Caribbean countries play by the rules

(The following is an edited version of the final part of an address on challenges facing the Caribbean financial services industry that the author delivered at a conference in Panama last week)

All Caribbean countries have had to make themselves compliant with the demands of the countries of the OECD as a group and individually. Every Caribbean country is compliant with the rules of the Financial Action Task Force (FATF) on money laundering and counter terrorism financing. In fact, they are more compliant than the US, which the FATF found to be non-compliant with entity transparency and gatekeeper rules in 2006 and which the FATF has chosen not to evaluate since.

As far as the OECD Global Forum rules on Transparency and Exchange of Information for Tax Purposes are concerned, the majority of Caribbean countries are on their way to full compliance. My own small country, Antigua and Barbuda, is fully compliant with the requirement for Common Reporting Standards (CRS), while the US has not signed-up to it. And the US has been the beneficiary as Trust structures move there to avoid disclosure.

States in the United States, such as Delaware, South Dakota, Wisconsin, Colorado and Arizona, disregard OECD rules – and are practical tax havens, confirming why the US has not signed-up to the CRS. It is clear that the doctrine of ‘might is right’ continues; the principle of transparency applies only to the weak; and the notion of a level playing field for competition is a myth.

Incidentally, it is worth pointing out that, in 2015, a number of individual States of the US adopted legislation naming Caribbean countries, including my own, as ‘tax havens’. When, as Ambassador of my country to the US, I pointed out to the Commissioner of the US Inland Revenue Service that under the Tax Information Exchange Agreement which my country signed with the US in 2000, the US – and all its States – had access to automatic tax information and, therefore, the legislation adopted by Maine, Montana, Oregon and the District of Columbia was ill-informed and wrong, and that he should so advise them, the reply I received in writing was that “the IRS plays no role in the legislative process” of these States.

Nothing was done. It makes one wonder what is the point of a TIEA with the Federal Government of the US, and whether, instead, we should have negotiated individually with all 50 States of the United States. What is clear is that, though the IRS won’t enforce the terms of the TIEA with its own States, it demands enforcement, upon pain of penalties, by Caribbean countries. Added to all this, over the last two years, Caribbean countries have been facing a huge new threat not only to their financial services, but to their sustainable development and their ability to participate in the global financial and trading system.

This new threat comes from a decision by banks in the US and the UK to withdraw correspondent banking relations from respondent banks in the Caribbean. As Christine Lagarde, the Managing Director of the IMF, points out: “Correspondent banking is like the blood that delivers nutrients to different parts of the body. It is core to the business of over 3,700 banking groups in 200 countries”. Without correspondent banking relations, Caribbean countries cannot pay for the goods and services that they buy from the US and the UK, including medical and education services.

They also cannot receive payments for tourism or remittances from their diaspora that sustain the well-being of the poorest and most vulnerable in their societies. The consequences of this should be obvious, since the US and the UK are the Caribbean’s biggest trading partners. The majority of banks across the Caribbean have lost their correspondent banking relations with US and UK banks. They have had to find expensive alternatives that have pushed up the price of bank transactions and the cost of doing business.

Already heavily-burdened, open economies in the Caribbean are now faced with additional costs to import goods and services from the US and UK, and to receive payments for their own goods and services. It is not clear how long these alternative arrangements will last before US and UK banks shut them down under the present dispensation. Frightened by the huge fines and forfeitures with which they are threatened, particularly by regulators in the US, and conscious of the branding of the Caribbean as a ‘high risk area’ for financial services, banks that have done business in the region for over a century, are taking the view that the risk is not worth the rewards of the business.

No bank or other financial institution in the Caribbean has been a party in any of the cases of money laundering or tax evasion prosecuted in the US or the UK. It should be patently clear that the withdrawal of correspondent banking relations from the Caribbean is not due to any lack of compliance with the anti-money laundering, counter terrorism financing or tax evasion rules of the OECD countries, including the US.

One is left to speculate, therefore, as to the real reason.

It would be helpful if, committed as it says it is to less regulation, the Donald Trump government will be more open to the Caribbean’s argument that US regulators and correspondent banks should mitigate rather than avoid risk, and that, therefore, US banks should only terminate correspondent banking relations where money laundering and terrorism financing risks cannot be mitigated. It is a proposition that Caribbean countries collectively should explore with the Trump administration as soon as they are able to do so at all levels.

What the future holds for correspondent banking relations for the Caribbean is very uncertain. What is clear is that if the present trends continue, the region will be in danger of losing even more sovereignty over its fiscal and banking affairs. If the indigenous onshore banks and offshore banks of the Caribbean are all deprived of correspondent banking relations, the region will be left with only the foreign-owned banks (mainly Canadian) that are prepared to remain because they have their own headquarters correspondent relations.

Those banks can then form cartels that control the means of exchange in the Caribbean and determine interest rates, lending policies, and sectoral investment. The region will be gripped by a new form of colonialism and control – this time by foreign banks. A responsible international community should help the Caribbean to resist this growing cancer; other developing countries should be in the forefront of support, for the cancer can spread to them, as it has already started in Central America and Africa.

Nothing that I have said here should imply or suggest that Caribbean countries ought not to comply with the rules against money laundering, counter terrorism financing and tax evasion that are being set – albeit not by globally-represented bodies. They have to do so, and are doing so, at very high cost.

So, to summarize the themes of this presentation.  In relation to Globalization, the only global rules are those set by powerful countries in their own interest. Fiscal sovereignty as a right of individual States is largely ignored and up-ended by the doctrine of might is right. Tax competition has survived in part so far, but the OECD countries are unrelenting in their efforts to coerce other nations into mirroring the areas of their taxation, even though the economic imperatives of nations are vastly different.

What then for the future of Financial Services in the Caribbean? The prospects would be best served by the formation of alliances in every global forum to wrest control of financial services matters from the OECD that represents only a handful of nations in the world community.

In the late 1990s, it was an alliance of Caribbean nations with Austria, Switzerland, Luxembourg, the Isle of Man and Jersey, that held back the OECD over its so-called ‘harmful tax competition initiative’; and it was the decisive intervention of the new Republican government of George W Bush, before 9/11 and the Patriot Act, that eventually pushed back the OECD.

Since then, the European jurisdictions retreated into the fold of the OECD, and the Obama administration in the US strengthened the heavy-hand of regulation and extra-territorial laws such as FACTA. The Caribbean should now look elsewhere – to the countries of South and Central America, including Panama, and to Africa and the Pacific where nations are also subject to coercion, erosion of fiscal sovereignty and loss of competitiveness to build alliances to counter the domination of global rules on tax matters by a few self-serving nations.

The Ecuadorian government is right . A UN body is needed. But not to chase after imaginary windmills of falsely-labelled tax havens. It is needed to create standards created by representatives of the entire world and not by a handful of elite countries; it is needed to establish rules that tax competition, like all other competition, is good for global growth; it is needed to enshrine the principle that settling levels of taxation is the sovereign right of each nation in the context of its own economic and fiscal imperatives.


(Sir Ron Sanders is Antigua and Barbuda’s ambassador to the United States and the Organization of American States (OAS). Comments expressed in this column are his own)


One Response to Caribbean countries play by the rules

  1. Hal Austin February 28, 2017 at 1:41 pm

    This is juvenile and silly. Is selling passports playing by the rules? Did Stanford play by the rules?


Leave a Reply

Your email address will not be published. Required fields are marked *