By Sir Ronald Sanders From Caribbean News Now

A presentation by Sir Ronald Sanders on Friday, February 17, 2017, at a conference organised by Goethals Consulting Corp in Panama on “Widening the Pathways to Open Societies”

When, as ambassador of my country to the US, I pointed out to the Commissioner of the US Inland Revenue Service that under the tax information exchange agreement (TIEA) which my country signed with the US in 2000, the US – and all its states – had access to automatic tax information and, therefore, the legislation adopted by Maine, Montana, Oregon and the District of Columbia was ill-informed and wrong, and that he should so advise them, the reply I received in writing was that “the IRS plays no role in the legislative process” of these states.

Nothing was done.

It makes one wonder what is the point of a TIEA with the federal government of the US, and whether, instead, we should have negotiated individually with all 50 states of the United States.

What is clear is that, though the IRS won’t enforce the terms of the TIEA with its own states, it demands enforcement, upon pain of penalties, by Caribbean countries.

Added to all this, over the last two years, Caribbean countries have been facing a huge new threat not only to their financial services, but to their sustainable development and their ability to participate in the global financial and trading system.

US not enforcing TIEAs in the US

Incidentally, it is worth pointing out that, in 2015, a number of individual states of the US adopted legislation naming Caribbean countries, including my own, as ‘

The New Threat – Withdrawal of CBRs

This new threat comes from a decision by banks in the US and the UK to withdraw correspondent banking relations from respondent banks in the Caribbean.

As Christine Lagarde, the managing director of the IMF, points out: “Correspondent banking is like the blood that delivers nutrients to different parts of the body. It is core to the business of over 3,700 banking groups in 200 countries.”

Without correspondent banking relations, Caribbean countries cannot pay for the goods and services that they buy from the US and the UK, including medical and education services.

They also cannot receive payments for tourism or remittances from their diaspora that sustain the well-being of the poorest and most vulnerable in their societies.

The consequences of this should be obvious, since the US and the UK are the Caribbean’s biggest trading partners.

As I speak, the majority of banks across the Caribbean have lost their correspondent banking relations with US and UK banks.

They have had to find expensive alternatives that have pushed up the price of bank transactions and the cost of doing business.

Already heavily-burdened, open economies in the Caribbean are now faced with additional costs to import goods and services from the US and UK, and to receive payments for their own goods and services.

It is not clear how long these alternative arrangements will last before US and UK banks shut them down under the present dispensation.

And what is the present dispensation?

Frightened by the huge fines and forfeitures with which they are threatened, particularly by regulators in the US, and conscious of the branding of the Caribbean as a ‘high risk area’ for financial services, banks that have done business and made profits in the region for over a century, are taking the view that the risk is not worth the rewards of the business.

But what is the risk?

No bank or other financial institution in the Caribbean has been a party in any of the cases of money laundering or tax evasion prosecuted in the US or the UK.

It should be patently clear that the withdrawal of correspondent banking relations from the Caribbean is not due to any lack of compliance with the anti-money laundering, counter terrorism financing or tax evasion rules of the OECD countries, including the US.

One is left to speculate, therefore, as to the real reason.

An incongruous side note to this is that the World Bank has warned that around 50% of adults in the world’s poorest households are unbanked – in other words, they have no access to financial institutions.

The World Bank says that it is “scaling up support to reach an additional billion people”.

But, while it is doing that, 15 million people in the Caribbean are at risk of being unbanked by the withdrawal of correspondent banking relations.

And, the response of the pre-Donald Trump administration to what should be an obvious wrong was that the Caribbean – already more compliant than the US with FATF and OECD rules – must strengthen their anti-money laundering and counter terrorism financing regimes.

That response demonstrates that the playing field is anything but level, and redress for injustice is not a matter of morality; it is a matter of might.

Looking To Trump

It would be helpful if, committed as it says it is to less regulation, the Donald Trump government will be more open to the Caribbean’s argument that US regulators and correspondent banks should mitigate rather than avoid risk, and that, therefore, US banks should only terminate correspondent banking relations where money laundering and terrorism financing risks cannot be mitigated.

But that is a mere hope; it is not an expectation.

Nonetheless, it is a proposition that Caribbean countries collectively should explore with the Trump administration as soon as they are able to do so at all levels.

So, what the future holds for correspondent banking relations for the Caribbean is very uncertain.

What is clear is that if the present trends continue, the region will be in danger of losing even more sovereignty over its fiscal and banking affairs.

If the indigenous onshore banks and offshore banks of the Caribbean are all deprived of correspondent banking relations, the region will be left with only the foreign-owned banks (mainly Canadian) that may be prepared to remain because they have their own headquarters correspondent relations.

A New Colonialism

But those banks can then form cartels that control the means of exchange in the Caribbean and determine interest rates, lending policies, and sectoral investment.

The region will be gripped by a new form of colonialism and control – this time by foreign banks.

A responsible international community should help the Caribbean to resist this growing cancer; other developing countries should be in the forefront of support, for the cancer can spread to them, as it has already started in Central America, including Panama, and Africa.

Incidentally, nothing that I have said here should imply or suggest that Caribbean countries ought not to comply with the rules against money laundering, counter terrorism financing and tax evasion that are being set – albeit not by globally-represented bodies.

They have to do so, and are doing so, at very high cost.

For instance, in my own country, here is a list of the obligations that we have to finance:

• The FATF’s rules on anti-money laundering and counter terrorism financing;
• The OECD’s common reporting standards;
• The US FATCA;
• Operation of tax information exchange agreements with over 25 countries;
• Operation of mutual legal assistance treaties with almost 90 countries.

In the case of the US FATCA, small countries in the Caribbean are paying for the dubious privilege of being policemen for the US Inland Revenue Service.

And, incidentally, the US has only promised to provide reciprocal information; it has not done so and shows no sign of doing so.

But Caribbean nations – and all other affected countries – should strengthen their advocacy worldwide, enhance such representation as they have in the OECD Global Forum and at the FATF, and demand that every OECD country implements the same rules they impose on others.

Summary

So, to summarise the themes of this presentation.

In relation to globalisation, the only global rules are those set by powerful countries in their own interest.

Fiscal sovereignty as a right of individual states is largely ignored and up-ended by the doctrine of might is right.

Tax competition has survived in part so far; but the OECD countries are unrelenting in their efforts to coerce other nations into mirroring the areas of their taxation, even though the economic imperatives of nations are vastly different.

What Should Caribbean Nations Do?

What then for the future of financial services in the Caribbean?

The prospects would be best served by the formation of alliances in every global forum to wrest control of financial services matters from the OECD, which represents only a handful of nations in the world community.

In the late 1990s, it was an alliance of Caribbean nations with Austria, Switzerland, Luxembourg, the Isle of Man and Jersey, that held back the OECD over its so-called ‘harmful tax competition initiative’; and it was the decisive intervention of the new Republican government of George W Bush, before 9/11 and the Patriot Act, that eventually pushed back the OECD.

But, since then, the European jurisdictions retreated into the fold of the OECD, and the Obama administration in the US strengthened the heavy-hand of regulation and extra-territorial laws such as FATCA.

The Caribbean should now look elsewhere – to the countries of South and Central America, including Panama, and to Africa and the Pacific where nations are also subject to coercion, erosion of fiscal sovereignty and loss of competitiveness – to build alliances to counter the domination of global rules on tax matters by a few self-serving nations.

A Truly Representative World Body Needed

The Ecuadorian government is right – a UN body is needed.

But not to chase after imaginary windmills of falsely-labelled tax havens.

It is needed to create standards created by representatives of the entire world and not by a handful of elite countries; it is needed to establish rules that tax competition, like all other competition, is good for global growth; it is needed to enshrine the principle that setting levels of taxation is the sovereign right of each nation in the context of its own economic and fiscal imperatives.

Alliances should also be sought with groups within OECD countries that recognise that high taxation and coercion of other nations do not make for a prosperous world or a peaceful one.

That, to paraphrase Abraham Lincoln, the world will not survive half-free, and half-enslaved.

There would be good reason for other developing nations and groups within OECD countries to join the Caribbean in such an undertaking.

For the small are the bully’s first victim; they are seldom the last.

The writer is Antigua and Barbuda’s Ambassador to the US and the OAS. He has been engaged with the OECD, FATF and the governments of the US and UK on financial services matters, including the OECD Harmful Tax Competition Initiative and TIEA’s since 1998. He has written and spoken extensively on these matters. He is also a Senior Fellow at the Institute of Commonwealth Studies and Massey College in the University of Toronto. The views expressed in this presentation are entirely his own. Reponses to:
www.sirronaldsanders.com

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