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October 10, 2007
Offshore Explorations: Guernsey
by Martin A. Sullivan

Full Text Published by Tax Analysts®

Document originally published in Tax Notes Today
on October 10, 2007.

This article takes a long, hard look at the financial sector of Guernsey using a variety of sources. We are particularly interested in data that could shed light on the potential for individual tax evasion. The objective is to estimate, if possible, the extent of tax evasion facilitated by the Guernsey financial sector.

Guernsey was not selected for this initial investigation because it raises more suspicions than other jurisdictions about its potential as a platform for offshore tax evasion. On the contrary, it is among the most well-respected and tightly regulated offshore financial centers. It was chosen because it has excellent data — far more complete than, for example, data from the Cayman Islands — and because the size of its financial sector is large relative to the size of its economy (making it easy to identify offshore activity in aggregate data).


SIDEBAR: Guernsey Facts

30 miles west of the Normandy coast

Population (2006): 61,029

Size: Approximately 24 square miles (slightly larger than the island of Manhattan)

Gross Domestic Product (2005): £1.65 billion ($3.01 billion)

Unemployment Rate: 0.6 percent

Per Capita GDP (2006): £27,068 ($49,897) — 13% above the U.S. level

Median House Price (March 2007): £305,425 ($595,579)

Size of Financial Sector (2006): 9,234 employed in the finance, legal, and business services out of a total island employment of 31,156

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

Source: States of Guernsey, Facts & Figures 2007.



Following the lead of the Guernsey Financial Services Commission (GFSC), the island's chief financial regulator and source of financial data, we have divided the financial sector into four categories: (1) banking, (2) investment business, (3) fiduciary services, and (4) insurance. Unless otherwise noted, all the data in this article are from the GFSC (

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


The banking business in Guernsey is growing rapidly. Figure 1 shows that over the seven-year period from December 1999 through December 2006, deposits nearly doubled from $92 billion to $181 billion. Then during the first six months of 2007 they jumped another 19 percent to $216 billion. (The 20 percent appreciation of the pound against the dollar during those years explains only a small part of the increase.) Most of the advances are due to real growth in the banking business in Guernsey despite the decline in the number of banks from 78 to 50 since 1998.

The dollar was the favorite currency of depositors in Guernsey banks: 37 percent of deposits were dollar-denominated (down from 49 percent in 2000). Second was the British pound, which accounted for 32 percent of deposits (nearly unchanged from 31 percent in 2000). The euro accounts for 25 percent (offsetting the decline in dollar deposits by rising from 14 percent in 2000). In both 2000 and 2006, 3 percent of deposits were in Swiss francs.

All banks in Guernsey are subsidiaries or branches of banks headquartered in other jurisdictions. Not surprisingly, U.K. banks play the biggest role, accounting for 40 percent of the ownership in 2006. Swiss banks own 20 percent. Four countries — Cyprus, France, Germany, and the United States — together account for 18 percent. And banks from about two dozen other jurisdictions each own one Guernsey affiliate. All of those banks have a physical presence, but many of the smaller banks (so-called administered banks) share staff and facilities with other banks. Out of the 50 banks operating at the end of 2006, 19 had assets greater than £1 billion.

Like bank owners, holders of bank deposits also are from around the globe. Swiss depositors are by far Guernsey's best customers. As shown in Figure 2, they account for 45 percent of all deposits — larger even than the combined 34 percent share of Guernsey, Jersey, and the United Kingdom.

Figure 1. Guernsey Bank Deposits, 1998-2007

GFSC, "Second Quarter 2007 Banking Sector Activity."
Sept. 7, 2007; and Bank for International Settlements, Locational
Banking Statistics, Table 3A (

Guernsey is not a significant commercial lending center. Lending to companies and persons is modest. Most of its assets are loans to onshore banks — in particular, interbank placements with head office banks — and holdings of low-risk EU and U.S. government securities.

Interbank Deposits

As with loans, but to a lesser extent, a significant portion of deposits are interbank. At first glance it might appear that interbank deposits are not a concern in a study of individual tax evasion, but a large discrepancy between data from the GFSC and data from the Bank for International Settlement (BIS) alerted us that that may not always be the case. At the end of 2006, the GFSC reported $42.1 billion of interbank deposits (as shown in Figure 3) while BIS reported $95 billion (as shown in Figure 4). The difference, it turns out, is largely due to the different accounting treatments of Swiss fiduciary deposits. They are reported as bank-related for BIS purposes but not in the case of the GFSC.

This disparity in interbank deposits, shown in figures 3 and 4, exposes two important issues for interpretation of offshore bank data. First, the scope of potential tax evasion could easily be double-counted if, in addition to the bank deposits in Guernsey, data from Swiss banks also included the same deposits and the two figures were added together in an international study of tax evasion. Second, potential tax evasion may be undercounted if it is automatically assumed that "bank" deposits in other banks have nothing to do with individual tax evasion.

Because the smaller "bank" deposit figure reported by the GFSC represents deposits by banks on behalf of themselves and not clients of their fiduciary business, we assume all 23.3 percent reported by the GFSC ($42.1 billion) is not related to individual tax evasion.

Swiss Fiduciary Deposits

Swiss fiduciary deposits are deposits made by Swiss banks into Guernsey banks on behalf of Swiss bank clients. Under Switzerland's tax law, income earned by foreigners from Swiss-source income is generally subject to withholding tax. Non-Swiss depositors can avoid this "advance" tax by allowing Swiss banks to recycle their deposits into non-Swiss banks. From the Guernsey point of view, Swiss banks are the owners of record.

Those deposits are highly conducive to tax evasion by individuals. As noted in a 1999 OECD working paper: "This scheme allows a nonresident desiring to evade taxes to be reasonably certain that a failure to declare the invested capital and/or the interest thereon to his country of residence will go undetected." (David Carey, Kathryn Gordon, and Philippe Thalmann, "Tax Reform in Switzerland," OECD, Economics Department Working Paper No. 222, Aug. 1999.)

In this study, all 39.4 percent ($71.3 billion) of bank deposits identified as Swiss fiduciary deposits by the GFSC are assumed to be related to individual tax evasion. (To prevent double-counting, it is essential that when we later analyze Switzerland's financial sector, we do not include fiduciary accounts in Swiss totals.)

Domestic Deposits

Figure 2 shows the geographic distribution of ownership of Guernsey bank deposits. As already noted, Swiss fiduciary deposits make up a large portion of deposits. Other Swiss-owned accounts compose an additional 5.6 percent of the total.

Figure 2. Domicile of Depositors in Guernsey Banks
Total $181 Billion (end of 2006)

See endnotes

The next largest source of funds is Guernsey itself. It is not too surprising, in percentage terms, to see that 19 percent of Guernsey bank deposits are made by Guernsey depositors. (And, in fact, that percentage may seem low.) But the amounts are extremely large.

To get an idea of how large, we checked comparable U.S. data. In the United States, bank deposits (broadly defined) are about $8.5 trillion. With a population of just over 300 million, that averages about $28,000 per person. Bank accounts in Guernsey held by Guernsey depositors amount to approximately $673,000 per person. If we assume that accounts related to domestic residents and business are equal per capita in Guernsey and the United States, Guernsey (with a population of approximately 60,000) would hold approximately $1.68 billion (£857 million). That is less than 1 percentage point of the 19 that are ascribed to Guernsey sources. On the basis of these U.S. data, we assumed that 0.9 percent ($1.6 billion) of total Guernsey deposits are held by Guernsey residents and businesses related to the domestic economy.

At the end of 2006, domestic (Guernsey) interbank deposits totaled £872 million ($1.71 billion); those deposits are already accounted for in the total interbank deposits described above. (See GFSC press release, "Fourth Quarter 2006 Banking Sector Activity," Feb. 19, 2007.)

Other Accounts

We would now like to explain the ownership of the remaining 36.7 percent of accounts in Guernsey that are not interbank, Swiss fiduciary, or purely domestic. 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 Guernsey. 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.

Figure 3. Types of Depositors in Guernsey Banks — GFSC Data
Total $181 Billion (end of 2006)

See endnotes

No data are available directly on this point for bank deposits in Guernsey. 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 U.K., 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.)

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

 Total deposits           $181,004       £92,349        100.0%
 Interbank                 $42,174       £21,517         23.3%         No
 Swiss fiduciary           $71,316       £36,386         39.4%         Yes
 Domestic (Guernsey)        $1,629          £831          0.9%         No
 Other -- Institutional    $32,943       £16,808         18.2%         No
 Other -- Individual       $32,943       £16,808         18.2%         Yes
Total PTEA               $104,258       £53,193         57.6%

Source: Calculations described in text.

Using the data from the Bank of England, we assume that 18.2 percent ($32.9 billion, one-half of 36.4 percent) of deposits are held by households that are likely to be evading their home countries' taxes. As a reality check, the 50 percent figure was measured against a comparable figure for the United States; according to data from the U.S. Federal Reserve Board, at the end of 2006, 58 percent of bank deposits and money market mutual funds were owned by households. (See endnotes for details.)

Combining the 39.4 percent figure for Swiss fiduciary deposits with the estimated 18.2 percent for other deposits to be beneficially owned by individuals yields 57.6 percent of bank deposits. Multiplying the corresponding fraction by the data for total Guernsey deposits as of December 31, 2006 ($181 billion, £92.4 billion), yields $104.3 billion in potential tax evasion assets.

Because we will return to the concept of potential tax evasion assets many times, we will abbreviate it as 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.

Figure 3. Types of Depositors in Guernsey Banks — BIS Data
Total $181 Billion (end of 2006)

See endnotes

In addition to deposits, other bank liabilities — like short-term paper issued by banks — could serve as vehicles for offshore tax evasion by individuals. The 2005 GFSC annual report notes that "the increasing issue of non-deposit structured products . . . has been a feature of the resurgence of offshore private banking." In the three years from the end of 2003 to the end of 2006, "other liabilities" at Guernsey banks jumped more than fourfold from £1.5 billion to £6.7 billion. It is likely some component of these is PTEA, but we have not included them.

The Case for Assuming Widespread Evasion

Despite the lack of direct evidence (as is almost always the case with illegal activities), there are several good reasons to believe evasion plays a major role for location of assets in Guernsey (or any other offshore tax haven).

First of all, it is easy for any moderately sophisticated investor to place money in a Guernsey bank or mutual fund and completely avoid detection by the investor's home country tax authority. Although under Guernsey "know your customer" laws, Guernsey banks know the identity of all their customers, or work with intermediaries of good standing who do, they would reveal this information to Guernsey or foreign authorities only if a serious crime were under investigation involving drug dealers, corrupt government and corporate officials who have looted the treasuries they were supposed to be guarding, and, of course, suspected terrorists. Run-of-the-mill tax evaders like dentists from Belgium do not fit the bill.

The second reason to believe tax evasion is prevalent among individuals making deposits in Guernsey banks is the high proportion of deposits from other tax havens. In addition to the 39.4 percent through Swiss fiduciary accounts, an estimated 5.6 percent is from other Swiss sources, an estimated 18.1 percent comes from Guernsey sources beyond what is generated by the local economy, 8 percent is from Jersey, and 3 percent is from the Caribbean. Certainly, some of this money flows from banks and other businesses making deposits on their own behalf (and not for their clients), but it is also likely that individuals have set up trusts and corporations in these (and other) countries to provide an extra layer of secrecy to avoid discovery by their home governments.

Figure 5. Bank Deposits in Jersey, Guernsey, and the Isle of Man,

GFSC, "Second Quarter 2007 Banking Sector Activity,
"Sept. 7, 2007; Jersey Financial Services Commission, "Growth in
Banks and Bank Deposits," last updated Sept. 27, 2007; and Isle of
Man Financial Supervision Commission, "Bank Deposits," last modified
Sept. 21, 2007.

Given recent developments, an informed observer is likely to remark at this point: "Private banking and tax evasion may have been prevalent in the past, but that is no longer likely to be the case in Guernsey because of the European Union savings directive and because of the stepped-up enforcement and information reporting resulting from the United Kingdom's recent tax amnesty for offshore investors." That is a logical hypothesis. There is, however, nothing in the data to indicate that either EU or U.K. efforts have been effective in curtailing offshore evasion in Guernsey.

The European Union savings directive (ESD) came into effect on July 1, 2005. The general idea behind the savings directive is that all EU members, as well as associated territories and some other European countries that voluntarily participate, will share information on all interest earned in the EU with the country where the EU account holder resides. All 27 EU members and a number of other jurisdictions must either provide each other with information for the investors' home government or collect a withholding tax on behalf of the investors' home government.

Guernsey is not part of the EU, but the United Kingdom did a little arm-twisting and persuaded Guernsey and its other crown dependencies (namely Jersey and the Isle of Man) to participate in the ESD. Guernsey — like Switzerland and other jurisdictions that pride themselves on strict bank secrecy laws — opted to collect a 15 percent withholding tax in lieu of information sharing. The withholding tax rate will increase to 20 percent on July 1, 2007, and to 35 percent on July 1, 2011.

However, the ESD leaves investors with a lot of room to continue evading taxes. The ESD applies only to interest paid to individuals. Accounts held by trusts and corporations are exempt, and so EU residents wishing to avoid the ESD need only incur the fees of setting up a shell corporation and open the account in that corporation's name. This may be a hurdle for some small investors, but it is no problem for high-net-worth individuals who account for most noninstitutional offshore deposits (by value) and who probably already invest through trusts and corporations.

In the United Kingdom, tax collectors got an additional boost in their fight against offshore tax evasion when in late 2006 and early 2007 a special magistrate ordered U.K. parent banks to provide Her Majesty's Revenue and Customs detailed information on deposits held by U.K residents in their offshore branches. Now holding all the cards, the agency announced on April 17, 2007, that U.K. residents who had not declared interest on their offshore accounts had to come forward by June 22 and pay reduced penalties or be subject to severe penalties afterward.

Figure 6. Guernsey-Domiciled Mutual Funds,
Assets Under Management, 1998-2007

GFSC, "Second Quarter 2007 Investment Statistics,"
August 2007, and International Monetary Fund, "Portfolio Investment
CPIS (Coordinated Portfolio Investment Survey) Data- Database,"
online at

Approximately 60,000 U.K. residents participated in this partial amnesty. In the future, U.K. taxpayers can evade detection through similar disclosures by simply making deposits in offshore banks not owned by a U.K. parent company.

The relative unimportance of the ESD and the U.K. partial amnesty is illustrated in Figure 5. Even when expressed in British pounds, deposit growth in all three crown dependencies appears to have been unhampered by either program. From the end of 2004 through June 30, 2007, deposits in Jersey, Guernsey, and the Isle of Man grew at a healthy 34 percent, 50 percent, and 59 percent, respectively.

Commenting before the details of the ESD were final, consultant Rupert Evans reported: "A survey of deposit takers on the Island of Guernsey indicated that about 90% of deposits would be outside the direct scope of the EU Savings Directive." ("Guernsey Update," Ozannes, Advocates and Notaries Public, Sept. 2004, online at In 2005 Phillip Marr, GFSC director of banking, said the data suggested that "the overall impact of the coming into force of the EU Savings Directive arrangements will not be significant." (GFSC news release, "Third Quarter 2005 Banking Sector Activity," Dec. 6, 2005.)

One possible explanation for the lack of impact of the HMRC and EU initiatives is that the rates of tax evasion were low in the first place. This seems unlikely, first of all, because it was (and still is) relatively easy to evade taxes with offshore investing. Also, it is difficult to understand why individuals would go through the cost and inconvenience of offshore investing — especially when additional trust and corporate structures are involved — except if there is a considerable tax benefit involved.

When HMRC sought official approval to force banks to disclose information on offshore deposits, it had to show that there was good reason for its request and that it was not simply on a fishing expedition. HMRC presented information on 9,289 taxpayers with offshore accounts and found that only 327, or 3.5 percent, had declared foreign interest on their tax returns. Although there are a lot of reasons why this number could understate actual compliance, even if the percentage were 10 times larger, it would not change the conclusion that most offshore accounts are associated with tax evasion. It therefore does not seem likely that the lack of effectiveness of antievasion measures is due to a lack of tax evasion. (See "Keeping Score on Offshore: U.K. 60,000, U.S. 1,300," Tax Notes, July 2, 2007, p. 23.)

The Funds Business

Assets under management by Guernsey-domiciled funds — which include traditional open-ended mutual funds, hedge funds, and private equity funds — have grown even more rapidly than bank deposits. Figure 6 shows that from 1998 through the end of 2006, they grew nearly eightfold, from $26 billion to $206 billion. Over the first six months of 2007, they grew another 21 percent to $250 billion.

The growth of the Guernsey funds sector is both demand- and supply-driven. On the demand side, the market has been stoked by investor interest in alternative investments. There is still a retail fund sector, and traditional funds are still being marketed to wealthy individuals, but by all accounts hedge funds and private equity funds are the main source of growth. They are sold to sophisticated investors, including both high-net-worth individuals and, increasingly, institutional investors.

Two relatively new Guernsey-domiciled funds that have gotten a lot of attention are KKR Private Equity Partnership and Apollo AP Alternative Assets. Both are limited partnerships investing primarily in private equity. In 2006 they raised $5.0 billion and $1.5 billion, respectively, of "permanent capital" in their initial offerings on the Euronext Exchange in Amsterdam. Publicly traded permanent capital allows fund managers to pursue long-term strategies while fund investors can have liquidity (provided by the market rather than redemption privileges). The appearance of those and other similar funds explains a lot of the skyrocketing growth of Guernsey closed-end funds, which increased from £31.1 billion at the end of 2005 to £62.4 billion by June 2007 — doubling in size in 18 months.

On the supply side, Guernsey has facilitated growth by rapidly adopting new statutes and regulations to suit the needs of the marketplace (but at the same time always being careful to also take into consideration the preservation of Guernsey's reputation for financial probity).

In 1998 Guernsey established a new Class Q for investment by trusts, corporations, and partnerships with over £2 million in assets and by individuals with over £500,000 in financial assets.

Also in 1998, the Channel Islands Stock Exchange was established as a joint venture by Guernsey and Jersey. It is based in Guernsey and regulated by the GFSC.

In early 2005, Guernsey introduced the Qualified Investor Fund regime offering a new fund authorization within three days.

In early 2007, following the recommendations of an advisory committee headed by GFSC Chair Peter Harwood, Guernsey established the concept of the lightly regulated "registered fund." The Harwood Committee also recommended legislation that would put emphasis "less on the regulation of individual investment funds as products" and more "upon regulation of those licensees who provide services to such investment funds." (GFSC press release, "Summary of the Issues of the Harwood Report on the Investment Sector," June 7, 2006.)

Guernsey faces a lot of international competition for fund business. Jersey beat Guernsey to the punch with the 2004 introduction of its "experts' fund" regime a year before Guernsey introduced its Qualified Investor Fund program. The Cayman Islands, with its light regulatory touch and low costs, is by far the world's leading domicile for hedge funds.

With its large skilled labor pool, Ireland has come out of nowhere to become the world leader in fund administration. (Many of the funds administered there are domiciled in the Cayman Islands.) Luxembourg is also a giant both in fund administration and as a domicile. Ireland and Luxembourg, as members of the EU, can more easily market funds to EU investors. Guernsey officials note, however, that Guernsey funds can avoid the costs associated with EU regulatory and compliance costs.

Fund Administration

One component of the Guernsey financial sector that is important to domestic job creation, but does not figure prominently in any discussion of potential tax evasion, is fund administration in Guernsey. Administration refers to all the possible types of office support that go into running a fund beyond the central functions of managing the portfolio and soliciting clients. It is useful to keep in mind that offshore centers like Guernsey sometimes report funds under administration together with funds under management in a single number.

What matters in any study of offshore tax evasion is the legal domicile of a fund because this is often the primary factor determining the amount of reporting it makes to owners of its shares. Where funds are managed and where they are legally domiciled may or may not coincide. Luxembourg-domiciled funds are usually administered in Luxembourg. Cayman-domiciled funds are rarely administered in the Cayman Islands. In Guernsey, there is a mix: Guernsey funds are sometimes administered in Guernsey, and some non-Guernsey funds are administered there.

Mutual Fund Securities

For the five years (2001-2005) for which data from the IMF's Coordinated Portfolio Investment Survey (IMF-CPIS) are currently available, Figure 6 also shows foreign (non-Guernsey) security holdings (stock, bonds, and notes) of Guernsey-domiciled mutual funds. Those data combined with GFSC data indicate that about two-thirds of Guernsey fund assets are in securities.

At the end of 2005, of the total $95.8 billion in securities held by Guernsey mutual funds, $69.7 billion (73 percent) were equities, $22.4 billion (23 percent) were long-term debt, and $3.7 billion (4 percent) were short-term debt. In the IMF-CPIS data, mutual fund shares are counted as equity irrespective of the mutual fund's holdings. A large portion of mutual funds holdings in Guernsey is in mutual funds domiciled in other jurisdictions.

Geographically, the three favorite sources of securities investment for Guernsey mutual funds are the United States ($17.8 billion, 19 percent), the Cayman Islands ($13.9 billion, 15 percent), and the United Kingdom ($10.8 billion, 11 percent). After those big three, the portfolio is widely distributed, with Ireland, France, Germany, Bermuda, Japan, Luxembourg, the Russian Federation, the Netherlands, and the British Virgin Islands each accounting for between 2 percent and 4 percent of security holdings by Guernsey funds. The large investment in Cayman Islands securities is almost entirely (97 percent) in equity. It is likely that shares in hedge funds domiciled in the Cayman Islands accounts for the lion's share of this total. (The data above, not in any figure here, are available from the IMF-CPIS online at, Table 3.)

Figure 7. Types of Investment Funds in Guernsey,
December 7, 2006

See Appendix 1.

Given the prevalence of closed-ended property funds in Guernsey, real estate investment probably accounts for a significant portion of the remaining third of fund investment not accounted for in the IMF-CPIS data. Because the data do not include domestic securities and mutual fund shares, a portion could also be attributable to investment in Guernsey mutual funds. It is worth noting that Guernsey is one of a handful of jurisdictions (and that does not include the United States) that provide the IMF with security holdings by sector.

The GFSC publishes data separately for open-ended and closed-ended funds. An open-ended fund structure allows investors to move in and out of the fund at will. The number of shares created varies with the amount of investors' money. A closed-ended fund has a fixed number of shares. To move into (and out of) the fund, an investor must find a willing seller (or buyer). In general, the manager of a closed-ended fund can think longer-term than his open-ended fund counterpart because he does not have to be ready to liquidate assets at any time when investors want to cash out. (Nevertheless, in practice, investors in most open-ended hedge funds are contractually limited by withdrawal restrictions and penalties.)

At the end of 2006, the total value of Guernsey investment funds was split about evenly between open-ended (£56.7 billion) and closed-ended funds (£48.5 billion). There were 270 authorized open-ended funds, and of those, there were 179 umbrella funds with 1,417 subfunds. The GFSC publishes data on the number of funds by type (but not assets of funds by type). Figure 7 shows the distribution of funds, divided into four categories, assuming all open-ended funds are equal in size and all closed-ended funds are equal in size. (See endnotes for details.)

To avoid double-counting as we move toward identifying PTEA in the funds sector, we adjusted the size of the funds-of-funds total by subtracting 20 percent ($8.7 billion) from the total of $43.6 billion to get $34.9 billion and reduced the alternative funds total of $57.2 billion by 25 percent ($14.3 billion) to get $42.9 billion. Adjusting for double-counting thus reduces our total from $206.1 billion to $183.1 billion. (See the endnotes for background on this calculation.)

The final step in arriving at PTEA is removing the portion of funds owned by 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 Guernsey. Therefore we must reluctantly move from the realm of rough estimates to that of educated guesswork. We'll start with conventional funds, by which we mean funds that are not hedge funds or private equity funds (often jointly referred to as alternative investments).

Fermain Bay on Guernsey, in the Channel Islands. (J Lightfoot/Robert Harding World Imagery/Corbis)The Federal Reserve Board tabulates data on the ownership of U.S. mutual funds. At the end of 2006, total mutual fund shares (not including money market mutual fund shares and the relatively small amounts of closed-ended investment funds and exchange traded funds) had a value of $7.068 trillion. Individuals directly owned $4.585 trillion, or 64.9 percent, of this total. (Federal Reserve Statistical Release, Z.1, Flow of Funds Accounts for the United States, Second Quarter 2007, Sept. 17, 2007, Tables L.10 and L.122.)

A second point of reference for distribution of ownership for conventional mutual funds in Guernsey is the distribution of ownership of bank deposits in Guernsey. In the previous section, the estimate for household ownership was 57.8 percent.

Over and over again, articles on hedge funds (in Guernsey and elsewhere) describe wealthy individuals and tax-exempt institutional investors as their primary clients. But like all quantitative data on the hedge fund industry, data are scarce, and useful data on investors appear to be nonexistent. We know that, compared with conventional mutual funds, alternative funds will have far fewer small "retail" investors, but that does not provide much guidance about the split of mutual fund investors between wealthy households and institutions.

At some point in the future, more information will be available to us on the distribution between individuals and institutions of investment in conventional mutual funds and, separately, in alternative investment funds. For the time being, however, we will assume, based on the scraps of information available, that 60 percent of $183.1 billion of Guernsey mutual funds (that's after corrections are made for double-counting) is held by individuals. That's $109.8 billion of PTEA.

The Fiduciary Sector

Guernsey's fiduciary sector assists clients in forming corporations in which they can hold assets and in establishing trusts in which Guernsey fiduciaries acting as trustees control and hold as assets according to the mandates of contributors ("settlors") to the trust. Both structures put a legal layer between assets and their beneficial owners, and often they are stacked on top of each other. Among other potential benefits, this layering helps hide the identity of wealth holders from the public and from home-country tax collectors.

 Table 2. Various Measures of the Size of Guernsey's Fiduciary Sector
1999       2000       2001       2002

 Fiduciary license: Company      --          --      184*       194*
 Fiduciary license: Personal     --          --       77*        90*
 Fiduciary firms                over        over na na
                                £200        £200
                                billion     billion
 Assets under administration    over        about     £114       £120
                                £50         £100      billion    billion
 Fiduciary fee income           about       about na na
                                £200        £200
                                million     million
 Staff directly employed      1,300          na    2,556      2,281
 in the fiduciary sector
 Incorporations               1,410       1,623    1,363      1,303
 Companies on the register   15,453      15,900   15,910     15,914

[Table continued]
2003       2004       2005       2006

 Fiduciary license: Company      na         145        144        147
 Fiduciary license: Personal     na          56         54         58
 Fiduciary firms                 na na na na
 Assets under administration     na na na na
 Fiduciary fee income            na na na na
 Staff directly employed      2,402       2,652         na na
 in the fiduciary sector
 Incorporations               1,099       1,172         na na
 Companies on the register   16,071      15,840         na na

 * Includes applicants not yet approved.

Source: GFSC annual reports.

Data on this sector are not published regularly. The 1988 "Edwards Report" (officially known as the Review of Financial Regulation in the Crown Dependencies, Nov. 19, 1998, available at referred to an unnamed study indicating that assets held in trust in Guernsey are at least two-thirds as large as bank deposits. If the two-thirds figure was correct and remained unchanged for two decades, then assets held in Guernsey trusts in 2002, for example, would be equal to $76.7 billion.

 Table 3. Assessments of Guernsey's Fiduciary Sector

 1999    "Significant new trust and company administration
         business was attracted. . . .The sector, in general, is
         extremely busy."
 2000    ". . . an extremely busy and successful year. . . Good
         quality new business was plentiful. . . ."
 2001    ". . . most trust companies enjoyed a very profitable
         year of trading in 2001."
 2002    " . . . generally a strong year for the fiduciary sector,
         although not surprisingly many trust companies did not see
         the high level of business growth experienced in recent
 2003    ". . . fiduciary sector continued to perform strongly. .
         . ."
 2004    ". . . Guernsey's fiduciary sector remains in good shape.
         . . ."
 2005    ". . . the fiduciary sector is in a healthy state and is
         positive about new business flows in the future. . . ."
 2006    "The insurance and fiduciary sectors did not see such
         dramatic shifts but continued to attract good flows of new

Source: GFSC annual reports.

More recently, the GFSC has published glimpses of the numbers on Guernsey fiduciaries. Table 2 above summarizes what we have been able to garner from GFSC annual reports (from 1999 to 2006).

The category most useful to our investigation is assets. Unfortunately, to our knowledge, no data after 2002 are available. Given the severe lack of information, it is worth taking a look at what the GFSC says about the sector in each year from 1999 to 2006. The agency's comments on the financial condition of the sector for each year are summarized in Table 3.

It is our judgment that those statements are generally less optimistic over time. Given the character of the statements, our suspicion that the nonpublication of details in recent years could be an effort to keep unfavorable numbers from public view, and the stagnant growth in the number of corporations from 1999 through 2004, it is probably wise to assume that Guernsey's long-established fiduciary sector has matured and has entered a period of low growth (at least in terms of business volume). For this study we will assume that Guernsey's fiduciaries managed £130 billion ($254.8 billion) at the end of 2006. Furthermore, we assume that all of this was related to investments by households.

Figure 8. Guernsey-Domiciled Insurance Companies,
Assets Under Management, 1998-2006

GFSC "Summary of Insurance Statistics as of 31
August, 2007," and International Monetary Fund, "Portfolio Investment
CPIS (Coordinated Portfolio Investment Survey) Data- Database,"
online at


If indeed there has been a slowdown in the fiduciary business, it may be related to the increased regulation of the fiduciary sector by the GFSC. On April 1, 2001, legislation (enacted in 2000) came into effect that made Guernsey one of the first jurisdictions in the world with a comprehensive system for the supervision of trust and corporate service providers. All providers of fiduciary services must be licensed, and no license is approved unless the GFSC determines the provider is "fit and proper." In accordance with the law, the GFSC issued separate codes of practice for trust services providers, corporate service providers, and company directors.

Guernsey is one of the few offshore jurisdictions requiring full disclosure of beneficial ownership before a company can be incorporated. That information is provided to the GFSC but is not available to the public. According to the GFSC, Jersey and Bermuda have similar requirements, but most other offshore jurisdictions do not. After passage of the 2000 fiduciary law, GFSC conducted on-site visits to fiduciaries and concluded — contrary to the expectations of some — that "fiduciaries have a very good grasp of whose interests they are representing when administering trusts and companies." That conclusion supports the statement of Talmai Morgan, GFSC director of fiduciary services and enforcement, in a speech to Guernsey trust service providers on June 13, 2002: "The days of doing business behind the bicycle shed are long gone." (Available at

 Table 4. Summary: Potential Tax Evasion Assets in Guernsey
                            (in billions)
Total in        Adjusted for         Further Adjusted to Remove
Sector       Each Sector     Double-Counting      Non-Evaders = PTEA

 Banking        $181.0           $181.0                  $104.3
 Investment     $206.1           $183.1                  $109.8
 Fiduciary      $254.8            $79.0                   $79.0
 Insurance       $36.8            $36.8                    $0.0
Total for      $678.7           $479.9                  $293.1
  all sectors

Calculating Fiduciary Assets

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 Guernsey that is potentially related to tax evasion, we want to exclude from our calculations any of those assets held in either Guernsey or non-Guernsey intermediaries.

Data with this detail are not available for Guernsey, but they are for the United States. Out of a total $30.3 trillion of nonpension financial assets held by households at the end of 2006, $6.3 trillion (21 percent) were direct holdings of corporate equity, and $3.2 trillion (10 percent) were direct holdings of bonds and other credit market instruments. (Federal Reserve Board, "Flow of Funds Accounts for the United States, Second Quarter 2007," statistical release Z.1, Sept. 17, 2007, Table B.100.) Assuming this distribution is a good guide to the distribution of holdings by individuals in Guernsey trusts and companies, we will say that 31 percent of Guernsey fiduciary assets are investments not made through financial intermediaries. So we estimate that 31 percent, or $79 billion, of a total of $254.8 billion of fiduciary assets are PTEA at the end of 2006.


Approximately one-fourth of employment in Guernsey's financial service sector is in insurance (Peter Neville, "The Finance Industry in Guernsey," GFSC, Mar. 2005). In terms of assets, however, it is a much smaller share of the total. Despite rapid growth (see Figure 8), Guernsey's insurance sector assets of $36.8 billion at the end of 2006 are just a fraction of the corresponding totals for banking, mutual funds, and the fiduciary business.

The insurance sector can be divided into three components: (1) domestic business, (2) captive insurance, and (3) offshore life insurance. A captive insurance company insures risks of a single company (or a small number of companies), usually when commercial insurance is either too expensive or unavailable. Neither (1) nor (2) is of concern regarding potential offshore tax evasion by individuals.

Offshore life insurance (not specifically from Guernsey) is often promoted on various Web sites along with offshore bank accounts, trusts, and shell companies. Life insurance is already tax-advantaged in the United States and other countries. Its net advantage to offshore investors is the extra benefit, if any, it provides in its various policies and investment plans (if, for example, a policy's investment component was too large relative to its insurance component to qualify as life insurance for U.S. tax purposes). Of course, if premiums in offshore policies are paid with taxable proceeds that have escaped tax, offshore life insurance can facilitate tax evasion even though it is not tax-advantaged relative to onshore products.

Given the small size of the insurance sector relative to the other sectors, life insurance's fractional role in the insurance sector, and the uncertainty of the level of evasion potential of these insurance products, we will not, for the time being, include any component of the $36.8 billion of insurance assets in PTEA.

Putting It All Together

All the calculations discussed in this article are summarized in Table 4. At the end of 2006, there were $293.1 billion of assets in the Guernsey financial sector beneficially owned by non-Guernsey 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 $300 billion.

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Appendix 1: Distribution of Guernsey Funds by Type

All data described in this appendix are from GFSC, Investment Business Division, "Quarterly Statistical Review, 31 December 2006," Feb. 12, 2007.

At the end of 2006, Guernsey-domiciled open-ended mutual funds held assets of £56,667 million. Of a total of 270 funds, there were 179 umbrella funds with 1,417 subfunds. Combining data on 91 nonumbrella funds and on 1,417 subfunds, we get distribution of open-ended funds as indicated in columns (2) and (3) of Table 5A.

Assuming (not because it is realistic but because there is no alternative) that funds and subfunds are equal in size, the distribution of assets in open-ended funds is computed in column (4).

At the end of 2006, Guernsey-domiciled closed-end mutual funds held assets of £48,472 million. There were a total of 454 funds. The distribution of closed-ended funds is shown in columns (2) and (3) of Table 5B. Again, assuming that funds are equal in size, the distribution of assets in open-ended funds is computed in column (4).

In Figure 7, we assigned each of the 14 categories from tables 5A and 5B in the following manner:

"Traditional funds" are the sum of categories (1), (2), (5), (6), (11), (12), and (13).

"Closed-ended property" is category (10). "Alternative investment funds" are the sum of (4), (8), (9), and (14). And "funds of funds" are the sum of (3) and (7).

Appendix 2: Funds of Funds

Funds of hedge funds are a major fixture in the Guernsey financial sector. Unfortunately for us, they make the data difficult to interpret and require some adjustments to avoid double-counting. There are two components to the double-counting problem. Figure 9 is an attempt to illustrate them.

 Table 5A. Guernsey Open-Ended Mutual Funds, End of 2006
(3)                    (4)
                                  Percentage             Estimated
(1)                 (2)          (Totals may             Assets (in
Type of Fund      Number        not equal 100%)           millions)

 (1) Equity          308               20%                  £11,574
 (2) Debt             97                6%                   £3,645
 (3) Fund of funds   397               26%                  £14,918
 (4) Derivatives     108                7%                   £4,058
 (5) Money market    103                7%                   £3,870
 (6) Guaranteed        1                0%                      £38
 (7) Feeder funds    195               13%                   £7,328
 (8) Other           299               20%                  £11,236
Total              1508              100%                  £56,667

Table 5B. Guernsey Closed-Ended Mutual Funds, End of 2006
(3)                     (4)
                                      Percentage              Estimated
(1)                      (2)          (Totals may             Assets (in
Type of Fund           Number        not equal 100%)          millions)

  (9) Venture capital    203               45%                  £21,674
 (10) Property            95               21%                  £10,143
 (11) Guaranteed           7                2%                     £747
 (12) Emerging markets     9                2%                     £961
 (13) Technology          10                2%                   £1,068
 (14) Other              130               29%                  £13,880
Total                   454              100%                  £48,472

The first is easier to understand. Guernsey funds of funds that invest in other Guernsey hedge funds should not be added together when trying to measure the amount of investment flowing through Guernsey. In this respect, GFSC data double-counts fund data to the extent Guernsey funds of funds invest in other Guernsey funds. To correct this problem, in terms of the diagram in Figure 9, we must subtract [C] — Guernsey funds of funds invested in other Guernsey funds — from the official data.

The second type of double-counting, involving cross-border investment by funds of funds, is more complicated, and there is no single method of dealing with it. Rather than tediously describing all the possibilities, we'll focus on the one we have chosen and think is best suited for our purposes.

The goal of this study is to measure offshore assets that are prone to tax evasion. We will assume all funds of funds in Guernsey possibly involve evasion (until later, when we eliminate investors in these funds who are not likely tax evaders). To avoid double-counting in the context of our international study of tax evasion, we must subtract from our adjusted total (described above) and offshore funds that invest in Guernsey hedge funds. That's the area [G] in our diagram.

Figure 9. The Double-Counting Problem for Funds of Funds

Unfortunately, there are no readily available data on [C] and [G]. (A detailed examination of the portfolio of all funds of funds in Guernsey could tell us about [C]; and a detailed examination of the portfolio of all funds of funds could give us a clue about [G].) Until we get further information, we will assume 20 percent of Guernsey funds of funds invest in other Guernsey hedge funds (i.e., [C] = 0.2 x [A]) and that 25 percent of the investment in Guernsey funds are from non-Guernsey offshore funds of funds (i.e., [G] = 0.25 x [B].


Figure 2.
Total deposits (£92.3 billion, $181 billion) and Swiss fiduciary deposits (£36.4 billion, $71.4 billion) are from the GFSC, "Second Quarter 2007 Banking Sector Activity," Sept. 7, 2007. Percentages for jurisdictions are from GFSC, 2006 Annual Report, Figure 5. "Other Swiss" is the difference between (a) the product of 0.45 and total deposits ($181 billion) and (b) $71.4 billion.

Figure 3. GFSC, 2006 Annual Report, Table 2.

Figure 4. Foreign bank and non-foreign-bank totals are from the Bank for International Settlements, locational bank statistics, tables 3A and 3B. The remainder is the difference between total deposits as calculated by the GFSC ($181 billion) and the sum of the two figures from the BIS data.

Distribution of bank deposits in British crown dependencies. Bank of England, Monetary & Financial Statistics, Aug. 2007, Table C5.1, "Monetary Financial Institutions in Jersey, Guernsey and Isle of Man Balance Sheet." Deposits in those three jurisdictions, in all currencies, held by U.K., Jersey, Guernsey, and Isle of Man residents totaled £96,390 million. Subtracting £38,089 million held by banks leaves £58,301 million. Of that amount, £615 million (1 percent) was held by the public sector, £28,184 million (29 percent) by nonbank financial corporations, £19,613 (20 percent) by private nonfinancial corporations, and £47,977 million (50 percent) by households.

Distribution of bank-like deposits in the United States. Federal Reserve Statistical Release, Z.1, Flow of Funds Accounts for the United States, second quarter 2007, Sept. 17, 2007. For checkable deposits and cash, households owned $19.6 billion out of a total of $1,509.6 billion (Table L.204). For time and savings deposits, households owned $5,119.6 billion out of a total of $6,993.9 billion (Table L. 205). For money market mutual funds, households owned $1,133 billion out of a total of $2,312.5 billion (Table L.206). When those three categories are combined, households owned $6,272.2 billion out of a total of $10,816.0 billion, or 58 percent, of total deposit-like liabilities in the United States.

Exchange rates. All U.S. dollar/British pound exchange rates, shown below, were downloaded from, "FX History: Historical Currency Exchange Rates," available at

 Date                            Exchange Rate
 Dec. 31, 1998                        1.66
 Dec. 31, 1999                        1.62
 Dec. 31, 2000                        1.49
 Dec. 31, 2001                        1.45
 Dec. 31, 2002                        1.60
 Dec. 31, 2003                        1.78
 Dec. 31, 2004                        1.93
 Dec. 31, 2005                        1.72
 Dec. 31, 2006                        1.96
 June 30, 2007                        2.00

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