We spoke to Dustin D.P. Delany of Delany Law to assess how the international finance industry is developing in the region and the impact of recent legislative developments in light of the continuing push towards the automatic exchange of information.
IFC: How is business for Delany Law in the Caribbean?
A: Fortunately, the firm continues to see growth despite the lingering effects of the global economic downturn throughout the region. Our client service, work product and adherence to international standards are our most effective marketing tools which is appreciated by our predominantly international client base. Our comprehensive geographic footprint is convenient for clients conducting business regionally.
IFC: What developments in the region are impacting upon business there?
A: The global economic downturn has continued to impact throughout the region for a number of years now. It is a trickle-down effect. Tourism is the main driver of most of the Caribbean economies and those numbers have been consistently depressed. However, as the implementation of the Foreign Account Tax Compliance Act (FATCA) progresses as well as other transparency related initiatives, there is a lot of activity in the area of re-structuring as clients seek to become compliant and tax efficient. For example, our head office in Barbados has seen a flurry of companies migrating businesses to Barbados to take advantage of Barbados’ extensive tax treaty network. These initiatives definitely have clients and their advisors more cognisant of leveraging the benefits of the many products offered throughout the region.
IFC: As more IFCs sign up to the likes of FATCA, do you see a fundamental shift in policy happening in the region?
A: FATCA has altered the entire landscape of IFCs in the Caribbean and around the world. We first saw this several years ago when many financial institutions (as FATCA defined) made the decision to no longer serve those subject to FATCA. This was followed by FATCA based intergovernmental agreements (IGAs) which triggered IGAs not involving the US. This fuelled the ongoing global transparency initiative that has caused many financial institutions to re-assess their risk, which has had a direct impact on their conduct of business and correspondingly in IFCs. IFCs still work, they just work differently in some cases.
IFC: With many in the region among the early adopters of the OECD Automatic Exchange of Information Standard, does this enhance the legitimacy of IFCs in the Caribbean?
A: Any reasonable transparency initiative, including the OECD’s Automatic Exchange of Information Standard, enhances the legitimacy of IFCs in the region and the rest of the world, however, the OECD and other policy makers need to be cognisant of the real-life objectives behind some of these structures. Granted, persons need to be responsible for their tax obligations, however, for the high net worth individual in Latin America, for example, who seeks the assistance of a Caribbean IFC to protect his family from kidnapping, these policies are not accommodating.
IFC: Are you seeing a shift from the traditional mainstream perspective of Caribbean IFCs as ‘tax havens’ - has that corner been turned yet?
A: From the perspective of the general public, it will be years before IFCs in the Caribbean and elsewhere shed the ‘tax haven’ label. Those within the industry know that the various jurisdictions within the Caribbean cannot be seen as a stroke of the same brush. Case in point, Barbados, which was the only English speaking Caribbean country on the initial White List of the OECD in 2009 and has since maintained this status. Other jurisdictions like St Vincent and the Grenadines (and their Financial Services Authority) have made great strides over the last decade. There is no standardised definition of ‘tax haven’, which complicates this. In Latin America, for example, many IFCs are declared tax havens simply because that particular jurisdiction offers a tax rate below a certain threshold, generally in the range of 20 per cent, despite that particular jurisdiction’s compliance with OECD and other standards.
IFC: Many have called for a ‘level playing field’ regarding discussions on the future of the industry, do you think we are getting closer to that goal?
A: To an extent, this transition of the sector does level the playing field as it mandates compliance, however, this transition comes at a cost and it has cost the Caribbean. As the sector has progressed towards FATCA implementation, the region has seen a contraction of the financial services sector as the cost of doing business and implementing compliance mechanisms proved expensive and even unrealistic to some. While certain financial institutions have been able to cope with this increased expense, some of them have made the decision to exit the sector or certain portions of it because they have assessed the risk to outweigh the benefits. This has not only been a blow to Caribbean IFCs but has had a detrimental impact on local economies easily measurable in the loss of jobs.
IFC: With a Beneficial Ownership registry now proposed for the British Overseas Territories do you think transparency will continue to remain central to discussions on the global movement of wealth?
A: The creation of publicly accessible registries of the beneficial owners of private companies is concerning at many levels. There are numerous alternatives available to achieve the same or similar objectives while protecting the rights of the wealthy. In any event, the sector currently exists in the transparency portion of the cycle. As the sector continues to progress, it will learn to adapt to the shortcomings of some of these initiatives and continue to evolve. The result will be an improved sector more accommodating to the concerns of all concerned but for the near future, transparency will continue to dictate many of the actions of IFCs.
IFC: How does the region remain competitive in today’s turbulent market?
A: With respect to evaluating the region’s ability to remain competitive in the sector, we must be aware of the fact that each IFC within the Commonwealth Caribbean brings its own advantages and perspectives to the marketplace and must individually remain competitive. However, in the current IFC environment it is vital that each Caribbean IFC continues to be compliant with OECD and other international standards. Any shortcomings of any jurisdiction in the Caribbean has the ability to taint the region as a whole and have existing and potential clients looking elsewhere.
IFC: A number of IFCs in the Caribbean have diversified their services to other new revenue raising areas, such as Citizenship by Investment – do you see any areas of promise?
A: Diversification and modernisation of products and services is the key to survival for all IFCs Caribbean and elsewhere. Caribbean IFCs are constantly evaluating their offerings in an effort to maintain a competitive edge in what has become a global market. Given this competitiveness, it is necessary for Caribbean IFCs to be targeted in the development of these products and services. Barbados, for example, has positioned itself as a low tax jurisdiction through its tax treaty network. One of its focuses has been Latin America having recently completed double taxation agreements with both Mexico and Panama in addition to other agreements at various stages of negotiation with Brazil, Chile, Colombia, and Costa Rica. In order to cater to this Latin American market, Barbados has put into place such things as foundations, reserve power trusts, and private trust companies.
IFC: Some fellow Caribbean jurisdictions, such as Jamaica have expressed interest in developing financial centres, do you think this a positive development?
A: The development of an international financial services sector in Jamaica would be a positive addition for the country. It makes sense since it is one of the more developed economies in the region, though it has continued to suffer negative growth in recent years. The primary concerns are two-fold given the current IFC climate; to wit: (1) the Jamaican Government must be committed to the establishment of the sector and dedicate the necessary resources; and (2) given the lack of experience in the sector, persons with the proper background, training and experience must be brought in to lead the initiative. Any effort absent these components is a recipe for problems if not failure.
IFC: What does the future hold for the region?
A: Commitment to the sector by both the governments of the region and the private sector and the need for both to work together to find solutions in dealing with the increased competitiveness of the sector, the enhanced standards (including FATCA and related initiatives), and the development of new and improved products and services are the key to survival of IFCs throughout the region. The unfortunate reality is that given these factors, for some Caribbean IFCs, it is a matter of survival; for others it is a matter of sustainability whilst we all wait for the pieces to fall as the sector continues into the age of FATCA, other IGAs, enhanced KYC/due diligence requirements, and transparency.
Dustin Delany of Delany Law is a Caribbean based international business law specialist practicing throughout the Commonwealth Caribbean and other CARICOM jurisdictions.