Ravaged by efforts to control money laundering and funding for terrorism, some of the world’s newest tax havens in the Caribbean are seeing a dramatic fall in offshore banking. While the fallout has hit the more well-known jurisdictions — such as the Cayman Islands and the Bahamas — it has been particularly severe in the eastern Caribbean.
The last offshore bank has been closed in Dominica, which had 50 institutions registered over the past five years. In Antigua, the number of offshore banks has dropped from 60 four years ago to 15 today. The Bahamas has lost a quarter of its banks, now having just over 300, while the Cayman islands, the world’s fifth-largest offshore financial centre, has 5 percent fewer banks.
The contraction has crushed smaller financial centres. “We are trying to get our economy to recover and the offshore sector is one of those we expect to lead the process,” said Eisenhower Douglas, Dominica’s senior government economist. “However, we want to avoid the many difficulties that we have had in the past.”
The eastern Caribbean islands had used a tax-favourable environment — no taxes or low tax rates — to attract a range of financial services, including offshore banking, and to bolster weak economies based on fickle tourism and troubled by a reduction in the export markets for their commodities.
Tax havens have been under increasing pressure over the past five years. The Organisation for Economic Co-operation & Development, accused them of providing “harmful” tax competition and demanded greater exchange of information.
The Financial Action Task Force, an arm of the OECD, demanded changes that could not be met by many offshore banks, said Calvin Wilson, executive director of the Caribbean Financial Action Task Force, an organisation of Caribbean basin countries that have agreed measures to counter money laundering. “There were new demands for improved regulation and several banks were found wanting and had to be closed.”
While saying they are seeking improved regulatory oversight for offshore banks, administrators of the region’s financial services jurisdictions reject suggestions that the institutions are poorly regulated.
“Crooked banks would relish poor regulation, so why should they move?” says Sir Ronald Sanders, Antigua’s chief negotiator for international financial services and the country’s high commissioner to London.
The decline in the number of Antigua’s offshore banks was influenced also by US demands after the 11 September attacks that they should have a physical presence in the jurisdictions in which they are regulated. “Physical presence means a street address, books and records and at least one person who could be held accountable for the bank’s activities,” says Sanders. “This would have required significant relocation and setting up expenditures by banks that were not prepared to spend the money. Failure to comply would have resulted in the US cutting off correspondent relations with US banks.”
In response to the OECD, Caribbean countries created regulatory bodies to inspect banks for standards and for protection against money laundering, terrorism financing and fraud. Existing regulators, such as central banks, were given additional powers to monitor offshore banks. Penalties were introduced and increased, not only for the account holders, but also for the banks and their staff. Banks have been required to employ compliance officers to check and enforce anti-money laundering rules and report suspicious activity.
Central banks and other regulatory agencies have stopped giving licences to “managed” or “shell” banks, and instructed that all their books and records must be kept locally. Banks also had to meet due diligence criteria.
The closure of offshore banks will affect the economies of the eastern Caribbean jurisdictions, says Wilson. “With problems for their economies, governments were urged to look to financial services, including offshore banking. Now the closures will reduce their revenues.”
In Antigua, for example, offshore banking accounts for 4 percent of the country’s GDP. The benefits for the jurisdictions include registration fees, direct and indirect employment, and the use of support services such as lawyers and accountants.
Having met the new demands for regulation, jurisdictions that host offshore banks are continually revising their oversight standards.
Grenada, Dominica’s neighbour, was recently removed by the OECD from the list of non co-operative countries. “As we stated prior to being placed on the list, we will continue to do everything in our power to improve the jurisdiction,” said Keith Mitchell, the prime minister.
However, it is widely held in the region that the jurisdictions will never recover the volume of offshore banks they once hosted. But there will be a leaner, cleaner banking sector, what Sanders describes as an industry with a predictable life that contributes to revenues and employment.
“We are interested only in clean banks. Those we have are operating under higher standards than many in the OECD countries.”
Sunday Business, London.
