Caribbean Export OUTLOOK 2016 - 2017

OUR COMPETITIVE ADVANTAGE

Is Compliance for Caribbean IFCs Approaching the Tipping Point?

By Jovan Reid

belie the symbiosis of the relationship between well-managed IFCs and the global economy. More than being just third-state destinations for offshore accounts, true IFCs focus on providing avenues for investors to maximise the money that they make on their investments through tax efficiencies, the provision of a professional workforce, and the extension of favourable allowances for the repatriation of investor profits to their state of origin. The Barbados-Canada relationship is particularly demonstrative of this symbiosis. With as much as 8% of Canadian investment flowing through Barbados, Canadian investors who maintain a substantive business there andwho demonstrate local employment are allowed to repatriate their profits to Canada tax-free, making Barbados particularly attractive to Canadian investors. The value of IFCs also extends to their host economies. According to Connie Smith of the Barbados International Business Association, international businesses there generated over BDS$1 billion in foreign exchange in 2014. Indirectly, international businesses also tend to improve the level of pay for the local workforce, as well as provide exposure to specialist on-the-job training that may not otherwise exist in the IFC’s domestic economy. The intangible benefits of people-to-people exchanges between states, and the spinoff effect on the host country’s built-up infrastructure to support international business,

With their domestic economies already hard hit by a tepid and uneven global economic recovery, international financial centres (IFCs) in the Caribbean have faced increasing challenges to their competitiveness through political pressure from countries of the Organization for Economic Cooperation andDevelopment (OECD) to adopt regulatory standards: standards which, ostensibly, are aimed at protecting global economies from the erosion of their tax bases, and identifying the proceeds ofmoney laundering in the international financial system. While the cost of compliance is daunting to small Caribbean economies, and the exigencies of compliance financing have to be considered by governments in tandemwith their own domestic demands for social services, the economic risks of non-compliance – evidenced in blacklisting, investor flight and threats to correspondent banking – mean that there is increasingly little choice but to comply. How Caribbean IFCs manage this dilemma will be fundamental to their continued viability, albeit that there is still no coordinative mechanism at the regional level to facilitate joint responses to the ever-changing global compliance regime.

top off the benefits of a viable international financial services sector.

Costs vs. benefits of the international financial services sector

But are the benefits equal among Caribbean IFCs? Notwithstanding the Barbados-Canada relationship and a large financial services sector in The Bahamas, Caribbean IFCs are small players as far as it pertains to the global economy and their share of industries. For the most part, particularly for IFCs that are within the CARICOM bloc, the internationalfinancialservicessector’svalue–while domestically significant – is far fromwhat obtains in non-CARICOM IFCs such as Bermuda and the CaribbeanUK dependencies. Giventhisreality,expertshavequestionedwhether the costs of compliance for small IFCs outweigh the benefits, andwhether itmay be better for small Caribbean IFCs to transition out of the financial services sector altogether. According to Francoise Hendy, international lawyer and tax/investment treaty negotiator for Barbados, “while it may be argued that it does not make economic sense to continue to comply with all these regulations, it may be that you have no choice in the end, because it affects your domestic banking sector, imports and foreign reserves.” Hendy, who has consistently argued that small IFCs were far divorced from the epicentre of the financial services meltdown,

The benefits of IFCs to the global economy

The challenges in meeting regulatory standards and the political fallouts from IFC blacklistings

70

www.carib-export.com