Today I will not dwell on the issues of how we got into our present state, the logic, fairness or lack thereof in the negotiating stance, or the opportunity we missed to be the leader of the pack rather than the laughing stock of the pack. Neither shall I attempt to find the rationale behind capitulating so dramatically and hastily. Rather, I will draw on the end results of those negotiations and the enacted legislation in order to highlight where we have placed ourselves as a competitively disadvantaged jurisdiction and the difficult task ahead of making lemonade out of the lemons we have been given.
Without a doubt we can certainly boast of having the framework for a well-regulated financial services sector, one possibly unparalleled in either the developed or developing countries. As you may be aware, it is now easier and simpler to open a bank account and make deposits in New York, Toronto and London than it is to open an account or make deposits in Nassau. We are well ahead of the requirements, which even the OECD financial centres do not impose. In the process of capitulating we have wrongfully focused on ether justifying or dismissing the extent of our actions by comparing with those taken similarly by our competitors, ignoring simultaneously, but just as importantly, to recognize that full compliance also meant that our competitors would now include the likes of New York, London, Delaware, or Nevada. Given this scenario, it is acceptable to innocently ask what then really are the so called "international standards and practices" to which we were constantly reminded we had to aspire. If these standards and practices already exist and are internationally recognized, accepted and practised, then why are we now left to plead at this point in the process for a level playing field? Have we not put the cart before the horse?
What has escaped the majority of Bahamians until now, the point of implementation of the legislation, is that its impact and application affects not only those offshore banks, those foreigners who place funds in The Bahamas or those illusive and nefarious drug traffickers, money launderers, and tax evaders. The construction worker in Bimini and Andros, the business executive or realtor in Freeport and Nassau, and local domestic financial institutions will also feel its impact. For those who thought that this package of legislative measures was only intended for those bad guys in the offshore financial sector, a reality check will soon awaken them to the fact that the problem is not isolated to a certain type of individual or sub-sector of the economy, but applies without discrimination to all and sundry. For financial institutions and the broad sweep of financial service providers, the administrative costs associated with compliance, particularly that required within a short period of time, will certainly impact the bottom line, and for those who dare to ignore the regulatory requirements, the auditors will have the task of qualifying financial statements and making provisions for fines and/or jail sentences for officers and employees. At least this is what seems to be required if we are to be seen as serious about the implementation of the legislation and ultimately fulfil the requirements to be removed from the blacklist. It is also worth noting that it does not take a far stretch of the imagination to appreciate that the local banks will also attract fewer deposits from the offshore clientele, thereby in some instances dramatically diminishing their asset management base and reducing their revenue stream. Will this have an impact on the size of their local operations? Will it require rationalization and downsizing? Will it ultimately impact on the value of shares of publicly traded domestic financial institutions?
As indicated earlier, the scope of the legislation has placed The Bahamas at a competitive disadvantage vis-à-vis other competitors/jurisdictions which have neither gone as far or as quickly as we have, such as Barbados and Panama. Further, since November of last year there has been significant belief that both the OECD and the new Bush Administration were softening their respective positions, both on the tasks ahead and the process or timeframe in which to accomplish them. Consequently, the real possibility now exists that with further coordinated pressure from the international community, the agenda or ultimate objectives will not change but that a more cooperative and all-inclusive forum will handle the movement forward and that the process of implementation will be prolonged. The result is that The Bahamas, having raced well ahead of the pack to the finish line, will have a longer period to plead for a level playing field and the international investor will have real alternatives to locate his or her assets. However, on the upside, one can view it as The Bahamas having a headstart in adjusting to the inevitable new world financial order.
If we wish to be optimistic about the legislative initiatives taken, does it enhance the perception of The Bahamas as an independent thinking nation or are we at risk of being perceived as a walkover; when told to jump we simply ask how high. In the eyes of the international financial investor perception is reality. Consequently we may have done irreparable damage to our credibility, past reputation and projection of ourselves as an independent and stable jurisdiction. We have not only failed to negotiate effectively for our own economic direction and treasures but we have also failed to give comfort and reassurance to those investors and institutions which have contributed to the development of those treasures.
Where do we go from here? Have we gone far enough to satisfy the United States of America and the OECD? Have we given up everything and gained little or nothing in return? Will the goal post or carrot shift as we go along? Because we have been so diligent in responding to the master’s demands will the master see the wisdom in tactfully persuading us to do more? It is interesting to note that today the United States releases its report on the certification process of The Bahamas in efforts to fight drug trafficking. Will this report provide an indication of any influence by the blacklisting of The Bahamas by the FATF and recent actions to remove ourselves from that list, or will it indicate yet another agenda to which we will have to react? Despite our aggressive legislative action we are still on the blacklist. The Qualified Jurisdiction Status for which we moved so frantically was conditionally given for only 18 months. The Internal Revenue Services statements unequivocally indicate that they seek and require access to information on both criminal and civil tax matters. Our Government has conceded on criminal tax matters, but will it be forced to bend or break on the civil tax within 18 months or during discussions for the Tax Information Exchange Agreement? The OECD's proposed Memorandum of Understanding presents a four-stage action plan that states the objective of access to all types of tax information by the end of 2005. Will The Bahamas allow itself to bend to the pressure in 18 months and reach that goal post three years ahead of schedule? Will the consequences and impact of these actions over the next 2 to 3 years be less than the benefits hoped to be gained by the convention tax concession and the projected increase in import tax revenues due to enhanced support by the United States authorities?
It is clear from past experience that we need to develop a well-structured negotiating strategy before entering further discussions. This strategy must involve some indication of how we wish to develop the industry and what is in our best economic interest. A house with no direction or foresight falls for anything. We must have the confidence, urgency and preparation to negotiate in our own interest rather than capitulate to the course of least resistance and follow someone else’s interest and agenda. We must now take that position into the negotiations for a beneficial tax information exchange agreement, and an effective double taxation treaty network. Any remaining competitive advantage, with or without a level playing field, will only be attractive if substantiated by a local low tax rate to allow set-off and credits in the home country to compensate for the new disclosure requirements, the existence of a significant tax treaty network, and the containment of operational costs associated with doing business in The Bahamas.
Finally, this must be recognized as the wake up call for substantive and effective steps to be taken in the diversification of the economy, the encouragement of entrepreneurship and enterprise, and the active movement towards more Bahamian ownership or equity participation in all sectors of the economy. However, Bahamians first and foremost must be able to have confidence in believing that their government will negotiate to retain the opportunities that they have worked so hard to develop. They must feel that the government is truly creating the environment for them to take advantage of those opportunities. This will become all the more important as we join discussions on the implementation of the Free Trade Area of the Americas. The necessity for growth in other areas of the economy becomes more evident when viewed in the context of the latest report of the Caribbean Development Bank, which projects a downturn in economic growth of three percent for The Bahamas. The International Monetary Fund and the World Bank will repeat this prognosis, with possible calls for systemic structural adjustments to the economy over the next several years.
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