Arbitrage, in the financial markets, is the process of finding a difference in pricing between two counterparties and exploiting the differential for profit. Arbitrage in terms of law and regulation is a very similar process, and consists of locating a commercial activity (or part of it) in a jurisdiction which confers advantages, while continuing to do business in other jurisdictions without being subject to the burdens which those jurisdictions impose on local businesses. This phenomenon is well-known already in the field of taxation, and many corporations locate their head offices in tax havens (usually small islands with favourable climates).

However, the opportunities for legislative and regulatory arbitrage are limited for physical world businesses. The need for a sales force and physical distribution infrastructure usually subjects the business to the laws and regulations of the jurisdictions in which it has customers. This is not true for Internet activities. In particular, where the business is dealing in information products it will often be able to adopt a distributed business model (see Chapter 2.4) and locate the different elements in multiple jurisdictions. This can create two main types of arbitrage advantage:

• Decreased overheads, eg because lower taxes are payable or a reduction in the cost of complying with supervisory regimes.

• Avoidance of restrictions on, or in extreme cases prohibition of, certain activities.