It was only a matter of time before the long finger pointing from the global North in the midst of the financial crisis extended outward towards the Caribbean. Much is now being made of the role tax havens have played in this economic depression, and the Obama administration is being joined by its European counterparts in stamping out "harmful tax competition", with the Cayman Islands featuring high on the US's hit list. While Obama's laudable come-in-and-clean-up attitude has undone many of the foolish and frankly unconscionable practices of his predecessor's 8-year term in office, he has to take some responsibility for the facts not only that George W Bush halted the OECD plan to ferret out secrecy jurisdictions at the beginning of his term, so sending these economies a very clear message of non-pursuance, but that small island states have increasingly been pressured to implement "more competitive tax policies" in order to grow their financial services' sectors. So while it may be desirable to uncover the tax practices and offshore destinations that have removed a large part of the tax burden from the wealthiest citizens of the US and Europe, and to have a small, convenient scapegoat in the South at whom to point the finger, we need to consider the repercussions of such an immediate blow to some of our smaller island economies.
Now one might argue that each territory has its own responsibility for how they structure their outward-facing industries, and that the onus is on developing nations to diversify their economies away from products that are so wholly subject to the whims of larger countries. But we all know the politics of the international financial architecture, and a big voice from a small territory is still just a squeak in the grand scheme of things.
For years, Caribbean countries have been doing the rating agency dance - nipping and tucking their financial practices in order to avoid the damning "inhospitable business environment" label of the S&Ps and the Moodys. And for as many years, the haves of the North has been benefiting from the very practices they now seek to condemn. To be fair, Obama has always been ideologically in favour of a Stop Tax Haven Abuse Act, which in itself is not undesirable, but whose implementation and economic fallout for the developing world have to be fairly weighed before ploughing full steam ahead.
And let us not be fooled that "more compliant" territories like Barbados are exempt from scrutiny simply because we employ a silly little thing called a Tax Information Exchange Agreement (TIEA). TIEAs are quite close to useless, since the requesting body has to know what information it's looking for in order to request that information. Wrongdoing can only be uncovered if specific wrongdoing is suspected. So TIEAs aren't fooling anyone, least of all the big sticks that are going to be coming poking around in the affairs of small, Caribbean offshore financial centres. Negotiation (and by this I mean real negotiation rather than economic threats) of new terms for TIEAs would be one possible, measured advance towards the elimination of tax haven abuse.
I have always been uneasy about the irony of the offshore financial centre: we provide the means by which richer nations can increase the global inequality that maintains us as essentially colonies to their empires. So I am not at all opposed to increased regulation that is introduced in a way that does not leave developing nations disadvantaged and stripped of fundamental sources of income. What I am not in favour of is the demonization of these nations at a time when it is convenient to pass the buck - for governments to say "No it wasn't us, it was the bankers," and for financial institutions to say "No it wasn't us, it was the evil island economies." Seriously? Of these players, with whom does the majority of power disproportionately lie? You can argue over whether it's the government or the finance industry, but you for damn sure can't say it's Caribbean economies. It's not that tax havens have not contributed in some measure to the poor regulation that led to economic collapse, but who were their beneficiaries and originators? Let's keep things in perspective, and acknowledge that when you ask the right questions, the fingers are going to point right back in the opposite direction.
Our "let's see what they hand us" approach to doing business with the world's economic superpowers is not going to cut it this time around. (Did anyone notice how the region's grand policy idea for a response to the crisis was to beg for more money? That's some inspired economics right there!) We're going to have to do our homework, get it together and strongly represent our interests.
Tuesday, 31 March 2009
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It is either conveniently forgotten or overlooked but we can never repeat it too often. All wealth management is spawned in NY. Our little islands are mere pawns in someone's chess game. Some years ago the WSJ, which is generally considered to be reliable on matters of money and wealth, noted, without fear of contradiction, that tax avoidance, tax evasion and indeed money laundering were usually the brainchild of NY's nimble legal tribe, who along with the help of a few accountants, create the vehicles for the wealthy to keep as much of their wealth as possible. The region's financial centres are mere adjuncts. The New York legal tribe makes contact with a firm in the relevant financial services jurisdiction and tells them what they want done and of course the lawyers are more than happy to accommodate them.
ReplyDeleteOne does not have to take my word for it. Merely do a survey of Caribbean lawyers (as opposed to expats in the British dependencies) and you will find that a single hand may surfice to number the lawyers in any single jurisdiction, capable of structuring the elaborate tax avoidance schemes as well as other more esoteric vehicles for hiding other people's money. Those lawyers trained in the region may have one or two courses in revenue law while the vast majority who travel to england rarely bother with revenue content to do something called corporate law (that's where the money is presumably).
Of course when they return and began to practice they quickly learn that their job, especially in financial services (the label used to describe what they do for wealth managers), is to follow the directions of their counterparts in NY or London.