Caribbean Offshore Financial Centers
Starting in the 1960s, certain Caribbean territories were granted independence from the United Kingdom and since then some of them have struggled to define themselves in the new global landscape. At first they continued with their monoculture of sugar cane or bananas and as that collapsed, they switched their dependence to tourism. Given the risks that come with allowing an economy to be entirely dependent on tourism, some territories have sought to become offshore financial centers (OFCs), but most have not found the level of success they expected.
Despite the rhetoric from most English and some Dutch territories, success in the OFC space appears to have been limited to certain British dependencies together with Panama. Bermuda (yes I know it is technically not in the Caribbean but most people think it is) is a global leader in reinsurance although it has lost ground in funds, the BVI is an incorporation hub which is developing very strong links with China, the Cayman Islands is perhaps the most diversified OFC but is particularly attractive to hedge funds, and Panama is a specialist with foundations / shells with its leading law firms regarded as giant incorporation factories. Finally, it would be hard for me to ignore Miami which some regard as the financial hub of Latin America especially for entities from Latin American and the Caribbean.
Unfortunately OFCs have been subject to negative publicity because of cases where dishonest entities used OFCs to evade tax obligations (as distinct from avoiding tax which is legal) as well as hiding under the veil of banking secrecy laws to launder illicit funds and fund terrorist activities. In last year’s US Presidential elections, Governor Mitt Romney was vilified for his connection to financial accounts in the Cayman Islands.
That is where FATCA comes in. By way of background, the Foreign Account Tax Compliance Act (FATCA) is part of the effort by the US government to prevent money laundering, and reduce tax evasion. Despite the negative coverage in some media, in principle, FATCA is probably welcomed by most OECD nations because all nations have a vested interest in ensuring that they receive all the tax due from its citizens and corporations. While in practice, FATCA has its share of flaws, in principle FATCA goes a long way towards shining the light of transparency into the sometimes shadowy world of OFCs. Anyone who has nothing to hide has no reason to be afraid of FATCA.
The reasons why British dependencies have been more successful than independent Caribbean territories are obvious. Investors find assurance in the British legal structure, the relative political stability and the spoke / hub relationship of these dependencies with the City of London. In terms of political stability, smaller developing economies can be particularly vulnerable to the corruptive influence of relatively large financial inflows. Last December, the Premier of the Cayman Islands was arrested for alleged corruption. In 2009, because of allegations of corruption, the Turks and Caicos Islands temporarily returned to direct rule by the UK and last December, the former Premier was arrested in Brazil after having been on the run for a couple years. Moves like this assure investors that their business would not be affected by the political uncertainty that comes with corrupt governments and the abuse of the rule of law. Markets tend to dislike uncertainty.
Unfortunately the track record of independent Caribbean territories in addressing allegations of corruption has been less than stellar. An aspiring OFC, Antigua allowed itself to be used as a base for Allen Stanford’s US$7 to US$9 billion ponzi scheme which came to an end with the intervention of American authorities who have now jailed him for 110 years.
Another aspiring OFC is Trinidad and Tobago which also benefits from the liquidity that comes with being an oil and gas exporter. Trinidad and Tobago built an International Financial Centre (IFC) which has failed to attract the expected international interest for two reasons. Firstly, the necessary legal and tax framework was and still is not in place. Secondly, the territory does not have the reputation for stability and transparency that the British dependencies have.
Trinidad and Tobago is perhaps the only Caribbean territory with a Cabinet member whose name seems almost synonymous with corruption. Furthermore, to date two financiers of the ruling political party are wanted by the US authorities “on numerous fraud and money laundering charges”. Extradition requests have been frustrated by what appears to have been the direct intervention of Cabinet in what has been termed the Section 34 scandal. One of the two wanted financiers was recently photographed in a carnival party hugging a sitting government Minister.
Given the apparent inability of some jurisdictions to abide by the rule of law, FATCA and similar initiatives are a necessary step to address tax evasion, money laundering and terrorist financing in OFCs. Read more on derrenjoseph.blogspot.com