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 of allowing an economy to be entirely dependent on tourism, some territories have sought to become offshore financial centers (OFCs). Still, 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 has been limited to certain British dependencies and 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 legal tax) and hiding under the veil of banking secrecy laws launder illicit funds 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 US government's effort 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 OFCs' sometimes shadowy world.  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 relatively large financial inflows' corruptive influence.  Last December, the Premier of the Cayman Islands was arrested for alleged corruption.  In 2009, the Turks and Caicos Islands temporarily returned to direct rule by the UK because of allegations of corruption. Last December, the former Premier was arrested in Brazil after being on the run for a couple of 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 corruption allegations 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.  Firstly, the necessary legal and tax framework was and still is not in place.  Secondly, the territory does not have a 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 Cabinet's direct intervention 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, Caribbean Offshore Financial Centers FATCA and similar initiatives are necessary to address tax evasion, money laundering, and terrorist financing in OFCs.

Read more on derrenjoseph.blogspot.com.

Note: The blog that used to be here is now at https://www.mooresrowland.tax/.

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