Bahamas: The Financial Sector-The Challenges Ahead

Those of you who, over the last two months, have had to deposit large amounts in the bank would have had the opportunity to experience first hand the new regulatory environment in respect of domestic financial transactions. Others of you may have received or will receive requests to provide documentation on yourself and/or each transaction involving your account at the bank. You would have appreciated that the rules of the game have changed even for you, and that all of the laws that you read about being enacted to curtail nefarious criminals, money-launderers and drug traffickers also included you, and have a bearing on your previously normal way of doing business. Similarly in the offshore sector many good and decent clients will have to be inconvenienced for the abuses of the minority. This is not to say that the attack against the crimes of drug trafficking and money laundering of the proceeds of crimes is wrong. Indeed we have possibly already seen the effect of this locally by the significant amount of cash being carried around in cars and being found in homes, unable to be deposited to a bank account. To the contrary, specific and targeted action was certainly necessary and commendable. What is problematic is that the baby has been thrown out with the bath water.

For better or worse we have introduced a regulatory regime which places this jurisdiction both simultaneously at the vanguard of compliance with the OECD requirements and ironically at a competitive disadvantage to our financial services peers, old and new. The irony of business moving to the Caymans because it is a colony benefiting from the perceived protection of mother country, a member of the OECD, is whimsical given the fact that our previously professed strength and drawing card was our independence. The sequence of recent events has certainly shattered that confidence and brought home the reality of international relations and politics, the illusion of independence, and the impact and scope of "globalisation". The irony continues as jurisdictions such as Delaware and Nevada can continue to welcome and camouflage money-launderers through corporate entities with bearer shares and New York and Miami can open bank accounts with less due diligence than that which exists in The Bahamas and, in certain respects, has really existed for years. In the current circumstances it would appear that The Bahamas has certainly set the pace for "international best practices and standards", a loose term which had no substance, real meaning or universal understanding and acceptance until we formulated our legislation. Now we are left to plead for a level playing field and appear to be "holier than thou". But do we truly believe that we have the strength or credibility to demand that level playing field? Is there not the greater risk that we will be required to do more in our new role as the showpiece for compliance with "international best practices and standards"?

Our recent aggressive legislative initiative in this respect has given us the Qualified Jurisdiction status by the United States of America, albeit for 18 months while other jurisdictions got 3 years. I am convinced that we have gone beyond the call of duty in complying with the OECD and United States’ requirements to be taken off the blacklist of the Financial Action Task Force (FATF) in June and the Financial Stability Forum (FSF) in September. But our view of things may have absolutely no bearing on the decisions made if there is another agenda, sinister or not, being followed. Nevertheless, we should not sit on our laurels because, having taken action to the extent that we have, we will always be monitored and reviewed for any lapse in implementation. The yardstick or goalpost for the continuation of the Qualified Jurisdiction status could be shifted arbitrarily within the time period of 18 months. Will the FSF insist on more action in respect of civil and criminal tax matters as the OECD’s proposed Memorandum of Understanding outlines, or will other countries within the FSF argue the principles of non-discrimination and equal treatment with the United States of America and insist on Tax Information Exchange Agreements with them also in September?

Will those institutions who are seeking to be approved as Qualified Intermediaries by the Internal Revenue Service find themselves in double jeopardy as they attempt to comply with the requirements for direct access to information on client transactions by the IRS and the domestic law as outlined in the Banks and Trust Companies Regulation and the Financial Intelligence Unit Acts requiring that requests for information from a foreign regulator be channeled through the Central Bank and Financial Intelligence Unit?

The Government has acknowledged that there has to be some cleaning up of the hastily enacted legislation. The private sector, through the Bahamas Financial Services Board, has presented to the Government a list of proposed amendments to the legislation, ranging from clarification and inconsistencies to removing sections which have gone beyond the laws and regulations of our competitors in their own compliance endeavours. The challenge for the Government is certainly in responding effectively and expeditiously to these recommendations, and thereby minimize or avoid the uncertainty and haemorrhaging in the financial services sector, while at the same time not appearing to renege on or reverse its commitments and resoluteness in the fight against drug trafficking, money-laundering and tax evasion. Balancing these objectives while attempting to give confidence and comfort to the investor/client will be a difficult task for both the Government and the private sector.

We must also recognise that, having built up an industry for decades, it is not a trivial matter that even 1 or 2% of that growth pattern is reversed, because that level of growth cannot be replaced overnight. The time frame for simply regaining lost ground is not calculable. The level of loss, even with amendments that may take us back to a competitive position, with its ripple effect throughout the economy, will take time to replace, and time is a scarce commodity if we are to take advantage of opportunities in a dynamic global financial industry. All of this must be considered in the broader context of a projected 3% economic downturn for The Bahamas by the Caribbean Development Bank, and a global economic recession taking hold.

We should further be cautious in assuming that the concession of a convention tax exemption will save the day. The case studies, as confirmed by the Bahamas Chamber of Commerce several years ago, of our fellow Caribbean tourist destinations who, under the aegis of the Caribbean Basin Initiative, effected changes for the carrot of the convention tax exemption, have proven little, if any, significant and beneficial impact from this exemption.

However, the private sector in the financial community must also play the important role of innovator and provider of products. Hereafter, the comparative advantage over other jurisdictions will be in the quality, diversity, delivery and price of services. The cost of labour, the cost of utilities, communications and transportation, crime and social unrest can all contribute to a further diminishing of our competitive advantage, particularly if, in the short to medium term, there continues to be different playing fields. We will lose any advantage if we do not offer the same products that the potential client can obtain or demand in financial centres such as New York, London, Zurich, Hong Kong, and even Miami. We will truly have to maintain an international financial services perspective both as individual providers and as a jurisdiction to ensure that we respond as quickly to the demands of the market as we do to the demands of foreign regulators.

Above all, we must recognise that our market is a global market and as such the products and services that we provide must have a broader international acceptance rather than being defined by the concerns of any single jurisdiction, which concerns may change from administration to administration or year to year depending on its own self interest. Indeed it is my view that the American Administration, or any of its OECD colleagues, can effectively accomplish, to a large degree, what it wishes by taking the simple measure of declaring a tax amnesty for the repatriation of all foreign-based assets of its citizens which have not been disclosed or declared and thereby show its serious intent and commitment to tax reduction at home and the effective elimination of tax havens abroad.