By M. E. Freeman
Ms. M.E. Freeman is Counsel to the law firm of Kaye, Scholer, Fierman, Hays & Handler, LLP, where she is a member of the Latin American/Emerging Markets Group. She is a member of the New York State Bar Association, the Association of the Bar of the City of New York, and the Society of Trust and Estate Practitioners (STEP).
In the last 12 to 18 months those of us who work in and do business with the offshore financial centers have been subjected to an unprecedented barrage of reports, "reform" proposals and law enforcement initiatives. These have come from a variety of organizations, committees and governmental entities including the Organisation for Economic Cooperation and Development ("OECD"), G8, Financial Action Task, the United Nations and the U.K. Government. All espouse the laudable goal of preventing criminal abuse of the global financial marketplace. In reality, they are a continuation and enhancement of efforts that began many years ago with mutual legal assistance treaties and now extend as far as "all crimes" suspicious transactions reporting. These efforts, and in particular the attempt to broaden the definition of criminal activity to include the arguably less noble and certainly more nebulous concept of "harmful" or "unfair" tax competition, have resulted in a responsive series of articles, papers, seminars and pronouncements declaring "Offshore Jurisdictions Under Attack", "Assault on Offshore Jurisdiction" or some variant thereof.
One is always tempted to ask "harmful or unfair competition" to whom - the high tax jurisdictions whose bureaucrats are writing the reports?
There seems to be, at least in some quarters, a growing recognition that there may be no monolithic tax system that can or should be applied across the board to countries with vastly different economies, resources and populations.
Tax harmonization may not prove as attainable or desirable in practice as it appears in theory.
Switzerland and Luxembourg have both refused to approve the latest OECD report on harmful tax competition, which included a broadside attack on confidentiality, or to adopt the recommendation to implement the report’s proposals. The tax debate seems destined to continue for some time and to complicate the discussion of proper conduct of business in the offshore jurisdictions.
The intensified pressure on the offshore financial centers is already having intended and unintended effects, both on the offshore service providers (and their onshore affiliates) and on the clients who avail themselves of their services. Our clients have always appreciated focused efforts to combat money laundering and the drug trade and, in particular, mutual legal assistance treaties. They have become accustomed to providing detailed personal and financial information about themselves to offshore financial institutions and service providers (indeed, much more detailed information than a U.S. resident has to give to bankers or brokers upon opening an account in the U.S.). They do so, however, in the expectation that their confidentiality will be maintained and the information kept from third parties. Many reside in countries where the judiciary and tax systems are, regrettably, corrupt, and financial information that ends up in the wrong hands can lead to blackmail, extortion or kidnapping.
What we have observed recently, however, is that certain offshore institutions and their onshore affiliates, in their zeal to comply with increased "know your customer" demands of internal auditors and external regulators - often beyond the current requirements of the law – have managed to insult and alienate longtime customers. Applied with a heavy hand, "know your customer" can become "lose your customer". Proper due diligence can and should be performed with tact and diplomacy and not left to inexperienced clerks completing forms. There is no substitute for first hand knowledge. Experienced customer relationship managers, working with a client’s lawyers or other advisors, can obtain and maintain the information required without needlessly offending the client.
The imposition of more stringent "know your customer" policies by many onshore financial institutions also has been a presumably unintended boon to the Bahamas and other offshore financial centers. While our clients are willing to provide detailed know your customer information to financial institutions and service providers located in jurisdictions with bank secrecy, they have not in many cases been willing to put the same information in the hands of onshore institutions. Once onshore, particularly in the U.S., such information cannot be protected effectively from disgruntled spouses, family members, creditors, business associates or persons seeking to obtain or use such information for their own ends. Accordingly, many foreign clients have chosen to close onshore accounts and open new ones in countries such as the Bahamas and Switzerland.
The pressure on the Bahamas and other offshore centers will undoubtedly continue and will produce changes in the way business traditionally has been done. The Bahamas, however, is well positioned to meet the challenge and is fully capable of responsible self-regulation. As an independent country it is not under the nanny politics of the British Foreign and Home Offices. It will, like all offshore centers, have to deal with international bodies like the OECD and the U.N. but, unlike "brass plate" offshore jurisdictions, it has an establishedregulatory infrastructure and a community of professionals to counter criticism with a program to adapt its financial services industry to new requirements of the international community.
The formation of the Bahamas Financial Services Board is a timely and important development to unite and promote such efforts, which should include the judiciary. The increasing number of recognized and respected financial institutions from the major onshore centers with affiliates in the Bahamas is testimony to its current position as a vital offshore center.
As an advocate for clients and companies that do business in the Bahamas, one would hope that the Bahamas would follow the lead of Switzerland, recognizing that a reasonable measure of confidentiality is an important component of the financial and other services it offers, and is well worth maintaining. I share the sentiment expressed by Professor Milton Grundy in a recent editorial in Offshore Red on the pressure on offshore centers to release information to the world at large versus the importance of confidentiality -" It will be wonderful if these new measures hamper money laundering and reduce tax evasion. But when they have finished with the bath water, we would still like to have the baby."
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