Re-Imagining Offshore Finance: Market-Dominant Small Jurisdictions in a Globalizing Financial World. By Christopher M. Bruner. New York: Oxford University Press. 2016. Pp. xii, 236. $95.
Bank-secrecy laws, low tax rates, and shell companies amassed at P.O. boxes are some of the common features associated with offshore financial havens that have catapulted famous vacation destinations in the Caribbean and elsewhere into magnets for global financial transactions. (1) The culprits in these stories--usually abetted by small offshore jurisdictions facilitating tax evasion (2)--range from celebrities, including Mel Gibson and Vivienne Westwood, to corporations, including Apple and Google. (3) While the topic of tax evasion is nothing new, (4) a series of massive document leaks in recent years, exposing the vast scope and variations of evasion schemes, has propelled multilateral government crackdowns (5) and attracted academic interests from a wide range of disciplines, including economics, international relations, and the law.
Christopher Bruner's Re-Imagining Offshore Finance: Market-Dominant Small jurisdictions in a Globalizing Financial World (6) is a significant contribution to the literature that should become required reading for both consumers and producers of knowledge concerning the regulation of global financial transactions. Bruner starts with the observation that "reducing or eliminating taxes does not itself guarantee the arrival of cross-border capital" (p. 21). Instead, the handful of small jurisdictions that have become the dominant players in cross-border finance provide more than just low taxes and bank-secrecy laws: they offer "cutting-edge regulatory regimes in high value-added areas of cross-border financial services" (p. 47). Bruner's careful comparative case studies cut through ideologically charged old labels and reveal several important characteristics shared by certain small jurisdictions, like Bermuda and Singapore, that account for their disproportionate success in the global market for cross-border finance. (7) Bruner terms these jurisdictions "market-dominant small jurisdictions" ("MDSJs") (pp. 7-8). There is more than semantics at play here, for MDSJs have "much to tell us about the future of financial globalization, territorial sovereignty, and territorial financial regulation in the twenty-first century" (p. 13).
Descriptively, Bruner's work provides a compelling account challenging the all-too-popular scholarly view that conceptualizes small offshore jurisdictions as parasitic entities that subsist largely at the expense of eroding the tax base of developed nations. (8) To the contrary, Bruner observes that MDSJs have "promoted innovation in their areas of specialization later emulated by larger markets, and otherwise enhanced market efficiency within such larger markets" (p. 224). In doing so, Bruner complicates the debate over the function of small offshore jurisdictions, which is largely taking place in the absence of good data.
This Review situates Bruner's contribution to the literature examining the regulation of cross-border finance and highlights the import of Bruner's book for thinking about the complex (and contested) relationship between territorially configured domestic laws and the increasingly liberal movement of capital. Part I sets out the book's central thesis. I highlight Bruner's novel framework, which identifies the factors that propel certain small jurisdictions into becoming magnets for cross-border finance. I also outline the limits of this framework in accounting for the stability in the overall demand for the commercialization of sovereignty. Part II examines the rise of MDSJs and other offshore jurisdictions as they relate to the territorially configured domestic rules--a subject that has yet to attract the attention that it deserves. While Bruner views the rise of MDSJs as typifying the continued dominance of territorial sovereignty, I show that it is a reflection of a new jurisprudential tendency that deemphasizes the relationship between soil and the law. This understanding has significant implications, because small offshore jurisdictions, intentionally or not, increasingly supply templates of substantive and procedural law that govern cross-border finance and replace and reconstitute territorially configured domestic rules. Here, I develop a paradigm conceptualizing tax havens as "producers" of corporate law and start a discussion about the normative desirability of this emerging trend.
CAPITAL MOBILITY AND THE WINNERS OF CROSS-BORDER FINANCE
Market-Dominant Small Jurisdictions
Delaware maintains a preeminent status in corporate law. In the United States, corporate law--the body of law governing the relations between the firm's shareholders and managers--is largely a matter of state law. (9) Under the internal affairs doctrine, firms choose their state of incorporation for statutory domicile "independent of physical presence." (10) This system sets up a competition between states to supply corporate law--one that has been dubbed the central building block underlying the "genius of American corporate law." (11)
It was not always like this. Before the merger movement in the late nineteenth century, corporate activities were primarily local, and corporate law was largely monopolized by the state where the corporation conducted its business. Capital mobility and the growth of interstate business effectively broke this monopoly since "[legislatures could not afford to ... driv[e] business out of state to the detriment of local interests." (12) Delaware has been the clear winner in this "race" enabled by regulatory competition. (13) Notwithstanding the state's status as one of the smallest states in the United States (both by land mass and population) (p. 175), Delaware is the juridical home to "more than half of all U.S. publicly traded companies and 65 percent of Fortune 500," (14) only two of which are physically headquartered in Delaware (p. 181). Delaware derives a substantial portion of its government revenue from the incorporation business (p. 176) and works hard to retain its competitive advantage in producing cutting-edge corporate law. The Delaware General Corporation Law is a byproduct of "a decidedly cooperative public-private undertaking" (p. 183), while some of the country's most renowned experts in business law staff its judiciary (pp. 183-84).
Delaware is just one of a handful of small jurisdictions that Bruner identifies as the dominant players in cross-border finance--broadly defined to include insurance, Islamic finance, private wealth management, cross-border banking, and incorporation services (p. 7 n.19). Bruner identifies the following characteristics shared by MDSJs: (1) they are "poorly endowed with natural resources," creating a strong incentive to convert their main asset--the ability to write laws--to attract foreign capital; (2) they can exercise legislative autonomy, which need not be full sovereignty recognized under international law; (3) they are culturally and geographically proximate to major economic powers; (4) they are rich in human capital and professional networks; and (5) they maintain credibility with the private sector through a mix of collaboration and oversight (pp. 43-47; emphasis omitted). These factors, Bruner claims, reveal six paradigmatic jurisdictions that cut across differences in geographies, cultural affinities, and legal traditions: Bermuda, Delaware, Dubai, Hong Kong, Singapore, and Switzerland. (15) According to Bruner, these jurisdictions are "not merely successful, but literally globally dominant in specialized areas of cross-border finance" (p. 9).
Consider the fascinating case of Bermuda, an island roughly one-third the size of Washington, D.C., widely recognized as one of the largest centers for insurance and risk management in the world (pp. 51-52). Bermuda squarely fits the MDSJ paradigm. Despite being a territory of the United Kingdom (voluntarily), the island wields substantial legislative autonomy, enabled by the United Kingdom's broad delegation of authority (p. 45). Bermuda has used this autonomy to develop some of the essential ingredients for its success--"substantial investment in human and institutional capital catering to cross-border finance, as well as the development of a competitive regulatory regime in close coordination with the private sector" (p. 56). As Bruner sees it, the legislature's "business-friendly capacity to innovate" has played a significant role in the island's economic development (pp. 56-58). Today, this island with a population of less than 100,000 people (p. 52) is home to "subsidiaries of 75% of the Fortune 100," (16) while controlling a dominant share of insurance policies connected to the United States and elsewhere--evidenced by the significant growth in disputes arising under the famous "Bermuda Form" policy insurances. (17)
Singapore, a small island nation in Southeast Asia almost 10,000 miles away from Bermuda, shares similar traits. Despite being one of the smallest independent states, Singapore has come to dominate the wealth-management industry, even while the industry in the "United States and Europe grapple with the worst slump in a generation." (18) Bruner attributes Singapore's ascendance in large measure to deliberate state policies adopted in the latter half of the twentieth century, aimed at developing the infrastructure broadly resonant with the MDSJ concept (pp. 115-21). This includes maintaining some of "the least restrictive immigration laws in Asia for foreign talent," (19) and a regulatory environment that is said to be closely attuned to the interests of the private sector (pp. 129, 132). Today, this island nation with a land mass about twice the size of Detroit (20) is "the world's fastest-growing wealth management center ... and its share of global offshore wealth is expected to outstrip Switzerland by...