The Political Risk of Offshore Financial Centres: The Cyprus Bail-Out

This chapter puts forward the idea that investors face a new type of political risk arising out of the increased international regulatory focus on financial crimes, such as money laundering, terrorist financing, foreign bribery, tax evasion, and financial sanctions. This political risk is manifested in the policies of international regulators towards offshore financial centres (OFCs), especially in emerging economies, and includes powerful policy making bodies, such as the Financial Action Task Force (money laundering, terrorist financing) and the Organisation of Economic Co-operation and Development (OECD) (foreign bribery, tax evasion), as well as the International Monetary Fund (IMF), the World Bank, and the Bank for International Settlements (financial stability). Both the G7 and G20 have drawn a link between systemic risk and weak anti-financial crime laws and practices, and have made the assumption that OFCs are more likely to present systemic risks arising from weak anti-financial crime laws.