by Dr. Peter D. Maynard[1]
Trade in services, including financial services, is so important to the economic future of the Caribbean and Latin America. There is a chorus of complaints from the Caribbean. 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 concerted action by the region and the transition to a new US Administration may help to restore that perspective.
I shall use the Bahamas as a case study. But, what I say has important implications for all of the financial centres 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.” There is rush to judgment and also rush to capitulation.
Some of these countries give power to the acts and words of others. They allow people to shut us down because we buy into what they say. We allow people to shut investors down because we buy into what they say. People characterize things in the opposite way from what they really are. Perception becomes reality.
1. “International Morality”.
The Bahamas Prime Minister is quoted in a recent speech 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 and the capacity of developed countries to tax those resources. Those who have done wrong under present law should be prosecuted.
2. “International best practices and standards.”
Isn’t that what we have been doing? We are committed to continue and improve the standards. But, they are not “international” or reciprocal, as OECD countries do not apply them, and they also impact negatively on the competitiveness of IFCs. To a considerable extent, this is another euphemism for “do what I say, not what I do.”
3. Alphabet soup:
Three (3) so-called “supranational” bodies have launched initiatives against international financial centres (IFCs):
(i) The Organisation for Economic Development and Co-operation (OECD), based in Paris, concerned with exchange of information to enhance onshore tax compliance; blacklisted 35 countries;
(ii) The Financial Action Task Force (FATF), based at OECD offices in Paris, and concerned with countering money laundering;
(iii) The Financial Stability Forum (FSF), based in Basle, Switzerland, concerned with proper supervision of the global banking system;
(iv) The US Internal Revenue Service (IRS) “qualified jurisdiction/qualified intermediary” program; and
(v) 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, rice or bauxite, but in services including IT, tourism and financial services. The OECD have dropped their protectionism over those raw materials but increased it on financial services.
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? Comparative advantage, free trade in services, economic diversification, rule of law, sovereignty, presumption of innocence, Audi alterem partem
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. We are in “denial” – denying what?
Aren’t they suggesting that we are denying basic principles of international law and justice mentioned above? The OECD are denying that they are flexing their political muscle, and that this is a matter of the strong compelling the weak to submit to their demands.
7. Transparency. Big Brother is re-emerging as boldly as ever.
Transparency means no privacy. It also means no bank secrecy. In modern societies, we take privacy for granted. We do not speak up strongly enough against incursions into privacy. It may be alright to strip someone else of it, until we ourselves are directly affected. International exchanges of financial and tax information would mean that companies and citizens would have no incentive legitimately to take their business overseas, as regulators in their home countries would be likely to find out about their foreign business. Therefore, foreign investment will dry up, although it is so important to the growth and development of the world economy.
We are in favour of a transparent and vigorous approach to money laundering. But, we oppose eliminating our privacy and the comparative advantage of the financial centres. It is quite legitimate not to expect governments or the police to stick their noses in your personal private affairs, unless you have done something wrong or are suspected of so doing. It is a violation of your human rights if, without probable cause or the slightest ground for reasonable suspicion of crime, any person can run roughshod over the core values of your personal, home, family and business affairs. Then, you have no privacy at all.
What is this transparency? Transparency means different things to different people. It can mean anything the OECD wants it to mean. If it means ending corruption in business transactions, that is not a problem. 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. If it means an end to privacy, including privacy in relation to governments, then it is a problem. No business transaction takes place without some degree of privacy. If your competitors know everything that you are doing, then it is impossible to do business. Then, it would mean an end to the comparative advantage of IFCs. The difficulties here have largely been overcome. But, transparency, like the other loose, unscientific and amorphous concepts suggested by the OECD, can emerge again as a problem in a different form.
8. “What are the limits on the right of the US to restrict access?
As a general rule there are few limits on, for example, the right of the US to restrict such access. Such decisions are often discretionary but amount to protectionism. 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.[2]
The Bahamas was granted IRS qualified jurisdiction status on January 9, 2000.[3] 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 will ensure maintenance of the relevant position of the Bahamas, while the absolute position of all centres shifts. The suggestion is that, at the end of the day, the Bahamas will be just a little more liberal than Luxembourg and Switzerland . There is no control over this. What is to prevent business from departing to Luxembourg, Switzerland or other IFCs? Nothing. One should also beware of a “holier or better than thou” attitude. It has no place in international politics. National self interest does have a place.
10. The 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 income tax base and to turn back globalization and the increasing irrelevance of territorial boundaries and governments. Competition improves government administration, and serves the interests of the individual citizen.
11. Level playing field
The request for a level playing field is put forward by IFCs as a means of having the OECD countries end their hypocrisy by applying to themselves the same requirements they impose on the IFCs.. Therefore, IFCs make declarations of commitment to the OECD harmful tax competition and transparency objectives, in the hope and expectation that the OECD countries will not comply with the same requirements themselves.
However, the IFCs are already on a “level playing field.” It is well established and recognized in public and private international law that no state or groups of states are to impose their fiscal, tax and revenue laws upon other states. It is astonishing that some IFCs would give up the level playing field. If you compromise, you will be compromised.
Moreover, it is widely recognized that the right to impose taxes is territorial. The most extraordinary claims are made by some countries, including the US, of the extraterritorial reach of the long arm of their tax authorities. But, those claims are not well founded.
Such a gamble by the IFCs of hanging their future on a level playing field, could backfire. If the European Union carries out its savings tax directive, requiring all members to exchange tax information and ending bank secrecy, that would mean equality among them and satisfy the level playing field concept. Then, the IFCs would have to abide by their conditional commitments to the OECD to end bank secrecy.[4]
12. Concrete Legislative Steps
The Bahamas Government has an ambitious legislative program for upgrading local legislative infrastructure involving new or amended legislation as follows:
(i) Financial Intelligence Unit Act, 2000
(ii) Criminal Justice (International Co-operation)Act, 2000
(iii) Central Bank of The Bahamas (Amendment)Act, 2000
(iv) Banks and Trust Companies Regulation Act, 2000
(v) Banks (Amendment) Act, 2000
(vi) Proceeds of Crime Act, 2000
(vii) Financial Transactions Reporting Act, 2000
(viii) Financial and Corporate Service Providers Act, 2000
(ix) International Business Companies Act, 2000
(x) Evidence (Proceedings in Other Jurisdictions) Act, 2000 (14 of 2000)
(xi) Evidence (Proceedings in Other Jurisdictions) (Amendment) Act, 2000 (33 of 2000)
What is quite disquieting is the move away from courts to exchange of information from one executive agency to another, one FIU to another FIU. Investors are prepared to have confidence in the courts to protect their rights. They do not have any confidence in executive agencies of one government or the other to perform such judicial or quasi judicial functions. There is little or no provision for due process.
12. Mutual Legal Assistance
Mutual Legal Assistance needs to be flexible and adapt to change. I have just completed a study of 72 such court cases in the Bahamas since 1990. That is a credible record. The applicants are all ex-parte requests for banking information in which only the Bahamas Attorney General was present, not the accused. I stressed in an article written 10 years ago that accounts could be frozen and restraining orders could be obtained over money and assets in at least half a dozen ways until the opposite side is heard. Now, there is no room at all for the other side to be heard before his privacy is violated and his records are released.
13. Caribbean Unity
The Caribbean countries should act together. Their lack of effective cooperation is their greatest weakness. The OECD countries count on the imperial philosophy of divide and rule. The Barbados Prime Minister in particular has encouraged unity. At his suggestion, a group of financial service providers has been formed. But much more has to be done in this area of a joint response by like minded stated and also like minded interests in the metropolitan countries in favour of financial freedom and also the development of the developing countries.
Conclusion
We have to believe profoundly and protect tenaciously our core values, and not proceed with undue haste. In the mid 1990s, many of these countries considered themselves as international financial centres on par with any other. Now, they are called offshore once again – and tragically accept such a derogatory appellation – even though more offshore activities take place in London, New York, and Miami. There has been a rush to judgment and a rush to capitulation. This has also had a negative impact on the shrinking middle class of these countries and worsens their prospects for economic development.
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[1].President of the Bahamas Bar Association, and of the Organization of Commonwealth Caribbean Bar Associations. Originally delivered at “Offshore Financial Jurisdictions: Perspective & Outlook” hosted by the Caribbean and Latin America Action at the 24th Annual Miami Conference on the Caribbean and Latin America at Inter-Continental Hotel Miami Florida on 6th December, 2000. Admitted to practice law in 1979 in England, Wales and The Bahamas; and in 1986 in St. Lucia, St. Vincent and the Grenadines, Antigua and Barbuda and Trinidad and Tobago, in 1996, pro hac vice in the Turks and Caicos Islands. Education: McGill University (B.A., Hons.); Johns Hopkins University (M.A., Ph.D.); Cambridge University (LL.M.); Sorbonne University (1966); Cornell University (1968). Member of the Hon. Society of Gray’s Inn, London. Former posts: Legal Adviser, Bahamas Ministry of Foreign Affairs; Economics Affairs Officer, United Nations; and Acting Stipendiary and Circuit Magistrate. Contributing Editor, Journal of Financial Crime, Journal of Money Laundering Control, Amicus Curiae, International Journal of Banking Regulation, Company Lawyer and Caribbean Law and Business. PETER D. MAYNARD & CO., Chambers, Jehovah Jireh House, Bay & Deveaux Streets, P.O. Box N-1000, Nassau, Bahamas, telephone: (242) 325-5335 , fax: (242) 325-5411, email: peter.maynard@maynardlaw.com Disclaimer: The views expressed here are personal views and do not necessarily represent the views of any organization with which the author is associated.
[2].See Daniel Mitchell, “An OECD Proposal to Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy,” the Heritage Foundation Backgrounder No. 1395, September 18, 2000. See by the present author, “Civil Liberties and Privacy – The Question of Balance,” 1 Journal of Money Laundering Control 177 (1997).
[3].The Tribune, Bahamas, January 10, 2000.
[4].It is noteworthy that Daniel Mitchell described the consequence as follows, “It would be a ‘level playing field,’ but it would be the wrong playing field. The right playing field would give every nation the right to determine how economic activity within its borders are taxed.” Of course, nations already have that right under international law. They seem to hasty to give it up. He continued, “The level playing field you only reach by jumping off a cliff isn’t a good playing field to be on.” The Tribune, Bahamas, March 28, 2002, page 7B.
