An Archipelago of Contrasts: Blacklists, Caribbean Autonomy and the New Tax Colonialism

Large economies find blacklists an attractive tool with which to coerce smaller ones to adopt the policies the big countries prefer. Not only does the Council of the EU have its “List of Noncooperative Jurisdictions” but there are also national lists maintained by multiple European states. By attempting to force small jurisdictions into “one size fits all” regulatory and tax regimes, the EU and European states are repeating the mistakes of the colonial era.

Europe’s numerous blacklists pose a host of fairness issues, such as what criteria are used for listing. We ignore those here, focusing instead on the impact on the application of blacklists of the structure of the relationships between Britain, France, the Netherlands, and the United States and their territories and former territories in the Caribbean.  We contend that the differing constitutional attitudes of the metropoles toward their dependencies and former dependencies translate into contrasting development and blacklisting outcomes. France’s direct incorporation of its territories into its legal system prevents offshore finance and thus blacklisting. The United States follows a similar approach, mostly limiting itself to providing tax incentives which have not yet been used as cause for blacklisting, although even the limited degree it allows the US Virgin Islands to pursue building an IFC has resulted in that jurisdiction being blacklisted at times. In contrast, the Netherlands and the UK allow their territories a higher degree of autonomy, which has enabled those territories to pursue economic growth through development of IFCs. The UK also assisted many of its former territories in developing financial industries. These jurisdictions are among the region’s biggest economic success stories, yet they are also the most susceptible to European blacklisting.

Differing Approaches

The four colonial powers who held Caribbean territories in the 20th century took different approaches in the process of decolonisation after World War II. France’s legal approach was the simplest: départementalisation meant incorporating its overseas territories, including the Caribbean, into France. Thus, formal differences between the body of law applicable in France itself and in the French Caribbean are small. Ironic exceptions to this rule exist, such as the preservation of the 1890s octroi de mer tax charged on all goods entering the overseas territories, making the French the only outside power to have higher taxes in the Caribbean than at home.[i] However, the de facto legal regime has more variation from metropolitan France than the formal legal equivalence suggests. Guadeloupean sociologist Georges Trésor contends that “we interpret [French laws] in our own way, we instrumentalise them for our own benefit, never having the feeling that they are the product of our own sovereignty”.[ii] In a similar vein, anthropologist Yarimar Bonilla quoted a Guadeloupian union leader explaining to the union, “we mean the law as long as it serves us. As soon as the law holds us back, we break with the law, we create our own laws – that is the tradition of the nèg mawon”.[iii] The idea of nèg mawon – symbolising runaway slaves’ creation of their own societies in the French Caribbean – captures the gap between the formal treatment of French territories in French law and its actual application on islands thousands of miles away from France.  The balance that France struck between formal rules and informal adaptation prevented development of IFCs.

The Netherlands’ post-war strategy initially embedded its six Caribbean islands in a local federation which was in turn a part of the Kingdom of the Netherlands. Responding to local pressure, the federation eventually dissolved. Three of the six territories became Dutch municipalities, the other three gained separate status within the Kingdom. Thus, some of the Dutch islands are in a position analogous to the French territories, while Aruba and Curaçao used their greater autonomy to develop international financial sectors and to maintain greater autonomy. (Sint Maarten also retained greater autonomy but without a significant financial services industry.) Curaçao in particular exploited the combination of its autonomy and relationship with the Netherlands, becoming a major IFC from the 1960s to the 1980s while remaining included in the US-Netherlands tax treaty. The island’s financial services sector suffered a significant blow when the United States cancelled the treaty’s application to the Dutch Caribbean islands.[iv]

The British even less successfully attempted to federate their island possessions. Not only did their initial idea for a Federation of the West Indies collapse when Jamaica and Trinidad and Tobago opted out, but even their efforts to combine Anguilla with St. Kitts and Nevis failed, leading to a farcical British “invasion” in 1967. Territories connected to Britain adopted a wide range of constitutional structures and relationships. Each gained its own unique Westminster-style constitution, retaining links with the Commonwealth through institutions such as the Privy Council. Those that remained associated with Britain gained varying degrees of autonomy, increasing over time. However, the UK has used its reserve powers to stage major interventions in some (e.g. the Turks & Caicos Islands and Montserrat), as well as make broad changes affecting all of the Overseas Territories, such as abolition of the death penalty and legalisation of homosexuality to fulfill Britain’s EU obligations. The UK has also demanded fiscal concessions when asked to provide economic aid after natural and economic disasters (e.g. the “Framework for Fiscal Responsibility” in the Cayman Islands). The flexibility in Britain’s relationships enabled considerable development success through the creation of financial sectors in multiple jurisdictions.[v]

While the United States was a late entrant to the colonial game, it has played a significant role, not only with respect to Puerto Rico and the US Virgin Islands but also for the entire Caribbean, most dramatically by invading both Panama and Grenada. While not permitting the much greater degree of independence in financial regulation allowed by Britain, the United States provided special tax incentive regimes to promote economic development in both. For example, Operation Bootstrap provided tax incentives for businesses to locate in Puerto Rico, but when it was phased out between 1996 and 2006, the economic activity the incentives had brought quickly eroded.[vi] The US Virgin Islands is a unique case with the legal system of the territory being generally consistent with federal financial and fiscal laws, except for a provision allowing non-US citizens to form tax-exempt companies. This piece of fiscal autonomy proved insufficient for the US Virgin Islands to become a successful IFC, as their BVI neighbours did. However, it has been sufficient to earn the islands a regular place on European blacklists.

The Link

These different attitudes of the colonial powers toward their current and former Caribbean territories influence how the EU and European nations’ blacklists are applied to these jurisdictions. We suggest that the outcomes of this process originate in the various Caribbean jurisdictions’ tradeoffs between autonomy and dependence and the impacts of those choices on economic development. Relative independence enables a jurisdiction to enter the global economy through offshore finance business, whereas integration with the metropole has led to subsidy-dependent development. The first choice can then result in blacklisting by larger, “onshore” economies seeking to restrict the autonomy of which the British and Dutch territories make use. Ironically, the EU and European blacklists thus introduce a new channel to exert European control over the destinies of Caribbean islands and their peoples – one which once again expresses a colonial attitude, but this time applying it to independent countries and territories associated with other nations rather than their own possessions. The underlying assumption that every country should have a tax system similar to European states is a key pillar of the New Tax Colonialism, leaving no room for local policy choices.

Indeed, some of the most impressive development success stories among Caribbean jurisdictions are the British (current and former) and Dutch islands, which have found ways to effectively monetise their provision of the rule of law. Yet it is also these territories that are regularly blacklisted. Paradoxically, these jurisdictions’ relative success as IFCs is, at least in part, related to their effectiveness in avoiding the problems that are often stated to be the reason for blacklists. For example, a review of the post-2001 legislation in most Caribbean jurisdictions will reveal dozens of new anti-money laundering, anti-terror financing, international cooperation, etc. statutes. Many IFC jurisdictions have built their own independent regulatory infrastructure, some as early as in the 1990s, and joined international organisations such as the Caribbean Financial Action Task Force (CFATF), the International Organisation of Securities Commissions (IOSCO), and others. These commitments required significant investments for these relatively small jurisdictions. The British and, to a lesser extent, the Dutch have sometimes played a constructive role in assisting in such developments, providing drafting support and supervisory personnel to help. Particularly in IFCs related to Britain, jurisdictions regularly draw on expertise from across the Commonwealth for regulators, judges, and lawyers.

On the other end of the spectrum, there are the French and American possessions, both characterised by moderate (at best) development. France’s départementalisation strategy avoids blacklists by keeping the French Caribbean aligned with European regulation, but at the considerable cost of greater dependence. France’s steering of EU solidarity funds to its Caribbean territories, as Robert Aldritch and John Connell concluded, led to “a more subtle yet thoroughly pervasive structure of dependence” resulting in an “economic fiasco: a society which consumes but produces practically nothing”.[vii] Moreover, the French brought more than laws to the Caribbean territories: bonuses for service outside metropolitan France “led to a massive influx of French bureaucrats—often described by locals as chases primes (benefits chasers)”.[viii] This process was –perhaps hyperbolically – labelled “genocide by substitution” by the Guadeloupean poet and political leader Aimé Césaire.[ix]

The United States tried tax incentives, which tend not to produce blacklisting, to promote economic growth rather than development of financial centres in Puerto Rico, with similar unimpressive results. A limited exception made to the US Virgin Islands resulted in a territory which cannot work its way up the value chain to provide sophisticated financial services but was sufficient to trigger blacklisting. The generally positive impact of even this tiny piece of fiscal autonomy on the islands’ revenue confirms the importance of offshore finance as a critical development strategy for the region.

Indeed, the most important contribution of the British and the Dutch to economic development in the Caribbean has been their collaboration with their current and former Caribbean territories in developing those islands’ autonomy. It is only as actors on the international stage in their own right, whether formally independent or not, that these jurisdictions were able to develop financial sectors robust enough to play a constructive role in the world economy. Ironically, it is that very autonomy that the blacklists undermine, de facto if not de jure.

Conclusion

The application of blacklists to the Caribbean, particularly those of the EU and European nations, is discouraging the most successful economic development strategy these smaller jurisdictions have created. They are a barrier to improving the lives of Caribbean peoples. While most Caribbean IFCs have not managed to equal the degree of success that the Bahamas, Bermuda, BVI, and Cayman have achieved, a larger number have developed niche markets that contribute to their economies and their potential has not been fully developed. The alternative is economic dependence on former colonial sovereigns based on subsidies, tourism, and social engineering, reinforcing the globally unequal status of these jurisdictions. The countless requirements and standards created by blacklists also force these islands to incur exorbitant costs for regulatory infrastructure. Blacklists deepen the economic dependency of small jurisdictions on the large ones and present the danger of refastening the chains of the region’s colonial history to its peoples.

We are not advocating a standardless world, in which rogue jurisdictions undermine governance by enabling fraudsters to find safe havens. IFCs in the Caribbean and worldwide have repeatedly demonstrated their interest in making financial regulation both effective and efficient through their participation in multilateral organisations like the Group of International Finance Centre Supervisors, the International Association of Insurance Supervisors (IAIS), and many others. Collaboration, not coercion, combined with mutual respect for sovereignty is what is needed. The EU and European nations should be working with Caribbean jurisdictions to solve problems, rather than regressing to their earlier role as colonialists and attempting to impose a restructuring of tax systems, governments, and international relations on the Caribbean.

In the end, this is ultimately a question of money. What can EU states do to protect their tax revenue? They could, of course, get their own houses in order and simplify their tax codes, reduce rates, and rationalise rate structures. Designing an efficient tax regime is not difficult; finding the political will to do so is. And since that seems much harder than imposing the New Tax Colonialism, Europe is embarking once again on an attempt to impose its will on Caribbean peoples and islands. Let’s hope the results this time are less costly for the region than was the first round of European colonialism in the Caribbean.

 

Footnotes:

[i] Yarimar Bonilla, Non-Sovereign Futures: French Caribbean Politics in the Wake of Disenchantment 26 (Chicago 2015).

[ii] Bonilla, supra note 1, at 54-55.

[iii] Bonilla, supra note 1, at 55.

[iv] Craig M. Boise & Andrew P. Morriss, Change, Dependency, and Regime Plasticity in Offshore Financial Intermediation: The Saga of the Netherlands Antilles, 45 Tex. Int’l L. J. 377 (2009).

[v] Tony Freyer & Andrew P. Morriss, Creating Cayman as an Offshore Financial Center: Structure and Strategy since 1960 (with Tony Freyer), 45 Az. St. L. J. 1297 (2013).

[vi] Nick Brown, How dependence on corporate tax breaks corroded Puerto Rico’s economy, Reuters, Dec. 20, 2016, available at https://www.reuters.com/investigates/special-report/usa-puertorico-economy/.

[vii] Robert Aldritch & John Connell, France’s Overseas Frontier: Départements et Territoires D’Outre-Mer 163, 166 (Cambridge University Press 1992) (quoting B. Petitjean-Roget, Pour comprendre la situation économique des Antilles, 441-2 Les Temps Modernes 1866 (1983).

[viii] Bonilla, supra note 1, at 26.

[ix] Bonilla, supra note 1, at 26.