[Continued from last week. The original can be read here:
https://donmitchellcbeqc.blogspot.com/search/label/Financial%20regulation]
Recently, a major international insurance company registered a subsidiary insurance company to do business in Anguilla. This subsidiary met all the due diligence requirements, and was granted a Class A Insurance Licence by the FSC. For several reasons, it required a bank account in Anguilla. Under the FSC statutes, a licensed insurer is required to hold reserves in a bank account in Anguilla. The bank administers a lien over this bank account in favour of the FSC. Additionally, the Anguillian subsidiary was doing local insurance business. It needed a bank account to conduct this business.
Yet, when it attempted to open a bank account, the bank, probably instructed by head office in North America, advised that the AML/CFT regulations prohibited an “offshore” company from opening a domestic bank account. It took an immense amount of negotiation and work before the bank could be persuaded that this was not an offshore company or an IBC, and that this was legitimate insurance business.
Some months ago, a Trinidadian company won a bid on a contract for a new hotel on another island. The contractor had a problem. Some of the necessary materials were available only in the USA and Europe. Trinidadian industry is burdened with currency exchange restrictions imposed and enforced by their Central Bank. It takes forever to get permission to purchase foreign currency. If the contractor applied for permission every time it placed an order for materials, it would miss its construction deadlines.
The obvious solution was to set up an Anguillian company, capitalised by a one-time authorised injection of US dollars deposited in Anguilla. The company in Anguilla would order and pay for the materials, and have them shipped to the project. When the job was done, the profits would be dividended back to Trinidad, and taxes paid on the profits.
The subsidiary company in question was an ordinary private company registered under the Companies Act of Anguilla. It obtained a Caribbean Trading Business Licence, and hired staff in Anguilla. It submitted the necessary documents to a local bank, and opened an account to be able to ensure it processed the letters of credit and other financial instruments it needed to have the materials ordered and paid for.
As there is no income tax in Anguilla, there is no statutory requirement for any trading company’s accounts to be audited, unless it is a public company. Few businesses, save for public companies and licensed financial institutions, are in fact audited. Under section 126 of the Companies Act, all that the directors of an ordinary trading company are required to do is to be able to ascertain the assets and liabilities and the financial status of the company. Their bank is entitled to ask for their internal financial statements, not for audited accounts.
The bank, no doubt instructed by head office in North America, notified the company that, as it did not have audited financial statements as required, it was in breach of the Companies Act and the AML/CFT regulations. The bank was therefore obliged to close the account. The bank did not understand that in Anguilla only public companies, or licensees of the FSC, are required to audit their accounts.
It took a lot of effort: legal opinions, conferences and correspondence, before the company could persuade the bank that it was in full compliance with all the applicable laws and regulations, and could keep its account.
The continued existence of our region’s corresponding banking relationships depends on all our compliance with AML regulation. We are glad to be able to comply with international regulatory standards, if that will ensure our continuing to enjoy vital corresponding banking relations. Without this we shall not be able to settle credit card payments or clear US dollar denominated transactions.
I am not aware of any US bank that has been fined as a result of doing business in the Eastern Caribbean. The Eastern Caribbean is not the same risk to US and Canadian banks as are Wyoming, Switzerland, Paris or London, or even Western Caribbean countries such as Belize, El Salvador or Columbia. It would appear that the international banks’ threatened removal of our corresponding banking relationships has more to do with US politics and xenophobia, and their desire for a non-level playing field, than from any genuine risk that we expose them to. Indeed, our business is of no real importance for foreign banks. We are so insignificant in substance that doing banking business with us is at most a mere nuisance to them. From their point of view, because of their AML/CFT due diligence obligations, the cost/reward ratio has changed to our disadvantage.
In my view, however, we need to move on from bemoaning the unfairness of the world, and find a way to profit from the ever-increasing regulatory and taxation burdens that affect not only the Caribbean but the “onshore” world as well. Things aren’t going to go back to the way they were, and the bigger economies will never make decisions to benefit competitors. We simply have to be more inventive and learn to identify and use the new opportunities for serving our clients that continuously arise.
FATCA, for example, presents an opportunity for progressive and inventive bankers and company managers. FATCA is related to policing “passive” income reporting and not “active” income. Where a US client invests his or her money in an active corporate equity opportunity in one of our countries, such as villa operations and other businesses, instead of in passive, bank term-deposits, he or she can permanently and legitimately defer all US tax requirements until repatriation, and should not be subject to FATCA. Think of the Apple, Google and Starbucks examples, and the trillions of dollars of active income earnings not as yet taxed.
CFATF and the other regulators are very important for our international financial services industry in the Commonwealth Caribbean, and indeed to our entire economies. If we do not get a good report card from them, we are liable to be put on a black list and to lose our corresponding banking relationships. The industry is anxious to ensure that it complies with all the regulations, but it remains an uphill struggle to persuade the regulators that the industry is a legitimate one and that it does not harbour money launderers and terrorists.
A paper delivered at a Panel Discussion on the topic, “Financial Regulatory Issues Affecting the Commonwealth Caribbean” at the OECS Bar Association’s Annual Law Fair and Conference held in Saint Lucia.
Friday 16 September 2016
