The Caribbean is not noted as one of the world’s richest areas; but ironically it is custodian to a huge amount of “offshore” wealth. Tony Thorndike investigates
As all Caribbean tourist destinations are at pains to stress, “we are more than a beach”. In some islands, “offshore finance” has become an important industry, where reputations for excellence have been hard won.
The major Caribbean offshore financial centres are Anguilla, The Bahamas, Barbados, the British Virgin Islands (BVI), the Cayman Islands and the Turks and Caicos Islands (TCI). Four of these are British dependencies. Outside the Caribbean proper, but historically linked to it, is another British dependency, Bermuda; Panama is a major centre on the fringe of the Caribbean. In all these countries, investment in telecommunications and convenient airline schedules ensure that they are easily reached.
What is “offshore finance”? It means the provision of facilities for trust, banking, company registration, insurance, shipping and associated business, limited to a clientele residing outside the centre. It fulfils genuine business and personal needs in an era of global financial markets.
Any offshore finance industry requires regulation, and the Caribbean centres are more regulated than many others. The rules are set and policed not only internally but also, in the case of the British dependencies, by the Bank of England.
Starting with the Cayman Islands in 1987, information exchange agreements (officially, “Mutual Legal Assistance Treaties”) were signed by the British government with the United States on the behalf of its dependencies. The treaties permit US federal agencies access to bank accounts if a strong prima facie case of illegality exists. The treaties also permit investigation of insider dealing and securities fraud. Other, independent, countries have now signed similar agreements with Washington.
If anything, this restriction on confidentiality has added to the attractiveness of the Caribbean offshore centres. The international financial community does not wish to be associated with drug traffickers and other criminals using offshore centres to “launder” funds. This was once unfortunately a feature, but is now virtually unknown. The determination of the authorities to stamp out illegality was shown in 1991 in Montserrat when in one day over 360 offshore private banks were closed down.
Apart from Barbados, another attraction is the islands’ role as tax havens, where income tax, capital gains and inheritance taxes are unknown. A few charge a small corporation tax, typically 1%. Tax-avoidance thus becomes legitimate. Unfortunately, the havens also enable illegitimate tax evasion. If the centre has no income tax, evasion of income tax elsewhere cannot be an offence in those jurisdictions.
Several other Caribbean countries have facilities for offshore business. Antigua and Barbuda, for example, has legislation in place permitting a wide range of offshore financial activity. So does Aruba, though the industry never developed to the same extent as the bigger centres. Some centres, such Curaçao in the Netherlands Antilles, have fallen on hard times; there, the industry never really recovered from the successive cancellation of double taxation treaties by the United States and the Netherlands.
A number of specialisms have developed, with a few centres offering several. Company registration is the hallmark of the BVI and the TCI and, increasingly, of Anguilla. Over 100,000 international companies have registered in the BVI alone, after the passing of legislation in 1984. Company registration and annual fees now account for 35% of the BVI’s government income.
As in the Bahamas and Cayman Islands, where company registration is also important, the rules do not require residency. Local lawyers are equipped to act as “sleeping partners” and to fulfil the very limited local company reporting and filing obligations.
Offshore insurance is firmly established in Barbados. The key there is “captive” insurance, whereby multinational corporations create their own insurance companies to provide their own cover, as well as for others as opportunities arise. The risks are reinsured, mainly through Lloyds of London and in New York. Bermuda is pre-eminent in the field, having pioneered it.
One obvious advantage of “captives” is the amount corporations can save in commission; another, less obvious, is that insurance funds can be easily moved around world money markets.
Banks and trusts dominate in The Bahamas and the Cayman Islands. Offshore trusts were the original product, developed by Bermuda in the 1930s and The Bahamas in the 1950s. Trusts can be very sophisticated but, in essence, they are simply legal instruments protecting family or business fortunes, as much from the tax authorities as from wastrel spenders. The legal rules relating to their establishment and operation are strict.
Offshore banking started in The Bahamas, but the country lost its lead. Whereas in 1983 it was – in terms of total foreign liabilities – the third largest international banking centre in the world, by mid-1988 it was 11th, and its market share had been halved. Several difficulties were responsible, now happily resolved.
One beneficiary was the Cayman Islands, now second only to Switzerland as the largest banking centre in the world. The industry there was also boosted by the events in Panama in 1989-90, although several transferring banks which applied for registration could not meet the Caymans’ exacting standards.
At first, virtually all the offshore banks in The Bahamas and the Cayman Islands were private and functioned simply as “conduits“, where financial transactions are limited to recording and book-keeping entries with minimal physical presence. Increasingly, however, activities by offshore branches of international publicly-quoted banks began to dominate. Typically, they linked borrowers and lenders in the interbank and “eurocurrency” markets.
“Eurocurrency” operations, or the lending of a currency other than the country of its “residence”, typically US dollars by European banks and yen and selected European currencies by US banks, has become an important segment of Caribbean offshore bank business.
Bank of International Settlements statistics bear out the attractiveness of the Caribbean offshore industry despite intense competition elsewhere.
Of the worldwide total of over $12,000 billion in offshore funds at the end of 1993, an estimated $5,200 billion is to be found in the Caribbean. This figure only refers to bank deposits. If offshore trusts – where secrecy is the norm – and offshore insurance are included, then the total reaches an estimated $20,000 billion, a staggeringly large sum.
Another success story then, for the Caribbean. To sun, sea and sand, add money. A lot of it.
ANTIGUA AND BARBUDA
Antigua and Barbuda, lying less than 300 miles south-east of Puerto Rico, has developed as an offshore centre since the passing of its International Business Corporations Act in 1982. It has a strong tourism industry, good communications with North America, Britain and Europe, well-developed professional services, and no direct personal income tax.
Swiss American Bank was the first offshore financial institution to start operations, in 1983; it has been joined by a group of mainly bank and trust corporations offering a full range of offshore services. There is also a ship registry, established under the 1985 Merchant Shipping Act.
Antigua places strong emphasis on confidentiality; there are heavy penalties for any breach of secrecy (unless there is a firm base of evidence pointing to an abuse that would be triable under Antiguan law).
Under the International Business Corporations Act, company formation can be undertaken swiftly at competitive charges and with minimal compliance requirements; it can be handled by a local registered trust company, accountant or attorney, usually within 24 hours. International Business Corporations (IBCs) must have a registered office and a resident agent, and are exempt from taxes and stamp duties. There is no minimal capital requirement. Typical formation costs for an IBC are US$975 with annual maintenance fees of US$475.
IBCs licensed for international banking or international insurance business pay higher fees; for banks there is a minimum capital requirement of US$l million, but no reserve requirement or restriction on foreign exchange.
As well as being recognised as a leading centre for offshore or “captive” insurance, Barbados has developed a wide range of other offshore services. Its strong tourism industry, well-developed professional services and excellent communications make it an attractive business centre. Its legislation covers exempt insurance, banking, international shipping, international trading and service operations, and foreign sales corporations operating as subsidiaries of US parent companies.
Qualifying as a domicile for US Foreign Sales Corporations in 1984, it moved quickly to legislate a Foreign Sales Corporations Act and attracted a range of US subsidiaries, exempt from taxes on income or capital gains and from withholding tax. The Shipping Act of 1981 and the Shipping (Incentives) Act of 1982 established Barbados as a centre for ship registration.
Under the International Business Companies Act 1991- 2, several hundred IBCs have been formed, paying up to 2.5% tax on profits (capital gains are free of tax). IBCs enjoy an attractive range of concessions on tax, duties, withholding tax and exchange controls.
The Exempt Insurance Act of 1983, revised in 1986, established the offshore insurance centre, insuring risks not arising in Barbados through companies whose equity is owned by persons resident outside the Caribbean Community. Minimum capitalisation is Bds $250,000 or equivalent, and there are basic solvency and reporting requirements.
The Offshore Banking Act (1979) established banking as the first offshore sector in Barbados; “only applicants of the highest integrity” gain licences. The sector has combined assets of well over US$3 billion. Companies must restrict activity to offshore banking in Barbados, and must have at least Bds $l million issued capital if controlled by nonresidents. One director must be a Barbados resident, and taxes range from 2.5% on profits up to US$5 million to 1 % on profits over US$15 million, with no other taxes applicable.
Professor Tony Thorndike is a lawyer, writer and teacher of international relations