Should small island nations serve as financial hubs?
Abacus Seychelles Limited
05 April, 2017
During the last few months, this sector has been under fire. Commonly referred to as "offshore", but what exactly does it mean, what do offshore people do? More importantly, what is its contribution? Should we continue with this sector?
In this global world, individuals and companies invest globally. Unfortunately, borders are not seamless and these transactions are hindered by the borders. To enable countries to invest globally, many island nations have become conduits of international transactions Singapore, Hong Kong, Labuan, the British Virgin Islands, Bahamas, Bermuda, Mauritius, Dutch Antilles, Isle of Man, Guernsey, Jersey, Curacao, Samoa, Vanuatu, Cyprus, New Zealand, Mauritius etc. This list is long with almost 100 countries on the list.
Even large countries facilitate cross border transactions Ireland, UAE, Delaware, Nevada, Switzerland. Each jurisdiction has a unique product, offering and niche market.
The key question is why do these countries need to be cross border facilitators? One there is global requirement for this service and the second they need to augment their own economies especially small island states.
If we look at Mauritius, this industry has helped to create a financial services eco-system, top lawyers / law firms, professionals, large banks, large accounting firms, universities which would have been unsustainable its own economy which was primarily driven by sugar.
It started in 1991 by chance due to a good treaty with India. It burgeoned to create a new middle class and category of entrepreneurs and professionals. Today it has become a knowledge share industry with Mauritius now being used for data safety protection, outsourced operations and a whole host of other services. Also, with the decline of sugar this has become a key pillar of the economy.
One of the risks of this business is fraud, money laundering, funding, terrorist financing which is why there is a requirement for it to be regulated properly by people who understand the risks and the business properly.
Seychelles started the Seychelles financial services in 1994 and started marketing around this time. It grew rapidly from 2000 to 2011. Since 2003 the industry has been regulated. It comprises of about 60 small companies accountants, lawyers, company secretaries, other qualified professionals whose job it is to convince people to use Seychelles for their cross border transactions, ensure they are genuine and comply with the law. These companies known as international corporate service providers (CSPs) are regulated by the Financial Services Authority (FSA) and are subject to the provisions of the Anti Money Laundering Legislation (AML). They have to undertake a series of checks under these laws to ensure the client is genuine, is not a convicted felon, his source of funds are legal and he is not using the company for illegal purposes. Once this is done, they need to ensure that the Company complies with the local laws, files returns, pays taxes, maintains statutory books and records, etc on an ongoing basis.
The CSPs are subject to inspection by FSA, FIU and bound to provide information on request by a regulatory body, Court, etc.
There are many reasons people structure their cross border investments through a neutral territory. It could be ease of implementation; unlike our domestic Registry, an overseas company takes a day or two to set up. The other reasons are asset protection, trade bloc agreements, inheritance and estate planning, mitigate taxes so the same money is not taxed multiple times whilst doing cross border transactions.
The sector has been under much scrutiny internationally on accounts of tax evasion. The famous Irish structuring resulted in Ireland being accused of giving upto Euro 13 billion in tax benefits to Apple. This brought the sector under scrutiny.
Further, scams Panama Papers, the Singapore / Malaysia 1 MDB Scam, Switzerland have resulted in massive negative publicity for their countries and the sector. The debacle of the Cypriot banks where many people lost their life savings also fueled concerns about the industry and risks involved.
Many small island nations are now at cross roads "To do or not to do?"
Should they continue this sector or should they erase it and focus on island activities - fisheries and tourism? Some nations have considered this like Brunei. However, they normally have other sources of income like crude oil, natural resources, industry, etc.
Surprisingly, the industries flourish in Ireland, Panama, Cyprus, Switzerland and Singapore. Cyprus today has the fastest growth rate in the EU and has had major rebranding "Invest in us, Invest in Cyprus." Singapore continues to be one of the fastest growing financial centers despites its banking system being the conduit for the multibillion USD fraud of the Malaysian Government. Ireland continues to be the center for large MNCs to host their operations fueling its economy and providing jobs.
With the increase in global standards and regulations for the industry, many small island nations are evaluating this industry?
Should they scrap their vision of becoming a financial services economy and becoming a knowledge share economy?; or
Should they diversify their economies out of tourism and fisheries to ensure they create wealth through services and increase their GDP?
Abacus (Seychelles) Limited
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