Blacklists In The Caribbean

The 2016 leak of 11.5 million encrypted confidential documents from Panama law firm Mossack Fonseca, otherwise known as the Panama Papers^[i], opened a veritable Pandora’s Box and cast a long shadow over the offshore services world.

If the Panama Papers were a hand grenade that exploded and took many crooks down, the ensuing Paradise Papers in 2017 – 13.4 million documents leaked from law firm Appleby and other sources – were a comparative damp squib^[ii]. However, the headlines each generated and the impact on the general public and politicians cannot be underestimated. Together these two leaks lit a touchpaper whose ramifications are being felt around our region to this day.

The backlash was immediate. High-profile figures suddenly found themselves under an uncomfortable spotlight. Some, like the Prime Minister of Iceland, were left with no choice but to fall on their swords, following public anger over sheltering family money offshore.

Things had to change. The public’s appetite for righting these perceived wrongs had to be satiated. But instead of righting the tax anomalies at home that enabled those with an ulterior motive to dodge their tax obligations, politicians instead deflected criticism by pointing the finger elsewhere: at the smaller countries and territories in no position to defend themselves from this tidal wave of adverse publicity.

The UK and European Union (EU) are both guilty of employing this deflection tactic. Prominent UK and EU politicians have targeted (in particular) UK Crown Dependencies and Overseas Territories, including my own home of the British Virgin Islands (BVI). Although some of these states are but small global blips, lost in the surrounding seas and oceans, they have a huge turnover in terms of providing offshore services.

Bully Boy Tactics

The UK and the EU have thrown their weight behind the wheels of change, employing the sort of body swerve that would make Lionel Messi proud. In the meantime, they have failed to rectify their own shortcomings, resulting in a “do as I say not as I do” attitude.

This impact became clear here on 5 December 2017, when the Council of the European Union (EU) adopted the EU’s first list of non-cooperative tax jurisdictions, in order to tackle tax avoidance and other unfair tax practices. The list – known colloquially as the “the black list” – is continually monitored by the Council and is updated twice a year, together with a separate “grey list” (comprising those jurisdictions that fall short of EU tax standards but have committed to reform) alongside it. 

Both lists were substantially updated in February 2020, following the expiry of deadlines for the listed jurisdictions to meet their various commitments. As a result of the revision, the Cayman Islands joined Trinidad and Tobago and the US Virgin Islands on the black list. The Cayman Islands is the first British Overseas Territory to appear^[iii]. 

Blacklisted jurisdictions face reputational damage and stricter controls on their financial transactions with the EU, while those which are on the grey list could be moved to the blacklist if they do not meet certain commitments.

These EU bully-boy tactics have forced the BVI to pass The Economic Substance (Companies and Limited Partnerships) Act, 2018. It was pushed through by the BVI in order to meet the EU’s deadline to adhere to its brutal demands (or else risk being blacklisted). The EU had previously placed the BVI and other Overseas Territories on the grey list, supposedly due to concerns regarding their compliance regimes.

With the exception of holding companies, the new Act effectively requires offshore financial services companies registered in the British Virgin Islands to physically set up office spaces in the territory, if they are to continue doing business with/through the BVI. Penalties to be hurled at those who do not comply with requirements of the BVI’s new Economic Substance Act will come in the form of fines ranging from US$5,000 to US$50,000. The final penalty will be decided by the International Tax Authority (ITA) established under the BVI’s Ministry of Finance.

Fortunately, there does appear to be some common sense evident, at least where the estimated 400,000 BVI holding companies are concerned. Under the new law, such companies only have to show that they have “adequate employees and premises” to manage their equitable interests or shares. The point being that a holding company does not do very much of anything, other than to passively hold shares in another company or group of them.

EU governments are meddling with an offshore eco-system that could blow up in their faces. The EU’s blacklisting threat against smaller countries or territories for not adhering to its unclear standards in the area of tax avoidance is undemocratic. It also reveals a misunderstanding of what BVI companies do in large measure.

The EU seemingly fails to appreciate that the business of the majority of BVI companies is to act as passive holding companies for share capital in subsidiary undertakings domiciled and operating elsewhere. The “economic substance” of a holding company does not involve employing many people or producing “widgets” or services. It is to act as an aggregator of capital to go on risk through investments through subsidiaries or holdings in the capital of other companies all over the world.  

BVI companies form an integral part of the world’s economic plumbing, which in turn has stimulated the movement of surplus capital from rich nations to go on risk in developing nations, thereby pulling many people out of poverty. This has been one of the most positive benefits of globalisation. Many transparency campaigners – who’ve been pressuring EU governments and politicians to browbeat smaller jurisdictions into submission – remain unaware of this role the BVI can, and does, play, along with her sister service providers elsewhere in the Caribbean and the Channel Islands.

The EU is seemingly unwittingly threatening to destroy the plumbing of globalisation over its own political failings, in order to get its internal tax policy equalised and to negate tax competition in the internal EU market (for example, comparing Irish corporate tax rates with those in France) or outside the EU.

The use of blacklists to try to extort policy results in small foreign sovereign states is an open form of economic warfare and hostility — and a direct assault on the sovereignty of democratically-elected local government. It is a blunt instrument which is pregnant with unintended consequences. It is unjust and wrong-headed for the EU to blame small Caribbean Islands for its own tax mess. 

It also seems a certain myopia is present. The EU drafted its 5th Anti-Money Laundering Directive^[iv] (5MLD), and soon to be 6th (6AMLD)^[v], to frustrate those who would engage in corrupt practices or facilitate them. Despite these directives, several EU states have failed to adopt the necessary processes and protocols, with many it seems facing possible court proceedings due to their regulatory failures^[vi].

The BVI, The Bahamas, Barbados, and other Caribbean jurisdictions have each been deemed to have fulfilled their commitments to the EU and have been removed from the grey list, whilst Anguilla and St Lucia remain for the time being. 

The removal of these Caribbean jurisdictions is due, in main part, to the significant legislative reforms they have made. Among these reforms has been the introduction of economic substance legislation which meets the EU’s requirement that jurisdictions “should not facilitate offshore structures or arrangements aimed at attracting profits which do no reflect real economic activity”.^[vii]

Removal from the EU’s lists is by no means an easy process, but the importance of doing so cannot be overstated. A jurisdiction’s inclusion can impact on the funding it might otherwise receive from the EU, and EU member states may also apply defensive countermeasures against those listed^[viii]. 

There is also a profound risk of far reaching reputational damage. For example, transnational financial organisations may be reluctant to deal with listed jurisdictions.  In fact, at the 31st CARICOM (Caribbean Community) intersessional meeting held in Barbados in February 2020, the risk of correspondent banks in New York or London severing their relationships with listed jurisdictions (known as ‘de-listing’) was vividly described as an existential threat to the economic security of the CARICOM member states^[ix].

Indeed, it was reported by the outgoing Chairman of CARICOM, St Lucian Prime Minister Allen Chastanet, that by mid-2018 a quarter (25 per cent) of the 50 banks operating across CARICOM had reported termination of correspondent banking service and 75 per cent stated they were facing certain correspondent banking restrictions^[x]. Without correspondent banking relationships, the financial services industry in the region will naturally suffer. And the lifeblood of the economy of the Caribbean – banking – may be constricted.

Only time will tell if the Caribbean jurisdictions that remain on the lists will be able to meet the commitments required of them by the EU before suffering lasting economic and reputational damage. The BVI, among other Caribbean jurisdictions, has shown that it can be done.

Pressure From The UK

The British Overseas Territories are also being placed under significant pressure to introduce public UBO (ultimate beneficial ownership) registers, through which traditionally private company beneficial ownership information may be accessed.

In April 2016, the UK reached an agreement with the BVI for the creation of BOSS – a non-public beneficial ownership platform – affording the British police access to the identities of the UBO of any BVI company. The BVI met its commitment in June 2017.

The requirement to make this (or a similar) platform public – which is supposed to happen by 2023, thanks to a law passed in Parliament and imposed on the BVI and other territories^[xi] – could have dramatic consequences for the BVI, which attracts business from many of those that wish to keep their affairs private for legitimate personal and commercial reasons. This law, which smacks of colonialism, could face constitutional challenges.

The UK has its own problems, of course, from its much-lauded open access Companies House register, containing mountains of unverified and inaccurate information, to the north where Scotland has come under immense criticism for its provision of offshore limited partnerships, gleefully adopted and utilised by many corrupt and former Iron Curtain inhabitants.

The UK’s Companies House is the most venerated and oft-repeated model for nullifying tax evasion and corruption. But in 2017 it was Transparency International which identified there were only six members of staff trying to provide oversight to over four million companies inside Companies House records^[xii] (although there are plans to improve this position).

We could go on ad-infinitum in this dynamic world of anti-money laundering. But suffice to say that several of the small targets picked out by the UK and the EU (including the BVI) have responded. They will implement all the changes demanded to their compliance policies, once they are the global standard – and once the UK and the whole of the EU also do likewise. Isn’t it hypocrisy, otherwise, to demand changes that they themselves fail to implement?

With thanks to Jamie James and Tony McClements of Martin Kenney & Co. for their assistance martinkenney.com

Footnotes:

^[i] https://www.icij.org/tags/panama-papers/

^[ii] https://fcpablog.com/2017/11/09/martin-kenney-on-the-paradise-papers-real-news-or-a-titillat/

^[iii] Bermuda had previously been blacklisted, but in error https://www.captive.com/news/2019/03/15/bermuda-included-eu-tax-blacklist-in-error

^[iv] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN

^[v] https://www.planetcompliance.com/2020/02/10/6mld-the-eus-6th-anti-money-laundering-directive-in-a-nutshell/

^[vi] https://www.globalwitness.org/en/press-releases/eu-takes-legal-action-against-eight-member-states-over-anti-money-laundering-failings/

^[vii] https://www.europarl.europa.eu/doceo/document//E-8-2017-001312-ASW_EN.html

^[viii] https://ec.europa.eu/commission/presscorner/detail/en/ip_20_262

^[ix] https://today.caricom.org/2020/02/20/caricom-wants-inter-governmental-tax-body-to-set-standards-rules/

^[x] https://today.caricom.org/2020/02/18/step-on-regional-integration-pedal-a-little-more-pm-allen-chastanet/

^[xi] https://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Commons/2019-01-23/211611

^[xii] https://www.transparency.org.uk/publications/hiding-in-plain-sight/

Martin Kenney
Martin is Managing Partner of Martin Kenney & Co (MKS), a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases. In 2014 Martin was the recipient of the Association of Certified Fraud Examiners (ACFE) highest honour: the Cressey Award for life-time achievement in the detection and deterrence of fraud. Ranked by both Chambers and Partners and Legal500, for the past several years he has been chosen as a global elite “Thought Leader” of the legal profession by Who’s Who Legal. Website: martinkenney.com