CASH-FILLED SUITCASES GIVE WAY TO HEDGE FUNDS

International Money Marketing, 6 December 2001

Caribbean financial centres have done much to shake off their image as havens for the kind of money that comes as banknotes stuffed into a suitcase. Many have found a remedy to economic stagnation in building a successful offshore financial centre and are reluctant to see that disappear in a puff of OECD and FATF blacklists.

So what are these centres doing to ensure their continued development? Will they be able to defend their position against campaigns that are inspired, at least in part, by rich country resentment of their attractiveness to tax-shy dollars?

Many of the Caribbean islands have realised that financial services could provide a more stable source of income than tourists, who might be swiftly deterred by a chance hurricane (or a terrorist attack). Proximity to the US and a similar time-zone meant these centres were well-positioned to attract US businesses who wanted to secure the tax advantages of an offshore centre.

The Cayman Islands is now one of world's largest financial services centres, with $782bn in external assets at the end of 2000. At the same time, it had 2,298 funds on its register, including 367 hedge funds, as well as strong banking and insurance sectors. As these have grown, lawyers, accountants, auditors and consultants followed; the infrastructure has developed, and the Caymans now has all the hallmarks of a first-class financial centre.

Similarly, growth has been enjoyed by the British Virgin Islands, which has 1,684 registered funds. Even smaller countries such as Anguilla have carved a niche for themselves in the area of company registration, while Barbados and the Bahamas are also making steady progress.

These centres have done a lot to smarten themselves up. Over the past two years, most have tightened up financial legislation and regulation. For example, the Cayman Islands has expanded the remit of its monetary authority and taken action against "shell banks". Barbados passed the Money Laundering (Prevention & Control) Act in December 1998, while the Bahamas has introduced nine major pieces of legislation since the beginning of last year. Smaller jurisdictions realise they cannot buck the trend and have followed suit.

Of course, there have been blips. The Manhattan hedge fund, accused of defrauding investors out of more than $300m, was based in the British Virgin Islands. Although regulation on the islands was not implicated, it was an association that the BVI could have done without.

The constant scrutiny of the OECD and FATF has also presented problems for the Caribbean jurisdictions. While none admit to a drop-off in business, the process has meant resources being deployed elsewhere when they could have been invested in expanding business. Only a few of the smaller centres remain on the FATF's list of jurisdictions that are "unco-operative" on money laundering.

However, the Caribbean islands are starting to grow more assertive. They took the lead in forming the International Tax & Investment Organisation (ITIO) earlier this year as a collective body to defend the interests of offshore centres against the OECD in particular. Ben Coleman, a spokesman for the organisation, says the group works to ensure that Caribbean financial centres have their voice heard and are an active participant in all negotiations that affect their future.

A lingering problem of perception still exists with the Caribbean jurisdictions. Whether it is the image of sandy beaches and luxury holidays, or, more pernicious, a legacy of their colonial past, Coleman believes that treatment of Caribbean countries has been patronising at times. Sovereign nations have been excluded from the international decision-making process, while the UK government has made commitments affecting its dependent territories without consultation.

Says Coleman: "Countries like the BVI, Caymans, Barbados and the Bahamas have standards higher than developed countries. We would like to see a recognition from the onshore/developed world that it needs to look at itself."

According to Jennifer Dilbert from the Cayman Islands financial regulator, the message about standards in offshore centres is still not getting through, and she cites the recent accusations on terrorist financing as an example. Says Dilbert: "There is misinformation, and we tend to get named and blamed. This is unwarranted and we have to handle our PR better."

There are signs that things are improving. The OECD is taking a more consensual approach to its "harmful tax practices" initiative, having initially been accused of high-handedness and arrogance. Most Caribbean centres have now given advance commitments to ensure they are not on the OECD list to be published in February 2002. According to Coleman, the FATF has learnt the lesson and is embarking on a round of peer reviews for its recommendations on terrorist financing, a move he describes as "very, very welcome".

Caribbean financial centres still vary widely, from the sophistication of the Caymans to smaller centres, which are just realising the benefits of a strong financial services sector. There are still some developmental hitches, but with little in the way of other economic activity bar tourism, they realise how important it is to forge a sound reputation for the future of their economies.

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