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12/09/24
Between A Rock And A Hard Place: Risks, Reputation, And Resilience In Caribbean Offshore Financial Centres
The Caribbean offshore financial services sector has thrived against all odds. Indeed, the history of the sector has been marked by innovation, adaptability to structural risks, and resilience-building. These Small Island Developing States (SIDS), which host offshore financial centres (OFCs), have always been a special case for sustainable development. This is not least because of their small size, narrow resource and export base, and vulnerability to external shocks and crises. Indeed, many SIDS are still reeling from the effects of the global financial crisis and the COVID-19 pandemic.
However, one of the most insidious threats to the sector’s survival is the unabated external misperceptions of offshore jurisdictions. In the main, Caribbean OFCs have made significant strides in strengthening financial integrity standards. They have established robust anti-money laundering and anti-corruption regimes with the support of bilateral and multilateral development partners. Some have adopted, or are engaged in legislative reform to adopt, beneficial ownership registries. Others have introduced unexplained wealth orders (UWOs), protected disclosure, and whistleblowing regimes to prevent the misuse of their financial sectors for illicit purposes. Yet, these achievements are not sufficiently recognised, applauded, or even reported on. This must be corrected through a regional brand management strategy for the sector.
Why is this necessary? Because perceptions matter! Perceptions influence international policy interventions targeted at offshore jurisdictions. Perceptions shape the region’s risk profile. And, ultimately, perceptions determine access to international financial markets. The consequences of regulatory risks have been acutely underscored by the region’s issues with de-risking, its financial institutions’ dwindling correspondent banking relationships, and resulting financial exclusion.
Blacklisting, Ranking And Ratings!
Blacklisting, grey-listing, rankings, and ratings have become normalised in the world of combating illicit finance. The high concentration of OFCs in the Caribbean has long contributed to its mislabelling as a region of rogue states that commercialise their economic sovereignty to attract illicit wealth from kleptocrats, jet-setting high-net-worth individuals (HNWIs), and organised crime groups. Nonetheless, these OFCs weathered the ‘perfect storm’ in the 1990s and 2000s, in the form of campaigns targeted at offshore jurisdictions, namely the OECD’s Non-Cooperative Countries and Territories Blacklist (NCCTs), and the OECD Harmful Tax Competition Initiative. These initiatives sought to weaponise the reputation of liberal offshore jurisdictions, to force them to tighten their financial regulatory and investor protection regimes (including banking secrecy and confidentiality laws), and dissuade the flight of mobile international capital from onshore jurisdictions. Many still feature prominently in the US State Department’s International Narcotics Control Strategy Report as “jurisdictions of concern for money laundering”. Yet, as was evident from the last round of the Caribbean Financial Action Task Force (CFATF) mutual evaluations, the Cayman Islands was one of the strongest performers in terms of technical compliance with the Financial Action Task Force (FATF) standards and effectiveness rankings. This was especially so when contrasted with many advanced onshore financial centres. Concerningly, there is no policy coherence among these various unilateral and multilateral regimes, which assess, rank, and label offshore jurisdictions. Jurisdictions removed from FATF’s grey-list, for instance, have remained on the European Union’s (EU) list of high-risk third countries.
Suspect Wealth And Money Laundering
There is no correlation between OFCs and corruption perception. Transparency International has ranked many Caribbean OFCs among the least corrupt countries in the world. These include Barbados, the Bahamas, St. Vincent and the Grenadines, Saint Lucia, Dominica, and Grenada. Furthermore, a cursory review of the UNODC/World Bank Stolen Asset Recovery (StAR) Database reveals that the jurisdictions to which looted assets have been predominantly siphoned off are not Caribbean OFCs. Rather, they are mainly advanced onshore financial centres. The StAR Database reveals that an estimated $16.5 billion in assets have been frozen, confiscated and returned, across 566 cases and 141 jurisdictions.
However, since the 1990s, only three Caribbean jurisdictions have been implicated in siphoning the proceeds of corruption and money laundering to foreign jurisdictions – Antigua and Barbuda, Turks and Caicos, and Trinidad and Tobago (including a case of a transfer of US$ 3.7 million from a victim company via a US correspondent bank to Dubai). Interestingly, the destinations were Canada, the United Arab Emirates (UAE), and the United States. These advanced financial centres are unlikely to feature on any black- or grey-list. Furthermore, there have only been 11 reported instances of assets being transferred to five Caribbean jurisdictions – Antigua and Barbuda (from Ukraine), Bahamas (from Nigeria), BVI (from Russia), Cayman Islands (from Kuwait, Chile, Peru), and Bermuda (from India and Mexico). When one considers the volume of cross-border flows through the region, and the fact that Latin America and the Caribbean (LAC) host approximately 42 per cent of all offshore banks, compared to Europe with 29 per cent, Asia and the Pacific with 19 per cent, and Africa and the Middle East with 10 per cent, it becomes difficult to deny the strength of financial integrity standards in the region.
Russia Sanctions
On the Russia sanctions front, the track record of Caribbean OFCs has likewise challenged popular misperceptions of their financial services sectors being regulatory ‘black holes’. Instead, it has become clear that they are actively contributing to the effectiveness of the UK’s unilateral Russia sanctions regime. In terms of the scale of Russian presence in the region, between 2007 and 2016, an estimated £68.5 billion in foreign direct investment from Russian residents went to British Overseas Countries and Territories (OCTs), as opposed to only £9 billion in the UK.[1] In 2018, Global Witness reported that an estimated £34 billion was currently invested by Russians in the UK’s OCTs, with the British Virgin Islands being the second most popular destination for money leaving Russia, behind Cyprus.[2] Still, the BVI’s response has been swift and decisive, despite the likely impact on its business interests and offshore sector. The Government of the BVI has insisted on taking all requisite steps to ensure that it adheres to its international sanctions obligations as an Overseas Territory of the United Kingdom, and that the Russia sanctions will “apply in the same form and rigour” as in the UK.[3]
In May 2022, the Governor’s Office, as the Competent Authority for sanctions in the BVI, reported that since the Russian invasion of Ukraine in February 2022, assets with an estimated value of more than US$400,000,000 were frozen in the BVI.[4] Likewise, the Government of Bermuda has confirmed the implementation of the sanctions will affect around 740 aircraft registered in the country that are used by Russian operators.[5] In the case of the Cayman Islands, in March 2022, less than a month after the invasion, the Government established a Russia Sanctions Task Force (Operation Hektor) to coordinate, identify, and make policy amendments to implement the Russia sanctions. Both the UK Foreign, Commonwealth & Development Office and the Office of Financial Sanctions Implementation (OFSI) have reportedly taken a positive view of Operation Hektor’s work, and the joint task force model is being considered by other British OCTs.[6]
Cryptocurrency Regulation
An emerging challenge, which Caribbean OFCs will have to confront sooner than later to safeguard their reputations, is the regulation of crypto exchanges and other virtual asset services providers (VASPs). This is particularly important given the spate of crypto fraud litigation before English courts, which often involves unknown fraudsters operating in offshore jurisdictions. The Model Law on Virtual Assets launched by the Commonwealth Secretariat in July 2024, is timely. This will assist Caribbean OFCs in crafting legislation to mitigate the risks involved in the misuse of digital assets and VASPs, in line with FATF’s international standards.
The Future Of Caribbean Offshore Finance
Risks to OFCs are not only derived from the financial products and service offerings within these jurisdictions. External and systemic regulatory risks can threaten the sustainability of Caribbean offshore financial services sectors. Three realities must be confronted to arrest these risks and support resilience-building.
First, it is no secret that FATF is not a development organisation. There is no special and differential treatment for under-resourced SIDS that host OFCs in terms of timetables for compliance with FATF standards. Compliance, legislative and institutional strengthening at the domestic level must, therefore, be complemented by a deliberate political strategy of stakeholder engagement at the international level.
Second, FATF still has no international legal standing, its membership is still exclusive, and its policy agenda is still set by a small group of powerful countries (the G7), whose interests may not necessarily align with those of Caribbean OFCs. The G7 and the OECD have always had a penchant for curbing capital flight. FATF must be institutionally reformed and legally democratised.
Third, FATF’s risk-based approach (RBA) does not alleviate small Caribbean jurisdictions’ resource challenges, which are critical to compliance with FATF’s standards. Improving effectiveness ratings requires significant resource investments. Problematically, FATF’s standards are so dynamic that there are constantly shifting compliance goalposts for OFCs. This leads to a cyclical and bottomless barrel of regulatory demands on OFCs, exacerbated by the need for OFCs to meet both FATF standards and the diverging regulatory expectations of the EU. These realities set up under-resourced Caribbean offshore jurisdictions and non-offshore SIDS to fail. OFCs should insist that international cooperation elements of the FATF standards are expanded beyond information sharing, mutual legal assistance and extradition. Rather, provisions should be made for fostering mature development partnerships. Such partnerships should prioritise scaled-up financing to address the compliance challenges these jurisdictions face, and build their resilience to regulatory risks. These issues cannot be divorced from the ineligibility of many high-income SIDS for concessional development finance purely based on their per capita gross national income, despite their extreme exposure to economic, regulatory, and natural risks.
[1] Loft, Philip (2022). The UK’s Overseas Territories and sanctions against Russian- Research Briefing No.9485. London: House of Common Library.
[2] New analysis: Five times more Russian money in the UK’s tax havens than in the UK, April 29, 2018, https://www.globalwitness.org/en/press-releases/new-analysis-five-times-more-russian-money-uks-tax-havens-uk/.
[3] Government of the Virgin Islands, The Government of the Virgin Islands expresses concern over the conflict between Ukraine and Russia, 28 February 2022, accessed 3 March 2022.
[4] Office of the Governor, Ministry of Finance and Financial Services Commission Press release, 11 May 2022, “BVI takes action to ensure compliance with Russia sanctions”, https://bvi.gov.vg/media-centre/bvi-takes-action-ensure-compliance-russia-sanctions.
[5] The Royal Gazette, Bermuda will follow UK sanctions against Russia, 2 March 2022, accessed 3 March 2022.
[6] https://www.gov.ky/news/press-release-details/task-force-reports-on-russian-sanctions.
Dr. Rohan D. Clarke
Dr Rohan Clarke former Jamaican diplomat and was called to the Bar of England and Wales at the Honourable Society of Lincoln’s Inn. He is also an international consultant on illicit finance, Fellow at Yale University’s Global Justice Program and at the Society of Advanced Legal Studies, University of London, and a member of the organising Secretariat of the Cambridge International Symposium on Economic Crime. He received his Ph.D. from Jesus College, University of Cambridge, as a Commonwealth (Cambridge) Scholar. He authored “Illicit finance and the law in the Commonwealth Caribbean: The myth of Paradise” and has published in leading peer-reviewed journals on illicit finance.
He sat on the National Anti-Money Laundering Committee (NAMLAC) in Jamaica. He holds a Bachelor of Science in International Relations and Political Science (1st Class Hons.), from the University of the West Indies; a Bachelor of Laws (Hons.) from Nottingham Law School in the UK, and a Master of International Law & Politics (1st Class Hons.), from the University of Canterbury in New Zealand where he was a Commonwealth Scholar and an LLM in Legal Practice (Bar) with Distinction from BPP Law School in the UK.
