The Week in Europe
By David Jessop

There are now ten separate international initiatives to examine globally the
conduct of the offshore financial services sector. Their objectives range
from tackling money laundering, through to seeking to eliminate the 'harmful
tax competition' of tax havens, to establishing minimum international
standards for financial services regulation. 

In many cases it is the Caribbean's independent states or the Overseas
Territories of the European Union (EU) that are finding themselves at the
centre of this growing storm

For a region used to sudden climactic change, the best way to describe what
is happening is as a series of financial hurricanes building up in the
mid-Atlantic and moving inexorably in the Caribbean's direction. Some have
already passed through the islands (the World Trade Organisation's ruling on
Foreign Sales Corporations), others are close by and gathering momentum (the
Organisation for Economic Co-operation and Development's (OECD) work on
Harmful Tax Competition), while still more lie off the coast of Africa
possibly presenting a distant threat (the Financial Stability Forum (FSF),
an exercise to establish standards for financial services regulation). 

The cause of this sudden build up of freak financial weather is
globalisation. In a liberalising global market, capital has had to become
increasingly mobile as currency and exchange controls have been relaxed to
facilitate the cross-border flow of capital. This has sharpened the focus of
developed countries keen to maximise their national tax bases in order to
ensure that as little as possible escape's the taxman's grasp. 

But globalisation has had more worrying consequences. Money laundering is
now easier than ever before and the opportunities for organised crime to
rapidly transfer large sums to, or through, small offshore jurisdictions is
tempting. While the Internet has reduced the speed and cost of financial
transactions, it has also made them more difficult to police. The
consequence has been a growing clamour, justified and unjustified, to pursue
international initiatives aimed at controlling or curtailing activity
previously accepted as legitimate.

For the smaller jurisdictions such as those in the Caribbean, these
processes are far from democratic and decidedly one-sided. There is no
Caribbean presence in the OECD, the EU, the FSF or the many other bodies
known by a wide range of mind-bending acronyms through which many of the
proposals are bring pursued. Only the United Nations process allows the
offshore financial services centres the chance to participate in the debate
on their own future. Even then the negotiating capacity of the Caribbean
compared with that of OECD governments makes the playing field far from
level. 

Equally troublesome is that many of the initiatives are moving into
controversial or uncharted territory in terms of law or seek to impose
extra-territorially the developed world's view on the developing world. So
much so that it seems that in the absence of agreed internationally accepted
standards, some developed nations are now looking to get their way by
exerting coercive political pressure on weaker jurisdictions. 

Senior Caribbean officials have also accused the developed nations of taking
advantage of the OECD process by deliberately muddying the legal waters
between tax avoidance, which is legal, and tax evasion which is not.
Observers have also pointed out that as OECD nationals are among the major
clients of offshore financial centres, OECD governments might be better
advised to tackle the issue of tax avoidance domestically rather than
seeking to internationalise it.

The problem is that while discussions on these issues continue in
Washington, New York, London and Paris, the impact on the Caribbean is
already being felt. The sense of uncertainty has been steadily increasing
and this is already affecting business and investor confidence. It is
particularly acute when any exercise is politically driven. 

For the user of offshore financial services finding a way through the
briefings and policy papers to assess the likely impact is no easy task.
Accurate analysis is made more difficult by the fact that each financial
service industry is different in character. Therefore, not all of the
initiatives are relevant for all financial centres. 

By way of example, the World Trade Organisation's (WTO) decision on Foreign
Sales Corporations will have had little affect in the British Virgin Islands
or Cayman Islands but relates directly to Barbados' interests. Conversely,
the EU's proposed code of conduct for the financial services sector will not
unduly worry Barbados, but may be a cause for concern in certain of the UK
Overseas Territories. 

The common theme in all initiatives would appear to be a desire by the
developed nations to see greater transparency, international co-operation
and exchanges of information between offshore and onshore jurisdictions.
These are laudable objectives, particularly if the financial scandals of the
type, with which the 1990's began and ended, involving the BCCI and Bank of
New York, are to be avoided. However, many developed nations pursuing these
initiatives are unwilling to address problems associated with their own
financial regimes. By way of example: Luxembourg and Switzerland abstained
from the 1998 OECD Report on Harmful Tax Competition. In February 2000, the
OECD's Financial Action Task Force threatened to suspend Austria from its
membership for its anonymous passbook accounts. These countries may soon be
joined by Britain, with offshore centres in crown dependencies close to home
such as the Channel Islands. 

International emphasis in recent years has been on encouraging regions such
as the Caribbean to strengthen their service sectors in the light of
preferential arrangements for agriculture coming to an end. While the
growing number of threats might be seen as a compliment to the recent
relative success of the region in developing offshore financial centres,
they are in reality a further challenge to the region's economic survival.

A well-regulated offshore financial service sector is a prerequisite and a
defence against use for criminal purposes. However, there is a sense that
the ever-increasing range of initiatives now underway amounts to nothing
short of an attack on the success of one of the few new industries in which
the region may have competitive advantage over the developed world.

More information on the range of threats facing Caribbean financial centres
is available on request by Emailing: [log in to unmask] 

David Jessop is Executive Director of the Caribbean Council for Europe 




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