The Bahamas and offshore banking

First Published: 2005-03-23

Years ago, government officials were wont to dismiss out of hand any suggestion that our unregulated offshore sector and strict bank secrecy laws helped real criminals. It was all about taxes, they claimed.

Referring to US deposits in Bahamian banks, former attorney-general Paul Adderley once said "these figures have excited the Treasury Department…There is money here which may be evading American income tax, and that is perfectly legitimate."

But as the United states and others began to pay more attention to international crime, we turned more belligerent even as our position became less tenable.

Mr Adderley went so far as to blame the entire "nation for sale" drug trafficking scandal (which almost brought down the Pindling government in the mid-1980s) on a "warlike" American plot.

"Nothing would divert them from their course," he shouted at a political rally in September, 1983. "We still did not surrender. And then somebody said, let's call NBC." That rally took place shortly after NBC television broke the news that Bahamian officials were on the payroll of Colombian drug lords.

"No person, group or agency will cause us to buckle under over laws which we deem to be in the best interest of the country," said then tourism minister Perry Christie, referring to "scandalous attacks" on the country's leadership.

It may be difficult to recall those days when bank secrecy and official corruption made the Bahamas a crook's paradise, ruining our reputation and spawning social problems that still bedevil us today. But the facts are there – a 500-page commission of inquiry report in 1984 linked a number of high-ranking officials and politicians to foreign gangsters and outlined the consequences.

It got so bad that in 1987 the US Senate threatened travel sanctions, and the possibility of an American indictment of the prime minister for alleged drug connections was real. Former cabinet minister Kendal Nottage actually was indicted on money laundering charges in connection with a mafia drug ring.

THE BANK OF NOVA SCOTIA SUBPOENA

That's the back story to a controversial early attempt by the Americans to control the laundering of criminal profits – the demand by a US grand jury for records from the Bank of Nova Scotia branch in Nassau to support an investigation against two Americans on drug trafficking and tax evasion charges.

The government tried to resist this extraterritorial measure. Leaders of both major parties cited our strict bank secrecy laws, which supported a lucrative financial services sector with lots of high-paying jobs.

But when Scotiabank refused to provide the information, a US court in 1984 assigned it heavy contempt fines (that reached $1.8 billion) and threatened to seize its American assets.

Analysts say that protests from allies made the US reluctant to pursue this tactic again. But the case marked a major turning point, and convinced our government to re-start talks on a mutual legal assistance treaty with the Americans to combat organised crime.

That agreement came into effect in 1990 (and not 1992 as we previously stated). A unit within the attorney-general's office was created to process international requests for information. And we went on to sign similar treaties with Britain and Canada.

MISCHIEVOUS EXAGGERATIONS

In an earlier article we reported the view that our lack of response to treaty requests in the 1990s led to American support for the blacklisting of our offshore sector. In effect, some say, the US ran out of patience and put a gun to our heads, leading to a hasty and costly restructuring of the industry that is still ongoing.

But spokesmen for the previous government deemed this view "a mischievous exaggeration", whatever that means. According to former attorney-general Carl Bethel, the only problems that arose during the 1990s were when the Bahamas refused to provide tax information, which it was entitled to do.

"It was during this period that those comparatively few requests which involved enforcing income tax laws, were refused, either by the courts or the (attorney-general)," he said recently.

In this context, a review of US government reports over the years is instructive. They all underscore the need for more responsiveness, and the earlier ones refer to a "backlog" of unexecuted treaty requests.

Even the most recent report says the Bahamas still faces "international criticism (on) the effectiveness and speed with which these measures are being implemented, and the level of responses to international requests for assistance."

When it was in opposition, the Progressive Liberal Party hammered the Ingraham government for rushing through financial sector reform laws in the face of heavy external pressure. The PLP promised a review when it came to power, but has had little to say in almost three years.

And now the present opposition leader, Tommy Turnquest, is calling on the Christie administration to fix ongoing "vulnerabilities" in the laws. Mischievously, he adds that the government should "ensure that investigations and prosecutions are satisfactorily completed and that requests for international cooperation are efficiently processed."

According to Tennyson Wells, another former attorney-general, both the Pindling and Ingraham governments had promised to sign a tax treaty with the US, but kept stalling: "So eventually the US used the Financial Action Task Force to get at us and all the other offshore centres."

ADRIFT IN THE OFFSHORE WORLD

Forty years ago there were just a handful of tax havens, based in exotic (to others) locations like the Bahamas and supporting a bevy of high-paying jobs with a lot of perks. But as globalisation and information technology advanced, the global offshore industry expanded exponentially.

So much so, experts say, that soon half the world's financial transactions were being booked through offshore centres like the Bahamas. And bringing this vast international network under control emerged as "one of the central issues on public policy agendas around the world."

Alarmed by a rising tide of international crime, from drug dealing and terrorism to counterfeiting and embezzlement, Western governments responded with stronger measures to curtail money laundering.

"These initiatives began in a serious way in the 1980s and have been pursued in a variety of forums including the United Nations, especially the 1988 Convention Against Illicit Traffic in Narcotic Drugs," according to Professor Eric Helleiner of Trent University in Ontario.

Leading the way has been the Financial Action Task Force – a free-standing body set up by the Group of Seven countries (the US, Canada, Britain, France, Germany, Japan and Italy) in 1989. The FATF issued a set of 40 recommendations to curb money laundering in 1990, which has become a kind of global standard. It issued 10 more recommendations after the 9/11 terror attacks in New York.

Chiefly, the FATF called on governments to criminalize money laundering and terrorism, to require financial institutions to report all suspicious transactions, and to refuse to engage in transactions without knowing the identity of the customer.

As a result, in 1996 the Bahamas made money laundering a crime. But this law had to be strengthened in 2000 and was supplemented by others that eliminated anonymity and improved cooperation with enforcement agencies. The anti-terrorism law was passed in 2004.

"Gone is the rhetoric that the financial globalization trend is inevitable and irreversible," Professor Helleiner wrote. "The new conventional wisdom asserts that global financial markets will survive only if public authorities are actively involved in promoting this outcome through regulatory activities,"

Plainly, over the last two decades, Western governments have been building a regulatory regime for the international financial system, with information sharing and legal cooperation as key features. And the Bahamas, along with other offshore centres, have been resisting.

"It's fine to talk about legal distinctions," one authoritative American source told Tough Call recently, "but our laws are just as valid as yours. If you play the game, you have to play by the rules. Or we won't let our citizens deposit money in your banks.

"Bahamians like the perks of the financial services industry, but don't want to modify their behaviour and practices to accommodate others. Well, concessions are involved in any international transaction"

So after years of relying on peer pressure and jawboning, in 1998 the FATF decided to take stronger measures against countries it viewed as "non-cooperative" in the fight against money laundering. Two years later a blacklist was drawn up that included the Bahamas.

The threat of sanctions forced the Ingraham government to react swiftly – something that rarely, if ever, happens in the Bahamas. And the result was the package of financial regulations enacted in December 2000, which many argue were hastily devised and had the effect of crippling the country's second largest industry.

But others say that offshore centres like the Bahamas had simply allowed things to get out of hand: "The lack of regulatory oversight was reaching a tipping point and certain things needed to be done," one analyst told Tough Call.

As well as the fact that other jurisdictions were making reforms and reaping the competitive benefits, globalisation made the Bahamas far more susceptible to international pressure, some say. The more you have at stake, the quicker you are to react.

And the extent to which global financial markets depend on the legal, informational and technical infrastructures concentrated among the Western powers, made the FATF threats very real. Perhaps if we had been paying more attention to the 'geopolitics' of global finance, we would not have been caught with our pants so far down.

The FATF went so far as to include lawyers and accountants in their regulatory dragnet – calling them "gatekeepers" who often facilitated (intentionally or otherwise) the entry of criminal money into the legitimate financial system.

This gave rise to a legal action initiated by independent lawyers Maurice Glinton and Leandra Esfakis, which is still working its way laboriously through the courts. The lawsuit challenges the constitutionality of FATF regulatory measures that breach professional confidentiality with clients.

As Ms Esfakis put it: "If, in order to survive in this world, we are signing treaties to implement other nation's fiscal policies, then we need to find a way to make that work, without demolishing legal professional privilege, and without allowing the premises of citizens to be 'inspected' by government agents on a mandatory basis without cause."

TAX HAVEN OR TAX COMPETITOR

Meanwhile, Western nations were raising another red flag. Recognising the potential of the new anti-money laundering regime, the Organisation of Economic Cooperation and Development, a group of 30 rich and middle-income countries based in Europe, introduced initiatives to counter tax evasion in 1998.

There is no doubt that the FATF/OECD measures have been effective, particularly when backed by US pressure. For example, the Pacific island state of Nauru, cut off from the international financial network by FATF sanctions, disavowed offshore services and delivered thousands of financial documents to US officials in 2003.

At the same time that the Ingraham administration was buckling under to FATF threats, the US was also pressuring the Bahamas to sign a tax information exchange agreement. Intensive talks were held during 2001 and the agreement was signed in January 2002.

Tax information is important, the Americans say, because prosecutions of serious organized crime figures responsible for contract killings, drug trafficking, and other extraordinarily serious crime, have often succeeded only through the making of tax cases.

According to one US government report, "The inability of criminals to explain where their money came from, and the clear frauds involved in their handling of funds, made criminal prosecutions successful.

"By contrast, the generally accepted principle that there is nothing wrong with handling mere 'tax evasion' money offshore has created a swamp in which financial criminals breed."

And now new questions are being asked about Bahamian compliance with international regulators by yet another supranational agency – the Financial Stability Forum, which was set up in 1999 by the Group of Seven finance ministers.

"Reputations are hard to build and easy to destroy," one analyst told Tough Call. "The Bahamas has had a number of problems with international compliance in the last few years and so has developed a reputation for this. New vulnerabilities have been identified that the FSF is trying to address."

The Bahamas Financial Services Board was set up in 1998 by the government and the private sector to "represent and promote" the country as a blue chip, well-regulated, and cooperative financial centre. But clearly, there's more changes gonna come.

This article was first published in The Tribune, Wednesday, March 23, 2005.

The column 'Tough Call' by Larry Smith is published in The Tribune every Wednesday and is reprinted here as a courtesy. Mr. Smith founded and successfully grew an advertising agency over 20 years. Under his direction Media Enterprises diversified into short-run commercial printing and publishing, and is now the largest non-fiction book wholesaler in the Bahamas. He has 30 years experience as a journalist and publicist and has contributed numerous articles and columns to the Bahamian press. A former reporter at the Nassau Guardian, local correspondent for Reuters and editor at the Bahamas News Bureau, he conceived and edited the Bahama Almanac (published 2000 by Media Enterprises), wrote the commentary for Mike Toogood's Portrait of an Archipelago (published 2004 by Macmillan Caribbean), and edited the Bahamas Environmental Handbook (published 2002 by the government). In 2003 he took a year's leave of absence from Media Enterprises to lead a transition management team at the Nassau Guardian after the paper was acquired by local investors. After leaving the Guardian he was contracted by the Tribune as online manager/editor and columnist. He has a degree in political science and journalism from the University of Miami. Mr. Smith can be contacted at: larry@tribunemedia.net

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