Nearly three years after the world’s economic powers issued damaging money laundering and tax haven blacklists, the Caribbean’s offshore financial industry is bowed but not broken, experts in the sector say.
The region’s burgeoning financial services industries were deeply scarred as companies fled in the face of the blacklists, which the Group of Seven leading industrial countries said were needed to crack down on tax cheats and money launderers. Small countries, however, decried it as a form of fiscal colonialism.
The Bahamas lost nearly a quarter of its registered banks after passing strict regulations to ward off the blacklists, according to official records. But industry insiders say the loss of banks in the services-dependent island chain may have been closer to 70 percent.
“It has done a lot of damage. People are afraid to use offshore centers as a result of the blacklists,” said Vincent Hubbard, a retired industry executive, lawyer and historian credited with starting the offshore industry on the tiny eastern Caribbean island of Nevis in the early 1980s.
In Caribbean nations and colonies, reeling from fading traditional industries like sugar and bananas, offshore finance, along with tourism, are crucial to economic survival.
Offshore money centers around the world were staggered by the blacklists issued by the G7’s Financial Action Task Force and the 30-nation Organization for Economic Cooperation and Development in mid-2000.
The OECD list targeted 35 offshore centers, from the south Pacific to Europe to the Caribbean, as potential paradises for tax dodgers. The FATF list cited a host of nations and colonies deemed uncooperative in the battle against money laundering, processing crime profits through the world’s financial system to hide their origins.
NOW OFF LISTS, BUT DAMAGE WAS FELT
As of mid-February, nearly all Caribbean nations had been cleared from the blacklists. St. Vincent and the Grenadines remained on the FATF list.
In many cases, the damage caused to territories by being blacklisted and then taking steps to remove themselves is difficult to determine. Their emergence in mid-2000 coincided with the global downturn in stock markets, making it impossible to know if falling “assets under management” should be blamed on tumbling markets or the lists.
The Cayman Islands, the largest of the Caribbean banking centers, lost some business, while the Bahamas, a stronghold of private wealth management, was badly hurt, experts said.
In the Bahamas, for example, the government faced inclusion on the OECD blacklist with a raft of tough new legislation some in the industry considered a panicked response that damaged the sector far more than the blacklist would have done.
“There was a high degree of uncertainty …. Our industry does not react well to that degree of uncertainty,” said Wendy Warren, director of the Bahamas Financial Services Board.
The number of registered banks fell from 415 in 1999 to 317 in mid-2002, a drop of nearly 24 percent, as “brass plate” banks closed or let licenses lapse, according to official statistics.
But some industry insiders say the official government numbers on current functioning banks are too high. Companies and private customers were scared off by new disclosure rules, tougher “know-your-customer” regulations and promises of closer cooperation with big nations to catch tax cheats.
“About 115 (remaining banks) is probably realistic,” said Gilbert Morris, director of the Bahamas’ Landfall Center think-tank and a government adviser. “A lot of those were brass plate banks … but we’ve also lost a number of genuinely interesting international banks and trust companies.”
“They may have been able to survive those pressures had we not acted so quickly to put a riot of legislation above their heads,” he said. “The way we responded to the OECD and the FATF was utterly wrong and wrongheaded.”
SMALL NATIONS HIT HARD
In the Cayman Islands, touted as the fifth-largest financial center in the world behind New York, London, Hong Kong and Tokyo, the number of banks and trust companies dropped 6.8 percent last year alone.
Inclusion on the FATF blacklist for two years severely damaged offshore finance in the tiny two-island nation of St. Kitts and Nevis, population 39,000. It may not recover for years, Hubbard said.
“Business is off about 50 percent from where we were in 2000,” he said. “Confidentiality has not gone completely out the window but we are being pushed by the OECD to give it up.”
Government officials say the tougher standards that resulted from the blacklists should strengthen the industry in the long run. But insiders complain bitterly that the economic powers simply used the FATF and OECD to tilt the playing field, effectively forcing small jurisdictions to kowtow.
“The OECD was very successful playing a game of divide and conquer,” said Dan Mitchell, a senior fellow at The Heritage Foundation who specializes in international tax issues.
Advocates for small offshore centers were irked that the blacklists emerged not long after one of the biggest money laundering scandals in history — a plot by Russian mobsters to launder billions through the Bank of New York — hit the developed world’s financial heart, Wall Street.
“The G7 countries were the ones with the big money laundering scandals,” Morris said. “The biggest tax haven in the world is an island. It’s called Manhattan.”
Bruised and battered in the short term, the Caribbean islands’ long-term fate is less clear.
The Bahamas, a nation with no income tax and favored retreat of wealthy foreigners like fashion designer Peter Nygard, author Arthur Hailey and billionaire Joe Lewis, is trying to ease some of the nooses it put on the industry in response to the blacklist.
Cayman — which required banks to have a physical presence, nearly eliminating shell banks — actually saw its registered companies climb to 65,259 at the end of 2002, a 1.2 percent increase over the previous year.
“My grandmother used to say what doesn’t kill you makes you stronger,” Assistant Financial Secretary Deborah Drummond said.
Now, increasingly, advocates for the Caribbean industry are calling on G7 nations to clean up there own houses.
“There will be long-term harm (to Caribbean offshore industries) if there are different standards for us than for all the players,” Drummond said.
Mitchell said that with few natural resources and high transportation costs, the Caribbean islands had few economic options. “Offshore has to be a foundation industry if they have any chance of prospering,” he said.
By Jim Loney, Reuters
