Storm clouds over Caribbean financial services

Nov 23, 2008 Features / Columnists, Ronald Sanders

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By Sir Ronald Sanders

Ominous clouds are gathering around financial services in the Caribbean both offshore and onshore. The clouds are approaching from two directions – the new US government that will take office in January 2009, and the European Union (EU) in the implementation of the Economic Partnership Agreement (EPA) that Caribbean countries have signed.

The Caribbean will well recall the blacklisting of many of their jurisdictions in 1998 by the Organisation for Economic Cooperation and Development (OECD) – known as the rich nations’ club – when it launched its so-called ‘harmful tax competition initiative’ (HTCI).

The OECD claimed that the tax-revenue bases of its member states were being eroded by competition from 41 low taxing jurisdictions, some of them in the Caribbean.

Alongside the HTCI, the OECD’s sister-organisation, the Financial Action Task Force (FATF), initiated its “Forty recommendations on money laundering”, which it then unilaterally sought to impose on the world by naming countries that it said were “uncooperative” in the effort to curb money laundering.

Of course, the so-called recommendations were not recommendations at all; they were rules that the OECD countries alone created.

Eventually, the IMF, also controlled by the OECD countries, adopted the “recommendations” and now uses them as part of the financial sector appraisal programmes of countries.

The OECD’s HTCI initiative was widely seen as an attempt to kill the offshore financial services sector of the economies of developing states which had turned to such services as a means of diversifying their economies and easing their reliance on the exports of primary products or tourism.

The financial services providers in some of these countries in the Caribbean, such as the British Virgin Islands, the Cayman Islands, the Bahamas and Bermuda, became very good at it and gave stiff competition to their rivals in the OECD nations. In the end, the OECD set aside its HTCI blacklist but the intent behind it was never fully abandoned.

The tactical withdrawal of the OECD from the HTCI owed much to the ability of the affected countries to argue their case vigorously in Commonwealth councils where OECD members–Australia, Britain, Canada and New Zealand–were present, even though the major breakthrough was the decision of the new US administration of George W. Bush not to support the OECD initiative which was started with the full cooperation of Lawrence Summers, the Treasury Secretary of the previous Democratic Party government of President Bill Clinton.

Summers has been part of the election campaign team of the Democratic President-elect of the United States, Barack Obama, who is on record as opposed to “tax havens”.

In February 2008, Obama co-sponsored a bill in the US Senate with Carl Levin, the Senator from Michigan, which names 13 Caribbean jurisdictions among those that could be listed by the Treasury Secretary as “un-cooperative” and penalised.

Among these countries are the four mentioned earlier and Anguilla, Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, St Lucia, St Kitts-Nevis, and St Vincent and the Grenadines.

Levin believes that the total loss to the US Treasury from offshore tax evasion alone approaches US$100 billion per year and he wants, amongst other things, to give the Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement.

How quite the US Treasury will establish that US tax enforcement is being impeded is unclear, but given the past history of how these matters have been handled, the burden of proof may very well be imposed on the foreign jurisdictions and financial institutions, not the US Treasury.

In any event, a robust pan-Caribbean response is needed to the “Stop Tax Havens Abuse Act” as the Levin-Obama bill is called. Some Caribbean countries have had the tendency to go it alone on these issues, in the belief that they are better able to negotiate themselves out of them.

But, this problem is far too fundamental to the new Caribbean ideology of services as the saviour of their economies not to be tackled jointly.

The governments of Jamaica and Guyana have recently indicated that they wish to establish financial services, and legislation has been enacted to do so. In this connection, with almost all of its member-states and associate member states being vulnerable to the US bill, the Secretariat of the Caribbean Community and Common market (CARICOM) might take the initiative to convene a group to start preparing a pan-Caribbean response.

The EU member states of the OECD – France, Germany and Britain in particular – were also hawks on the HTCI. In March this year, the 27 Finance Ministers of the EU announced their determination “to crack down on tax havens”.

And it is significant that the EU has sought to introduce into the EPAs, which it is negotiating with several developing countries, standards that have not been agreed in negotiations at the World Trade Organisation (WTO) on the General Agreement on Trade in Services (GATS).

Among these “standards” are: the OECD’s “Agreement on exchange of information on tax matters” and a requirement that note be taken of the “Ten key principles for Information Exchange” promulgated by the finance ministers of the G7 nations.

It is telling that no small state was invited to the G20 meeting held in Washington on November 15th to consider the current global financial crisis, even though many of these countries operate financial services and have borne the brunt of OECD criticism over financial regulation and supervision.

Without even acknowledging that the current crisis resulted from poor oversight in the US particularly and some countries in Europe, the G20 communiqué stated: “Tax authorities, drawing upon the work of relevant bodies such as the (OECD), should continue efforts to promote tax information exchange. Lack of transparency and a failure to exchange tax information should be vigorously addressed”.

Tax information exchange had nothing to do with the current global crisis, but the crisis is being used to again target the financial services of small countries.

Recognising that the storm clouds are gathering, Caribbean countries should bolster their regulatory and supervisory systems so that they are beyond reproach, but they should also gear themselves for a downpour of new demands. They would do so better if they do it together.
(The writer is a business consultant and former Caribbean diplomat)
Responses to: [email protected]

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