by Dr. Peter D. Maynard[1]
The blacklisting of international financial centres (IFCs) has devastating consequences. It threatens to stamp out the international financial sectors of these countries,[2] to produce massive unemployment, and to introduce economic recession and political instability.[3] The fundamental impact is competitive, and has little or nothing to do with money laundering. It is said that more money laundering goes on in London or Miami in a day than in Nassau, Cayman, Nevis or Tortola together in a year. So, with blacklisting have come double standards and a loss of perspective. More recently, the OECD has sought to cajole the IFCs into signing a collective memorandum of understanding that they will implement the requirements of the OECD. With the advent of FATF blacklist[4] and the US FinCen advisories,[5] the problem of perception and reality has been exacerbated.[6] The blacklisting or “name and shame” method, which finds its pedigree in Hitler’s arsenal of arbitrary and ruthless persecution of the Jews, is not compatible with the rule of law, and is designed, largely by competitors, to put IFCs or so-called “tax havens” out of business.[7]
I shall use the Bahamas as a case study. But, what is said has important implications for all of the IFCs in the developing world, especially those across this region.
The Bahamas Minister of Finance is described recently by a Bahamian daily newspaper as saying that resistance to the G7 countries is futile, and that the end of offshore financial centres is forecasted. He suggested that the activities that were conducted offshore will in the future be carried out onshore. In other words, the offshore centres including the Bahamas are a “dead horse.”
They give power to the acts and words of others. They allow people to shut them down because they buy into what others say. They allow people to shut investors down because they buy into what others say. Perception becomes reality.
Some misperceptions and red herrings:
1. “International Morality”.
The Bahamas Prime Minister is quoted in a recent speech[8] as suggesting that there is a new wave of “international morality.” But, in my view, the present events are about money and competition. There will be in another 10 to 15 years some $29 million in the global Internet economy. The question is whether the developing countries will have access to those resources and on what terms.
Those who have committed crimes under pre-existing law should be prosecuted. There is no need for a new wave of legislation for that purpose, but rather the resources and the political will. Banking secrecy was a myth all along, in the sense that several methods have been available for quite some time to obtain information arising from and also the proceeds of crime.[9] Indeed, the new legislation, by imposing even greater administrative and financial requirements on government and the private sector, will exacerbate those needs.
2. “International best practices and standards.”
Isn’t that what they have already been doing, in many cases? For example, the Bahamas has applied Know Your Customer rules since as early as 1985 Code of Conduct of the Association of Banks and Trust Companies. The Caribbean countries have participated fully in the Caribbean Financial Action Task Force (CFATF), which seemed wholly inadequate to prepare them for the recent onslaught by the OECD and FATF. The financial community is by and large committed to continue to improve those practices and standards.[10]
However, the problem is one of shifting goal posts and double standards. Hence, the two major accomplishments of the OECD meeting in Barbados were to give the IFCs a seat at the OECD bargaining table, and to pressure the OECD for consistency and a commitment to establish a level playing field. To put it the latter point differently, what is good for the goose is good for the gander. The OECD countries should apply to themselves the same practices and standards they wish to dictate for the IFCs. Otherwise, “international best practices and standards” are nothing more than practices and standards imposed by the OECD on the IFCs.
3. Alphabet soup:
Five (5) “supra national” bodies have launched initiatives against IFCs:
1. The Organisation for Economic Development and Co-operation (OECD), based in Paris, concerned with exchange of information to enhance onshore tax compliance;
2. The Financial Action Task Force (FATF), based at OECD offices in Paris, and concerned with countering money laundering; and
3. The Financial Stability Forum (FSF), based in Basle, Switzerland, concerned with proper supervision of the global banking system.
4. The US Internal Revenue Service (IRS) “qualified jurisdiction/qualified intermediary” program and
5. The European Union (EU) initiative for exchange of information for tax purposes
What of the UN, World Trade Organization, IMF and World Court – 200 states, not 29 of our competitors? The Caribbean Development Bank at its annual meeting in the Bahamas at the beginning of the year, said that the future of the Caribbean lay not in bananas, sugar or bauxite, but in services including information technology,[11] tourism and financial services. The OECD have dropped their protectionism over key agricultural products and raw materials from the South but increased their protectionism on financial services. The South is in a Catch 22 situation, damned if they can’t compete and damned if they can.
4. “The metropolitan countries invite cooperation with the threat of sanctions.”
The IFCs are under pressure to participate in the design and implementation of these initiatives. Sanctions are proposed for those who do not assist. Sanctions applicable to non co-operating. What of international law? Haven’t basic principles such as privacy, civil liberties have been thrown out the window?
There are other basic principles of justice as well:
No man shall be condemned unheard.
No man can be judge in his own cause.
An act of the Court shall prejudice no man.
An act in law shall prejudice no man.
There is a presumption of innocence of the accused.
5. “Defensive” measures are really “offensive”.
The OECD characterized what they are doing as defensive. In fact they are destabilizing the economies of many developing countries.
6. The IFCs are “in denial”
Denying what? It is not the IFCs who are in denial. Aren’t the OECD denying basic principles of international law and justice? The OECD are denying that they are flexing their political muscle, and that this is a matter of the strong compelling the weak to comply with their demands.
7. “Transparency”
Big Brother is re-emerging as boldly as ever. IFCs have stated their commitment to a transparent and vigorous approach to end or reduce money laundering. But, they oppose eliminating privacy and the comparative advantage of their financial centres.
8. “What are the limits on the right of the US to restrict access?”
In general, there are few limits on, for example, the right of the US to restrict access to US financial and securities markets. Such decisions are often discretionary and difficult to attack. Now, with the advent of the Bush administration and the departure of Messrs. Sumners and Eisenstadt, both of whom orchestrated the US policy in defiance of Congress, the balance may be reestablished to permit fiscal sovereignty, tax competition and financial privacy.[12]
The Bahamas was granted IRS qualified jurisdiction status on January 9, 2000.[13] Until then, as a stop gap measure, a local branch could attempt to be designated as a qualified intermediary (QI) under its head office. Also, a subsidiary could elect to be a branch for QI purposes.
9. “Financial centres, both onshore and offshore”
The Bahamas Government says it will ensure maintenance of the relevant position of the Bahamas, just a little more liberal than Switzerland, Luxembourg and Liechtenstein, while the absolute position of all centres shifts. But, they have no control over this. What is so unattractive or bad about going to, say, Nevis or Anguilla? Beware of the “holier than thou” attitude. When a balloon is squeezed in the middle, it bulges on both ends. A more likely scenario is that business will flow to other IFCs or back to the metropolitan centres of the North.
10. OECD “Harmful Tax Competition” is an oxymoron.
Tax competition is no more harmful than any other kind of competition in goods and services. What we have here is a rear guard action by dinosaur tax administrations to preserve their tax base, to turn back globalization and to combat the increasing irrelevance of territorial boundaries and governments.
In contrast, Owen Arthur, prime minister and finance minister of Barbados, said: “Institutions in the developed world that have no authority under any treaty, convention, agreement or legal instrument known in international law, are simply attempting to bend the course of development in countries such as ours to their will by use of crude threats and stigmas.” “It is nothing more than a form of institutional impe
