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We Are the Champions: Resilience of Caribbean IFCs 

by L. Ryan Pinder

Published: May, 2019

Submission: May, 2019

 



(Article is a transcription of a presentation given by L. Ryan Pinder, Parnter, Graham Thompson Attorneys)


Introduction


Good morning and welcome to The Bahamas. I trust you will enjoy your stay in our beautiful country. Today I have been asked to speak on the resilience of Caribbean IFC’s, their ability to adapt and survive amidst the many global initiatives over the past two decades and to explore the multitude of ways in which Caribbean IFCs remain relevant and competitive in this era.


I think the tone of the topic implies that we are strong, mighty and will all be ok, we will find a way. Well I do not share that optimism frankly. I think we are all in very serious trouble, and I don’t say this because I believe we cannot survive with compliant business. Region wide we struggle with a lack of identity and an opaque value proposition as international financial centers given today’s regulatory reforms and scope of business that we must adapt to.


I struggled with preparing for this presentation as my view of the world and us IFCs in the world today is not very bullish. I think we have significant challenges to be viable as financial centers. I have difficulty identifying our competitive advantage and value proposition that clients’ will desire. Why do clients need regional IFCs when their information is no longer private and they have to invest significantly in physical presence, in certain cases from an operational point of view, and in most cases from a governance point of view.


In an era of transparency, economic substance, and over compliance what sets us as IFCs apart from on shore financial centers? Unless we adapt and can identify and convince the market of our value proposition in the new world order, we will struggle to continue. In the short term we will all try to survive, in the medium term we will struggle with innovation and differentiation, in the long term I fear many of us will not exist as IFCs any longer without fundamental and visionary policy direction and reform.


I won’t go into a history lesson of Caribbean IFCs, but I think it is important to understand the history of our value proposition, and the glaring need to learn from our journey and to be relevant again in the world, and to understand what our value proposition is today, if there is one.


I don’t have to convince any of you that throughout the last couple of decades, spanning almost a generation now, there has been a concerted assault by the large economies of the world against IFCs, and the services we offer to private clients, and mobile capital. In many, if not every instance it has been an un-level playing field, imposing rules and obligations that these countries fail to impose on themselves. These large economies and countries have admitted as much.


The changes from a regulatory point of view has led to legitimate questions regarding the future viability of international financial centers, and especially those in the Caribbean. Paul Byles writing for the Cayman Financial Review correctly categorizes these efforts in two primary areas: those that focus on global regulatory standards and those that are aimed at minimizing tax evasion and tax avoidance – primarily through forcing financial transparency down our collective throats.


This has created a constant evolution in who we are as small island based IFCs. We have had to adapt, adjust, and be innovative in the changing landscape of regulation and big brother oversight. Not only have we had to adapt to be relevant, but we have also had to invest a tremendous amount of resources, time, effort and know how in the development of our regulatory framework, and the implementation of the internal processes from both a private sector viewpoint and government viewpoint in order to remain compliant with those who set the standards and to avoid, to the best we can, from being named and shamed in arbitrary black lists which seems to be the only constant in today’s world.


These efforts over the last decades have been admirable, but have they put us in a position to remain competitive? I struggle to see how we are better off from a business point of view. We have gone from holding ourselves out as true differentiating financial centers, to proclaiming that we are compliant with all the rules imposed on us. That alone does not attract clients and develop an industry. That message, as a sole message, is an admission that we are regulating ourselves out of business.


Fiscal Transparency - Minimizing Tax Evasion and Tax Avoidance


We have witnessed a multi-faceted strategy of regulatory and compliance reforms designed to institutionalize the demise of fiscal privacy, not only in the individual private client market, but also in the corporate structuring market. CRS and FATCA as we all know dismantled the value proposition of our region, financial privacy. CRS and FATCA imposed fiscal transparency for individuals by creating a new standard of automatic exchange of fiscal information. Unlike the CRS and the harmful tax practices initiatives of the past, BEPS has a focus not necessarily on the private client, but on the multinational commercial organization. This has imposed an entirely new framework for tax enforcement and fiscal transparency.


These initiatives have added complexity to Governments, private sector and even those countries that are imposing these measures to combat, from their prospective, tax avoidance and tax evasion. These initiatives not only are obtaining the underlying goal of the major economies, increased fiscal transparency, but are also imposing cost and complexity of compliance that has the ability to force the private sector participants to retrench and consolidate, but also systematically dismantle the financial service industry as we know it for small, island based IFCs.


These tax initiatives have also eliminated the historical value proposition of IFCs such as The Bahamas and other regional IFCs, financial privacy and confidentiality. This is particularly important in markets such as throughout Latin America and other countries where citizen intimidation and victimization is the order of the day, removing a market for us that in all reality requires our services for their self-preservation.


We as countries have adjusted to the implementation of fiscal transparency and automatic exchange of information, but as a result, we have all seen the business in our region suffer from it. We have seen deposits and capital leave the jurisdictions, whether going back on shore, or to the United States. We have witnessed client structures being collapsed and simplified. We have witnessed compliance costs continue to climb through the roof in the private sector just to remain compliant. Fiscal transparency has been a difficult adjustment, one we have all paid the price for.


Global Regulatory Standards


As if being the tax enforcement and information collecting agency for large economies wasn’t enough, we have witnesses a significant increase in global regulatory standards and the systematic ratcheting up of the application of standards to countries like ours, without any regard to the ability of these large economy countries to meet the same standards.


Certainly we have been familiar with the FATF and the compliance requirements of anti-money laundering regimes and the requirement to have the requisite due diligence on our clients. I have been known to say that the region, and in our context The Bahamas have the most experienced and developed compliance professionals in the industry worldwide. But this has not been enough in the context of AML standards. Laws, ability and practice have not been enough for the large economies of the world.


We have seen the FATF, and subsequently the EU, UK and even the USA penalize regional IFCs for what they perceived as a lack of enforcement of AML violations. We have seen us have to change our laws to bring attorneys, real estate agents and real estate developers within the definition of financial institution under our financial transactions reporting legislation. Global regulatory standards in financial services are no longer applicable to only those institutions in the industry, but to a much broader market segment. This has created much uncertainty and confusion throughout domestic economies, not just the financial services industry.


Global regulatory standards have expanded now beyond tax, beyond AML and have not put the focus on economic substance. This reform is inherent in BEPS, however has been advanced in an extraordinarily aggressive method by the EU, the group of countries who now seem to have branded themselves as the international watchdog and enforcement agency against IFCs and our industry.


The imposition of economic substance requirements will be difficult for many of our IFCs, difficult in understanding exactly what the clients are doing, difficulty in having the capacity to provide the economic substance domestically in our countries, and difficulty for our private sector, especially those that are in international groups to comply with the archaic outsourcing requirement that prohibits the outsourcing of core income generating activities outside of the country. This makes businesses operating in our countries challenged to continue what is international recognized practice, being able to leverage services in different countries for the success of the institution.


If these established institutions look to leave our countries, or to curtail the activities in our countries, the access to clients and workload to support our financial services industry will likewise suffer greatly. Imagine a bank from one of these large economies doing business in our respective countries having to consider their continued presence because they cannot outsource their credit activities back to head office, or another member in the group. This would be devastating to our economies on a number of different levels. This I fear is a genuine reality today.


What are we now doing?


What we have witnessed in our respective countries over the last 18 months is an all hands-on deck effort to comply with what seem to be overarching international tax transparency and global regulatory standards. A host of new legislation, amended legislation, and domestic regulatory reforms are underway. Governments are working in the diplomatic sphere and the legislative reform sphere at a pace that has made all of us dizzy and uncertain. In The Bahamas we have implemented the following:


  • Financial Transactions Reporting Act
  • Proceeds of Crime Act
  • MultinationalEntities Financial Reporting. Act
  • RegisterofBeneficialOwnership Act
  • Commercial Entities (SubstanceRequirements) Act
  • Removal ofPreferential ExemptionsAct

Many of these pieces of legislation are lacking in regulations and guidance that will assist the private sector in understanding their obligations and how to conduct their business, adding to the uncertainty in our marketplace. We still have work to do on the legislative front, some of the legislation likely will require amendments, and most of the legislative we have seen requires more precise guidance. The downfall of this process, however, is that we have not passed enough legislation for new products, new innovation, and new opportunities for a value proposition.


We are countries of limited resources, limited capacity but historically creative with outside the box innovation. Yes, we are living in likely the most difficult times of international regulatory standards and an un-even playing field internationally. What we have experienced over the last three to five years, and the escalation in the last eighteen months is far more burdensome and pose far more risks to the viability of our industry than we have ever seen before.


We collectively have to focus on a renewed value proposition. We probably should have done this in parallel with the imposition of all our collective reforms. Uncertainty is the recipe for failure for us; we have lived in uncertainty for too long. It is now that we must redefine ourselves, we must once again find our place in this new world order. This isn’t going to be like historical efforts to redefine ourselves, where we come up with interesting products and new markets to generally work within our historic business model. We need a new business model, new value to our clients, a new frontier where clients will see why they want to be invested in our region.


This approach is going to take willing governments to listen to us practitioners and understand, especially in this area, they do not have all the answers. When there is an idea to re-define ourselves, or even a portion of the market, we need our respective governments to put in place all the necessary reforms to make it happen, and I mean put them in place right away. We have to have a better understanding of what the global marketplace genuinely wants, this requires travelling and listening to the practitioners in other countries.


How do we survive going forward?


Recognizing the new frontier is one of complete fiscal transparency, no real financial confidentiality for our clients, and one where compliance costs are going to be very high, where do we sit with our clients? The only way to redefine ourselves is to embrace the new world order and carve out a place for us in it. We have to do this even though we think that it is it unfair, that it has severely affected current business and we don’t quite understand what the market makeup looks like. We must understand that in the context of commercial cross border transactions, the approach to tax planning is a fundamental component of any transaction. We must find our place in compliant tax planning structuring for our cross-border clients.


In order to do this, we have to better understand taxation, which has not historically been an area of focus or knowledge for us. We have to educate ourselves and be a compliant player in the cross boarder commercial business as well as the global approach to our private clients’ in their business operations. In this context we also have to build the capacity to service the clients with real economic presence and substance in the jurisdiction. This will likewise require significant investment in capacity of our people. We have arrived in a commercial and regulatory environment where we need to retrain and reeducate ourselves to be the place where business is conducted, not just forming an IBC to be a cog in the global structure, not just to review commercial documents to ensure they are compliant with our laws, we must be the place of business, or at least a part of the global business.


Training - Here in The Bahamas we are focused on enhanced and continued professional training. We have the Bahamas Institute of Financial Services, of which I am the President. At the institute we are focused on retraining our professionals to be able to provide the services and expertise in this new regulatory environment. I encourage all jurisdictions to focus on the re-training of your professionals with particular focus on opportunities as a result of the new regulatory regime and tax transparency. Ultimately, we have to be knowledgeable in areas that are important to the new era of business, physical business, cross boarder commercial transactions. For the most part we on a collective basis may not possess this knowledge, but we better do so and do so quickly.


Ease of business – We must recognize that we are now competing with onshore jurisdictions and major countries and economies. We struggle throughout the region with bloated bureaucracies and inefficient day to day administration. This is not something unique with any particular country; however, we are now competing with New York, London, and all other major financial centers. We need to be able to ensure our clients are approved through government bureaucracies in an expedient, transparent and predictable manner. This means removing the authority from the politicians and, assuming the client checks out, allow him to get all necessary approvals to live and start their business within our jurisdictions.


For example, immigration is a fundamental component of physical presence, an important element of our industry here in The Bahamas. If a client wants residency and qualifies, he should get his within thirty days. If the client has a business he wants to base within the country, one that will be compliant with the imposed economic substance requirements we have all adopted, this should similarly have an expedited transparent system of approval. If we cannot affect this, and we fall back into our centralized approval for every element of what our client wants to do within our country, a time-consuming demonstrative process, we will not be able to compete for this new world business. If we cannot out-compete, not only being the equivalent to our first world competitors, we will not survive. Unfortunately, I do not think our collective us understand the nature of the first world competition we find ourselves in just to be able to merely survive. It is fierce, efficient and knowledgeable. We must be all of that and more.


Client Service – Along with addressing the ease of our clients actually doing business from within our respective countries, us as practitioners have to commit ourselves to excellence, responsiveness and completeness in our advice to clients. Remember who we are now competing against, we have to be better. Client service is paramount to being able to be relevant as a jurisdiction. We cannot overlook this element of where are value is as IFCs.


Industry expansion – We likewise have to recognize that we must all significantly expand our industry and the clients we serve in order to sustain. For example, we have seen in The Bahamas a consolidation of banking and a loss of assets in our banks. However, we have stayed ahead of the game to attract new types of financial institutions. We have seen an increase in broker dealers in The Bahamas as well as asset managers. Recognizing this shift is important.


We also have to expand the type of client we are looking for. For example, as we would all know, The Bahamas has historically been a jurisdiction for the private client and the management of their assets. We have now committed ourselves to expand beyond individual and private client structuring work. We have re-drafted our Investment Funds Act to be more receptive and attractive to institutional funds to base within The Bahamas. Having done this, it is on us to go out and market this new sector of the industry and attract the business.


Likewise, we must carefully approach new industry for new opportunity. Fintech is a good example of this, and especially the digital asset space. Crypto currency, blockchain and all of the related services. Around this new phenomenon presents an opportunity for our jurisdictions to be the region of preference. In The Bahamas, for example, we have drafted the Digital Assets and Registered Exchanges Bill which is now in the public domain for consultation. This legislation has been carefully drafted to position The Bahamas as a leader in the region in Fintech and digital assets. We have a number of institutions interested in The Bahamas as a jurisdiction for their business in this sector.


We, however, have to be guarded in how we approach this industry and the clients therein. The digital asset phenomenon is famous for fraud and investor losses. We have taken an approach where we will have world class legislation, a regulator who understands the associated risks and a focus on legitimate, conservative institutional business in the space so we can gain our foot hold. To survive IFCs have to take this approach in my opinion with new industries and out of the box opportunities.


What are the risks of non-compliance with big brother?


Some say that this is all too much, and we should just tell the international community we will not comply until it is truly a global level playing field, with all other large economy countries having to address these concerns at the same pace and intensity we do. Unfortunately, this is not an option. We have seen regionally the adverse impact of negative opinion on the legitimacy of our business through the restriction and contraction of correspondent banking in the region. With the fines and enforcement against the large global institutions they have become gun-shy of what they deem to be higher risk activity. Providing correspondence banking to institutions in the regional IFCs is the real big stick that the large economies use, a risk brought about by these name and shame activities such as black-lists.


Another risk, especially with respect to AML non-compliance, or being deemed high risk is that financial institutions around the world may not open accounts if an entity from your particular jurisdiction is utilized. If the structure cannot bank or invest with your entity in it, your entity will not be in the client’s portfolio much longer.


There are real world consequences to non-compliance.


Conclusion


Unfortunately, we find ourselves in an environment of reform that we are not used to. Much of what we survived on is no longer because of the shifting global standard. We must find a way to adjust. I opened the conversation today stating that we might not all survive what we are facing. I still believe that. We have a lot of work to do, not just the policy makers to help provide regulatory clarity, but us as practitioners to prepare ourselves for this fundamental shift.


I challenge all of us especially in regional IFCs to focus on the speeches and presentations this week, take the time to look deep inside, both in your industry, practice and country and try to define where your value is with respect to the global marketplace and new regulatory regime we find ourselves in. If we cannot demonstrate a genuine, compliant value proposition to clients and markets then we don’t have a chance.


If we can define ourselves, be attractive to business, then we have a fighting chance. If we can reshape our market, invest in our own knowledge and understanding, work collectively as private sector, government and regulators then the chance of survival, and hopefully success remains. It is a hard journey, we all have a lot to invest, but it’s our industry not theirs, it’s our future not theirs, it’s our viability as small island nations that is most important, we live here, they don’t. If we don’t fight for it, who will? If we can truly overcome this and dedicate ourselves to it, then maybe we are the champions. But remember, you have to fight to be a champion.


 



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