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 New Providence | Grand Bahama | Abaco | The Out Islands WELCOME BAHAMAS - NASSAU, CABLE BEACH & PARADISE ISLAND - 2003  A new world order Blue chip - A new world order When Perry Christie became Prime Minister of The Bahamas following his Progressive Liberal Party's (PLP) landslide election victory in May 2002, he did two things to boost the country's important financial services sector. He created a Ministry of Financial Services and Investments, headed by MP Allyson Maynard Gibson, an attorney specializing in tax and estate planning, and he appointed Ambassador of Trade James Smith his Minister of State for Finance. The moves recognized the importance of the financial services sector as the second pillar of the Bahamian economy - it contributes roughly 20 per cent to the Gross Domestic Product (GDP) of $4.8 billion and employs 4,000 Bahamians - and helped to reassure an industry which had come under increasing attack from supranational organizations. " In the long term we needed to provide an environment where we can be proactive and we can give greater attention to the development needs of the industry," says Wendy Warren, CEO and executive director of the Bahamas Financial Services Board (BFSB), a professional organization that represents and promotes the financial services sector in tandem with government. " So we now have a Ministry of Financial Services in place, which we are very pleased about as an industry." Tough years In the two years before the general election and Prime Minister Christie's decision to separate international and domestic finance into two ministries, The Bahamas faced numerous challenges from groups operating under the umbrella of the Organization for Economic Cooperation and Development (OECD). In 2000, the Financial Action Task Force (FATF) and the Financial Stability Forum (FSF) launched separate attacks against so-called "offshore" financial centres over what they claimed was weak legislation governing money laundering and regulatory practices. The FATF blacklisted The Bahamas (along with numerous other ?offshore' centres) pending changes to its anti-money laundering regime, and the FSF gave the country its lowest ranking for its regulatory oversight. These were serious and alarming challenges to a legitimate and long-established industry Today, many in the business community see it as nothing less than economic colonialism sparked by the movement of capital away from high-tax jurisdictions. For example, the International Monetary Fund (IMF) estimates the amount of assets held offshore at $5 trillion. " They had to find a way to stop (the outflow of capital), so they came up with all sorts of reasons, like tax evasion and drug running and money laundering and those sorts of things. Because if they had just talked about tax, everybody would have yawned and walked away," says Ian Fair, financial expert and former chairman of the BFSB. He points out that high-tax countries have yet to change their own tax models to stop the haemorrhage of capital. " The French in particular have a high-tax, high-spend mentality. They are not willing to adjust it... and therefore they're trying everything they can to stop (the flow of capital out). It's not to say they haven't got a right to collect their taxes and that their residents shouldn't pay their fair share of taxes, I'm not saying that at all. What I am saying is the welfare state system as we know it in a lot of European countries has failed," says Fair. Nevertheless, faced with the loss of Qualified Jurisdiction (QJ) and Qualified Intermediary (QI) status, which allow it to trade in US securities, The Bahamas was forced to respond swiftly to the FATF and FSF initiatives with a basket of new legislation (see Bahamas a leader in new legislation, pg 179). It also agreed to enter into a Tax Information Exchange Agreement (TIEA) with the United States - something it had resisted for years. The new legislation "basically changed the industry," says Brian Moree, senior partner at McKinney, Bancroft and Hughes and chairman of the Financial Services Consultative Forum (FSCF), a 33-member body created by the Christie government to get input on legislation and initiatives that affect the sector. " Our anti-money laundering regime in this country now is probably as strict and onerous as anywhere else," says Moree. "Our regulatory environment has been drastically changed in response to the FSF issues, and today we have more regulators with wider powers than we have ever had in our history. Some people would say we have a more robust regulatory environment now than many other countries." While the basket of legislation was passed so hurriedly that it has required ongoing revisions, Warren is confident that The Bahamas is back on track. " We need to explain to people that The Bahamas has struck a very good balance. We have in place the infrastructure that if a valid request is made, that complies with our laws, and what are considered to be predicate offences - ie drug trafficking, fraud, a criminal offence - the ability is there for The Bahamas to cooperate," says Warren. " We now have a Financial Intelligence Unit (FIU) that is a member of the Egmont Group (a world body of FIUs) and we certainly are recognized as being a player on the global front against crime and the financing of terrorism." In fact, with its new legislation The Bahamas is a "major contributor to the world's agenda of cracking down on money laundering and beginning to tackle the concerns about terrorism," says Warren, referring in part to a terrorism bill due to be passed into law in 2003, as required by the IMF. "It's never been done before. It's something that everyone is struggling with." What about privacy? Despite the new regulatory environment, confidentiality and privacy still exist for the offshore investor, says Warren, starting with a strong due diligence process that ensures The Bahamas accepts only upstanding clients. " The Bahamas certainly is in a position to provide a continued commitment to the privacy of its clients. Once those clients do not fall afoul of laws, either in The Bahamas or elsewhere, they will have that sense of security and safety in The Bahamas. For many reasons, wealthy individuals prize privacy, and The Bahamas is certainly going to continue to offer that to them," says Warren. However, confidentiality is not going to survive as a major reason for offshore business, says Moree. " Under the new law, while a degree of privacy has been retained, I don't think it will be a major draw for business. You're going to have to have other reasons to go offshore," says Moree, a strong proponent of the need to develop new investment products, or enhance old ones, to take advantage of The Bahamas' tax-neutral platform. Challenges ahead There are still many challenges ahead, including the OECD Initiative on Harmful Tax Practices, which is supposed to be phased in by Dec 31, 2005. It would require companies, partnerships, trusts and other legal entities established in offshore jurisdictions to keep financial accounts which would then be subject to exchange under TIEAs, as now exists between The Bahamas and the US, for example. However, the US withdrew its backing for the project after lobbying by right-wing groups in Washington and when US Treasury Secretary Paul O'Neill warned that it was "too broad" and needed to be "refocused" on key areas of US concern, particularly transparency and tax information exchanges in specified cases on criminal matters. Many jurisdictions, including The Bahamas, have refused to sign a Memorandum of Understanding (MOU) on harmful tax practices, in part because it would include divulging information on civil tax matters, effectively making offshore jurisdictions tax collectors for OECD countries. On top of this, many OECD member states have yet to eliminate their own harmful tax practices, for which there was an April 2003 deadline. The Bahamas and others have said they won't budge until there is a level playing field. " I think the first declaration of the OECD in terms of harmful taxation, and the first objective that they announced and which we don't hear too much about, is that they intended to do away with offshore tax havens, and I don't know that they have really moved too much from that objective," says Minister of State for Finance Smith. "Because what we are seeing is, instead of stamping them out in a kind of forceful way, increasingly they are making them a little bit less competitive than the onshore sectors. And one begins to wonder about this now, because it has less to do with cleaning up the international financial services system, which originally speaking was about the perceived drug money and was enlarged to include tax evasion, and now tax avoidance, and now all forms of taxation, and since Sept 11 terrorism financing," and more to do with adjustments being made in low-tax jurisdictions to their disadvantage while the OECD countries are not moving as swiftly to make their own arrangements, notes Smith. " We have been placed in some areas at a competitive disadvantage, so the very motives behind this are being questioned. And the response from the so-called low-tax or no-tax countries is that we are not going any further until we can be assured there is a level playing field." Like Fair, Smith believes OECD countries need to restructure their own tax systems and stop attacking the sovereignty of tax-neutral jurisdictions. They appear to "be taxing to support a very large welfare system, early retirements, long pensions and basically inefficiencies. When you do that to capital, capital finds a way of walking to more efficient areas," says Smith. " We for one, and many other countries like us, we may be small, but I think we can make the view that we have no intention of assisting them in building their welfare states or their inefficient administrations. We have a sovereign right to select the kind of tax system we want. In our case, the system is not something new. We've had this since the beginning of time, and our parliamentary system predates the United States. We didn't have any taxes then and we don't have any now. You can't say that we established no tax on income to attract OECD business." |
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