In recent weeks, St. Lucia’s International Financial Services Industry has been the subject of endless innuendo and speculation amidst the reports that the country’s industry has been categorized and is being viewed in an unfavourable light by international bodies. Indeed for over a year now, there has been increasing pressure by the international community on Caribbean Offshore Financial Centres (OFCs) to clean up their operations to discourage illicit activity, and there has been increased scrutiny by other international bodies, namely the OECD.

As St. Lucia’s International Financial Services Industry has been featured over the past weeks, it has become increasing clear, particularly locally, that not only are many people unclear as to the various international bodies, but there is also a general haziness on what the Financial Services industry is all about. Not fully understanding what the industry is about and how St. Lucia fits into the industry has given rise to much speculation and misinformation.

Though St. Lucia has been involved in the International Financial Services industry from early this year, the easiest and most common reference used when referring to the industry is Offshore Banking. In reality however, offshore banking forms only a small part of the services of any offshore financial center (OFC) and is not St. Lucia’s core service in the industry.

Generally speaking, International Financial Services is based on effective management of wealth. This falls into two broad categories:

1. structuring one’s estate for succession planning or protection of wealth, and

2. maximizing of wealth through effective tax planning.

When one seeks to protect wealth, there is often a great need for privacy and as a response to this need, specialist private banks have developed in the offshore centers to accommodate the demands of the market. However, the driving force of most offshore centers, as is the case with St. Lucia, is the provision of international business companies that are flexible in the range of services that they are capable of offering and are attractive as they pay very low rates, if any, of tax; this lowers their cost of doing business. Increasingly in the ever-competitive global marketplace, businesses are seeking to maintain low costs if they are to remain competitive and stay in business.

It is this very concept of competition that has engaged the interest of the Organisation for Economic Co-orporation and Development (OECD) and continues to drive its efforts with regards to its views and objectives on Offshore Financial Centres.

There are at present some 68 OFCs in existence. Most, if not all, appear to be under scrutiny from the Organisation for Economic Corporation & Development (OECD) and its agencies the Financial Stability Forum (FSF) and the Financial Action Task Force (FATF). These acronyms have been used recently throughout the media without any explanation of the membership or the relationship of the agencies to one another. This paper will take a closer look at the OECD, the FSF, the FATF and their reports, which have been the subject matter of much debate .

THE OECD

The OECD is made up of 30 of the most powerful nations in the world. OECD countries produce two thirds of the world’s goods and services. It provides member governments with a setting in which to discuss, develop and perfect economic and social policy. Their discussion makes for better informed work within their own governments on the spectrum of public policy and clarifies the impact of national policies on the international community. However, the OECD has moved its focus beyond its own countries and has set its analytical sights on those countries that embrace the market economy.

THE FATF

The Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit in Paris 1989 to examine measures to combat money laundering. The OECD generally adopts the recommendations made by the FATF. The principal objective of the FATF in this respect stems from the need to ensure stability of the international financial system. It has been contended that in today’s open and global financial world, characterized by high mobility of funds and the rapid development of new payment technologies, various factors favour certain countries and make them even more attractive for money laundering. The factors include lack of regulation and numerous obstacles to customer identification; these it has been suggested, are notably prevalent in some offshore centres. The Caribbean Financial Action Task Force (CFATF) is the Caribbean arm of the FATF, and has its own set of recommendations that serve to complement the recommendations of the FATF. Saint Lucia - with twenty-four other Caribbean countries - is a member of CFATF.

THE FSF

At their meeting in Washington on 3rd October 1998, the Finance Ministers and Central Bank Governors of the G7 countries established a commission to consult appropriate bodies and recommend new structures that may be required for enhancing co-operation among the various national and international supervisory bodies and international financial institutions so as to promote stability in the international financial system.

The commission’s report on International Co-operation and Co-ordination in the Area of Financial Market Supervision and Surveillance was presented at the meeting of the G7 Ministers and Governors in Bonn on 20 February 1999. The meeting endorsed the recommendation to set up a Financial Stability Forum (FSF), which would be responsible for developing and implementing review methods to ensure global financial stability.

Concerns & Reactions

The primary concerns with regard to OFCs have been “Harmful Tax Competition” and “Money Laundering”. With regard to harmful tax competition, a set of criteria has been developed to assess individual OFCs. According to the report, harmful tax practices may exist when countries are perceived to allow tax benefits that may erode the tax base of other countries. This can occur when tax regimes attract investment or savings originating elsewhere which due to their nature are mobile and can be easily redomiciled. Increased liberalisation of financial markets in the global economy has improved the international allocation of savings and capital and reduced the cost of capital to enterprises. In this new environment, offshore financial centres have thrived and some governments have developed legislation and other infrastructure specifically targeted at attracting mobile activities.

The concern with regard to Money Laundering has been the destabilizing effect it can have on global financial stability, and the legitimization of the proceeds of crime. The local phrase “si pa ni situise la pa ni voleur” comes to mind, for if there was no route to legitimize the proceeds of drugs, terrorism etc, there would be less attraction to these distasteful and harmful causes. Of significance was the admission by the report that OFC’s do not appear to have been a major causal factor in the creation of systemic financial problems. The question that was not answered is what is the cause?

The FSF in its report in April this year categorised St. Lucia and several other Caribbean OFC’s in Group 3, which was the lowest of the three assessment categories available. This sparked a violent reaction in Washington from most of the governments of the nations categorized in Group 3, and even those who were included in Group 2. The main contention was that the report was admittedly based on “perceptions”, the assessment criteria were not structured, the assessment was based on comments of chosen onshore regulators, and the countries were not given the opportunity to review the reports or to explain or challenge the contents.

Some of the perceptions were from onshore supervisors who had no real practical experience or knowledge of the jurisdiction and the industry at all… it was a perception, which could have very well been based on little or no interaction with the OFC or as an OFC. As it relates to St. Lucia, there were other causes for concern. Firstly the report purports to have focused on territories with substantial offshore activity. At the time of the report (March 2000) the country had just made itself ready to incorporate its first international business company, and the regulations for the international banks, insurance, and mutual funds had not been finalized or published. In these circumstances we certainly did not have at that time “substantial offshore activity”. The report also looked at the strength of onshore supervision in the territories reviewed. In this area, St. Lucia’s domestic financial stability and supervision received favourable reports. In matters of co-operation with international law enforcement, the government has been at all times committed and the onshore supervisory authorities have been fully co operative.

Given these factors and the robust legislative regulatory environment that had been developed to combat Money Laundering and ensure effective supervision, our low rating appeared to have resulted from a failure to appreciate the unique framework of the industry in St. Lucia. Details of this framework were explained in an earlier Article and are available on www.pinnaclestlucia.com.

St. Lucia and the other Caribbean OFC’s were in the course of preparing responses to the FSF report when the FATF published its June 22 “Review to Identify Non Cooperative Countries or Territories: Increasing the Worldwide effectiveness of Anti money Laundering Measures”. In this report there was pressure brought to bear on Caribbean OFC’s with individual comments on each. With regard to St. Lucia the comment made indicated that the writer had not understood or had been misinformed on the structure of the industry and the roles of the various parties, particularly the private sector that has only a promotional role. Regulation is and has at all times been the responsibility of the Government though the report indicates otherwise.

The concerns of these developed countries and their motivation for going to such lengths to apply pressure on OFCs must be scrutinized.

Money Laundering seems to be the sheep’s clothing but protection of tax revenue is the wolf. While money laundering has taken place and continues to do so in large measure in the finance capitals of the world which are in large measure the G-7 and OECD members, the focus seems to be shifted to the OFC’s. The most recent large money laundering scandal involving the Russian mafia used the bank of New York to launder US$9 billion. It stands to reason it is easier to pass large transaction through a system accustomed to them and where there are several thousand if not millions of transactions.

Even in the systems that the OFC’s are required to put in place; such as due diligence on shareholders, no bearer shares under the theme “know your customer”. If a comparison is made between the due diligence standards expected in OFC’s and those of first world financial centers there is tremendous inconsistency. For instance, in the UK one can form a company without having to meet any due diligence standards, have bearer shares trade with greater ease and more quickly than it can be done in an OFC.

Therefore in effect the OFC’s have better systems to identify their clients and control companies than do the very nations that are crying foul.

Interestingly enough the global trend has been towards open competition with no protection. This has been a reality for the Caribbean where due to a US challenge at the WTO our favourable treatment from the EU has been eroded with disastrous effect on our economy and our people. This must be taken in light of the fact that the US does not produce bananas and that the Five Isles together produce less than 2% of the world’s bananas.

However in the development of OFC’s and the provision of tax advantages the size of the territory and its capital base are not major considerations. The legislative infrastructure, political stability and quality of professional services are the deciding factors. Here the Caribbean OFC’s can compete for mobile activities, and in this field we at last have some competitive advantage. This stimulates our economies by providing jobs, developing telecommunications, banking and Information Technology infrastructure and assists in the image development for tourism of the small Caribbean OFC’s.

The benefits to the region and its people are not considered in the OECD onslaught. Their concern is their tax base and their economies. Interestingly enough, the US government had been allowing the use of OFC’s for companies involved in manufacturing to have a Foreign Sales Corporation or FSC. This FSC would receive a tax credit for sales it made reducing the effective tax rate to the US based parent. This regime was very successful and was used by large companies such as Microsoft to increase its returns and make it more competitive. A report in the financial Times on July 22 valued the tax savings at some $US 4BN per year. The total export subsidy from 1985 to 1999 is valued at some $US 20BN, based on US treasury reports. The WTO on the basis of a European challenge deemed this to be an export subsidy and decided it had to be stopped. The Americans have until October this year to comply and are busy looking for loopholes to accommodate them continuing to take advantage of this system. Interestingly the FSC regime was developed as a follow on to another regime known as the DISC (Domestic international Sales Corporation) developed under the Nixon administration to promote US exports at a time of increasing trade deficits. Clearly it is not only OFC’s who develop laws to help their economies.

On the issue of taxes and tax competition stimulating economic growth, a historical review indicates that business from the G7 territories have historically used less developed territories for their own gain. Hotels and manufacturing all are accommodated tax-free or certainly were in the past even though they were owned by foreign nationals. This however was not a threat to the major economies and as such drew no unfavourable attention. As recently as 1996, in a report on Prospects for Service Exports from the English Speaking Caribbean, the World Bank advised, “the countries would have to forego virtually all potential tax revenue from the offshore sector to enable firms to compete”

International Financial Service on the other hand is successful, is changing the domicile of large amounts of mobile capital and activities and is becoming a threat. In fact the services sector accounts for more than 60% of the GDP in seven of the thirteen independent CARICOM states and over 70% in four.

In a recent article by the CARICOM secretariat it is noted that “the OECD report purports to address harmful tax competition in one particular area; financial services. This results in a discriminatory and distorted view of the world economy.”

In the FATF report St. Lucia was criticized for not having tax evasion as one of the predicate offences under the Money Laundering (Prevention) Act. It appears that we are expected to be tax offices of the OECD countries and enforce their domestic financial laws for all 30 of them. This position is not only narrow and self-serving but also totally impractical.

The position and motivation of the more developed countries is assessed by one writer as follows “politicians from industrial countries are diligently working to set up a cartel of high-tax nations” by undertaking “a breathtakingly brash effort to compel low-tax nations to act as collectors for their more greedy brethren”. Daniel J. Mitchell, writing in the Wall Street Journal (June 29, 2000) submits as follows:

In a startling move that tramples sovereignty and makes a mockery of international law, the OECD is trying to force low-tax regimes to collect taxes for confiscatory regimes. In effect, low-tax nations will be threatened with sanctions - ranging from ostracism to financial protectionism -- if they object to vassal status.

All of the threats and unilateral initiatives involve “name and shame” and retaliatory action. The OECD position seems to be that inherent in small size and underdevelopment is the inability and ineligibility to be on equal terms with the powers brokers of the OECD in international rule making. This is akin to a stripping of the sovereign status of these small states and a new modified economic colonization.

The government of St. Lucia and other Caribbean territories appear to have taken the position that the best way forward is through a process of dialogue and negotiation, leading to genuine international cooperation. These negotiations must be conducted in an environment of mutual respect free of big stick threats, arbitrary deadlines and ultimatums.

The government has embarked on St. Lucia’s financial services industry with great deliberation and prudence. This is reflected in the suite of legislation that has been created and the regulatory framework that has been established for effective supervision. There is commitment and continued effort to prevent illicit activity within our domestic and offshore financial services. However having put in place mechanisms to deal with the money laundering threat, St. Lucia faces the challenge of maintaining its sovereignty, and developing its economy and its people in a complex globalised market with apparently ever-changing rules of engagement.

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