This Week in Europe, 28 April 2000
Executive Director of the Caribbean Council for Europe
There are now ten separate international initiatives to examine globally the conduct of the offshore financial services sector. Their objectives range from tackling money laundering, through to seeking to eliminate the ‘harmful tax competition’ of tax havens, to establishing minimum international standards for financial services regulation.
In many cases it is the Caribbean’s independent states or the Overseas Territories of the European Union (EU) that are finding themselves at the centre of this growing storm
For a region used to sudden climactic change, the best way to describe what is happening is as a series of financial hurricanes building up in the mid-Atlantic and moving inexorably in the Caribbean's direction. Some have already passed through the islands (the World Trade Organisation’s ruling on Foreign Sales Corporations), others are close by and gathering momentum (the Organisation for Economic Co-operation and Development’s (OECD) work on Harmful Tax Competition), while still more lie off the coast of Africa possibly presenting a distant threat (the Financial Stability Forum (FSF), an exercise to establish standards for financial services regulation).
The cause of this sudden build up of freak financial weather is globalisation. In a liberalising global market, capital has had to become increasingly mobile as currency and exchange controls have been relaxed to facilitate the cross-border flow of capital. This has sharpened the focus of developed countries keen to maximise their national tax bases in order to ensure that as little as possible escape's the taxman's grasp.
But globalisation has had more worrying consequences. Money laundering is now easier than ever before and the opportunities for organised crime to rapidly transfer large sums to, or through, small offshore jurisdictions is tempting. While the Internet has reduced the speed and cost of financial transactions, it has also made them more difficult to police. The consequence has been a growing clamour, justified and unjustified, to pursue international initiatives aimed at controlling or curtailing activity previously accepted as legitimate.
For the smaller jurisdictions such as those in the Caribbean, these processes are far from democratic and decidedly one-sided. There is no Caribbean presence in the OECD, the EU, the FSF or the many other bodies known by a wide range of mind-bending acronyms through which many of the proposals are bring pursued. Only the United Nations process allows the offshore financial services centres the chance to participate in the debate on their own future. Even then the negotiating capacity of the Caribbean compared with that of OECD governments makes the playing field far from level.
Equally troublesome is that many of the initiatives are moving into controversial or uncharted territory in terms of law or seek to impose extra-territorially the developed world’s view on the developing world. So much so that it seems that in the absence of agreed internationally accepted standards, some developed nations are now looking to get their way by exerting coercive political pressure on weaker jurisdictions.
Senior Caribbean officials have also accused the developed nations of taking advantage of the OECD process by deliberately muddying the legal waters between tax avoidance, which is legal, and tax evasion which is not. Observers have also pointed out that as OECD nationals are among the major clients of offshore financial centres, OECD governments might be better advised to tackle the issue of tax avoidance domestically rather than seeking to internationalise it.
The problem is that while discussions on these issues continue in Washington, New York, London and Paris, the impact on the Caribbean is already being felt. The sense of uncertainty has been steadily increasing and this is already affecting business and investor confidence. It is particularly acute when any exercise is politically driven.
For the user of offshore financial services finding a way through the briefings and policy papers to assess the likely impact is no easy task. Accurate analysis is made more difficult by the fact that each financial service industry is different in character. Therefore, not all of the initiatives are relevant for all financial centres.
By way of example, the World Trade Organisation’s (WTO) decision on Foreign Sales Corporations will have had little affect in the British Virgin Islands or Cayman Islands but relates directly to Barbados’ interests. Conversely, the EU’s proposed code of conduct for the financial services sector will not unduly worry Barbados, but may be a cause for concern in certain of the UK Overseas Territories.
The common theme in all initiatives would appear to be a desire by the developed nations to see greater transparency, international co-operation and exchanges of information between offshore and onshore jurisdictions. These are laudable objectives, particularly if the financial scandals of the type, with which the 1990’s began and ended, involving the BCCI and Bank of New York, are to be avoided. However, many developed nations pursuing these initiatives are unwilling to address problems associated with their own financial regimes. By way of example: Luxembourg and Switzerland abstained from the 1998 OECD Report on Harmful Tax Competition. In February 2000, the OECD’s Financial Action Task Force threatened to suspend Austria from its membership for its anonymous passbook accounts. These countries may soon be joined by Britain, with offshore centres in crown dependencies close to home such as the Channel Islands.
International emphasis in recent years has been on encouraging regions such as the Caribbean to strengthen their service sectors in the light of preferential arrangements for agriculture coming to an end. While the growing number of threats might be seen as a compliment to the recent relative success of the region in developing offshore financial centres, they are in reality a further challenge to the region’s economic survival.
A well-regulated offshore financial service sector is a prerequisite and a defence against use for criminal purposes. However, there is a sense that the ever-increasing range of initiatives now underway amounts to nothing short of an attack on the success of one of the few new industries in which the region may have competitive advantage over the developed world.