WE SHOULD BEAR in mind that the objectives of international financial reform and international tax reform are to make the international financial system safer, to make it more efficient, and to reduce incentives for unfair tax practices. To what extent are these objectives being achieved?
International financial centres in the Caribbean are fully engaged with the international institutions overseeing the processes of international financial reform: the Financial Stability Board, the Basel Committee, the Financial Action Task Force, and the Global Forum.
Furthermore, Caribbean countries fully endorse the objectives of the United States (US), the Organisation for Economic Cooperation and Development (OECD) countries and the European Union to arrest the erosion of national tax bases and to develop globally acceptable standards for the exchange of tax information.
We have documented the Caribbean international finance centres (IFCs) level of compliance in all of these areas, and the Caribbean is on par with leading international financial centres globally, and with advanced economies.
The quality of supervision in Caribbean IFCs and their high reputation for probity are attested to by independent analysis by Transparency International and others, as well as by published reports of international regulatory agencies.
There has been a loss of banking services throughout the Caribbean, driven by international regulatory tightening and by actions to punish perceived wrong-doing by international banks, despite the high quality of Caribbean regulatory systems, judged by comparison with international standards and practices in advanced economies. Our paper documents the many ways in which this has manifested itself, including the loss of correspondent banking services by domestic and regional banks, the pruning of banks’ client lists, banking information systems and practices that discriminate in favour of the US and other advanced economies, withdrawal of international banks from selected countries and markets, and the revisions of global strategies of international banks to reduce their global footprint.
The result of all this has been a reduction in the efficiency of international financial markets because of what are in effect non-tariff barriers. International firms which would otherwise be motivated to establish subsidiaries and branches in Caribbean IFCs in order to increase the efficiency and transparency of their global operations are being deterred because they are unable to open transactions accounts in the Caribbean with international banks whose names they know.
Because the US, Canada and other OECD countries have less stringent customer information requirements for banks in their own countries than they do in Caribbean international financial centres, business is being diverted from the Caribbean to North America, even though the Caribbean provides more cost-effective services of comparable quality.
It is unclear whether there has been any impact on system safety as a result of the tighter regulations. There is no evidence of an improvement in safety, and the motives for shifting from a regulated, well-informed environment where safety is high, to informal markets and to markets where information requirements are below international guidelines, have strengthened.
Tax planning will continue to be done, so long as there is not a single global tax system.
The current international and national changes alter the landscape for tax planners, but little can be said about the effects on national tax bases, good or bad, based on Caribbean experience so far.
The first step towards addressing the global challenge of de-risking is to achieve an understanding of the reach and complexity of the problem.
All international banks are affected by the regulatory changes, the intensified compliance requirements and the heightened risk of fines and penalties large enough to damage the value of their franchise.
The banks’ strategies in response are many and varied, and they are manifested in countries right across the globe, in Asia, Africa, the Middle East, Europe and the Americas.
What is more, the situation is still evolving. International banks do not appear to have settled on their approaches to the evolving situation, and many of the agreed regulatory measures are in process and not yet complete.
The reactions of those affected by the international regulatory initiatives are also in a state of flux.
Some 29 countries and some institutions, bankers and their clients, have found alternative solutions to their banking challenges, only to find that those channels have also failed or that they have become more costly.
In documenting the impact of de-risking we must take account of the business that has been diverted from more efficient and more closely regulated small international financial centres to advanced countries where regulation appears to be looser and more opaque, as well as business that may have been driven underground.
We should also take account of the inefficiency costs of slowing the growth of cost-efficient, high quality international financial centres.
The costs in terms of lost growth potential for international financial centres, though of great consequence to the centres themselves, is trivial compared to the cost in terms of the loss of efficiency of international finance and commerce.
Those costs slow the growth of financial services in the originating countries, raise the costs of providing international financial services internationally and are therefore an additional cost to all international commerce.
The best approach to an acceptable framework to address the challenges of de-risking would be a coordinated, multifaceted approach, based on the application of some internationally agreed principles and limitation of liability.
The approach should be informed by comprehensive documentation and analysis of the phenomenon on a truly global scale, involving all the relevant parties in official institutions and the private sector.
The fact that this matter is exercising the minds of global leaders in politics and finance is an encouraging first step.
Taken from the paper De-Risking In The Caribbean: The Unintended Consequences Of International Financial Reform. It was authored by Dr DeLisle Worrell, Dr Michael Brei, Lauren Cato, Sadie Dixon, Bradley Kellman, and Shamika Walrond, with assistance from Ke-Anne Evans.
