There is a false narrative raging across the world in which ordinary citizens are being invited to believe that the general economic malaise is the existence of International Financial Centres (IFC).
There is a false narrative raging across the world, which has gained traction in America and Europe, in which ordinary citizens are being invited to believe that their loss of income, debts, paucity of jobs and the general economic malaise crippling their communities is not because of mismanagement, poor judgement, irresponsible warmongering and even corruption at home...but that the sole reason for their distress is the existence of International Financial Centres (IFC) - particularly former colonies in the Caribbean, together with jurisdictions such as Cayman Islands, BVI, Bermuda and Turks and Caicos Islands.
The recent cybercrime, which saw the release of the ‘Panama Papers’, offers fuel to this false narrative emanating from the corridors of power and media houses in the largest countries in the world. We posit that IFCs are lawfully constituted and are cogs of critical importance in the wheel of global trade and commerce. But we do not opine here to defend them. That is because their best and most meaningful defence is the rule of law, applied equally across the international system.
In this article we will examine - in five points - the dominant false narrative or public commentary on financial centres to discover where the anomalies lie.
1. There is a claim that financial centres are ‘low tax’ or ‘no tax’ jurisdictions.
This is false. Take The Bahamas, the relative tax burden is equal to the United States or about 30 to 40 per cent of income. Their taxes are indirect. So whilst there is no income, capital gains, corporate and in some cases property tax, there are customs duties, value added taxes, stamp duty, national insurance, departure taxes and a host of formidable government fees. Financial centres are neither low tax or no tax. Rather they have relatively high indirect taxes; and a tax by a different name is no less a tax.
2. Funds are sloshing around in offshore havens.
That is not just nonsense, but disparaging, perfect nonsense. Words such as ‘sloshing’, ‘soaked away’ and ‘hidden’ project a false image of lawlessness, when in fact and practice, (according to The Economist, 16 February 2013), IFCs are more expertly regulated than the large G20 nations and OECD members attacking them.
But let us consider this further. The US borrows 80 per cent of global savings (Roubini, Federal Reserve Bank, San Francisco, 2005), 70 per cent of that 80 per cent is structured through Caribbean International Financial Centres. (US Federal Reserve Bank Report, January 2016). President Obama said rightly that financial centres have legitimate uses, but then he said: ‘We need the money they hold to invest in jobs for the American people’. Except that that is exactly what financial centres do already. In fact, these centres ‘hold’ almost no funds in the jurisdictions. Instead, those funds are invested in American companies, loaned to American citizens, funding education, mortgages and economic expansion. Just today, (18 May 2016), Bloomberg News released a report (which confirms our previous article ‘The Panama Papers’), where it was demonstrated that after China and Japan, the Cayman Islands is the largest holder of United States Treasuries; in effect, lending money to the United States, to fund exactly all that President Obama mentioned above. This demolishes yet another astonishing falsehood that IFCs merely manage ‘secret’ money.
So much that is false has been said about Cayman and BVI. But in truth, from 2007 to 2011, Cayman and BVI contributed significantly to holding the global economy together by funding investment into China and thereby sustaining global demand during the financial crisis that came as result of poor financial regulations in America and Britain for which, we must add regrettably, no one has been held accountable.
3. Financial Centres Maintain a ‘cloak of secrecy’
This too is perfect nonsense, which any first-year law student could refute. Civil Law systems, as in Switzerland, Luxembourg and Belgium, have legislated secrecy. English Law or common law nations - such as America - do not. Just as America does, Caribbean financial centres enjoy constitutional privacy. Caribbean constitutions emerged from and are informed by the European Convention on Human Rights, which guaranteed privacy as a fundamental human right. The privacy that those investing through the Caribbean enjoy is the same privacy that each and all Americans enjoy as a fundamental right. Therefore, there is no dark evil secrecy to which we adhere. Caribbean constitutional rights are fundamental to our democracies. And as any such right, it yields – and should yield only - where wrongdoing or criminality has been proven, not alleged.
4. International Financial Centres promote tax evasion
Again, astoundingly untrue. Tax Evasion is illegal, avoidance is not. Consider that every American with a US$401k or a tax free municipal bond in their retirement portfolios is actively, legally avoiding taxes, as is his or her right in law. Delaware, South Dakota, Arizona, Wyoming, Colorado, Alaska and Nevada all exist perfectly legally as American onshore/offshore centres. The uses of IFCs are not nefarious. Complex multinational financial structures are managed more efficiently in financial centres. In America and Europe capital aggregation costs include a full array of overheads, fees and taxes, but smaller sized IFCs lower overhead costs and so drive marginally greater profitability. It is fair to say that when an American demands better performance from retirement fund managers, IFCs are critical to that process. Consider every merger and acquisition – in order to manage costs – employs IFCs as a perfectly legal, strategic option, which, in the end, saves American and European jobs. As such, and in this regard, small size and lower costs, together with global expertise are competitive advantages for the Caribbean.
So we have learned that on low tax or money sloshing in our banks, on ‘secrecy’, and
‘tax evasion’, these dominant media narratives are utterly false. But let us conclude on a final point and a comment.
5. The false, disparaging narrative carries a strong dose of hypocrisy, dualism, and worse
First it suggests that no professional financial management occurs in financial centres, particularly in the Caribbean; even as the global financial system was very nearly destroyed, not by the Caribbean or by any other IFC, but by the risky and unregulated behaviour of major brick and mortar financial institutions ensconced comfortably on Main Streets in America and Europe.
Second, the larger nations – America and in Europe – are the sites of the largest recorded financial crimes in human history. Third, the largest offshore centres on earth - in fact in the history of the world - are two islands: Manhattan and England. But what is stunning is in
2009, at the G20 meeting in London, after their bankers and regulators had brought the world to its knees, G20 nations focused their attentions not on regulating themselves, but on one-sided regulations for small island financial centres that had no hand in the global crisis; the corrosive effects of which remain operative even to this day.
As a commentary, the false narratives we have refuted at every turn in this article harbour a 19th century concept of the world. In an integrated world economy there is really no ‘offshore – onshore’ divide. Every transaction in every part of the world leverages the benefits of the comparative advantages of other nations. If you have bought into an Exchange Traded Fund (ETF), or invested in a company that extends warranties, (such as GE, GM or APPLE), the underlying companies in that ETF or the appliance or auto company issuing the warranty, uses a financial centre for reasons of efficiency, speed and costs to create and manage value for the benefit of the consumer. It is impossible to attain the necessary competitive efficiencies or obtain their benefits without the expertise of an IFC.
In our view, these five of the more egregious falsehoods ought to have been drawn into the notice of the world by IFC governments and officials themselves as part of their responsibility, not merely to enjoy the comparative advantages aforementioned, but to contribute to the health and well-being of the international system itself.
Therefore, it should be understood that financial centres are like the liver of the global financial system; small, yet significant to its operations, its hygiene and ultimate health. In an integrated 21st century world, one cannot point to one part of the international “body—politik-economicus” (Cayman or Bahamas or BVI), isolating them for ridicule, no more than one can pit Boston against New York City or Fort Worth, Texas. They are operationally interdependent. Undermining international financial centres, particularly in the Caribbean, will not force financial centres into extinction, but rather into countries like Russia, The Middle East, Turkey and China, where America and Europe – increasingly – have less cooperative influence. Moreover, unilateral impositions on IFCs, again, particularly in the Caribbean, cultivates a two-tiered financial system, in which larger nations abuse smaller ones to prevent them doing what large nations do unregulated, with impunity.
It is our considered opinion that for the sake of its legitimacy, in the international system, rules that apply to one country, must apply to all. That, at the end of the day, is the meaning of the rule of law.
Gilbert NMO Morris
Ambassador Professor Gilbert Morris is National Public Reader of The Bahamas, Ambassador-at-Large and Scholar-in-Residence at the Bahamas Foreign Service Institute (BFSI) at the Ministry of Foreign Affairs, Bahamas. He was Professor at George Mason University, where he taught in four faculties of the university. Morris is also one of the world’s leading thinkers on Financial Centres and gained global prominence as Advisor to Pierre Darier in his capacity as Chairman of the Swiss Private Bankers Association (SPBA). In 2003, Morris was contracted by CITIC/StarCapital to complete the largest ever study on “Multimodal Distributional Centres in the Caribbean Basin for the facilitation of China-Caribbean Trade” for Madam Wu, then the Vice Premier of China. Morris also served as Chairman of the Turks and Caicos National Investment Agency (then TC Invest, now INVEST TC). Morris also served as Senior Economic advisor to the Ministry of Finance of Turks and Caicos Islands (2006-2009), advising National Economist and PS of Finance, Delton Jones. In 2009, he was appointed Special Envoy from the Office of the Premier to the All Party Committee of the House of Lords, UK. Morris served for many years as a lecturer in Financial Services for STEP and the UK Law Society and was twice selected as Hamilton Distinguished Lecturer in Bermuda. Returning to the Private Sector in 2012-2019, Morris was selected as Chairman of the TCI Resorts Economic Council (TCREC), representing the 14 largest developers in TCI. Morris’ forth coming book (February 2023) is titled: “The Criminalisation of Financial Centres”.
Honourable Mark AG Brantley
MP, Premier of Nevis and Federal Minister of Foreign Affairs and Aviation.