By
Peter D. Maynard[1]
International capital flows will continue for the indefinite future to play a major role in free trade and improving world welfare. The only question is whether, and, if so, to what extent, international financial centres (IFCs) such as the Bahamas will continue to participate in and benefit from those transactions. That very question is quite surprising having regard to the preeminent role that IFCs have played in the past in the vast Eurodollar market and other international transaction matrices, and the substantial jurisprudence that has been built up in support of the economic development of the IFCs in and through financial services.
The cornerstone of Bahamian banking confidentiality[2] was Section 10 of the Banks and Trust Companies Regulation Act, Chapter 287 (“Section 10″). In the package of legislation aimed at removing the Bahamas from the money laundering blacklist of the Financial Stability Forum (FSF) and to meet the dictates of the Organization for Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF), the Bahamas Government repealed that law and passed the new Banks and Trust Companies Regulation Act, 2000 (No. 38 of 2000) (“the Act”), which virtually eliminates banking secrecy as we know it, and substantially reduces the use of the Bahamas for international capital and financial transactions. Its impact is so profoundly damaging that it is impossible to escape the conclusion that the new legislation is contrary to civil liberties, the national interest and constitution of the Bahamas.
The Act repeals the Banks and Trust Companies Regulation Act, Chapter 287 and aims to make fresh provisions relating to banks and trust companies. There has been a shift away from the courts to a greater exercise of executive power by and through the Central Bank. That kiss of death – namely the negation of the role of the courts in defence of privacy, confidentiality and the rights of the individual, and the ascendancy of unilateral, executive or governmental intervention to acquire and disclose private information – is a consistent thread in the Act and the rest of the financial architecture. Whereas, in the past, the Bahamas has taken a robust view of privacy and the rights of the individual, which assured its success as a major international financial centre, that view would be considerably weakened under the Act and its companion legislation. Of the 10 other pieces of legislation, it is most important to read the Act in conjunction with the Central Bank of the Bahamas Act.
The effect of the repeal of Section 10 is devastating to confidentiality. Section 10 codified Tournier v. National Provincial Bank. Before 1965, Tournier was applied as a part of the common law. With the advent of Section 10 in 1965, a considerable amount of jurisprudence developed on the basis of applications made under Section 10.
At least since the Bank of Nassau case, it had been established that confidentiality was the raison d’etre of the Bahamas’ preeminence as an offshore banking centre.
While the substance of Section 10 is cleverly repeated in Section 15 of the Act, significant additional exceptions are added into Section 15 which so significantly dilute banking secrecy that it is completely illusory and unrecognizable.
The provisions provide for greater regulation by the Central Bank over licensees and make possible cross-border supervision by banking regulators of foreign banks and trust companies with branches or subsidiaries licensed in The Bahamas. Additionally, many functions previously reserved for the Minister of Finance have been vested in the Governor of the Central Bank (“the Governor”) giving the latter significantly enhanced executive authority.
The Act consists of 25 sections. Section 2 comprises five new definitions. Of note is the definition of “Supervisory Authority” which means a foreign entity charged with the responsibility of conducting consolidated supervision of banking and trust business by organisations licensed in its home country.
Section 3 is expanded to increase the fines and penalties in that Section. Section 4 sets out the factors which the Governor must consider before granting a licence, and the factors which the Governor must consider in granting a licence to a bank or trust company having its office outside The Bahamas.
An application for a licence to carry on banking or trust business must be made to the Governor. In granting a licence, the Governor must consider whether the applicant is a fit and proper person to carry on banking business or trust business, the financial resources of the applicant, the soundness of the business plan, the business record and the experience of the applicant and whether the carrying on of the business will be in the best interest of The Bahamas.
Where the head office of the bank or trust company is located outside The Bahamas the bank or trust company is required –
1. to notify the Governor of its principal office in The Bahamas, the name of one of its officers who is to be its authorised agent in The Bahamas;
2. to satisfy the Governor that it is subject to adequate consolidated supervision by the Supervisory Authority in its home country;
3. to ensure the Supervisory Authority is permitted to examine the books of the bank or trust company, wherever they are kept;
4. to ensure the Supervisory Authority is informed where the bank or trust company will be managed.
Section 5 is new and requires a licensee to obtain the approval of the Governor before establishing a branch outside The Bahamas. Sections 6, 7 of the legislation remain substantially the same except for minor changes made in order to comply with the new and amended provisions. The provisions that have been changed or added are set out below.
Section 8 increases the power of the Governor to require financial statements and other documents of a licensee which is likely to become unable to meet its obligations or which in the opinion of the Governor is carrying on business in a manner detrimental to the interest of the public, creditors, or its depositors.
Section 9 gives the Governor power to appoint the Inspector of Banks and Trust Companies. The Office of the Inspector is located in the Central Bank. The duties of the Inspector include –
1. reviewing banks and trust companies practice in The Bahamas;
2. conducting on-site examination and off-site supervision of banks and trust companies for the purpose of satisfying himself that the provisions of the Act and the Financial Transactions Reporting Act, 2000 are being complied with;
3. inspection and supervision of banks and trust companies in accordance with the Rules for Inspection and Supervision set out in the First Schedule.
Sections 10 to 12 are new and deal with inspection by the Supervisory Authority, confidentiality of reports and rules for supervision and inspection of banks. Under Section 10, a Supervisory Authority may upon written notification to and approval by the Inspector conduct an inspection of a branch of one of the relevant institutions registered in The Bahamas. It may only gather information that relates to the branch being adequately organized, managed by persons who are fit and proper for the conduct of business activities, is correctly complying with its reporting duties and that it has in place adequate risk management systems and is complying with capital adequacy and risk diversification requirements.
Under Section 11 a Supervisory Authority may appoint another body to conduct an inspection on its behalf. Under Section 12 any director, officer, employee, agent, counsel and attorney, consultant, auditor or any other person who has access to reports or the Inspector or Supervisory Authority is prohibited under penalty from disclosing the contents of such reports.
Section 13 inserts a new First Schedule setting out rules for the supervision and inspection of banks. Section 14 sets out the powers of the Governor in revoking or suspending the licence of a bank or trust company.
The Governor may revoke the licence of a bank or trust company if the bank or trust company is carrying on its business in a manner detrimental to the public interest or the interest of its depositors, and is contravening the provisions of this or any other Act or any term or condition to which its licence is subject. Alternatively, the Governor may apply to the Supreme Court for an order to compel the bank or trust company to comply with any order or direction of the Governor. The Governor is also given power to suspend the licence of a bank or trust company in certain circumstances.
The most important provision, Section 15, would permit information relating to the identity, assets, liabilities, transactions and accounts of a customer of a bank to be released in certain cases. These include releasing information for the purpose of criminal proceedings, civil proceedings or disciplinary proceedings. The Governor may also provide information on the beneficial owners, directors, officers and operations of a bank or trust company to a Supervisory Authority which is responsible for regulating the head office of the bank or trust company.
The competitive advantage of the Bahamas rests on access to the courts pursuant to Section 10 and Tournier v. National Provincial Bank, and they should be restored by further amnedment of the Act. There was never absolute secrecy or confidentiality. But, banking secrecy that rests on executive discretion vested in the Governor of the Central Bank is no secrecy at all. It is of no business interest to the individual or institutional investor that information on its legitimate banking transactions may be requested and turned over by the Governor to other Supervisory Authorities without the investor having the opportunity to intervene to stop that through the Courts. The investor may as well leave his money in the banks in the metropolitan countries.
Of course, that is the real competitive effect and intention of the OECD so called anti harmful taxation measures, viz. to make it pointless or prohibitive for capital to leave their jurisdictions. Therefore, this provision in section 15 and others flowing from it are devastating to the fundamental competitiveness of the Bahamian banking sector and the peace order and good government of the country.
In other words, post Tournier, privacy and banking confidentiality have taken quite a different turn, and are based on a jurisprudence quite different in the Bahamas than in Britain. That is to be expected and respected. While Britain has looked to the European Union and made other adjustments to its law and policy, the Bahamian approach still rests and can flourish based on the healthy respect for privacy, such as was set out in Section 10. This means that more than ever the Central Bank ought to play the role of primary regulator and equip itself to do so. It cannot leave its regulatory functions to be carried out by other jurisdictions.
Indeed, the directive by the Governor that locally owned trust institutions are required to have a 25 percent institutional investor from a G7 country was a validation of the view that a broad executive discretion vested in the Governor lends itself to abuse, and is not consistent with the objective criteria, subject to review in the courts, necessary for the growth of the international banking sector. Indeed, few or no investors will form banks in the Bahamas if their information can be released to other parties based on the Governor’s discretion, no matter how strenuously he says he will not release their information unless he has to.
Moreover, it is quite apparent that the Central Bank is removing itself (and therefore the Bahamas) from the “offshore” banking business. It wishes to be a “secondary” regulator, and not a primary regulator. That means that it essentially does not intend to be a regulator at all. It will rubber stamp and accept the due diligence of the G7 Supervisory Authority in respect of its own nationals who are partners in domestic institutions. It does not expect the scrutiny of local investors to be of any significant consequence.
Sections 16 to 23 of the legislation remain substantially the same except for minor changes made in order to comply with the new and amended provisions.
Indeed, it is mind boggling, having regard to the importance of the financial sector to the economy and of the Bahamas as a world banking centre, that such an Act would be passed that, taken with other developments, such as tax information exchange, has virtually destroyed the comparative advantage of the Bahamas as a banking centre, decimated the number of existing banks, discouraged the entry of new banks, and ended the prospects of attracting new business, except for existing commercial and retail transactions. Furthermore, the legislation seeks to send to the trash heap of history, the well developed jurisprudence and the important court decisions that have buttressed the competitiveness of the financial sector.[3]
The banking sector in the Bahamas, consisting of more than 300 banks and trust companies, down from in excess of 400 in the pre-shaming era, has been built on the codification and development of banking secrecy or confidentiality in accordance with the principles of Tournier v National Provincial Bank. That approach and the wealth of common law that went with it, are swept away by this response to the anti tax haven and anti money laundering war. Indeed, that common law has been quite significant, including some of the most important judgments before Bahamian courts in this field, in defence of the national interest and the constitutional requirement of peace order and good government. Banking matters will no longer go to the courts, except to challenge a licence revocation under section 14. In this author’s estimation, the response in passing this legislation has been a gross overreaction. In this brave new world, the Bahamas can continue to sell the banking sector as one which is clean, well regulated and meets the supervisory requirements of the Financial Stability Forum, but not without the essential ingredients of confidentiality and privacy founded, not on unfettered executive discretion, but on access to the courts.
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[1]Counsel and Attorney at Law, specializing in commercial law, company law, trusts, banking, and civil and criminal litigation. President of the Bahamas Bar Association and President of the Organization of Commonwealth Caribbean Bar Associations. 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 (1996); Cornell University (1968). Member os the Hon. Society of Gray’s Inn. Former posts: Legal Adviser, Bahamas Ministry of Foreign Affairs; Assistant 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
[2]Confidentiality, secrecy and even privacy are used interchangeably in this article. It is recognized that confidentiality is a matter of degree. See by this author “Offshore Banking Secrecy: Myth or Reality?” 4 Journal of Money Laundering Control (1998) in which it is established that secrecy has always been a myth, and that the Courts provide every reasonable opportunity for obtaining information without destroying the banking sector.
[3]See, e.g., the Bank of Nassau case, and several other cases discussed in the article by this author “Offshore Banking Secrecy: Myth or Reality?”4 Journal of Money Laundering Control (1998). There is also a long line of cases related to letters of request, where confidentiality and privacy are defended as an prerequisite of the integrity of the Bahamian economy.
