Speech given by Anthony Bristol from FCC
at the Offshore Institute conference held in Madrid
Evolving Caribbean Jurisdictions
There are some 17
English-speaking countries in the Caribbean. Of this number only 3 are not
offshore centers. The territories and the region were viewed as tropical
paradises where one could engage in "offshore banking", which was
loosely used to include offshore banking and company formations. The
infrastructure in the islands was generally poor with primarily agricultural
and/or tourist based industries fuelling the economies.
There was little
regulation of the activities, merely a legal framework that facilitated the
clients. The service providers were able to operate providing complete secrecy
to their clients, which was a significant attraction to them. The island
paradises provided an opportunity not only to conduct business but to justify
the visit as vacation, which helped preserve the confidentiality of the
client.
There are four
categories of jurisdiction that presently co-exist in the region. Though the
term "category" or "group" has come to bear harsh
connotations in the offshore world, this is merely for ease of reference. The
first group would include the older jurisdictions that have developed very
specialist areas such as banking, funds and insurance. In these islands that
happen to be in the main dependencies, the entire economies are based on the
offshore industry. The association with the onshore jurisdictions has been very
strong with several large international banks, and professional service
providers present.
There are also the treaty-based jurisdictions of which Barbados is the one that springs most quickly to mind. These islands have benefited from treaties with some of the OECD states and have been able to build higher end services even though they have not become volume incorporation specialists. This treaty networking seems to be increasing as in the last four months Barbados has entered treaties with both China and Cuba.
The incorporation centres in the
region have emerged either out of change in the perception of other older
non-regional centers in the 1980's, or an effort to take advantage of a demand
for new jurisdictions that emerged in the late 1980's and early into the
1990's. The impact has been successful, and it should be noted that though most
territories have the flexibility to accommodate many different types of
entities there is a trend that in addition to the IBC base there will emerge a
niche. Two pointed examples of this are BVI with Mutual Funds, and more
recently Antigua with Internet Gaming. Those jurisdictions that have tried to
grow too quickly tend to have failed or to have developed such bad reputations
that have prevented the industry providing the sustainable benefits that it
could. Some jurisdictions have tried to compete with lower prices but this
unfortunately has not proven successful or sustainable.
The fourth category is the new hybrid jurisdiction, geared
to providing a range of services in a well-regulated environment. Much
attention is placed on the infrastructural development and the regulation of
the service providers in this group. The two most striking examples of this
type are St.Lucia and Anguilla, both of who have also on line registries, one
of which is publicly accessible.
The legal framework in the jurisdictions of old and in the
main before 1998 were based on meeting client needs. Flexibility and secrecy
were most important, especially in the non-treaty jurisdictions. At this time
an objective observer may have been minded to state that the regulatory
framework of the old jurisdictions was on par with that of the onshore
jurisdictions. Clearly this has now changed and the offshore jurisdictions are
in most cases stricter on regulatory issues than the onshore world.
Money laundering prevention legislation was not a feature,
and this first appeared in the region in some of the new hybrids in the late
1990's. Clearly it was a result of the efforts of the FATF and the regional sub
body the CFATF that these laws were introduced. The FATF 40 recommendations
have served to provide a useful framework for any such legislation and the laws
passed reflect most if not all of them.
The industry was jump-started in some of the older
jurisdictions, and has been reinforced in most others by the presence of
qualified foreign professionals. Their influx served the very important purpose
of facilitating the transfer of structures and entities to the region by
inspiring confidence in the investors that their financial futures were in
known and trusted hands. Over time local professionals have developed their
skills and reputations to take advantage of the opportunities, and in several
cases have formed partnerships and firms with a truly cosmopolitan
flavour.
Marketing of the jurisdictions was industry lead, as the
government's role was limited originally to the facilitation of the industry by
enacting legislation. The governments were receptive to the idea; just not all
were able to contribute effectively in this technical and specialized field.
The service providers with their knowledge and international networks bore the
expense and dedicated the resources to grow their business. Gradually the
government departments, usually the Registry would take part in the marketing
effort. This was an interesting grouping of responsibilities as the Registry
was in some cases also responsible for regulation and/or marketing, placing
quite a strain on the resources and as the OECD pointed out possibly creating
conflict of interest situations.
As the industry grew and did so at a rate faster than
expected the world's focus shifted to it. The argument that organizations such
as the OECD advanced, was that harmful tax practices lead to a flight of
capital from the more developed centers to the OFC's. This is a rather
simplistic view of how OFC's operate and interact with onshore jurisdictions.
In fact it is felt that there is a shift of income not capital from the high
tax to the low tax jurisdictions as the income generating investments are found
in the high tax countries . Even then it is a matter of where the income is
"booked" not where it is actually banked.
Over time the legislation in the territories and the
planning in creating structures was improved. The image of the region changed
from the tropical paradise to flexible financial center, and with it came
increased business. What is interesting to note is that the responsiveness of
the governments in the region to changes in demand and accordingly enact
legislation clearly indicates the importance of the industry to the
economies.
The other side of the equation, that of the onshore
jurisdictions, was that there is significant activity going on offshore that
appears to erode the onshore tax base. With strong legal frameworks and secrecy
provisions not only could one not find out what was being done, but even when
sound structures were disclosed, there was little room if any for challenge. At
the same time, an increase in the awareness of the drug trade and the use of
some of the OFC's for illegitimate purposes started to cause pressure to be
exerted on the offshore regimes.
The first global organization to be formed exclusively to
investigate the proliferation of money laundering was the FATF in 1989. The
CFATF was established as the result of two key meetings convened in Aruba in
and Jamaica in the early 1990s and now includes all of the countries in the
region involved in the industry and even some others that are not such as
Trinidad. The changes demanded were disclosure, effective regulation and legal
and institutional infrastructure to detect and prevent this illegal
activity.
The OECD, which is perceived as the parent body of the FATF,
has been the biggest change agent in the industry. The 1998 Report on Harmful
Tax Competition seemed to threaten the entire industry regionally and worldwide
and was the focus of attention for almost every service provider and regulator.
Over the past three years, the focus of the OECD has been narrowed to the three
key areas of transparency, non-discrimination and exchange of information.
While the dialogue is still ongoing between the OECD and most of the regional
OFC's, some have gone ahead to sign up with them and are reporting favourable
impacts on their business to date. Though it is felt by some that the threat of
sanctions, the use of deadline dates and the sticking in of the heels by the
OECD is a challenge to sovereignty or bullying, there is no doubt that the
organization is here to stay and that change, in those centres where necessary,
is advisable.
While the industry was attempting to adjust to the new
challenges of the OECD, the FSF, which was convened in 1999, came out with
another report and listing of OFC's. The most significant statements in this
report are that there is no threat posed to global stability by the offshore
industry, and that the report's findings are only preliminary and therefore
more in-depth review should be conducted. To this end the IMF has undertaken
the review process which is now in three phases starting with a
self-assessment.
The most recent report regionally has been the KPMG report
of November 2000. This report is distinguished from the others as the British
overseas territories as well as the British government jointly commissioned it.
The report focuses on what appear to be quality control issues, particularly
regulatory independence from influence and other non-related duties; such as
marketing. The report did make recommendations with regard to the regulation of
companies, the need for licensing of service providers, international
cooperation and information sharing, and money laundering prevention.
Interestingly for the new hybrid in that group, the online registry received
the approval of the reporting team.
With all of the reports and lists there are a few common
concerns. The first is the method of evaluation, as it is felt that the review
process in all but the KPMG report was not transparent and in some cases
discriminatory. Secondly there is the over riding concern that the reports seem
to try to hold the OFC's to standards higher than the onshore world, calling
for international standards which do not as yet seem to exist.
On the flip side are the common themes that emerge. Firstly
is the need for effective regulation of the activities carried out in the
OFC's. This translates to effective dedicated financial supervision units, and
the establishment of KYC standards for service providers and institutions
particularly banks. The keeping of records of the directors of the entities as
well as the owners was found to be significant and challenged the continuation
of bearer shares. In short the advice was to do away with them.
The effect on the OFC's is that many will have to revisit
their laws, particularly those relating to IBC's and Banking. In most OFC's the
IBC was the engine of the industry providing a steady income base to the
providers and the governments. The IBC was particularly useful as its
flexibility allowed it to be used for almost any business purpose. Gradually
this was restricted for instance with the regulation of mutual funds in the BVI
and Internet gaming in Antigua. In some regional OFC's, such as St Lucia, the
IBC can serve the purpose of an LLC by allowing a check the box election to be
made under regulation Reg.301.7701-b(8)(i) of the US Internal Revenue Code,
1986, as amended.
The major changes will be in relation to bearer shares and
to filing of directors and keeping of records of shareholders. The Bahamas has
been one of the first to respond changing its laws to meet the new standards.
Others will follow, however there is the inescapable increased cost of
reworking thousands and hundreds of thousands of companies and of using
alternate measures to preserve confidentiality, such as nominee shareholders.
Our research indicates that there are some territories that are in the process
of cost benefit studies on whether they should undertake the necessary changes
or simply bow out of the industry.
Banking in the region has undergone the most scrutiny. In
the last year with the clamp down on dubious institutions there appear to have
been more closures than new entrants. The IRS has made its demands on banks and
other intermediaries, in the form of the Qualified Intermediary rules which
require institutions wishing to avoid withholding tax on their clients
investments to enter into an agreement whereby the institution will undertake
to keep records on clients and to remit taxes to the IRS without disclosing to
the IRS the identity of the client. Though initially opposed, this too has come
to be accepted as part of the change and accordingly most of the regional OFC's
have applied for qualified jurisdiction status to allow intermediaries
established therein to obtain their QI status. Several of the OFC's have gained
qualified jurisdiction status and others including St.Lucia have applications
before the IRS at this time.
The banks are facing the increased cost and responsibility
occasioned by the anti money laundering legislation. There are stricter KYC
rules, need for training of staff, better record keeping, transaction
thresholds, and increased supervision. If however the trend is correct, then by
adhering to these standards the institutions that comply will be able to market
their services with greater certainty and confidence as all they would have the
international all clear which helps client confidence.
Service providers will have to be regulated in the new era.
In the following territories St.Lucia, Anguilla, Belize, Cayman, Grenada,
St.Kitts, and St.Vincent laws to license them including annual audits,
inspections etc have been implemented and in Barbados and Nevis similar laws
are in the process of being developed. Again in this regard the new hybrids
were ahead of the game starting off with these laws rather than having to
rethink and implement new legislation. Fortunately one of the changes that has
occurred over time is the involvement of the government working jointly with
the private sector in marketing either through industry associations or as has
been done in St. Lucia with a private promotional company. There is a definite
synergy to be had from this joint approach and it likely to become more
prevalent over time.
In light of the foregoing, the new expectations for
jurisdictions appear to include the following:
Licensing of providers
While there are in fact many new
challenges, it is likely that the rate of change experienced in the last four
years will not soon again be seen. There will be a transition period over the
next few years as the territories and institutions seek to comply with the new
laws and expectations, and fortunately there are provisions made to accommodate
this adjustment. The distinguishing factors are likely to be the quality of
service and the ability to identify new markets and products to sustain growth.
Treaty systems are undergoing change, for instance the FSC which has been
replaced by the Extraterritorial Regime that allows any territory to
participate which is a new set of opportunities for those geared to it. It is
also likely that with exchange of information and other OECD criteria met, the
OECD members is likely to seek ways to facilitate international business that
may include new treaties.
Another criterion is likely to be the need for substantial
activity. This will favour those jurisdictions with the human resource
infrastructure; that is large well-educated populations and actual on island
expertise in the target areas.
As in all other global industries, change is inevitable. The
response to change is what will make the difference and those that are best
geared for it will be the ones to survive the threats posed and the ones able
to identify and exploit the opportunities presented.