). But most of the gap is probably attributable to less than complete coverage in the CPIS survey. In 2003 (the only year for which CPIS reports "metadata" about survey participants) only 249 Jersey mutual funds participated (International Monetary Fund, Coordinated Portfolio Investment Survey, Portfolio Investment: CPIS Metadata, Individual Economy Information, Jersey, available at http://www.imf.org/external/np/sta/pi/01/JEY/eng/MdQnr.htm) compared with the 602 Jersey funds reporting to the JFSC at the end of that year (as shown in Figure 5).

Of the $76.3 billion total assets reported in 2005, $43.7 billion (56 percent) were equities, $27.5 billion (37 percent) were long-term debt, and $5.1 billion (7 percent) were short-term debt.

Geographically, the two leading sources of securities investment for Jersey mutual funds are the United Kingdom (43 percent) and the United States (17 percent). After those big two, the portfolio is widely distributed, with Sweden, Luxembourg, France, Germany, Ireland, Denmark, Switzerland, Japan, Netherlands, and the Cayman Islands each accounting for between 2 percent and 6 percent of security holdings by Jersey funds. (The data above, not in any figure here, are available from the IMF-CPIS online at http://www.imf.org/external/np/sta/pi/part.asp?iso=JEY, Table 3.)

In the IMF-CPIS data, mutual fund shares are counted as equity irrespective of the mutual fund's holdings. Jersey has a much smaller share (5 percent) of its equity investment in popular hedge fund domiciles — Cayman Islands, British Virgin Islands, Bermuda, and Ireland — than does Guernsey (33 percent). This is consistent with our impression that funds of funds are a smaller share of the fund sector in Jersey than in Guernsey.

Funds listed in official JFSC statistics include not only Jersey-domiciled funds but also funds legally domiciled outside Jersey that are regulated by the JFSC because they receive substantial administration services from Jersey businesses. We want to exclude these funds from our totals to avoid double-counting and to be consistent with our studies of other offshore jurisdictions. The JFSC does not include any data on the statistics sections of its Web site, quarterly reports, or annual reports.


Figure 6. Investment Strategies of Jersey Funds, 2004 and 2007




Source:
JFSC, "Summary of Statistical Survey of Funds Serviced
in Jersey as of 30 June 2007", and "Jersey Financial Services
Commission Quarterly Report" for Sept. 30, 2004 (released Dec. 7,
2004).
*Besides pure bonds funds, this category in June 2007 included @27.1
billion of mixed bond equity funds and #$3.5 billion of money market
funds.
** This category included $18.9 billion of "other" specialist funds
in June 2007.


 Table 3. Equity Investments by Funds in Jersey and Guernsey, 2005
 
                                  (millions)
 -----------------------------------------------------------------------------
 
Domicile of Equity                  Jersey                  Guernsey
 -----------------------------------------------------------------------------

 Cayman Islands                        $684                  $13,542
 Bermuda                               $210                   $3,465
 Ireland                             $1,231                   $3,377
 British Virgin Islands                $152                   $2,831
 Sum of Four                         $2,277                  $23,215
 All Equity Investment              $43,748                  $69,666
 Four as % of Total                      5%                      33%

 -----------------------------------------------------------------------------
 
Source: International Monetary Fund, Coordinated Portfolio
 Investment Survey, Tables 3.1 for Jersey and Guernsey,
 2005.


There are, however, some relevant data in the JFSC's "Business Plan 2007" (http://www.jerseyfsc.org/the_commission/general_information/publications/business_plans.asp). This publication shows that for 2004, 2005, and 2006 combined, of the total of 1,647 funds formed, 355, or 21.6 percent, were not domiciled in Jersey. Although this percentage may have been boosted recently through streamlining the process by the issuance of new guidance (JFSC, "Guide to Non-Domiciled Funds," 2004), we will assume in the absence of other hard data that 78.4 percent of all the funds in published Jersey statistics are domiciled in Jersey. Accordingly, our estimate of Jersey-domiciled funds included in Jersey fund statistics for the end of 2006 is $275.1 billion — that's 78.4 percent of $350.9 billion. This estimate is in line with a November 2, 2004, press release from Fitzrovia International indicating that 73.1 percent of funds reporting to the JFSC were legally domiciled in Jersey. (http://www.fitzrovia.com/press_office/press_releases/2004/nov_2_2004.asp.)

The problem of double-counting in the funds sector because of funds of funds is discussed extensively in the text and appendix of our previous article on Guernsey. The net result of those adjustments was a $23 billion reduction in potential tax evasion assets from $206.1 billion to $183.1 billion. There are several reasons to believe that the double-counting problem for mutual funds will be significantly less in Jersey than in Guernsey. First, official and commercial commentary on the funds industry has much less discussion of funds of funds in Jersey than in Guernsey. Second, Jersey's statisticians do not provide funds of funds their own category in the official data. Third, as noted above, Jersey funds are not heavily invested in offshore jurisdictions where hedge funds are common. And fourth, a search of the Morningstar hedge fund database (http://hedgefund.morningstar.com/fundlists.aspx?pgid=HFTablePerf) found only 48 funds of funds domiciled in Jersey, compared with 89 for its smaller rival Guernsey. Based on these data, we estimated a flow of funds adjustment for Jersey equal to 53.9 percent (the ratio of 48 to 89) of the $23 billion adjustment for Guernsey. That reduces our adjusted $275.1 billion total by $12.4 billion to $262.7 billion.

 Table 4. Measures of Jersey Trust Business, 1999-2006
 -----------------------------------------------------------------------------
                       
Trust and Company
 
                   Administration Businesses
 
                   (including legal service)
                ---------------------------------        
Incorporations of
 
               Profits     Employees     Revenue        Jersey Companies
 -----------------------------------------------------------------------------

 1999            £112         3,675         n.a.               2,699
 2000             £97         3,980         n.a.               3,064
 2001            £103         3,867         n.a.               2,760
 2002             £90         3,958        £500                2,829
 2003             £98         4,194         n.a.               2,141
 2004            £103         4,178         n.a.               2,439
 2005            £112         4,513        £566                2,874
 2006            £105         4,544        £530                3,479
 
Growth from      17%           15%          6%                  23%
 
 2002 to 2006

 -----------------------------------------------------------------------------
 
Sources: States of Jersey, Statistics Department, Business and Economy
 -- Financial Institutions — Data, "Profits" and "Employment,"
 
available at
 http://www.gov.je/ChiefMinister/Statistics/Business+and+Economy/Financial+Institutions;
 States of Jersey, Statistics Department, "Survey of Financial
 Institutions," 2005 and 2006; Jersey Finance, "Financial Services
 Industry Quarterly Statistics — Quarter Ending June 2007, Aug. 28, 2007";
 JFSC, Jersey Financial Services Commission Quarterly Report, Feb. 20, 2003;
 and International Monetary Fund,
Jersey-Crown Dependency of the United
 
Kingdom: Assessment of the Supervision and Regulation of the Financial Sector
 
Volume I — Review of Financial Sector Regulation and Supervision, Nov.
 25, 2003.

The final step in our funds calculations is to remove the portion of funds owned by the institutions like pension funds, university endowments, and large corporations where evasion is unlikely. Unfortunately, there are no data on ownership of mutual fund shares in Jersey. As in our prior article on Guernsey, we assume here, based on data on the distribution of ownership of fund shares in the United States, that 60 percent of fund shares in Jersey funds are held directly by individuals. Therefore, we conclude that $157.6 billion (60 percent of $262.7 billion) in the Jersey funds sector are potential tax evasion assets.
Jersey Trusts


The JFSC does not collect data from trust company businesses on assets under management. We know that currently (Oct. 2007) the JFSC regulates 903 trust company businesses and consultants. (JFSC, "Regulated Entities," available at http://www.jerseyfsc.org/the_commission/regulated_entities/index.asp .) In 2006 these businesses employed 4,544 individuals and generated £105 million of profit. (See Table 1.) The IMF reported in 2003 that the JFSC estimated that trust company businesses administered about 200,000 client entities, including trusts, Jersey companies, and non-Jersey companies. Only about 25 percent of these companies administered were Jersey companies. (International Monetary Fund, Jersey-Crown Dependency of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector Volume I — Review of Financial Sector Regulation and Supervision, Nov. 25, 2003.)

There is some scattered information about trust assets in Jersey. The 1998 Edwards Report commented: "There are no statistics collected on the number of or value of property in trusts. However, based on anecdotal evidence it is estimated that the value exceeds £100 billion." (Andrew Edwards, Review of Financial Regulation in the Crown Dependencies, Part II — The Jersey Finance Centre, presented to Parliament by the secretary of state for the Home Department, November 1998, available at http://www.archive.official-documents.co.uk/document/cm41/4109/4109-ii.htm.) On its Web site, the Jersey law firm Voisin reports that in 1999, "no statistics are available on the value of assets owned by companies and trusts managed in Jersey, but these are conservatively estimated to be in excess of £100 billion." ("Jersey's Development as a Financial Center," available at http://www.voisinlaw.com/pg465.htm.) Finally, the 2003 IMF report (cited above) states that in 2002:


      Trust company businesses in Jersey derive a fee income of approximately £500 million per year and, although accurate figures are not available, the [JFSC] estimates that the total value of assets under management could exceed £200 billion.

To estimate trust and company assets in 2006, we extrapolate forward the £200 billion figure using as guides various measures of the Jersey trust businesses shown in Table 4.

Figure 7. Brokerage and Investment Accounts in Jersey,
2001:1-2007:2




Source:
JFSC, "Investment Business — Total Funds Under
Investment Management," Oct. 2007, available at
http://www.jerseyfsc.org/investment_business/statistics/total/fundsunderinvestmentmanagement.asp.

Across these four indicators, the average growth from 2002 to 2006 was 15 percent. Therefore, we estimate total trust assets at the end of 2006 to be £200 billion times 1.15. That's £230 billion, or $450.8 billion, at the end of 2006.

As with funds of funds, there is the large potential for same-country and cross-country double-counting. Fiduciary assets can be divided into two categories: (1) directly held stock, bonds, and small-business assets; and (2) investment through intermediaries like banks, mutual funds, and insurance companies. To determine the amount of investment flowing through Jersey that is potentially related to tax evasion, we want to exclude from our calculations any of those assets held in either Jersey or non-Jersey intermediaries.

Data with this detail are not available for Jersey, but, as detailed in our article about Guernsey, they are for the United States. Using U.S. holdings as a guide, we assume that 31 percent of the total of $450.8 billion of Jersey trust assets are investments not made through financial intermediaries. That leaves us with $137.9 billion of PTEA held in Jersey trusts (and not invested in mutual funds) at the end of 2006.


Investment Business


The JFSC compiles statistics on assets under management of firms engaged in the "investment business." These are investment managers who have discretion to buy and sell securities on behalf of their clients. As shown in Figure 7, there has been remarkable growth recently in this sector. Over the last two years, from mid-2005 to mid-2007, total funds under management more than doubled from $66.7 billion to $141.9 billion. With the number of accounts holding steady at about 20,000, the size of the average account also more than doubled — from $3.1 million to $7.9 million. In our analysis, we will focus on the end-of-2006 figure for total assets of $121.5 billion.

Most of these assets are accounted for elsewhere in this study (or will be in studies of other jurisdictions) because they are in banks or mutual funds or are held on behalf of trusts. We have estimated that approximately 31 percent of securities are held directly (not through mutual funds). Some of this is (nonpersonal) corporate or pension assets (not likely to be evading taxes). And, as mentioned, some are trust assets (accounted for above). Yet it would be too much to assume that no portion of these assets bought and sold at the discretion of investment managers in Jersey is not held directly by individuals. We will assume that 10 percent fit this category and will include that amount in our compilation of potential tax evasion assets.


Figure 8. Authorizations of Special Purpose Vehicles Jersey




Source:
Figures from 1996 and 1997 are approximations from the
chart on p. 22 of the JFSC Annual Report 2000; 1998 through
2001 data are from 2000 JFSC press release, Mar. 6, 2002, "Jersey
Financial Services Commission Quarterly Report (1 October 2001 to 31
December 2001)", and information for 2002 is from JFSC Annual
Report 2002
.


 Table 5. Foreign Securities Held by Special Purpose Vehicles
 
                                  In Jersey
 -----------------------------------------------------------------------------
 
Year         Assets          Amount of Growth        Percentage Growth
 -----------------------------------------------------------------------------

 2001         $23,035                 N/A                    N/A
 2002         $90,362             $67,327                   292%
 2003        $126,205             $35,843                    40%
 2004        $184,062             $57,857                    46%
 2005        $198,878             $14,816                     8%

 -----------------------------------------------------------------------------
 
Source: IMF, Coordinated Portfolio Investment Survey, Portfolio
 Investment: CPIS Data -- Individual Economy Tables by
 Participant, Table 3, "Reported Portfolio Investment Assets by Sector of
 Holder Country of Nonresident Issuer: Total Investment,"
 
available at http://www.imf.org/external/np/sta/pi/part.asp?iso=JEY.

Jersey Insurance

Jersey does not have a significant offshore insurance business. This contrasts sharply with its cross-channel rival Guernsey, where insurance accounts for one quarter of financial sector employment. The JFSC does not collect data for statistics from Jersey insurance companies. Data from the IMF CPIS suggest that Jersey's insurance sector is not only small but shrinking. According to the CPIS, Jersey insurance companies held $532 million of foreign (non-Jersey) securities at the end of 2001. That total dropped to $17 million by the end of 2005. (IMF, Coordinated Portfolio Investment Survey, Portfolio Investment: CPIS Data — Individual Economy Tables by Participant, Table 3, "Reported Portfolio Investment Assets by Sector of Holder Country of Nonresident Issuer: Total Investment," available at http://www.imf.org/external/np/sta/pi/part.asp?iso=JEY.) For this study, insurance assets are not included in potential tax evasion assets.

Jersey Special Purpose Vehicles

Securitization of loans, receivables, and other securities has been a significant component of the Jersey financial services sector. This business line was booming from around 1998 through 2001 but seems to have leveled off since then. Although the JFSC does not publish data of assets held by SPVs, two facts lead us to this conclusion. First, as shown in Figure 8, the last published figures on the number of SPVs show a significant decline. Second, in recent years Jersey officials have had relatively little to say about SPVs compared with their commentary in previous years. Also, there is considerable competition from other offshore centers. Ireland and the Cayman Islands, in particular, report huge increases in SPV issues.

 Table 6. Summary: Potential Tax Evasion Assets in Jersey,
 
                             End of 2006
 
           (in billions, except where otherwise indicated)
 -----------------------------------------------------------------------------
                                                                     
With
 
                                                        With      Adjustment
 
                                          With       Adjustments  to Remove
 
                                       Preliminary   for Double-  Nonevaders
 
Sector                Raw Data         Adjustments   Counting      = PTEA
 -----------------------------------------------------------------------------

 Banking               $371.8             $182.1        $182.1       $182.1
 Mutual and            $350.9             $275.1        $262.7       $157.6
   Other Funds
 Trusts          £200.0 (in 2002)         $450.8        $139.7       $139.7
 Investment            $121.5             $121.5         $12.2        $12.2
   Business
 Insurance       $15 million (in 2005)      $0            $0           $0
 Special        at least $195 (in 2005)     $0            $0           $0
   Purpose
   Vehicles
 
Total          Approx. $1.36 trillion  $1,029.5        $596.7       $491.6

Somewhat contradicting these facts are data from the IMF-CPIS showing growth in SPV holdings of securities from 2001 through 2005. Some of this growth may be due to a pickup in reporting (which is voluntary for SPVs) since 2001. It should also be noted that the data indicate a leveling off in the growth rate in 2005. Given the typical three- or four-year life span of these SPVs, this would be consistent with a slowdown in new issues in the early 2000s.

At any rate, SPVs are usually held by institutional investors, both onshore and offshore. They are not included in our analysis of potential tax evasion both because institutional investors are not tax evaders and because holdings of their assets, if they are offshore, would already be included in this project's total and therefore must be excluded to avoid double-counting.


Putting It All Together


All the calculations described in this article are summarized in Table 6 (above). At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned by non-Jersey individuals who were likely to be illegally avoiding tax on those assets in their home jurisdictions. Rapid growth of bank deposits and mutual funds shares in the first half of 2007 easily pushes the total above $500 billion.

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