FROM THE ECONOMIST INTELLIGENCE UNIT
In early May, the UK inked a landmark agreement with its overseas territories in the Caribbean, which will make it more difficult for UK citizens to evade tax by holding accounts in offshore Caribbean financial centres. The agreement applies to British Overseas Territories (BOTs) and Crown dependencies and was voluntary in nature, although the UK government had been strongly promoting it.
The Caribbean territories that have signed up are Anguilla, Bermuda, the British Virgin Islands, Montserrat, the Turks and Caicos Islands and the Cayman Islands. The Caymans had led Caribbean adoption of the initiative by formally stating that it would improve financial information-sharing mechanisms with the UK and selected European countries.
The new agreement involves the UK and the G5 (the UK plus France, Germany, Italy and Spain) and is designed to reduce tax evasion by sharing certain information. Many Caribbean overseas territories possess large financial centres that are designed to attract deposits by guaranteeing secrecy of account holders, as well as low or minimal tax rates and transfer fees. From now on, these territories will provide the G5 with information on account holders’ names, addresses, dates of birth, account numbers, account balances and details of payments in and out of these accounts.
Although the primary reason given for this agreement is to crack down on tax evasion, it will also help to reduce criminal activity in these jurisdictions by reducing the ability of criminal groups to launder illegal funds through offshore jurisdictions. Offshore financial centres have long been a favourite location for money laundering owing to the high level of account secrecy provided. Given the Caribbean’s proximity to major drug-producing countries in South America and its presence on trafficking routes between that region and Europe and North America, there have long been concerns that drug traffickers use Caribbean islands as locations to launder money.
This is a perception that many Caribbean offshore centres have been at pains to counter, with the G5 agreement only the latest in a number of similar moves. None of the UK overseas territories in the Caribbean are listed by the Financial Action Task Force (FATF) as being non-co-operative jurisdictions, and all have implemented anti-money laundering regulations in line with FATF recommendations. However, the new G5 agreement goes beyond these recommendations and will prove extremely useful in tracking flows of money in and out of the islands, a feature that may deter criminal activity within these jurisdictions.
However, the G5 agreement is not entirely positive, and certainly not for the Caribbean territories themselves. For many of them, the financial industry is a main source of revenue and one that has become particularly important since the global economic slowdown began in 2008. Besides finance, tourism is a major component of GDP, but the industry has slumped since 2007, both because of weaker global economic conditions and because of these islands’ relative expensiveness compared with other, cheaper destinations.
Anguilla, Bermuda, the British Virgin Islands, Montserrat, the Turks and Caicos Islands and the Cayman Islands have all experienced weak economic growth in recent years, particularly Montserrat, where the tourism sector has slumped as a result of repeated volcanic activity. The duration of this economic slump is posing long-term problems, with all the islands above except the Cayman Islands experiencing a further decline in tourist arrivals in 2012. As a result, the governments have fewer funds to invest in job creation and infrastructure projects. In addition, the Turks and Caicos Islands suffered a major government corruption scandal in 2009, after which the UK reasserted direct control over the islands’ affairs in order to resolve its financial problems.
The new information-sharing agreement therefore comes at a bad time for their economies. The net result will be to make the financial sectors of the islands less attractive to legitimate account holders, as well as to criminals. The attraction of these offshore centres is that no account holder names can be identified and so the flow of funds cannot be tracked. Although it is entirely legal to hold money in offshore funds, many account holders are unwilling for their names and other data to be publicly known. For this reason, a relaxation of banking secrecy laws in the Caribbean may lead some investors to withdraw funds from these jurisdictions and move them to other offshore financial centres that retain higher levels of account holder privacy.
US clients unaffected, for now
The Caribbean islands will be able to point to the fact that information is only being shared with five countries, meaning that individuals and companies from other countries will still be able to bank in these jurisdictions without concerns about loss of banking privacy. This is particularly the case for the US, as geographical proximity means that US nationals make up a considerable proportion of Caribbean financial clients. Any indication that these British overseas territories are planning to share more information with the US tax authorities would likely provoke concern among such banking clients.
The UK is certainly aiming to move in this direction, with the UK’s chancellor of the exchequer, George Osborne, stating at the G7 meeting on May 11th that overseas territories should join automatic information sharing mechanisms implemented in order to be compliant with the US Foreign Account Tax Compliance Act (FATCA), introduced in the US in 2010 and due to go into effect in 2013. Among other provisions, FATCA requires foreign financial institutions to share information relating to US account holders. However, this would be illegal for many jurisdictions, including, at present, the British overseas territories. As a result, the extent of FATCA global implementation is uncertain, especially given concerns that FATCA could infringe sovereign legislation.
As yet, the UK is one of only five countries to have implemented FATCA-compliant information-sharing mechanisms. Nonetheless, this means that the UK is likely to put even more pressure on its overseas territories to comply, further reducing the attractiveness of these offshore financial centres for banking clients. With tourism still weak, reducing potential income from the financial industry may lead to prolonged economic weakness in the overseas territories, as they will struggle to diversify away from these main pillars of the economy.