Jurisdictional arbitrage

Jurisdictional arbitrage is the practice of taking advantage of the discrepancies between competing legal jurisdictions. It takes its name from arbitrage, the practice in finance of purchasing a good at a lower price in one market and selling it at a higher price in another. Just as in financial arbitrage, the attractiveness of jurisdiction arbitrage depends largely on its transaction costs — in this case the costs of switching legal service providers from one government to another. The lower the exit costs for leaving the jurisdiction — unrestricted emigration, cheap travel, liquidity of assets — the more desirable and feasible it is. Conversely, high entry costs into the more favourable jurisdiction are an inhibitor on jurisdictional arbitrage — certain tax havens such as Andorra only grant permanent residency rights to immigrants who meet certain criteria. Jurisdictional arbitrage is a significant concept in modern free market anarchist schools of thought.

Application

Augusto Pinochet, one-time military leader of Chile who sought to evade retributive prosecution in his native jursidiction by seeking refuge in United Kingdom. He was later prosecuted by a Spanish court according to the principle of universal jurisdiction.

Tax avoidance is not the sole benefit of jurisdictional arbitrage. Those who utilize jurisdictional arbitrage to hinder attempts at governmental prosecution include transnational criminals such as terrorists, money launderers, cyber-attackers. The practice of individuals seeking asylum involves appealing to a jurisdiction with favourable individual rights for residency, where the individual's native jurisdiction is seen to offer insufficient protection. By way of example, women have fled West African nations which have recently adopted Sharia law in favour of European and North American jurisdictions which prohibit female genital mutilation. Prior to recent international mobilisation against the practice, there existed a long-standing tradition of ousted state leaders such as Leon Trotsky, Idi Amin and Augusto Pinochet finding refuge and retirement abroad to avoid prosecution in their native jurisdiction. To counter-act this phenomenon, governments adopted the principle of Universal jurisdiction, which has enabled individuals to be prosecuted for offences (particularly alleged human rights violations and war crimes) committed outside the jurisdiction of prosecution — the legal structure of nations such as Belgium and Spain allow for this, as does that of international tribunals operating under the aegis of the United Nations. A similar attempt at governmental collusion to limit jurisdictional arbitrage is the policy of tax harmonization. The membership of European governments in the European Union resulted in a collection of nations with a limited set of common legal structures (Four Freedoms) which has resulted in tax competition by the otherwise less-developed nations (such as the Republic of Ireland in the early 1990s) whereby governments compete for foreign investment by lowering their tax rates significantly below those of their neighbours. This strategy has been adopted in the form of a flat tax by various Eastern European nations, which has resulted in calls for harmonization of tax rates by the traditionally more developed nations such as France, Britain and Germany.

Advocates

Jurisdictional arbitrage is a popular second-best strategy amongst anarchists who believe that it will allow them to avoid state control and persecution. In the 19th century, many persecuted European anarchists such as Mikhail Bakunin and Prince Peter Kropotkin sought refuge in London, which offered greater freedom of political expression than their native jurisdictions. Anarcho-capitalists hope that by subdividing existing governmental jurisdictions into city-states (such as Dubai or Singapore), competition among jurisdictions for citizens will lead to a diversity of legal climates including more favourable jurisdictions for liberty and self-determination. Cypherpunks and crypto-anarchists also cite low exit costs and fluidity of movement across jurisdictions as a significant means of advancing individual freedom through the free movement of information and capital.

A notable proponent and practitioner of jurisdictional arbitrage is Canadian billionaire and perpetual traveler Calvin Ayre, founder of online gambling consortium Bodog Entertainment Group. Although online gambling is illegal in the United States, a market which accounts for 95% of Bodog's sales, the company pays no corporate taxes there as its activities are distributed across different jurisdictions to minimise tax burden. “We run a business that can’t actually be described as gambling in each country we operate in. But when you add it all together, it’s Internet gambling.”

Sources

• Ware, R., (2006). "The Use of Jurisdictional Arbitrage to Support the Strategic Interest of the Firm," University of Toledo Law Review, 38, 307.

• Hosein, I., (2004). "The Sources of Laws: Policy Dynamics in a Digital and Terrorized World," The Information Society, 20, 187–199.

• Plender, John (2007-01-01). "Continental capitalism à la carte". Financial Times.

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• The Machinery of Freedom — seminal anarcho-capitalist literature detailing the privatisation of government functions
• Panarchy
• Polycentric law