International Trade and Investment Newsletter
INTERNATIONAL NEWS
News to
Use Dateline: Los Angeles, January 30, 2002
Divided loyalties
The Organization for Economic Co-operation and Development (OECD) and the Financial
Action Task Force (FATF) continue to scrutinize offshore financial
jurisdictions, but a sea change in US attitudes could HAVE a profound impact on
their influence
Early last year in 2001 the Financial Action Task Force (FATF) on Money Laundering published its twelfth annual
report, updating its influential list of non co-operative countries and
territories. There were cheers in the Bahamas, the Cayman Islands, Liechtenstein
and Panama as their names were removed from the blacklist in a series of
countries where the FATF identified serious deficiencies: Egypt, Guatemala,
Hungary, Indonesia, Miyanmar and Nigeria. Russia, the Philippines and the
obscure Pacific island of Nauru were singled out for specific attack and warned
to clean up their financial act or face stringent sanctions. To outsiders, Nauru
conjures up images of the classic ‘brass plate’ center, a PO box number conduit
for money flows handled elsewhere but technically administered through opaque
banking operations on the island.
Most already
follow rigorous internal standards and rules and many companies, including fund
administrators, run their own checks on suspect
business.
Fund promoters can win serious competitive advantage by having funds serviced
offshore or domiciled in an offshore tax efficient jurisdiction. From a
credibility viewpoint it is important that the jurisdiction the fund
administrator operates in is seen as clean and well
regulated.
For
Caribbean investment and fund administration centers such as the Bahamas,
removal from the FATF blacklist was an important step towards universal
financial credibility. Relief at de-listing was won through major legislative
change and serious soul searching. Some argue that FATF initiatives in the
Caribbean region had, paradoxically, undermined much good work by local
investment managers and fund administrators and created a serious credibility
problem in attracting outside business. But there is no doubt that most
jurisdictions named and shamed by the FATF have had to respond with vigor to
meet their demands.
Wendy
Warren, the chief executive officer of the Bahamas Financial Services Board, was
quick to capitalize on the FATF de-listing. “The de-listing provides an
authentication of the integrity of our systems. However, it is important to
recognize that it is not only in the last six months that the financial systems
and institutions in the Bahamas have been subject to adherence to counter money
laundering procedures. For example, since the mid 1980s, the Association of
International Banks and Trust Companies (AIBT) of the Bahamas has subscribed to
the codes of conduct including adherence to the principles of the FATF.”
Fund administrators operating in the
Cayman Islands, also removed from the latest FATF blacklist, similarly expressed
a sigh of relief. The threats to offshore fund admin business are constant,
ranging from external competitors tweaking their tax regimes to win advantage,
to more mundane problems such as battling to lower domestic telecommunications
costs.
According to Sean Flynn of local fund administrator UBS (Cayman Islands) Ltd.: “Fund
administrators in Cayman were very pleased the jurisdiction had been removed
from the FATF blacklist. We always felt we had a very good legal and regulatory
framework here in Cayman, but obviously we made the necessary changes that FATF
required to be de-listed.”
For industry watchers it has become something of an annual sport to guess who will be on the FATF blacklist and who
will be removed. But blacklisting is no joke to jurisdictions fingered in FATF
reports. Credibility is key to financial centers and, while bad money will
arguably always find a home, “clean” investors and institutions can withdraw
funds from jurisdictions they have doubts about.
That said, for the FATF or any similar
body to work it needs US support. And, just as FATF efforts are really starting
to bite, the US appears to be having second thoughts about the
project.
Under the previous Democrat President Bill Clinton, US support for the FATF was strong.
The Clinton administration was genuinely concerned with cracking down on money
laundering in an effort to combat international crimes such as drug trafficking
and gun running. There is no reason to suggest the new president, George W Bush,
is any less keen to tackle such crimes. But a subtle shift in policy on
monitoring financial crime has been evident since his
election.
Some are starting to question whether the FATF can really be as tough as it wants without
clear US backing.
The FATF is not the only body international financial jurisdictions
have had to contend with in recent years, or to be reconsidered by the Bush
regime. The OECD, which shares a Paris base with the FATF, has become the
scourge of tax evaders worldwide.
The Bush administration surprised many
in the financial world when US Treasury Secretary Paul O’Neill declared that
OECD policy was at odds with US tax strategies.
In a recent statement, he said: “I share
many of the serious concerns that have been expressed recently about the
direction of the OECD initiative. I am troubled by the underlying premise that
low tax rates are somehow suspect and by the notion that any country, or group
of countries, should interfere in any other country’s decision about how to
structure its own tax system.
“I am also concerned about the
potentially unfair treatment of some non-OECD countries. The United States does
not support efforts to dictate to any country what its own tax rates or tax
system should be, and will not participate in any initiative to harmonize world
tax systems.”
Despite signals from the US Treasury
that it was committed to finding ways to prevent tax evasion, its relationship
with the OECD has cooled significantly.
The change in emphasis has delighted a
raft of international organizations which have been lobbying hard for Bush to
withdraw support for the OECD completely.
Earlier this year the Caribbean states,
which have been highly critical of the OECD, put a forceful case to Bush at the
Third Summit of the Americas held in Quebec. Lester Bird, prime minister of
Antigua and Barbuda, damned the organization, warning that the US itself could
be swept into a negative tax loop.
Describing the organization and its
thinking, Bird said: “The scheme has its genesis in the left-wing ideologies of
certain European treasury departments that believe in the notion of high
taxation. Unable to tax their populations any further without running the risk
of not being re-elected, they have decided to set upon companies and persons
whose investments attract either low tax or no tax from foreign
jurisdictions.”
In a direct address to Bush, Bird added: “We know that you inherited
this OECD scheme from your predecessor. We have all been in that place where a
leader holds a particularly hot potato passed by the guy who went before him.
Our hope, Mr. President, is that you will drop it, and by doing so, help us and
help the United States.”
Anti-OECD pressure is also coming from within the US. Many rich US
investors hold offshore investments for tax advantage and are concerned about an
invasion of privacy and returns on their holdings. Some lesser-known states
within the US such as Montana and Colorado are effectively trying to compete as
low tax financial services centers. The idea is to attract inward investment and
mimic the success of offshore tax havens. Further efforts to clamp down on
taxing investments might upset the plans of these potential new players in the
investment and fund administration business.
An anti-OECD lobby which had been
effectively stymied under the Clinton administration is clearly gaining some
sway in the thinking of the Bush administration. At the forefront of these
efforts is the Center for Freedom and Prosperity, a right-wing US think tank
which the OECD itself admits has proved a potent force in lobbying American
politicians for change.
While the US effectively blocked moves to penalize offshore centers for ‘ring fencing’ or
adopting tax practices the OECD would once have deemed unfair, it did support
efforts to increase the financial transparency of offshore centers and
‘encourage’ an improved flow and exchange of financial information between
onshore and offshore centers. There is no denying several other OECD nations
would have liked to have gone further.
The latest OECD report on the approach
to be taken towards offshore tax havens was delayed while ‘constructive and
thoughtful’ negotiations took place between the US and other OECD members and is
still not publicly available. Ironically, ongoing bickering between Spain and
Britain over their respective powers over Gibraltar has thrown a further spanner
in the works. The OECD itself cannot give any clear picture as to when the
finished report will be made public, only to say that Spain and Britain must go
some way to resolving their differences prior to publication. If and when the
report is made public, it will clearly be a watered down version of what has
passed before.
While some OECD members are no doubt privately fuming about the
changes forced by the US, headquarters staff in Paris remain sanguine. One
source told ICFA: “These changes are not the end of the world and we have
reached a genuine agreement which reflects the change in US thinking. What we
are talking about is not a matter of life and death but of agreeing national
fiscal policies. The debate over taxation is, at heart, an intellectual one on
which sides can be taken and genuine debate is needed to resolve
issues.”
The OECD source was particularly scathing about some of the fire which has recently
been directed at the organization. “Our approach to taxation appears to have
been misrepresented several times. In terms of some of the things that have been
said we are talking here about basic dishonesty, propaganda and lies. The OECD
is definitely not about imposing high taxes on people as many of our critics
suggest. We approve of healthy competition between tax jurisdictions, but do not
want to distort the playing field in favor of some jurisdictions at the expense
of others.”
Despite this, many offshore fund
administrators remain less than convinced about the aims and motivation of the
OECD.
Typically, Sean Flynn says: “We welcome the line coming from George W
Bush. It is fair to say that the offshore centers do support the Bush policy in
this area and feel that the less interference we see with the taxation and
regulation of offshore jurisdictions the better.”
The Center for Freedom and Prosperity
now looks set to attack the OECD on the issue of investors’ rights to privacy.
Having agreed a plan of action with the OECD, the US government realizes its
room for further maneuver is limited. A revitalized Democrat party has recovered
from its election defeat and has taken a renewed interest in the OECD project.
It has already forced a pledge from the US Treasury that it would agree treaties
to share information within a year with almost half of the countries pinpointed
as tax havens by the OECD. Overall, fund administrators that
operate within so-called offshore tax havens appear to have made several gains
from the Bush administration. But, while the OECD in particular may feel it has
suffered recent setbacks, the project goes on. Only time will tell how strong
its influence will continue to be in the longer term. |
