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> Posted by Lizzy Bolze, Analyst, Investing in Inclusive Finance, CFI

In the aftermath of the Panama Papers, the words “offshore” and “tax-haven” are often taboo rhetoric within the investment industry. Perhaps even more so in the impact investing space, where fund managers have both fiduciary and social responsibilities. The Financial Inclusion Equity Council (FIEC; of which CFI is the secretariat) recently published the report Offshore Financial Centers for Financial Inclusion: A Marriage of Convenience to better understand attitudes and practices when it comes to how equity impact investors use offshore financial centers (OFCs). To dive into this topic CFI and consultants Daniel Rozas and Sam Mendelson interviewed FIEC members from the U.S. and Europe. Conversations resulted in varying opinions on the practice of using OFCs, with three key considerations for doing so: administrative efficiency; tax liabilities; and transparency and ethics.

Among all FIEC members interviewed, administrative efficiency was unanimously a primary driver in making the decision about where to domicile funds. Fund managers cited the importance of understanding local regulatory requirements, the presence of embassies, bank relationships, management facilities, remittance corridors, and convenience of location as important considerations in their decision. The reality is many low income offshore countries lack the infrastructure and capacity for supporting the administrative requirements of investments. Additionally, there are increasingly stringent AML/KYC requirements that disproportionately affect lower-income countries creating administrative burdens. The new CFI report states: “…this is at least one of the goals of using OFCs – not to avoid the regulators, but to outsource some of the reporting burden to entities that specialize in this service that have relationships to do it efficiently.”

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