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Is Compliance for Caribbean IFCs
Approaching the Tipping Point?
With their domestic economies already hard hit
by a tepid and uneven global economic recovery,
international financial centres (IFCs) in the
Caribbean have faced increasing challenges to
their competitiveness through political pressure
from countries of the Organization for Economic
Cooperation andDevelopment (OECD) to adopt
regulatory standards: standards which, ostensibly,
are aimed at protecting global economies from
the erosion of their tax bases, and identifying the
proceeds ofmoney laundering in the international
financial system.
While the cost of compliance is daunting to
small Caribbean economies, and the exigencies
of compliance financing have to be considered by
governments in tandemwith their own domestic
demands for social services, the economic risks
of non-compliance – evidenced in blacklisting,
investor flight and threats to correspondent
banking – mean that there is increasingly little
choice but to comply. How Caribbean IFCs
manage this dilemma will be fundamental to
their continued viability, albeit that there is still
no coordinative mechanism at the regional level
to facilitate joint responses to the ever-changing
global compliance regime.
The benefits of IFCs
to the global economy
The challenges in meeting regulatory standards
and the political fallouts from IFC blacklistings
belie the symbiosis of the relationship between
well-managed IFCs and the global economy.
More than being just third-state destinations for
offshore accounts, true IFCs focus on providing
avenues for investors to maximise the money
that they make on their investments through
tax efficiencies, the provision of a professional
workforce, and the extension of favourable
allowances for the repatriation of investor profits
to their state of origin.
The Barbados-Canada relationship is particularly
demonstrative of this symbiosis. With as much
as 8% of Canadian investment flowing through
Barbados, Canadian investors who maintain a
substantive business there andwho demonstrate
local employment are allowed to repatriate their
profits to Canada tax-free, making Barbados
particularly attractive to Canadian investors.
The value of IFCs also extends to their host
economies. According to Connie Smith of the
Barbados International Business Association,
international businesses there generated over
BDS$1 billion in foreign exchange in 2014.
Indirectly, international businesses also tend to
improve the level of pay for the local workforce,
as well as provide exposure to specialist on-the-job
training that may not otherwise exist in the IFC’s
domestic economy. The intangible benefits of
people-to-people exchanges between states, and
the spinoff effect on the host country’s built-up
infrastructure to support international business,
top off the benefits of a viable international
financial services sector.
Costs vs. benefits of the
international financial
services sector
But are the benefits equal among Caribbean
IFCs? Notwithstanding the Barbados-Canada
relationship and a large financial services sector in
The Bahamas, Caribbean IFCs are small players as
far as it pertains to the global economy and their
share of industries. For the most part, particularly
for IFCs that are within the CARICOM bloc, the
internationalfinancialservicessector’svalue–while
domestically significant – is far fromwhat obtains
in non-CARICOM IFCs such as Bermuda and the
CaribbeanUK dependencies.
Giventhisreality,expertshavequestionedwhether
the costs of compliance for small IFCs outweigh
the benefits, andwhether itmay be better for small
Caribbean IFCs to transition out of the financial
services sector altogether. According to Francoise
Hendy, international lawyer and tax/investment
treaty negotiator for Barbados, “while it may be
argued that it does not make economic sense to
continue to comply with all these regulations, it
may be that you have no choice in the end, because
it affects your domestic banking sector, imports
and foreign reserves.” Hendy, who has consistently
argued that small IFCs were far divorced from
the epicentre of the financial services meltdown,
By Jovan Reid
OUR COMPETITIVE ADVANTAGE
70
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