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By Timothy D. Scranton Thoughts on the Caribbean Financial Services Industry |
June 7, 2002: his afternoon I want to introduce a topic that is not treated directly in other parts of our program, but one that is no less at center stage in relations between the US and the Caribbean than trade and tourism. It has to do with war, but probably not the same war that would immediately come to mind for most Americans.
The fact is, for the last two years a war has been raging in the Caribbean, the geographic heart of the Offshore finance industry in the Western Hemisphere. It is economic war and trade war. In many ways this is a cultural war and lifestyle war. But it is a war nonetheless. Admittedly, this picture of Battlefield Caribbean is an ugly metaphor one I probably thought we could cast aside when American troops left Grenada almost 20 years ago. I think this conference is obligated to look at the Offshore war in the Caribbean. Otherwise, realistic plans for future economic and political relations between the U.S. and that region cannot be made.
Even as I speak, the "offshore" world remains under siege. The onslaught continues by the governments of the world's largest countries (the G7-G8) against the governments of some of the worlds smallest, most of which are island nations of the Caribbean. The battle cry of the aggressor countries, including the United States, has been "stop money laundering" and more recently, "stop aiding terrorists". Hard charges to disagree with. Yet many commentators have exposed these monikers as a pretext for a political campaign by wealthy countries with a wholly different agenda to stop the erosion of their income tax base and to stem the huge out flow of capital to the vilified "tax havens" of the world. The weapons wielded by these developed countries are powerful, and include economic, financial and trade sanctions that they threaten to use against so-called "uncooperative" offshore countries.
The Offshore wars have been going on for years. I am reminded of U.S. Senate testimony in 1937 by the Under Secretary of the Treasury, who cited one "Francis George Bush" as operating an offshore investment empire through Bahamian corporations using a Canadian address! The war has been going on in earnest for the past two. The first recent salvos were fired by the OECD and its financial crime sub-organs, the Financial Action Task Force (FATF), in June 2000 when they published separate "blacklists"-the OECD's containing the names of 36 harmful "tax haven" countries and the FATF's listing 15 countries deemed "uncooperative" in stopping money laundering.
Further action was expected by last Summer, when the OECD was to recommend "counter measures" to be taken by developed countries against offshore countries who have not managed to get off one or both lists by that time. These were to include any number of strong-arm maneuvers: special reporting obligations for taxpayers with assets in blacklist countries, penalties for investments in those countries, even a ban on certain transactions with holdout jurisdictions. Those deadlines came and went, and the issue might have been tabled were it nor for September 11, which spawned the controversial USA Patriot Act. That law calls for dramatic economic sanctions against uncooperative countries. Since then, several Caribbean jurisdictions have capitulated or surrendered without a fight, pledging in writing to take steps to be more transparent and cooperative with foreign authorities. Some offshore countries have not yet responded. Earlier this week, the House of Assembly of Saint Vincent repealed a financial privacy law I helped draft in 1995 and replaced it with an Exchange of Information Act.
Both sides in this dispute have their strong and weak points. Detractors have referred to this war as neocolonialism and arrogant- the "have's against the have not's". Dick Armey even referred to the hypocrisy of our telling other countries how to structure their tax systems, something Americans would never allow. Others have convincingly argued that the threats leveled against the "non-cooperative" offshore world are illegal under customary international law and international treaties, and that the OECD is really after a world tax cartel. Specifically, it is said that economic sanctions threatened by the G7/G8 countries would violate the articles of the World Trade Organizations. Not a healthy position for a region purporting to discuss in earnest the prospect of free trade.
Promoters of the anti-tax haven campaign share equal righteousness, and for many good reasons. US Treasury Secretary O'Neill said recently that, in the war on terrorism "money can be as lethal as a bullet". Others argue that unless everyone in every country is enlisted in the "war" against terrorism, illegal drugs, illegal arms sales and predatory investment scams, there can be no hope of success. There is no doubt that the Offshore world has harbored both the fruits and the instruments of crime, but in their campaigns, the G7 countries have demonized offshore finance far beyond its due. After all, most of the really big financial scams originate in London or New York.
Whatever side has the strongest rhetoric, it is sure that this war is politically charged and motivated by disguised agendas. It is also clear that this Offshore War pits the world's rich against its poor, the large against the small, the former colonizers against the former colonies. The battleground is clearly worldwide. The financial stakes and consequences are huge. The implications for trade and commerce with the Caribbean are obvious. Face it; if financial transactions with a Caribbean country were unilaterally declared illegal, trade with that country would be strangled.
So other than the G7 and the OECD countries, who are the combatants? The targets are countries that, in some way or another, have made a choice to participate in one of the largest commercial sectors of the globe: offshore financial services. One might ask what are the services that would qualify a jurisdiction as "offshore" that is, a tax haven, and why are they so vilified by the pursuers and so important to the pursued? Basically, these offshore jurisdictions are countries that have low or no taxes and that offer special benefits to certain regulated industries, and particularly to companies that promise not to conduct business inside the haven country. Well, that could be Florida.
Now, I could irreverently say that "offshore" is simply a "state of mind" nothing more than a geopolitical manifestation of the adage that "the grass is always greener on the other side", but that wouldn't help the analysis much. In another sense, "Offshore" is just a financial product made in one country exclusively to be exported to wealthy people in other countries. Like a Rolls Royce. In that regard, offshore financial services have for the past 30 years been one of the chief exports of the Caribbean. Just ask the Bush family.
But offshore is not synonymous with the Caribbean. State, provincial and national legislatures around the world have all recognized they can develop and market products crafted from little more than law itself. The only indigenous natural resources needed are paper, political will and a sense of sovereignty. As one might suspect, it is the small, largely island countries of the Caribbean that have been most successful in this marketplace. They are the hungriest for economic development in the face of limited resources and opportunities, and they realize that by passing laws to encourage the creation of companies, trusts, banks and mutual funds they can compete for a share of the world's wealth. Their legislatures and Parliaments are nimble and motivated to do whatever it takes to help the local economy. The question is: have they gone too far? If so, should they be coaxed to reason by a friend or punished by a foe? That's a central question in this debate.
It's easy to get moralistic about the motivations of little places like Saint Vincent and the Grenadines or the Cayman Islands in passing offshore laws. It's also easy to see that in many respects these countries are virtually indistinguishable from US states like Wyoming, Delaware, Nevada, Florida or Alaska. All US States, particularly the poor ones in the South, compete like gladiators for job-rich foreign investment and industrial relocations. Their weapons are special, sometimes secret State laws, forged in the shape of tax incentives, grants, and relief from state regulation. "Let us be your industrial haven," is their battle cry. Who could say Americans don't understand "offshore?"
Where should we draw the line in our comparisons between the Bahamas, and, say South Carolina? After all, there are some interesting "havens" in modern on-shore America. Consider the casinos of New Jersey and Nevada and the racetracks of New York and Florida. Other states are downright desperate to get into the act. The creation of new State laws and the manipulation of "loopholes" in U.S. federal laws has spawned casinos on Indian reservations, legal video poker and gambling boats that tout day cruises outside of the "territorial waters" of South Carolina, Louisiana or Alabama. One might go so far as to say that Americans are masters of offshore. Look around. South Carolinians, who were recently embroiled in internecine warfare over implementations of a state lottery, went "offshore" in droves whey they traveled across the border to Georgia to buy lottery tickets. Now we have our own lottery. Year before last, South Carolina passed a law to promote and attract "captive insurance companies" that was designed to make this state competitive with Bermuda and the Cayman Islands and the Isle of Man. On a more personal level, for those unhappily living or vacationing in a "dry county," a trip across the county line to a liquor store is, in a real sense, to make a sort of offshore investment that is, to get something they can't get where they live.
In the field of corporate and commercial law, these trends are less apparent to the general public, but they are no less proactive and focused. States continue to madly invent opportunities believed to yield economics benefits for their citizens. State legislatures have realized that they can attract outside investment capital by passing law with limited moral content and consequences, but that allow something "unique" or competitive within their borders. Take Delaware, for instance. The "First State" recently passed a special law that allows people to create "anti-creditor" trusts there. At the other end of the American political and cultural spectrum, the forty-ninth state of Alaska has done the same (some say better), sharing Delaware's hope and belief that a unique asset-protection trust law will attract much-needed local investments and bank deposits. South of the Mason-Dixon line one finds even more unique quasi-offshore attractions. Florida and Texas are where the wealthy move if they need real asset protection, since those states have special "homestead exemptions" that allow millionaires to hang onto their mansions, estates and ranches even through personal bankruptcy. And what about income tax? No self-respecting accountant or tax lawyer is unfamiliar with the state income tax havens in the U.S., like Wyoming, Florida and Nevada. In the pending South Carolina gubernatorial election, the elimination of taxes has become a political sporting event.
Competition among States for company formation business is equally keen. Wyoming, like the British Virgin Islands, has more companies registered there than it has inhabitants, a claim that could probably be shared by Delaware, where most Fortune 500 companies are incorporated because of management-friendly corporate laws. Not surprisingly, most states have emulated the Delaware corporate code and the Wyoming limited liability company law, if for no other reason than the fear of being left out of the game to win company relocations and government registration fees. Some like Montana, have been more aggressive, touting new State laws that they hope will allow them to compete head-on with true "offshore" banks in Switzerland and Liechtenstein. In each instance, the legislatures' belief in the free exercise of their own sovereignty to do what's best for their State is the main guiding light. The result is direct competition between U.S. States and those little countries in the Caribbean and Europe that we have pejoratively called "tax havens." Could this be petty jealousy?
This tectonic movement by U.S. States to compete with foreign "offshore centers" renders more curious the question whether Americans understand and appreciate the role played by offshore finance in the modern world. The statistics are sketchy, but under any formulation, are compelling. It is estimated that one-third of the world's wealth over five trillion dollars is managed or held in one or more of the fifty or so foreign "offshore" countries that have enacted special tax or finance laws to attract foreign investment. The Cayman Islands alone is reported to book more bank deposits through its 580 odd licensed banks than the banks of any country in the world other than the U.S. and Japan. Delaware, the rightful king of company formations in the United States, hardly ranks in the world of offshore company formations, where countries like the British Virgin Islands (with a population the sizes of a small Wilmington suburb) boasts more than 175,000 registered companies. Perhaps State regulators realize that, at least in the rest of the world, offshore is both mainstream and Main Street. Ask the US Fortune 500, most of which have good reasons to maintain offshore structures in the Caribbean.
Nonetheless, Offshore has been in the US press lately for reasons other than the belief that it is a haven for terrorist money: so called corporate expatriation of US public companies like Stanley Tools, Fruit of the Loom and Tyco to places like Bermuda is seen as "un-American." Face it though if you can increase the bottom line return to shareholders by 25%, don't the directors of a company have a duty to consider alternatives like Bermuda. Some members of our Congress actually believe it is un-American for truly global businesses to reduce tax and obtain regulatory incentives by moving their headquarters abroad.
So who will win the war over Offshore Financial Services? Will it be the G7? The Caribbean? Or the States of the United States? That's unclear. The current U.S. Administration is resolved to force change on the offshore world, on the theory that "offshore" financial institutions are responsible for the government's failure to win the drug war or the war on terrorism. Members of the European Union have differing levels of resolve. After all, the most successful members of the Caribbean offshore finance community are still British Protectorates places like Cayman, British Virgin Islands, Anguilla and the Turks and Caicos. Unanimity will not come easily, and the OECD and FATF lists are an important and divisive issues in Europe, which is still struggling to achieve a single currency and tax harmonization.
All countries, onshore and offshore alike, deplore true money laundering connected with international crime. Where countries rightly disagree is on the expansive U.S. definition of "money laundering" to include tax violations and whether sovereign offshore nations are obligated to help other, far wealthier nations collect taxes from their citizens. With the prosperity, cultural identity and financial independence of many countries at stake, compromise is imperative.
Leaving patriotism, morality, legalisms and politics aside for a minute, let's look at economics, and a straightforward question; as the Offshore Wars subside through surrender or defeat, how will the victors treat the vanquished in the Caribbean? Will they construct a Marshall Plan of economic revival and rebirth, or will they simply walk away? I am reminded of the accusations leveled against the US and Europe in the Banana wars of several years ago. I am also reminded that following the routing of Soviet troops in Afghanistan, the US retreated, turning killing fields into poppy fields and hideouts for terrorists. All of these experiences, however diverse, suggest that the G7 nations cannot simply demand that the Caribbean stop offering offshore financial services without at the same time supporting them through opportunities for free, or at least freer, hemispheric trade in goods and services. After all, offshore finance is a "clean industry" that promotes the establishment of an educated and trained professional workforce and a lucrative internal services industry isn't that what all governments aspire to? Wouldn't it be hard to give up, when nothing is received in return?
The support offered by the G7 nations and particularly by the U.S.. in this forced transition in the Caribbean needs to be real not merely the hollow incentives and lip service offered to Caribbean nations under the Caribbean Basin Initiative of the early 80's. CBI never worked, and to many of the United State's Caribbean neighbors, it was an insult to their dignity and intelligence. For the new Caribbean, I'm not just talking about direct aid, but about free trade, open markets and the active promotion of ties between the US and the Caribbean.
In closing, I would like to encourage everyone, but particularly the Americans in the audience to reconsider whatever negative attitude they may have formed about offshore financial services in the Caribbean. We all compete for offshore business. We need to trade our bully pulpit on these issues for the high road of straight talk about how we can support and enrich our closest neighbors. We need to appreciate that the concessions they are making to us in changing their financial sectors are serious and challenging to them.
Presentation at Caribbean Realities: 7 June, 2002