Offshore Financial Centres:
OFCs’ Response to recent International Initiatives
2002 Dr Jean-Philippe Chetcuti. All Rights Reserved.
Onerous changes are never welcomed with an embrace, especially when these changes bring along a duty to give up ones hen with the golden eggs. The OECDs list of requirements for compliance gave off tinges of fear and irritation in the Bermudan financial world, yet presently optimism, on the reforms demanded by the OECD, dominates the Bermudan business community. Currently, this radical financial regulatory change is depicted in a positive shade:
[U]ltimately, as we look to the future of the global economy, it will be those jurisdictions that adopt and maintain international standards that will be most highly regarded. These jurisdictions will by extension inspire confidence and continue to attract quality business, as we have experienced in Bermuda.
In the past, Bermudas reputation was marred by a high degree of corruption. However, presentably, it boasts of its established independent regulatory system and flexibility vis–vis new regulations. On May 2000 Bermuda contacted the OECD, assuring its commitment to the OECD guidelines.
Bermudas current fiscal regime is highly attractive to offshore investment. No profits, whether corporate or personal, are taxed; there is no capital gains tax regime; and no withholding taxes. Bermuda raises this revenue from customs duties, employment taxes, hospital levies, land taxes, and various other minor levies such as stamp duties. Yet, international companies registered in Bermuda have the option to apply and benefit from an exemption from any taxes on income until the year 2016, is ever such taxes are to be assessed.
Bermuda has an edge vis–vis other centres. It boasts of the highest income per capita in the world and it is a British dependency. Hence, it does not stand much to lose by abiding with the OECDs principles. There is also the added concern of a large number of Bermudan financiers that a marred label from the OECD would result in more damage than the new reforms actually would. All these factors resulted in Bermuda endorsing its adherence to the OECDs proposals.
The Bahamas is home to 580 mutual funds, 60 insurance companies, and 100,000 IBCs. This is approximately one for every three in Bahamas. It also holds $350 billion worth of assets under management and boasts of having 418 banks from 36 countries present within its territory. In contrast to Bermuda, the Bahamas, highly depends on its offshore sector: offshore finances account for 15 % of GDP and 20 % of governmental income. Thus, its opposing reaction to the OECDs actions is more than justifiable.
Yet, the Bahamas is also abandoning its aggressive, unconformist stance vis–vis the OECDs proposals. It has also been singled out by the OECD itself, together with the Cayman Islands, as having adopted a pro-active attitude en route to the adoption of new measures addressing the OECDs concerns.
The Bahamas adapted its laws addressing banking supervision, adopted stricter rules regarding customer identification and information about the ownership of IBCs, and branched out its channels for providing international judicial and administrative collaboration. However, Bahamas has still not enacted [or] implemented all necessary reforms required by the OECD.
Hence the aggressive approach undertaken by the Bahamian government to change its financial regime, including:
n the ban of anonymous ownership of its 100,000 IBCs;
n the suspension of two Bahamas-based banks for their inability to fulfil basic banking requirements;
n an indication that it will close any bank deemed to be a threat to the integrity of the international financial system;
n a real combat against money laundering;
n the enactment of the Central Bank of The Bahamas Act in 2000, providing for improved bank supervision, cooperation on cross-border supervision of banks, enhanced cooperation between the Central Bank and overseas regulatory authorities, as well as extensive information gathering powers for the Central Bank; and
n passing the Financial Transactions Reporting Act, addressing money laundering issues;
This stance adopted by the government, is reflected in the words:
[A]s a people of reason, we also know that if globalisation is to bear positive fruit, it will dictate widespread changes in the domestic and international arenas, especially in the area of trade.
A number of banks might consider ending their business relationship with the Bahamas. However, approximately more than half of the managed banks are likely to remain and comply with the new legal regime and they are even considering expanding their operations. Globalisation has fostered the atmosphere for the Bahamas to become a successful tax haven. Presently, this same globalisation is forcing the OFC to embrace internationally accepted standards for banking and tax regulation. The result will be melange of losses of a number of international investors and an attraction of other investments. Both these aftermaths will be the result of the employment of internationally accepted banking and accounting procedures.
Switzerland and Luxembourg
Switzerland and Luxembourg continue to resist pressure to exchange information for tax enforcement purposes. In fact both dissented from the OECD 1998 Report, even though both are also OECD members. Even if the Federal Council had to decide to negotiate on this matter, there are heavy constitutional restraints on its power to agree on measures to negotiate on bank secrecy. Excluding Switzerland and Luxembourg, 27 other countries approved the 1998 Report. Hence the de minimis attitude adopted by the OECD regarding these two countries dissenting view. However, one should note that the non-cooperating OECD states are the main onshore competitors for the offshore world and answer for many of the tax neutral structures managed onshore within the OECD. The fundamental principle behind the OECD initiative should be a commonly accepted standard, universally observed by all OECD states and cooperating OFCs. Otherwise, the credibility of the project suffers. Hence, the fears of the offshore world, that if Switzerland and Luxembourg are not compelled to abide to the standard sought to be imposed on OFCs, investment business will drift to these OECD member countries. [63
From offshore to onshore: