Regulation

Caribbean IFCs: Looking Beyond the International Initiatives


By Paul Byles, CEO and Director of First Regents Bank & Trust, Cayman Islands (01/06/2015)

Caribbean IFCs continue to face the growing challenges as global standards struggle to manage certain risks across borders. Some of these challenges (such as cross border tax information sharing) have maintained their original format but intensified and we have seen several new initiatives (for example a push for beneficial ownership registries) introduced as well. In both cases the larger Caribbean OFCs appear to have mostly weathered the storm.

 

Caribbean IFCs and indeed IFCs generally, will now need to consolidate their experiences over the past two decades, moving away from the current approach of reacting to these various initiatives, to getting more involved in the debate regarding the role of IFCs in contributing to risks across borders and addressing the question of whether these perceived/real risks are being adequately addressed by the seemingly never ending initiatives.

 

Key Initiatives Impacting Caribbean IFCs

 

FATF/CFATF Evaluations

The FATF is the international standard setting body in the area of fighting money laundering and the financing of terrorism, and has several regional arms such as the Caribbean Action Task Force (CFATF). The original FATF Recommendations have been revised and several Caribbean IFCs are undergoing or about to undergo the next round of CFATF Mutual Evaluations of their anti money laundering and CFT regimes. The purpose of this next round of reviews is to test whether the regulatory frameworks of the Caribbean jurisdictions are being implemented effectively.

 

A key difference between these newer round of evaluations and the earlier ones is that the focus goes beyond what is termed ‘technical compliance’. This term refers to whether the country has the required legal and institutional framework in place.

 

The newer test is whether the country’s legal and institutional framework is producing the desired results. This invariably becomes a question of whether the country has the resources and infrastructure to fully comply with the various laws and regulations. It is an important challenge for IFCs because there will most certainly be a difference of opinion between the external assessors and the respective IFC governments as to whether there are sufficient resources, with the latter facing financial austerity measures already and needing to spread limited resources widely across other areas such as education, health, etc.

 

How will they cope?

 

The larger IFCs will have more access to resources to deal with the required changes. Smaller IFCs may struggle and this poses a challenge to their ability to continue to operate without heightened scrutiny. Such scrutiny risks being placed on so styled black lists or uncooperative country lists. This in turn can have a negative impact on the ability of financial services firms to attract new clients to their jurisdiction because put simply, in the same manner that environmental campaigns has resulted in the boycotting of major firms by clients, unwarranted negative reputation of IFCs may turn some legitimate clients away.

 

Even in the case of the larger Caribbean IFCs, their relative success in dealing with this challenge will be determined by how well they balance the required changes with any risks that such changes may pose to the efficiency of doing business with their clients.

 

Tax Information Exchange & Similar Agreements

One of the most well-known of the OECD initiatives has been the push for countries to participate in the signing of tax information exchange agreements modeled after a template created by the OECD. Many Caribbean IFCs have previously implemented this information on request regime. However things have progressed significantly into the area of automatic exchange of information between tax authorities. The latter is fast becoming the new standard.

 

The automatic exchange of information is also evident in the other initiatives such as the Foreign Account Tax Compliance (FATCA), which will require automatic reporting of certain information on US or UK persons as defined by those respective countries’ FATCA regulations. FATCA is no longer a new initiative for Caribbean IFCs; it is in full swing with the first reports to be submitted either to the IRS or via local tax authorities shortly.

 

For the most part the main Caribbean IFCs such as Bermuda, Cayman Islands and the BVI have handled FATCA well as they have put the required infrastructure in place and local institutions are getting closer to being equipped for the first reporting date in the latter part of 2015.

 

A potentially bigger test for IFCs in the medium term may be the eventual expectation that jurisdictional compliance for FATCA becomes the next item on the US/UK agenda. At a minimum that compliance will need to be evidenced by local financial services institutions having to demonstrate that they have the necessary systems and procedures in place to comply with their local FATCA regulations. This may impose further resource strains on the various domestic authorities and other agencies as it may require onsite inspections or audits to test whether such systems are in place.

 

Finally in the medium term we should expect to see the OECD’s Common Reporting Standard in full force. This is an automatic exchange of information protocol based on FATCA and over 51 jurisdictions have already committed to start sharing information automatically in the latter part of 2017 and 2018. The Caribbean IFCs which have signed on to this new initiative to date are: Anguilla, Aruba, Bermuda, the British Virgin Islands, the Cayman Islands, Curacao, Montserrat and the Turks and Caicos Islands.

 

Realigning the Debate on Tax and the Role of IFCs

 

Much of the policy debates and discussions surrounding the various tax and regulatory initiatives is developed onshore, while the Caribbean IFCs have been largely reactionary with the exception of a few advocating bodies.

 

A good example of the reactionary approach is the debate surrounding tax evasion, tax avoidance and tax competition. IFCs have belaboured (quite rightly initially) the point that ‘tax evasion’ should be distinguished from legal ‘tax avoidance’. IFCs then positioned themselves further from the phrase ‘tax competition’ and in recent years some IFCs have attempted to avoid using the “t’ word altogether.  While this may be a rational public relations strategy it only plays into the hands of those that believe those terms are as relevant as they have made them out to be in the first instance.

 

In fact ‘tax’ is as valid a part of the existence of IFCs as it is in the US where tax competition between states is aggressive as well as in most other OECD based countries where tax incentives are widespread. All of these efforts are couched within a perfectly legal framework aimed at providing incentives to firms so that jobs can be created in one city (or indeed one country) over another. There is in fact nothing wrong with the term tax competition. There has been for many years, however, serious doubts surrounding the OECD’s proposition that this is ‘harmful’.

 

The immediate outlook for Caribbean OFCs will be determined not only by how they deal with the current initiatives but perhaps more importantly how Caribbean IFCs position themselves in this debate.

 

The truth is that the very well intended efforts to rebrand ‘offshore centres’ as ‘IFCs’ or to push back whenever someone mentions that an IFC is a ‘tax haven” have not in fact helped the general perception issues that these financial services centres face. Invariably, as soon as the battle against a particular negative label appears to have been won, a new one (eg, such as ‘secrecy jurisdictions’ or ‘jumbo directors’) will soon arise. The heart of the issue is not the labeling and its connotation but the more important policy and political battle that lies beneath.

 

The future of Caribbean IFCs lies in their ability and willingness to work together on a far more substantive front than ever before. This must go beyond, as an example, the occasional high level two to three hour meetings of the UK Caribbean territories. It must instead move on to a well defined organized effort with resources aimed at advocating for their rightful place in the global financial system.

 

At stake is the ability of each jurisdiction to continue on a proven path to economic development that has provided thousands of jobs and many millions of revenues to the governments of Caribbean IFCs.

 

The Caribbean IFCs play a valid role within the global financial system, but their respective governments now need to genuinely come together to protect that role if it is to continue  for another five decades.

 

The alternative is that the future of Caribbean IFCs will be determined largely on whether they can continue to provide resources towards implementing new initiatives. That may in turn mean that only the larger centres survive with many of the smaller jurisdictions moving away from financial services altogether.

 

 

About the Author:

Paul Byles is CEO and Director of First Regents Bank & Trust in the Cayman Islands, which provides private banking and investment advisory services. He is an experienced economist and financial services professional having worked in the financial services industry for 20 years. He is a former director of a big four consulting firm and a former financial services regulator. He is author of the book ‘Inside Offshore’ which deals with the perception of offshore centres and Offshore Financial Services: a BVI text, an introductory textbook on offshore financial services.