Regulation

Latin America and the Caribbean International Financial Centres


By Eduardo D’Angelo P Silva, former president of the Cayman Islands Bankers Association and former chairman of the Cayman Islands Financial Services Association (now Cayman Finance) (01/10/2012)

On a world map, start in New York City and draw a line to South-east until you reach São Paulo, Latin America’s business capital and wealthiest city. Then draw south-west to Buenos Aires, capital of Argentina, second South American economy. From there, go north-west to Mexico City, second largest city in the region, and back to New York. The area limited by these lines encompasses vast portions of Latin America’s wealth, its most attractive investment opportunities and USA’s financial powerhouses. At its geometrical centre, a few special places where these three factors can find their most effective combinations, the Caribbean International Financial Centres (IFCs), of which the Bahamas, the British Virgin Islands (BVI), and the Cayman Islands are the most relevant.

Latin America has always been considered of less importance to the world’s economy, when compared to USA, Europe or Asia. There’s been always a strong believe (acrimoniously contested by Latin Americans) that “where the US goes, so will go the rest of the Americas”.  History has confirmed this trend until recently, when the economies of certain countries like Chile, Colombia and Brazil started to show signs that they could finally get rid of the periodic cycles of “boom and bust” by controlling inflation, reigning on spiralling government deficits and adopting business-friendly policies to attract long term (as opposed to merely speculative) foreign investments.

Arrival of Latin America Banking Business

Banking business from Latin America has historically arrived to Caribbean IFCs via New York, London or Switzerland, as a spill over of the corporate banking, Eurobond issuing and private banking provided by those centres to their Latin American customers and counterparts.

In the early 90’s, a number of banks from Brazil, Mexico, Argentina and other jurisdictions opened offices in the Cayman Islands and the Bahamas, mostly because their US regulators expressed concerns with the fact that these banks were running offshore operations from their New York offices. At the peak of that movement, more than 28 Latin American banks operated just from Georgetown in the Cayman Islands. In total, more than 80 bank licenses were held by Latin American banks in those two IFCs, making them the second largest group, after the US banks.

However, because of mergers, acquisitions and the overall re-structuring in the banking industry, the number of Latin American banking licenses is now much smaller. Additionally, many banks that have licenses in Cayman or Bahamas today run their operations from their headquarters and don’t see the need to keep a physical presence in the region. However, some accomplishments of that era still remain: several Memoranda of Understanding (MOU’s) signed between Caribbean regulators and Central Banks of countries like Brazil and Mexico, which pioneered the setting up of guidelines for consolidated banking supervision and exchange of information in  the region, are still in place and regularly used by regulators. They showed to the world the IFCs Authorities’ commitment to proper cross border banking supervision. 

The decrease in Latin American banking presence gave place to new wave of business, this time provided by the creation of mutual funds and other investment vehicles based in the Caribbean to invest in the opportunities created by the emerging markets of South and Central America. Again, Caribbean IFCs like BVI, Cayman and Bahamas became “jurisdictions of choice” for those funds thanks to the professionalism and flexibility of their industries and regulators. That business flourished but attracted the attention of onshore regulators and tax authorities, that argued that some of the money being invested via Caribbean IFCs was “flight capital”, money transferred offshore by their own citizens and companies, who used the offshore funds to invest back in the country without identification and enjoying tax breaks originally designed to attract new foreign investors.

As a consequence, blacklists were enacted by authorities in Brazil, Mexico and Venezuela (to name just few) which penalised foreign investments originated from “low tax jurisdictions” with additional taxation of dividends and capital gains. Needless to say that the Caribbean IFCs figured prominently on such lists, despite having been removed from the OECDs own blacklist after agreeing to cooperate and adhere to its standards for exchange of information.

The existence of such blacklists was circumvented by the industry by routing investments in to emerging markets through non-listed jurisdictions like Delaware or London. That added layers of complexity to the structures, but avoided the penalties until the onshore authorities could gather the political will to blacklist the US or the UK (what Brazil did, but suspended its application “pending diplomatic negotiations”).

Present Potential

Meanwhile, the world continued to change. Most of the jurisdictions that used to be called “Emerging Markets” and were only recipients of investments in the 90’s and early 2000’s have now their own capital to invest internationally and present new opportunities of business for Caribbean IFCs. Multinational groups originated from family companies founded decades ago in Brazil, Colombia or Mexico today are listed on US stock exchanges and competing to win market share over European, American and Asian conglomerates. Traditional US brands like Burger King and Budweiser today belong to Brazilian investment groups.

Asset managers in Latin America are busy creating venture capital structures to channel capital from Latin America to invest in other parts of the world where the economies are depressed and good businesses can be acquired at attractive prices. They are using Caribbean IFCs as a “stepping stone” jurisdiction, where a structure like a trust or a company is set up to receive bulk investments which are then spread and diversified into to several other jurisdictions.

This practice of setting structures in Caribbean IFCs as stepping stone can again face criticisms from international bodies for ‘lack of business substance’, so it would be in the IFCs best interest to attract the decision-making directors or partners of such ventures to re-locate, creating immigration policies attractive to highest level of professionals to live and work here.

Opportunities, Diversification and Risks

Economists who follow the Latin American economies divide its countries in two groups: the first group, who is strongly dependent from the US and therefore has been suffering the effects of the US recession, comprises mostly close neighbours like Mexico, Honduras, El Salvador, but also Venezuela (who, despite of all the rhetoric by Hugo Chavez, is totally dependent on the US to buy its oil). The second group, whose economies present greater degree of independence from the US and are taking advantage of other partners in progress like China, India and Russia, include mostly the members of regional alliances like the Mercosur (Argentina, Brazil, Paraguay and Uruguay) and the Andean Community (Bolivia, Colombia, Ecuador and Peru), in addition of Chile.

For the Caribbean IFCs, whose economic fortune has been tied to the US for so long, creating or strengthening ties with Brazil, Argentina, Colombia or Chile should make great sense, as it would provide diversification to their businesses model and protection against future crisis in US and/or Europe.

The development of such new ties would not be without its own perils: these countries are experimenting fast paced growth, and with that there’s always the risk of imbalances, instability and even the formation of speculative bubbles that can burst and wipe entire segments of an economy. Prudence would be even more necessary than when dealing with mature economies.

Additionally, the old negative image of the offshore financial industry may generate animosity towards the use of our structures, even though Caribbean IFCs have been recognised and accepted by international organisations and entered into Tax Information Exchange Agreements (TIEAs) with many countries.

Caribbean IFCs governments and private sectors may be tempted to raise the offer of entering into TIEAs with these jurisdictions as a way of combat such animosity, but such strategy must be carefully considered in all of its implications. Having a TIEA with Caribbean IFCs would be seen by many Latin American governments as nothing more than a public relations stunt to intimidate their taxpayers and investors, rather than as an instrument of legitimate international cooperation. Additionally, as mentioned before, many Latin American countries have enacted blacklists that discriminate against the Caribbean IFCs, and it should be unacceptable to enter into a TIEA under these conditions.

In summary, Latin America is full of potential and has great complementarity to the present business model of Caribbean IFCs. We should all be heading there to capitalise on these opportunities.