Trouble looming in paradise

The financial activity of the criminal fraternity has led to government-enforced caution in the Caribbean, writes Stephanie Apap Bologna.

Last month, one of the Caribbean's more remote island territories, Antigua and Barbuda, announced that it was enacting a series of new laws to make it "one of the premier offshore financial centres in the world".

Perhaps Antigua's ambitions demonstrate that being a Caribbean offshore tax haven continues to be a lucrative business. Or perhaps not. These legislative developments can also be viewed as a protective response to the international pressure that is burdening the region's numerous financial centres.

At the beginning of 1998, against a backdrop of anti-money laundering efforts, the Foreign Secretary Robin Cook made a stern demand of the UK overseas territories, many of which are in the Caribbean: They would in future have to abide by "clear and explicit principles [which] are the best possible foundation for a successful and modern relationship".

In short, the Cayman Islands, Bermuda and the British Virgin Islands (the larger financial services centres in the region) will be expected to complete a check-list of measures to combat money laundering by the end of 1999.

"With the reputation, size and success of our offshore centres come obligations to abide by internationally accepted rules and to enforce the highest international standards of financial regulation in all our overseas territories," Cook said at the time.

"All must play by the same rules, and those rules must be strict if we are to avoid the risk of territories becoming channels for money laundering or for the concealment of the profits of crime. Criminal money will always find the weakest link and we must therefore constantly update our defences."

The Foreign Office check-list includes a package of regulatory legislation which meets recognised international standards, such as those set by the Financial Action Task Force and the Basle Group of Banking Supervisors.

To a certain extent, the larger jurisdictions in the Caribbean have already worked on meeting the requirements. Most islands have proceeds of criminal conduct legislation in place, and many have already become members of the Caribbean Financial Action Task Force.

More difficult to achieve are the remaining objectives. The islands will need to take steps to combat money laundering that are thorough enough to allow checks to be made on those companies incorporated in the dependent territory, but based elsewhere.

Cook also demanded legislation to allow overseas territories to co-operate fully with overseas investigations, and wants to see in place licensing and regulatory regimes for all financial activity, that create a level playing field between dependent territories.

Some fear that these points may weaken the bank secrecy and confidentiality structures which these islands thrive upon - and could undermine the competition between this group of islands vying for the same business.

Such competition is fierce. The twin-island Federation of St Kitts and Nevis is an example. There seems to be some unhappiness in Nevis at the arranged marriage organised by the UK when the islands were granted independence as a federation in the 1960s. However, a recent referendum to deregulate Nevis from St Kitts failed.

Both islands have developed financial services centres which are entirely different from one another. St Kitts, the larger of the two islands, has based the regulation of its centre on English law, while its sister island has followed the US Delaware system. At Shorex, an annual exhibition for offshore and international financial services held in London recently, officials from both islands promoted their centres at separate stands. And both centres were quick to point out each other's inferiority.

But these islands, and others like The Bahamas and Barbados, do not fall under Cook's microscope and have no constitutional ties with other countries. They have their own administrations and the legislation they put in place is their own - although it might be based on UK or US financial legislation and regulation.

Even if the UK cannot get at them, the Group of Seven countries (G7) and the Organisation for Economic Co-operation and Development (OECD) are certainly willing to try.

The issue of tax havens has gone beyond concerns of fraud, drug trafficking and money laundering. Governments of large economies have clamped down on tax avoidance or evasion, which ultimately cuts deeply into treasury coffers. They believe that as long as tax free or low tax jurisdictions continue to exist, so too will this bane of national funds.

According to John Lawrence, director of financial services at the government of Anguilla, the island's authorities are concerned about April's OECD report: Harmful Tax Competition, An Emerging Global Issue.

The report was called upon by members of the OECD countries, to "develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for financial tax bases". This request was subsequently endorsed by the G7 countries.

A communique issued by the heads of state of the G7 countries noted: "Globalisation is creating new challenges in the field of tax policies. Tax schemes aimed at attracting financial and other geographically mobile activities can create harmful tax competition between states, carrying risks of distorting trade and investment, and could lead to the erosion of national tax bases.

"We strongly urge the OECD to vigorously pursue its work in this field, aimed at establishing a multilateral approach under which countries could operate individually and collectively to limit the extent of these practices."

Says Anguilla's Lawrence: "The government of Anguilla is talking to the UK Government to see what the issues are. [The report] is not very clear. Are we talking about a world-wide tax? What does 'harmful' in this context mean?"

"The G7 is demanding greater disclosure. That's what it's all about," says an island government official, who did not wish to be named.

"It's a question of balance. You can have regulation and supervision, without undermining client confidentiality," he says. He adds that no offshore centre can be "completely pure", but what is important for his jurisdiction is that there are efforts in place to fight crime.

Confidentiality is what makes his financial centre thrive, and like many other centres in the region, the island's economy and employment depends to a large extent on financial services - perhaps more so than on tourism. Clearly for the Anguilla government, guarding client confidentiality is a priority.

Barbados is keen to stress that it is "a low tax rather than a no tax" jurisdiction, even if corporation tax is only 4 per cent (falling to 1 per cent) compared to the world's average 30 per cent.

Deborah Simmons, attorney-at-law at Millennium Law Chambers in Barbados, says the island has good double taxation agreements with the UK, US, Finland and Sweden, although 85 per cent of Barbados' business comes from Canada. She guesses it will be a long time yet before countries like Canada endorse OECD-type reports, as this will require a revamp of the country's tax structure. Barbados is positive. New business is streaming in now that the UK is putting pressure on its designated territories, the Channel Islands and the Isle of Man, notes Simmons. "It has opened up a new door for us."

Other jurisdictions, like the Turks and Caicos islands, are lying low. They too fall under Cook's check-list requirements. Most of the jurisdictions in the region thrive on attracting international business companies (IBCs) - hundreds of thousands of IBCs are registered in the various jurisdictions' trusts and offshore banks. Some attempt to diversify by creating structures, legislation and regulations for mutual funds and insurance. Turks and Caicos is now preparing itself to target fund management companies, while Bermuda and Cayman sell themselves as "one-stop-shops" since they operate their own stock exchanges.

International threats against offshore centres have prompted the Vancouver International Financial Centre to set up the first offshore centre association. The move is a bid for all offshore centres in the Caribbean, Europe, Asia and the US to lobby for the preservation of their fiscal privileges. "There should be co-operation between financial centres to attract good business and turn away the bad. It only takes one offshore centre to accept bad business and it taints everyone," says Lawrence.