Establish a Caribbean wide financial services regulator

In my last commentary entitled “Tax Haven jurisdictions – Sitting Ducks and Scapegoats”, the point was made that British Prime Minister Gordon Brown and others, including Congressmen in the United Sates, are trying to pass the buck of responsibility for the global financial crisis to jurisdictions with offshore financial services, including those in the Caribbean.{{more}}

I had drawn attention to Brown’s statement to the US Congress on March 4th in which he said: “‘But how much safer would everybody’s savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens?”

The point is that Brown and others are ignoring completely the lax regulation in many of the countries of the Organisation for Economic Cooperation and Development (OECD) that led to poor banking and investment practices and the collapse of financial institutions that were considered “giants”, and they are trying to move the focus to offshore financial jurisdictions, even though the financial institutions located in them were not responsible for the crisis.

Many authoritative persons and organisations are not buying into the targeting of offshore financial centres as the culpable parties.

On March 8th, the British Financial Times Newspaper said: “There is scant evidence that the offshore centres are to blame for financial turmoil. The UK Financial Services Authority told MPs last year that offshore centres had already undergone extensive regulatory reviews”.

Then on March 10th, the Chairman of the Confederation of British Industries, Martin Broughton, is reported to have said that “Gordon Brown’s focus on ‘red herring’ issues such as bank bonuses and tax havens risks turning next month’s summit of the Group of 20 nations into a catastrophe that fails to deal with the recession”.

Broughton constructively said the G20 Summit, scheduled in London for April 2nd, “should focus on a global stimulus and undertakings to resist protectionism – including a pledge not to increase trade tariffs”. He went on to say that it would be “nothing short of a catastrophe, when you’ve got an opportunity to make a difference, that you get bogged down” in issues that were “totally irrelevant” to resolving the current crisis.

In an editorial on March 12th, the Financial Times did not hold out much hope for Broughton’s call. The prestigious newspaper said: “Asking a group of politicians not to make a meal of irrelevant but crowd-pleasing issues may be a forlorn call.” But the publication said he “is still right to have made it.” And, the editorial warned: “True, the odds look better for extra funding for the International Monetary Fund and easing the shortage of trade finance – but these are not the stuff to capture the imagination of the watching world. So the attraction of announcing some populist crackdowns could be great.”

So, in circles that are expert and authoritative about global business and finance, the assault on offshore jurisdictions is seen as what Broughton called a “red herring”. But, it clearly is not going to stop those who are determined to shut them down because of the fear that they provide a haven for people and organisations who are evading tax.

Two matters arise from this. The first is that both the United Kingdom and the United States are “tax havens”. Non-residents of these countries bank in them and invest in instruments that do not attract tax. Indeed, if both the US and the UK were to begin to tax the bank deposits and tax-free investments of non-residents, the adverse effect on their financial systems would be significant to their economies. So there is a principle here that is being applied for Peter that is very different to the one being imposed on Paul.

The second point is that jurisdictions with offshore financial services should not sit back idly because authoritative organisations and personalities have pointed to the unfairness of the assault on them by OECD governments. They do have to be active in making their case.

The British Crown Dependencies and Overseas territories have begun to argue for what they call “a more discriminate approach”. Jersey, a large offshore financial centre, is reportedly sending a delegation to Washington on March 23rd to meet representatives of the new Obama administration. Undoubtedly, they have already been talking with officials in the United Kingdom.

It is a shame that the 35 jurisdictions, named by the US Congress in the ‘Stop the Tax Havens Abuse’ Act, are not all joining together to agree on common ground, including standards and practices to which they will all adhere, and in making a common case to the US, the UK and other OECD countries.

There can be few governments among the 35 jurisdictions which would not agree that, just as there is a case for better and tighter regulation and supervision of financial institutions in the OECD countries, so there is a need to do so in their own.

But, unfortunately, there appears to be no such harmony among them. Instead, some are trying to distance themselves from others by claiming that they are being “tarred with the same brush”. This lack of cohesion will weaken them and many will collapse in the process, hurting even further economies of small countries which are already hard-hit by the global financial crisis.

In the Caribbean, there is yet to be a meeting of governments or representatives of financial institutions on this matter, even though the G20 meeting to discuss “outlawing tax havens” is set for April.

There have now been consistent calls for a region-wide body to be a supra-national regulator for financial services throughout the Caribbean Community and Common market (CARICOM). It is a call that should be heeded not only to give an important layer of supervision of the sector but also as a strong tool in defense of their jurisdictions.

Sir Ronald Saunders is a business consultant and former Caribbean diplomat.
(responses to: ronaldsanders29@hotmail.com)