Jurisdictional arbitrage is the practice of taking advantage of discrepancies between competing legaljurisdictions. It takes its name fromarbitrage, the practice infinance 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 itstransaction costs, here the costs of switching legal service providers from onegovernment to another.[1]
The lower theexit costs for leaving the jurisdiction (unrestricted emigration, cheap travel,liquidity of assets) the more desirable and feasible it is. Conversely, highentry costs into the more favourable jurisdiction are an inhibitor on jurisdictional arbitrage; certaintax havens such asAndorra grant permanent residency rights to immigrants only if they meet certain criteria. Jurisdictional arbitrage is a significant concept in modern free marketanarcho-capitalism.
The practice of individualsseeking asylum involves appealing to a jurisdiction with favorable individual rights for residency, where the individual's native jurisdiction is seen by them to offer insufficient protection. For example, women have fled West African nations which practice tribalfemale genital mutilation and/orextremist Islam[2] in favour ofEuropean andNorth American jurisdictions.[3] In July 2019, one of the wives--Princess Haya--of the ruler ofDubai was in aLondon courtroom to ask the state to provide and enforce anon-molestation order for her and what is known as aforced marriage protection order for their daughters; otherwise the women would be forced to submit to theSharia law jurisdiction ofSheikh Mohammed.[4]
Jurisdictional arbitrage has also been utilized to hinder attempts at governmental prosecution, by transnational criminals such asterrorists,[5]money launderers, andcyber-attackers.[6]Prior to recent international mobilization against the practice, there existed a long-standing tradition of ousted state leaders such asMohammed Reza Pahlevi,Idi Amin andAugusto Pinochet finding refuge and retirement abroad to avoid prosecution in their native jurisdiction.[7] Pinochet, one-time military leader ofChile sought to evade retributive prosecution in his native jurisdiction by seeking refuge in theUnited Kingdom. He was later prosecuted by theSpanish court ofBaltasar Garzón according to the principle ofuniversal jurisdiction.
To counteract this phenomenon, most countries have signed bilateralextradition treaties with most other countries, and some governments adopted the principle of universal jurisdiction, which has enabled individuals to be prosecuted for offences (particularly allegedhuman rights violations andwar crimes) committed outside the jurisdiction of prosecution – the legal structure of nations such asBelgium andSpain allow for this, as does that of international tribunals operating under the aegis of theUnited Nations.
A similar attempt at governmental collusion to limit the use of jurisdictional arbitrage fortax avoidance is the policy oftax harmonization. The membership of European governments in theEuropean Union resulted in a collection of nations with a limited set of common legal structures (Four Freedoms) which has resulted intax competition by the otherwise less-developed nations (such asIreland in the early 1990s) whereby governments compete forforeign investment by lowering their tax rates significantly below those of their neighbours. This strategy has been adopted in the form of aflat tax by various Eastern European nations, which has resulted in calls for harmonization of tax rates by the traditionally more developed nations such asFrance,Britain andGermany.[8]
In the view of one journalist,Microsoft's satellite office inVancouver was set up because the USImmigration and Naturalization Service was given to restrict the immigration of programmers.[9]
TheBlueseed project intended to launch a ship 12nautical miles from the shore (and thus ininternational waters) with the goal of allowingentrepreneurs withoutUS work visas legally to work for and create companies close toSilicon Valley.[10]
Jurisdictional arbitrage is a popular second-best strategy amongstanarchists who believe that it will allow them to avoidstate control and persecution.[1] In the 19th century, many persecuted European anarchists such asMikhail Bakunin andPrince Peter Kropotkin sought refuge inLondon, which offered greaterfreedom of political expression than their native jurisdictions.[11]Anarcho-capitalists hope that by subdividing existing governmental jurisdictions intocity-states (such asSingapore), competition among jurisdictions for citizens will lead to a diversity of legal climates including more favourable jurisdictions forliberty andself-determination.[12]Cypherpunks andcrypto-anarchists also cite low exit costs and fluidity of movement across jurisdictions as a significant means of advancingindividual freedom through the free movement of information and capital.[13][14] The concept ofseasteading is an attempt to increase the possibility of jurisdictional arbitrage by decreasing the cost of switching governments.
A notable proponent and practitioner of jurisdictional arbitrage is Canadian businessman andperpetual travelerCalvin Ayre, founder ofonline gambling consortium Bodog Entertainment Group.[15] Although online gambling is illegal in theUnited States, a market which accounts for 95% of Bodog's sales, the company pays nocorporate 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."[16]
the entire enterprise could be jeopardized by immigration officials irritated by what amounts to jurisdictional arbitrage and a clever legal hack
