Bahamas: Related Information
The Bahamas Responds To Listing With A Raft Of Legislation
The listing in 2001 of The Bahamas by the OECD and by the FATF - in its third category even - caused initial screams of outrage, but quite quickly the Bahamas decided that it had to do whatever was necessary to be removed from the lists, and the jurisdiction began an extensive programme of legislation and international lobbying.
The Bahamas was particularly unhappy to find itself in Group 3 of the FATF's listing, whose members, said to have lower standards than Group 2, and consisted of Anguilla, Antigua, Aruba, Bahamas, Belize, British Virgin Islands, Cayman Islands, Cook Islands, Costa Rica, Cyprus, Lebanon, Liechtenstein, Marshall Islands, Mauritius, Nauru, Netherlands Antilles, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Samoa, Seychelles, Turks and Caicos and Vanuatu.
Prime Minister Hubert Ingraham made it his personal quest to effect the removal of his country from the blacklist and restore the good name of the jurisdiction. If release from the clutches of the OECD is in proportion to effort, then surely the Bahamas deserved it more than anyone. In terms of amending and enacting new laws, you name it and The Bahamas probably did it. Almost every legal component governing, regulating and supervising The Bahamas' financial industry was reformed. The PM was constantly on the go, visiting government officials in Canada and the United States. Then it was a whirlwind tour of Europe with more pleading, sorry, talks, with the FATF, the OECD, and various heads of European governments and the leaders of European financial institutions.
The new and improved Bahamas legislative framework included:
- Money Laundering (Proceeds of Crime) (Amendment) Act 2000
- Evidence (Proceedings in other Jurisdictions) Act 2000
- Evidence (Proceedings in other Jurisdictions) (Amendment) Act 2000
- The Criminal Justice (International Cooperation) Act 2000
- The Financial Intelligence Unit Act 2000
- The Central Bank of The Bahamas Act 2000
- The Banks and Trust Companies Regulation Act 2000
- The Financial Transactions Reporting Act 2000
- The Dangerous Drugs Act 2000
- The International Business Companies Act 2000
- The Corporate Services Providers Act
- The Mutual Legal Assistance (Amendment) Act
- The Prevention of Bribery Act (Amendment)
Although many of these pieces of legislation have a bearing on banking confidentiality, the Money Laundering (Proceeds of Crime) Act is particularly worthy of notice as an example of the approach taken by the new legislation.
In an address to the House of Assembly, the Prime Minister explained that the new law would allow the police authority to apply to a Judge in Chambers for a Monitoring Order which obligates a bank or trust company to provide information with regard to transactions undertaken by an account holder who is suspected of committing or being about to commit an offence.
Mr Ingraham said: 'A judge may grant such an Order if he/she is satisfied by evidence given on oath. A Monitoring Order must specify the name/names in which accounts are believed to be held, the nature and intent of the information which the bank/trust company is required to give and the manner in which the information is to be given. A Monitoring Order may be granted notwithstanding the provisions of our banking confidentiality laws. Failure to comply with a Monitoring Order carries a like penalty as failure to comply with a Production Order, i.e. $25,000 or three years in prison.'
Under the Bill, an individual is guilty of money laundering if he/she is found to have concealed or disguised the transaction of delivering or transfering to another person, place or property the proceeds of any criminal behaviour. The Prime Minister stated: 'For the purposes of this Act, concealing or disguising includes concealing or disguising the nature, source, location, disposition, movement, ownership or any rights with respect to ownership of property.'
The punishment for a person found guilty by a Stipendiary and Circuit Magistrate of money laundering can amount to imprisonment of five years and a fine of $100,000 or both. If convicted before the Supreme Court the guilty party can expect up to twenty years' imprisonment and a fine of any figure at the Judge's discretion. Mr Ingraham added: 'This Bill makes it an offence to facilitate another in concealing, retaining or controlling the proceeds of criminal conduct. This is so whether the concealment is by removal of the proceeds from the Bahamas, transfer to nominees or otherwise.' At the point of conviction, all monies derived from money laundering will be forfeited to the Crown.
By late 2000, the Prime Minister's Office was able to claim that new legislative package had brought the regulations and supervision governing The Bahamas' financial services industry into line with international banking standards as set out by the Basle Committee on Banking. It also clarified the processes to be employed by The Bahamas in reference to international cooperation to counter money-laundering, illicit drug trafficking and related crimes.
The new IBC Act removed the possibility for beneficial owners to conceal their identity, while provisions of the Criminal Justice (International Cooperation) Act permit cooperation in relation to criminal tax offences.
Speaking at his Christmas message address that year, Hubert Ingraham commented on the fulfilment of his pledge to reform the financial services industry in the latter half of the year 2000 by strengthening the industry's regulations and supervisory structures. Mr Ingraham explained the aim of the new legislation was to enable The Bahamas' financial sector 'to survive the threats and continue to flourish in the evolving international environment.'
The Bahamas Achieves Qualified Jurisdiction Status
After an initial refusal to grant The Bahamas Qualified Jurisdiction status in November 2000, the US Treasury Department anounced in January 2001 that approval had been given.
Approved status for The Bahamas meant that financial institutions in the jurisdiction could avoid imposing a 30 per cent withholding tax on US source income for properly documented clients, and could also deduct reduced rates under tax treaties applying in particular cases. Furthermore they would not be required to identify their non-US clients to the IRS.
Ian Fair, chairman of the Bahamas Financial Services Board, said: 'It is obviously very, very good news because it clearly indicates recognition and acknowledgment that the laws that we have put in place and amended meet international standards.'
With regard to the (at that time) hopeful removal of The Bahamas from the blacklisting, he added: 'Our chances have been increased. They have been enhanced by this because the only country which keeps a constant watch on us is our great neighbour, the United States.'
The Bahamas' application for QJ status had been submitted in mid-2000 but the US Treasury deliberated for some months over the "Know Your Customer (KYC)" rules regarding the governing of bank transparency, the implementation of which is a key condition for obtaining QJ status - it was only recently that The Bahamas had introduced the KYC system.
The news that the Bahamas had had Qualified Jurisdiction status bestowed was received with mixed emotion by offshore investors based there, and in particular, US investors and individuals with offshore savings, since the approval of the IRS came with conditions which could be seen as disadvantageous for customer confidentiality.
Qualified Jurisdiction status requires the implementation of KYC, or 'Know Your Customer' procedures; the bank or financial institution must monitor the financial behaviour of its clients, and is obliged to report any 'unusual activity' to the authorities.
The Bahamas Forms A Financial Intelligence Unit
The Financial Intelligence Unit Act, 2000 was part of the Bahamas' response to its listing by the FATF and OECD.
The Egmont Group of Financial Intelligence Units describes an FIU as "a central, national agency responsible for receiving (and, as permitted, requesting), analyzing and disseminating to the competent authorities disclosures of financial information (a) concerning suspected proceeds of crime, and (b) required by national legislation or regulation".
Under the Act, The Bahamas FIU's function is to receive, anlayse, obtain and disseminate information relating to the proceeds of an offence; all disclosures of information required to be made under the Proceeds of Crime Act, 2000 will be made to the FIU.
The FIU Act was "benchmarked" to ensure compliance with acceptable practices in multiple jurisdictions. American, Canadian and Swiss banks -- and all other foreign banks operating in The Bahamas -- are not expected to have difficulty with provisions and powers of the Financial Intelligence Unit, as they all operate in jurisdictions with similar procedures and powers given to the equivalent agencies.
The Prime Minister confirmed that the new Unit would operate under guidelines with which multi-national financial institutions elsewhere were familiar. "We are not asking banking institutions in The Bahamas to operate under rules that they are unfamiliar with. We are not asking them to have a reduced standard when they are in The Bahamas. We are asking them to conduct business in The Bahamas as they would in Zurich, or Toronto, or London or New York."
In January 2001 the Director of the newly-formed Financial Intelligence Unit issued a public notice indicating its intention to issue suspicious transactions guidelines, in accordance with sections 15 and 16 (1)(b) of the Financial Intelligence Unit Act, 2000.
The Bahamas' New Regime For Banks
Then Central Bank Governor of The Bahamas, Julian Francis, explaining the impact of the new legislation for the banking sector, said in January 2001 that banking institutions in The Bahamas could expect on-site inspections from January 29 onwards and could also expect to come under cross-border examination from foreign regulatory bodies.
The Governor explained that: 'The Bahamas is in the midst of a significant revamping of much regulation of our financial sector. The period 2000/2001 will represent in many ways an important turning point.'
In February of that year, the Governor slapped suspension orders on two offshore banks - the British Bank of Latin America Ltd (BBLA) and the Federal Bank Ltd - for a three-month period, citing the inability of the banks to fulfill certain requirements. The government said it would close the door on any banks in the Bahamas which were deemed to "threaten the integrity of the international financial system" and, more importantly, the reputation of the Bahamas as a major offshore financial centre.
Finance Minister at the time, Sir William Allen told the House of Assembly: 'There is an ongoing review by the Central Bank which in due course will lead to the suspension and the closure of a number of institutions. These are institutions which in our view are not adding anything significant to our financial system but indeed they threaten the integrity of the international financial system so we will be moving briskly to deal with these."
British Bank of Latin America and Federal Bank were shut down following the publication of a US Senate report which criticised them (and others) for accepting hefty amounts of highly dubious money. Although the investigation chiefly chastised American banks who use the correspondent banking system, which allows banks with no physical presence in the US to open accounts for clients at US banks, it did highlight the role of banks in various offshore jurisdictions (not just the Bahamas).
Sir William continued: 'May I say in this connection that the Bahamas has moved resolutely to respond to what it recognizes as a legitimate concern in international finance about the conduct of financial institutions and quasi institutions operating on the margins of finance and financial activity. Banks have been used by persons for activities related to money laundering, or so the report alleges. I might say that even before this report, the Bahamas had already begun to review its financial institutions in relation to the concerns of money laundering and the Bahamas had already begun to deal with these two particular institutions before this report. We were concerned before this report.'
The Finance Minister made it plain that the government's stance on offshore banks bore no connection whatsoever to the OECD's harmful tax competition intitiative. He said: 'In moving resolutely to deal with what we see is a legitimate concern of the international financial system, we need to make it quite clear that this action is separated from any action connected with taxes. This is not a tax issue. This is not an OECD issue. We have not concluded the OECD issue which is a tax issue. The issue which we have dealt with is a money laundering issue which is an issue dealing with the behaviour of financial institutions in relation to money laundering and in relation to their proper supervision.'
The government said it anticipated that as a result of the supervisory regime being implemented, there would be a reduction in the number of managed banks operating in The Bahamas. Of the 400+ companies licenced to conduct banking and/or trust business at that time, it was estimated that some 125 operated as brass plates, i.e. with no physical office or employees in country.
As a result of the Government's announced intention not to encourage such operations, some of that number had decided not to remain in The Bahamas. Importantly, however, it had been estimated that approximately half of the managed banks would remain and comply with local regulations - effectively establishing a physical presence in The Bahamas and expanding their operations.
Julian Francis said that there had been no new licences granted for "managed banks" over the previous 2 years, and that it had been the Government plan to phase out this category of bank licence in due course. Banks would be able to operate under "management agent" arrangements, but subject to strict conditions relative to management contracts and senior officer staffing, records being maintained in The Bahamas, and physical presence requirements.
The Bahamas Moves Towards De-Listing
By March 2001 the Prime Minister was becoming confident that the jurisdiction would be removed from the blacklists, since his government had made huge efforts to meet the multilaterals' demands.
Mr Ingraham spoke out in defence of his decision to implement the changes when accused by the opposition that his government had over-reacted. He stated: 'I am aware that there are some who think that we have gone too far and that our new regulatory and supervisory regime is excessive. There are others who think that we have not yet gone far enough. And, there are yet others who still think we ought not to have changed anything - they liked and benefited from things as they were.'
He said that he was satisfied with the manner in which the Bahamas had responded to the multilaterals' demands: 'The Bahamas has acted appropriately not only to preserve, but to enhance the financial services sector and to make The Bahamas once again the undoubted financial services jurisdiction of choice outside the continents of North America and Europe for discerning and discriminating, reputable financial service providers.'
Mr Ingraham said the Bahamas was in full compliance with the recommendations of the FATF. 'I am similarly of the view,' he continued, 'that if the OECD is prepared to level its playing field so that all of its members and all other financial service jurisdictions, not subject to sanctions, agree to cooperate in exchange of specific information relating to specific requests, that it would be possible for the Bahamas not to be listed by that agency in July.'
Confirmation of this view came when the Rt. Hon. Alderman David Howard, Lord Mayor of London at that time, addressed the business and financial community at a luncheon jointly sponsored by the Bahamas Chamber of Commerce and the Bahamas Financial Services Board in April.
The Bahamas was commended on changes to both its legislation and practices to counter more effectively the threat from money laundering and criminal financial activity. Also praised was the cooperation between the private financial sector and the financial supervisors. "Cooperation of this kind is a central element of our success in the City of London, and I am convinced that it will be a crucial factor in your success too", said Alderman Howard.
The Lord Mayor took the opportunity to point out that the City of London was well aware of the importance and the attractiveness of offshore financial centers, and the benefits they brought to the international community. He asserted that it was no part of UK or OECD policy to oppose low tax regimes, or to put them out of business. It has to be recognised, however, that "no administration can allow itself to be used with impunity as a conduit for stolen or laundered funds, and yet retain its respectability amongst the nations of the world". Appropriate legislation was seen as critical, with equal importance given to effective implementation. The Bahamas was applauded for its determination to pursue a level playing field - in addition to international standards of transparency, good regulation and adequate supervision.
Also in April came the formation of the International Tax and Investment Organisation (ITIO), which resulted from the work of the joint Commonwealth/OECD Working Group on Harmful Tax Competition.
ITIO had as its aims:
- To strengthen international cooperation between small and developing economies (SDEs) in tax and investment matters;
- To assist SDEs to interface with international organisations to achieve this end; and
- To consider the development implications of international tax and investment initiatives.
- The ITIO gave a multilateral dimension to the Bahamas' fight against its OECD listing.
At the same time, local interests were far from happy at the extent to which the Bahamas was compromising its market position. At a seminar in April 2001, , Bahamas Attorney Michael Paton complained that the OECD had been using the FATF as an added influence on the Bahamas to force the jurisdiction to implement its OECD commitments earlier than other jurisdictions which did not have to comply until the year 2005.
In reference to the new laws enforcing the 'Know Your Customer' rules and the reporting of suspicious financial transactions, he stated: 'The Bahamas is being held at a higher standard and the rules of the game aren't being evenly applied. The problem we're going to face now is that institutions in The Bahamas are going to have to verify each account that is being set up. Unfortunately the way business is working, where you have a financial institution headquartered in Switzerland for example that wants to set up accounts for clients in the Bahamas, which would mean very big business for us, now financial institutions in the Bahamas that want to take on that account have to call Switzerland and ask who their clients are. They're not going to do that.'
Mr Paton also argued that the new laws would also adversely affect stamp duty, real estate sales, domestic banking and the tourism industry.
According to economist Ralph Massey from the Institute of Economic Freedom, the poor track record of the Bahamas' offshore sector had not helped its case: 'in the case of the blacklisting, the weight of both the past and the present is pressing down on the Prime Minister and the country like a nightmare', he said.
Mr Massey was also of the opinion that the blacklisting had severely affected business and employment - particularly for lawyers, accoutnants, IFAs, fund managers, and estate agents in the Bahamas and it would be difficult to assess the damage until after the dust settled. He argued: 'What will be the business lost by the producing private sector? What are the critical factors causing that loss? And how much regulation is essential, and will it be cost effective? Right now, no one knows for sure. In the meantime, the Government is rightfully publicizing its crack down on the bad apples and extolling the virtues of government regulation. But will this progress last beyond the immediate crisis? Will it produce a new day? It will take strong political leadership and a new way of thinking about government law and order.
The government however continued on its way, signing a UN Convention Against Transnational Organised Crime at the end of April, when then Foreign Affairs Minister Janet Bostwick tabled a communication in the House of Assemby on the Convention.
The Bahamas Ambassador to the United Nations had signed the Convention at the UN Headquarters earlier in the month. The UNTOC generally seeks to promote cooperation in order to prevent and combat transnational organised crime, including the laundering of proceeds of serious offences. It also covers, extensively, mutual legal assistance and embraces the principle of dual criminality.
Also tabled was the Inter-American Convention on Mutual Legal Assistance in Criminal Matters, eventually signed at OAS Headquarters in Washington on April 26.
In tabling the Conventions, the Minister indicated that The Bahamas was now taking "this first step in the process of accession".
Accession to each Convention permits, where so agreed, the extradition by consenting state parties of alleged offenders without the necessity for bilateral treaties between states.
The Bahamas To Retain Low-Tax Regime
By May 2001 the Bahamas government was becoming confident that it would be able to retain its low-tax regime more or less unaltered despite coming to an accommodation with the OECD.
Prime Minister Hubert Ingraham publicly declared that the Bahama's "no tax" regime would remain unchanged despite pressure from some of the world's most powerful nations, saying: 'The Bahamas will, I believe, come to terms with and adjust to global changes and find the best way forward to expand our special niche in the global economy. Let me say now however that the way forward does not in my estimation include the introduction of an income tax in this country in the foreseeable future.'
He added: 'Our success in services over the past thirty or more years, has permitted us to enjoy the third highest per capita income among independent States in the Western Hemisphere, following only the United States and Canada. Today, we can boast of higher levels of employment, increased home ownership, rising personal and household incomes, the lowest business loan interest rates in thirty years and of increased entrepreneurial opportunities and small business growth. Together, these permit and support our infrastructural and social agenda.'
The jurisdiction's rapid rise in the estimation of its erstwhile tormentors was confirmed in May when the Financial Action Task Force concluded a visit to the Bahamas during which it reviewed the government's recently implemented anti-money laundering initiatives, and gave a positive response.
Chief executive officer and executive director of the Bahamas Financial Services Board (BFSB), Wendy Warren, said that the FATF praised the Bahamas' efforts to comply with the multilateral's demands.
At the beginning of June, the Bahamas' then Minister of Finance, Sir William Allen, announced that he had invited the International Monetary Fund (IMF) to conduct a review of the Island's offshore financial services sector.
Sir William was quick to point out that the IMF review was by his invitation only and would be constructive advice for the government, as opposed to the damaging effects of the FATF and OECD reports. He explained: 'In its work [the IMF] is obliged to follow balanced, even-handed and objective procedures applicable to all participating member countries. In its reporting the IMF does not follow the obnoxious process of naming and shaming as the G-7 related groups have done.'
Sir William commented on the last Article IV Consultation with The Bahamas, which was conducted in August 1999, at which time it commended proposals in the 1999-2000 budget to generate more revenue by raising several taxes and reducing tax exemptions. The IMF concluded with the suggestion that a 'full review of the tax structure' be performed to further strengthen The Bahamas' revenue base. The Consultation recommended that 'such a review should include an assessment of the desirability of lowering import duty rates, introducing a value-added tax, or sales tax, and of increasing revenue from property taxes.'
Sir William said: 'The replacement of import taxes as the main form of taxation is inevitable in light of the WTO and other likely developments in trade liberalization. However any reform would have to be implemented gradually and in a way that does not alter the overall level of taxation.'
The Bahamas Is Removed From The FATF List
The Financial Action Task Force released its annual report for 2000/2001 on June 20th, revealing that it had removed four countries from its list of "non-cooperative countries or territories" in the fight against international money laundering: Bahamas, Cayman Islands, Liechtenstein and Panama.
"The de-listing provides an authentication of the integrity of our systems", announced Wendy Warren. She continued: " We are very gratified since the de-listing clearly supports the reputation of The Bahamas as a credible financial services jurisdiction. However, it is important to recognize that it is not only in the last six months that the financial systems and institutions in The Bahamas have been subject to adherence to counter money-laundering procedures. For example, since the mid 1980s, the Association of International Banks and Trust Companies (AIBT) in The Bahamas, has subscribed to the codes of conduct including adherence to the principles of the FATF."
"The financial services industry has been operating within this new legislative and regulatory framework since the beginning of this year," added Ian Fair, BFSB Chairman. " All business accepted since the beginning of 2001 is in compliance with this framework and the industry is currently bringing existing business into compliance."
Opening the 22nd Conference of Heads of Government of the Caribbean Community (CARICOM) ten days later in Nassau, Prime Minister Hubert Ingraham took the opportunity to comment on the "delisting", noting that this had resulted from full compliance with that organisation's "Forty Recommendations" relating to the fight against international money laundering. He pointed out that Caribbean countries must remain aware of the increasing international competition in financial services but, nevertheless, must continue to advocate a level playing field in terms of any international initiative relating to the provision and delivery of international financial services, whether emanating from the FATF, the OECD or the FSF.
Following delisting by the FATF, both the United States and Canada removed their financial advisories on the jurisdiction. In a letter to the Bahamian Prime Minister, Hubert Ingraham, the Canadian Minister of Finance congratulated the Bahamas on its removal, and praised the efforts made by the Bahamas to clear its name. He also noted that changes to the regulatory and financial regime has made the jurisdiction a leader in the Carribean in terms of creating eminent standards to fight money laundering.
However, he warned that Canada would continue to monitor the country's action with regards to the restructuring of the financial sector, but added that: 'We will continue to stress the need for the FATF to treat countries in an open, fair and transparent manner.'
September 11th, 2001
In common with other offshore jurisdictions, the Bahamas came under increased international attention in the weeks following the terrorist attacks in the US. But the government felt confident that its new package of financial sector laws put it in a good position to detect possible terrorist financing activity.
Minister of Foreign Affairs at the time, Janet G Bostwick, said that the passage of tough financial laws in 2000 had put the Bahamas' government in a sound position from which it could pursue, seize and forfeit any terrorist money found in Bahamian banks.
She told the Bahamas' Parliament: 'In fighting terrorism, I am most pleased that The Bahamas is in a position, having passed financial legislation at the end of last year and again this year, which makes us unattractive as a depository for terrorist money.'
Minister Bostwick was speaking during a debate in Parliament on a resolution to condemn terrorism and to consider the impact of the September 11 terrorist attacks on the Bahamian economy. She continued: 'We are also in a position to pursue and to seize and forfeit any money which may be in our financial institutions and which are found to be for that purpose. This, to that extent, validates the actions which we took to bring our financial legislation, and to bring our practices in conformity with best world practices so that the Bahamas can be in a real position to offer assistance and co-operation in this respect. We could not have done it before we amended and passed new legislation last year, so I am more than pleased that we are in that position.'
'We intend to give our full support to the resolution of the Permanent Council condemning the terrorist acts in the United States,' she said.
Responding to President Bush's Executive Order requiring financial institutions to freeze accounts belonging to a list of people and organisations associated with Osama bin Laden, the Bahamas Financial Services Board announced that monitoring of the Bahamas' financial sector had been intensified to ensure none of its institutions was being used to fund terrorist activities.
New actions taken included:
- The signing by the government of the International Obligations (Afghanistan) Act 2001 which among other measures prohibits any person dealing with any property, and any financial institution licensed in The Bahamas from transacting business with Osama bin Laden, the Al Qaeda organization, or any individuals or entities associated with them;
- The Central Bank of The Bahamas had instructed all banks and trust companies licensed in The Bahamas to review immediately whether or not they held accounts beneficially owned or in some way used by organizations or persons suspected and/or reported by the media as being directly or indirectly connected with terrorist activity.
Attorney General and Minister of Justice at the time, Carl Bethel announced that: “ We will not flinch nor falter in the effort to prevent the abuse of our financial services system and in eradicating money laundering and other financial crimes.”
Under the Central Bank review, banks and trust companies were asked to consider all client accounts. This process was greatly facilitated by legislation that not only obliges institutions to 'know-their-customers' but to maintain full documentation within their offices.
" Money laundering is a global problem, not one that is restricted to offshore centers,” announced Wendy Warren, CEO and Executive Director of the BFSB. “ We recognize that we operate in a globally integrated market for financial services and our sole interest is legitimate international business. As a result, our counter-money laundering legislation is as advanced as any OECD country.”
She added:“ While confidentiality is an important aspect of our country, this confidentiality does not extend to those who commit offenses such as bribery and corruption, drug trafficking and other serious crimes.”
Under Bahamian law, banks and trust companies must report immediately to the Central Bank of The Bahamas information on any account identified as having any possible link to suspected terrorists or terrorist organizations.
In October of that year, the US Treasury revealed that the Bahamas had frozen a bank account belonging to a trust whose beneficiaries include one of the names listed in the US Executive Order, a US citizen born in Afghanistan. The individual, who was not named, was one of four brothers who were beneficiaries of an account which had been opened by their father.
Hubert Ingraham said that it held $20m and had been set up in 1994. Accrued interest was withdrawn periodically but apart from this, the account was largely inactive, he added.
The Prime Minister announced that he did not plan to release any further information on the account, in keeping with banking confidentiality rules: "We do not discuss in the Bahamas the freezing of bank accounts by our Financial Intelligence Unit. We shared this information with the US, and they have chosen to make the information public."
Mr Ingraham added: "We have no evidence to support the contention that any of the proceeds from the account were used for terrorist activities. However, the US Treasury has said that monies from the account were used for terrorist acts. We are unable to substantiate that. All we can substantiate is that the name of the person appears on the account as a beneficiary."
''We will redouble our efforts against money laundering and specifically, we will not permit our vital sectors to be used to support terrorism,'' concluded Mr Ingraham.
The name of the bank was also withheld but officials said it was one of the world's leading finance houses, with operations in all of the member states of the Group of Seven (G-7) industrial powers as well as throughout the Caribbean.
The Bahamas' New Legislation Begins To Bite
The wide publicity given during 2000 and 2001 to the Bahamas' strenuous efforts to conform to FATF and OECD demands led to dramatic drop in the number of registered International Business Companies, causing a huge reduction in government revenues.
In the 2000/2001 financial year the government received $4,281,000 in IBC registration fees, compared to 2001/2002's collection of $1,576,000. IBC annual fees earned the government $12,823,000 in 2000/2001, while 2001/2002 saw receipts of just $7 million.
Attorney General and Minister of Justice, Carl Bethel, held a press conference in November to reveal the news, and pointed to the country's recent overhauling of its financial service laws in combination with the September 11 terrorist attacks in the US which had severely affected tourist trade on the Islands.
The Minister said that the Bahamas was gradually recovering but suggested that the downturn in revenue from the IBCs was a matter for some concern. He explained: 'We think the financial services sector is better off under the present regime than it would have been had we remained on the (FATF) blacklist. In particularly, in view of recent events (September 11), the amount of pressure that is going to be brought on to the less well regulated jurisdiction, I don't think you would want to be in one of those jurisdictions in the coming weeks and months.'
Referring to the government's strict observance of the 'Know Your Customer Rules' which obviated the use of bearer shares to protect the identity of the true owner of a company, Mr Bethel concluded: 'You have to decide in this life sometimes what you want to give and what you want to keep. It is not possible to keep everything. It is not possible for the Bahamas to keep a well regulated, internationally acceptable, diversified and large financial services system... while at the same time seek to hold on to bearer shares.'
In the same month, Mr Bethel revealed that the authorities in the Bahamas had handed files on the banking arm of the Al-Taqwa network, which was registered in the jurisdiction, to the United States.
The banking arm of the Al Taqwa organisation had ceased operations in the Bahamas in April as the result of a government crackdown on 'brass plate' banks with no physical presence in the jurisdiction. 'Bank Al Taqwa didn't have a physical presence in the Bahamas and were not willing to have one,' explained Rhonda Bain, director of legal affairs at the Attorney General's office. 'However, we have no information from anyone that the bank was being investigated when it was here.'
The Bahamas Joins Call For 'Level Playing Field'
Late in November 2001 senior government officials from several of the Caribbean jurisdictions included on the OECD's harmful tax competition list renewed their calls for a 'level playing field' as regards tax practices and information exchange, arguing that the Organisation for Economic Cooperation and Development had painted a misleading picture.
'There is no level playing field because we are being asked to do what their own members are not doing,' argued the Bahamas Finance Minister at the time, Sir William Allen. 'Without a level playing field, it is us who will suffer from harmful tax competition.'
The OECD had announced that following consultation, it had extended the deadline for listing 'uncooperative' jurisdictions to February 2002, and had dropped provisions designed to prevent 'ring fencing', where offshore centres grant tax breaks to businesses with no physical presence.
However, the Caribbean jurisdictions felt that not enough had been done to take their concerns into account, and were unhappy that there had been no shift on the issues of transparency and information exchange. 'This report is written very cleverly,' explained Sir Ronald Sanders, Antigua's chief tax negotiator. 'It sounds as if the OECD has sat down with us, has listened to what we have to say and has modified its report to take account of everything we asked for. That is not the case.'
Caribbean officials from the spotlighted jurisdictions maintained their stance, and told the OECD that they were prepared to make a commitment to implementing changes to their tax regimes if these changes were demanded of all jurisdictions, including OECD members, and if they were permitted to contribute properly to discussions on the definition and application of transparency and information exchange.
The Bahamas also had to counter rumours apparently emanating from the OECD that it was about to cave in and sign a commitment letter. Executive Director of the Nassau Institute, Dr. Gilbert Morris, wrote to the OECD at the time to protest at the organisation's attempts to persuade other offshore jurisdictions to agree to its demands by pretending that the Bahamas was close to agreeing them itself.
Addressed to the OECD President, the letter read as follows: 'It has been reported recently to The Nassau Institute (NI) that officials at the OECD - in their negotiations with sundry Offshore Financial Centres OFCs - have given assurances that The Commonwealth of the Bahamas is moving to sign onto the OECD's "information exchange" regime.
'If there is merit to this report, it raises grave concerns, not only concerning the methods of OECD officials, but the presumption that this group, which does good work in many areas, is fit to negotiate in good faith on important sovereign matters between nations.
'The danger, as you will be aware, is that such rumors may deter credible investors - wishing to exercise their right to privacy - from investing with the Bahamas through no fault of its own. While I understand that it is the OECD's position that investor information be subject to its information exchange regime, may I say respectfully that is not yet the status quo. I say further, it would be an unthinkable diplomatic faux pas that the Bahamas could be moving towards the existing proposal; since in recent days, the Governor of the Central Bank Mr. Julian Francis has echoed comments by the Prime Minister - The Rt. Hon. Hubert Ingraham - that the concessions offered by the OECD in its latest 'harmful tax' report were not enough to see targeted Caribbean jurisdictions sign up to comply.
'As such, we call upon you Sir to clarify the position to the international community by a means sufficient to the task; confirming the status of the Bahamas aforesaid. Additionally, we would welcome any clarification on these rumors your office may condescend to provide.'
The Institute also issued a press release pointing out that Governor of the Central Bank at the time, Julian Francis and the Prime Minister Hubert Ingraham had said clearly that the concessions offered by the OECD were not enough to see targeted Caribbean jurisdictions sign up to comply.
The Bahamas Courts Buttress Banking Confidentiality
A court ruling in the Bahamas in November 2001 required government regulators to apply to the Supreme Court for permission to freeze the accounts of individuals and organisations suspected of money laundering activities.
Lawyers for the Financial Clearing Corp., which had its assets frozen in January 2001 over allegations that the company was connected with criminal activity, argued that the power to freeze accounts should be left to the jurisdiction's judicial system, and not to a financial police unit. The company further argued that the law which allowed government regulators to freeze its accounts violated constitutional articles which protect against deprivation of property without compensation.
Some commentators expressed the fear that the new ruling could seriously undermine the efforts made by the jurisdiction over the previous year to combat money laundering and terrorist financing. The law in question had been passed in the effort to secure removal from the FATF list of 'uncooperative' countries in the fight against money laundering.
Regulators feared that as a result of the ruling, the lengthy process for obtaining permission to freeze assets would allow companies under suspicion plenty of time to pull their money out of the jurisdiction before investigations can begin.
The Bahamas Continues To Resist The OECD
Speaking at the annual Caribbean Latin American Action Conference in Miami in December 2001, Zhivargo Laing, then Minister of Economic Development for the Bahamas, vowed to resist unfair tax pressure from the Organisation for Economic Cooperation and Development.
'We have a simple position: The like must be treated alike and the equal treated equally,' he explained. 'It has to be a matter of all countries being required to adjust as opposed to just one jurisdiction and that jurisdiction being the Bahamas.'
Mr Laing defended the efforts made by the Caribbean jurisdiction in the fight against money laundering, pointing to the fact that the Bahamas had been recently removed from the FATF blacklist as evidence of the progress made. However, he defended the country's low tax regime, and revealed that in the face of the OECD's tax demands: 'The Bahamas has largely not responded,' adding 'We were not prepared to erode any advantages we have. '
Summing up the Bahamas' belief in its position at the end of the year, Wendy C. Warren, CEO & Executive Director of the Bahamas Financial Services Board, had this to say about the Bahamas' progress:
' Money laundering is a global problem, not one restricted to offshore centres. We recognise that we operate in a globally integrated market for financial services and, it must be emphasised that the sole interest of The Bahamas is legitimate international business. As a result, our counter-money laundering legislation is as advanced as any OECD country and, in some cases, more advanced. In fact, counter money laundering vigilance and measures have been a priority in The Bahamas for a number of years and received additional attention in the past year when the government passed new legislative initiatives to ensure all financial institutions are, by law, required to "know-their-customers" and to report any suspicious transactions.'
The Bahamas Signs A Tax Information Exchange Agreement With The US
US Treasury Secretary at the time, Paul O'Neill and then Bahamian Finance Minister William Allen signed a Tax Information Exchange Agreement (TIEA) on January 24th 2002. This agreement, according to the US Government, commited the Bahamas to share tax information in order to cut off funding to terrorist organizations, to eliminate the use of financial institutions for illicit transactions and to assist in the enforcement of US tax laws.
The agreement, which followed the establishment of similar arrangements between the US and Antigua, Barbuda, and the Cayman Islands, marked a further stage in the Bush administration's campaign to clamp down on terrorist financing. It allows the US Internal Revenue Service to pierce stringent banking secrecy rules in the Bahamas in certain circumstances.
However, in a BFSB retrospective of 2001 published in late December, Wendy Warren warned that the co-operation demonstrated by the Caribbean jurisdiction in the international fight against money laundering has not changed the country's fundamental perspective on financial privacy.
'The Bahamas will continue to co-operate with all who seek to fight money laundering, fraud, international terrorism and other serious crimes. At the same time, this does not diminish the fundamental fact that The Bahamas is wedded to the belief that law-abiding persons and entities have a right to privacy and confidentiality with respect to the conduct of their affairs,' she stated.
The Nassau Institute in the Bahamas expressed grave concern over the TIEA, complaining that the government had failed to consult sufficiently over the agreement.
Part of the tax and information exchange agreement (TIEA) between the United States and the Bahamas came into effect on January 1 2004, giving the latter the status of a permanent Qualified Jurisdiction.
The US gave The Bahamas provisional QJ status in 2000, but made an extension to the full six years conditional on the Bahamas signing a TIEA with the US before the provisional period expired. The TIEA was not, however, retroactive and only applied on criminal matters from January 1, 2004. Civil tax matters were covered by the TIEA from January 1, 2006.
According to the US Treasury, the Agreement was consistent with the standards for an exchange of information agreement described in the Internal Revenue Code.
The Code generally allows US taxpayers to claim a tax deduction for expenses associated with a convention held in certain beneficiary countries with tax information exchange agreements with the United States to the same extent as a convention held in the United States.
Thus, since January 1, 2006, The Bahamas has been considered part of the “North American area” for purposes of determining whether US taxpayers may deduct expenses incurred in attending conventions, business meetings and seminars in The Bahamas. Good for tourism.
In August, 2004, the Bahamas government announced that it had taken a decision not to enter into any more tax information exchange agreements in the near future. Minister of State for Finance James Smith said: “Until we have a level playing field with regard to tax information exchange we are not entering into any treaties with other OECD members," said Mr Smith.
However, in July 2007, Financial Secretary to the UK Treasury, Jane Kennedy announced details of the UK's treaty negotiating priorities for the year to 31 March 2008, which included The Bahamas.
Ms Kennedy stated that:
"I am pleased to announce the programme of work on double taxation conventions for the year to 31 March 2008. The UK has a comprehensive network of bilateral conventions and is committed to maintaining and strengthening this network. Double taxation conventions provide an agreed framework for individuals and businesses when dealing with overseas tax systems."
In a statement on the matter published at the time, the UK's tax authority, HM Revenue & Customs (HMRC) revealed that that:
"We plan to complete work on new DTCs with the Faroes, Macedonia, Moldova, Slovenia and Thailand; and on Protocols with Australia, Mexico, New Zealand, South Africa and Switzerland. We also plan to complete work on new Tax Information Exchange Agreements (TIEAs) with Jersey, Guernsey, the Isle of Man, Anguilla, Bermuda and the British Virgin Islands."
"We intend to progress negotiations with Bahrain, the Cayman Islands, China, Croatia, Germany, Hungary, Luxembourg, Libya, Netherlands, Peru and Saudi Arabia."
With regard to planned new talks, the tax authority revealed that:
"We have plans to commence negotiations with the Turks & Caicos Islands, the Netherlands Antilles, Aruba, the Bahamas and Panama on TIEAs. We will make further announcements about DTC talks with other jurisdictions as and when arrangements are in place."
The Nassau Institute Workshop In February 2002
At a workshop held in February 2002, the Nassau Institute addressed the threats to the Bahamas' financial sector from the recently-signed US/Bahamas Tax Information Exchange Agreement and other international legislative developments.
Under the title 'The Diplomatic Opportunities and Strategic Possibilities In Neutralizing the Effects of Cross Border Financial Services Regulations', Dr Morris addressed the history of the development of legitimate tax avoidance techniques and current trends to limit and compromise their use.
'It was nearly 35 years ago,' said Dr Morris, 'that Sir Stafford Sands caused a change in the direction of the commercial landscape of the Bahamas. What he intuited and foresaw was a means by which the American investor could arbitrage - legally - his tax obligations by organizing his affairs through tax saving instruments and investment vehicles in the Bahamas. These instruments - which are "tax avoidance" measures - had been in use in Europe since the rise of the Austro-Hungarian empire between 1630 and 1647. In England, the notion of tax avoidance gives a meaningful reading to the 1215 crisis which lead to the signing of Magna Carta. The King, under the presumption of "divine right of rule" saw it as his prerogative to tax - in this case by raising armies in the duchies - unquestionably. Each duke or knight had a duty to provide war resources to the king from his lands. The difficulty was that in the exploitation of these resources - which included men - the king was unaccountable…and a disproportionate loss to a duke or knight may have meant such a depletion in his resource base as to render him unable to maintain his place in the king's "pecking order". At Runnymeade in 1215, the knights changed that by limiting the prerogative powers of the king by force of threat. This was the first decisive act of citizenship by Englishmen against taxation without representation.'
After reviewing the early history of banking, Dr Morris explained the origins of banking secrecy:
'In the wider European political theatre, the first Swiss banking clients were the royal courts of France - who greatly which sought discretion from their money lenders, against the prying eyes of the church. The Geneva bankers were actually Protestants, who were often of French origin and chased out following the Revocation of the Edict of Nantes by Louis XIV in 1685. They soon found commerce in financing the King of France from Geneva. At the time there was no better borrower than the king, who had both the ability to pay back his loans and insatiable financing needs. Discretion was of utmost importance, since knowledge of the king's indebtedness to heretic Protestants would have brought the ire of the church. One of the earliest pieces of legislation regulating bank secrecy dates back to this period. In 1713, the Great Council of Geneva (cantonal council) adopted banking regulations which stipulated the bankers' obligation to "keep a register of their clientele and their transactions. They are, however, prohibited from divulging this information to anyone other than the client concerned, except with the expressed agreement of the City Council".
'Switzerland became a "financial asylum" for those fleeing the political upheavals ravaged the continent since 1789 . From then to 1934, bank secrecy was regulated solely by civil law. A client could lodge a complaint for damages against any bank that neglected its duty of confidence. The cantonal civil rights unified in 1907 by the Swiss civil code and the 1911 labor code provided sufficient guaranties for aggrieved clients to enforce their rights. This capacity for enforcement is at the heart of citizenship…won from the vestiges of over-centralized government since 1215. On the other hand, there was no criminal provision; there was no threat of imprisonment for the banker's breach of confidence to his client…though in practice the banker was regard alike to the priest and the physician. Swiss jurisprudence at the turn of the 20th century would confirm this duty of confidence on several occasions. In 1930, the federal court, the Supreme Court of Switzerland, recalled that "the banker's confidence constitutes an implicit contractual duty". This affirmation was further developed in 1932 in the case of Charpiot versus the Caisse d'épargne de Bassecourt (Bassecourt savings bank): "Bank secrecy is nothing other than the right of each bank client to demand the strictest confidence from the bank in the business affairs with which it is entrusted; it is equally, and conversely, the bank's duty to keep completely quiet about these affairs. For the banker in particular, this duty is independent of the legal relationship between the banker and his or her client. Whether there is a written contract or not, violation of bank secrecy constitutes a wrongful act according to articles 41 et seq. of the labor code".'
Turning to the present day, Dr Morris said that the Bahamas faced a three pronged attack upon its banking and financial services sector from the The Tax Information Exchange Agreement (TIEA), the OECD initiative on Harmful Tax Practices, and the US Patriot Act 2001. He analysed these three threats in detail, concluding:
'The fallout of these initiative in general and the Patriot Act in particular is that whilst all of the smaller, less prestigious financial centres will be squeezed out of the business, if centres such as the Bahamas fail to respond with some diplomatic sophistication, there will be a landmark shift toward the traditional European centres. Some offshore centres have already expressed concerned that if Switzerland (and Luxembourg) are not obliged to adhere to the standard sought to be imposed on offshore Caribbean centres, business will migrate to OECD Member Countries. (Particularly the US, Switzerland and Austria - and do not discount Russia and Cuba. Note also that Italy has just announced a new IBC law). If Switzerland's commitment is delayed so that it remains the "last man standing" for clients seeking financial privacy, client structures may well come to rest there, even if Swiss laws subsequently change.'
Dr Morris concluded:
' It will not do to fall into the nonsense that signing the undertakings or the TIEA - and such other initiatives as will come to the fore eventually - are an assent to "international standards". This is ridiculous when at the same time arguing for a "level playing field". What is more it appears ridiculous to the world.
'Returning to the issue of culture, we lack a genuine banking-culture as much as we do a juris-culture. When the foreign banker comes to our shores, it is not we, but he who demonstrates to us the advantages of banking here. It is he who - to the extent that he does - tests the limits of possibilities of banking. Part of the reason there is no defense of banking from the general population is exactly because in the public's mind, banking has no understandable relation to the way Bahamians live; and even for those Bahamians in banking, they do little more than mechanical tasks involving none of the responsibility, and so creativity required for financial services. What they have is a job. Period.
'Third, the representatives of the industry - though peopled by some quite thoughtful and interesting people - are thoroughly compromised by their sponsored relationship with government. It is impossible to be objective under such an arrangement. Indeed, they are inoculated from the responsibility of developing policy for their membership in a manner consistent with our political realities and germane to a community without the native talent and experience in the broader cultural conception of financial services. Moreover, I say without reservation, those bodies who failed to defend the financial services industry in the Bahamas take as their defense that their role is promotion and so they cannot be seen to be critical. It must now be seen as a nonsense of the first water. First, if their promotion within the Bahamas were successful, Bahamians would be apprised better of the role of banking in the national culture inducing a historiography as laid out for Switzerland in the beginning of this paper. Second, if promotion of the banking in the Bahamas is their goal, that too now is shown to be a failure as the government and the industry continues to reaction rather than induce reaction to policy. In point of fact - which I challenge all and sundry to refute - the absence of a native creativity after 35 years in banking; the absence of genuinely Bahamian banks; the absence of a "Bahamian standard in financial services - all reflect a failure of democracy and an enterprise culture.
The OECD's Deadline Approaches
Just prior to the OECD's deadline of 28th February 2002 for publication of its much-deferred blacklist, the Bahamas Financial Services Board issued a statement reiterating that the jurisdiction would only cooperate with international initiatives on taxation if there was a 'level playing field', in which OECD members and blacklisted countries alike were forced to make changes.
'While the OECD is now accepting a reference to a level playing field in commitments, clarity is still required with respect to whom it applies and when it is applied,' explained Wendy Warren. She added that the Bahamas would likely be unwilling to act unless its 'principal competitors', which included blacklisted offshore centres, OECD member countries, and non-OECD members such as Hong Kong and Singapore, were also obliged to change their taxation regimes on the provision of cross-border and international financial services.
Ms Warren also commented that it would be unreasonable for the OECD to demand changes from the smaller offshore jurisdictions before its own members had amended their regimes, and expressed concern that the 12 month implementation plan outlined for countries which had made commitments to the OECD on tax and transparency would appear to be doing just this, ending, as it did, prior to the requirement that member countries come into line.
The BFSB Executive Director concluded that: 'The Board is therefore of the view that any commitment should only be given to the OECD with the most robust "level playing field" language. This language would be essential to ensure that The Bahamas changes its business environment only when every OECD member country, as well as all non-sanctioned Offshore Financial Centres (OFCs) agree to implement the same initiatives.'
The Bahamas Finally Signs Up With The OECD
In mid-March 2002 the Bahamas' then Minister of Finance, Sir William Allen, issued a statement describing the terms of the islands' commitment to the OECD:
'The OECD has signaled its acceptance of The Bahamas' form of commitment on transparency and effective exchange of information on Friday, 15th March, bringing to an end months of intense negotiations on a mutually acceptable form of undertaking which fully recognises The Bahamas' right to protect its economic interest by conditioning The Bahamas' commitment to the application of a level playing field in relation to all jurisdictions with which The Bahamas is materially in competition in the provision of cross-border financial services.
'I have today therefore formally submitted the Bahamas' commitment to the OECD in the form now agreed as acceptable. This commitment represents a framework within which bilateral treaty negotiations may take place, provided that all OECD member and non-member countries and jurisdictions with which The Bahamas is materially in competition have, likewise, assumed obligations equivalent to those assumed by The Bahamas.
'The Government of The Bahamas believes strongly that the success of this OECD initiative rests on the adherence to the principle of parity in the obligations assumed by all jurisdictions, OECD and non-OECD member countries in relation to standards and timelines in the move to greater transparency and information exchange. Clearly, if this principle is not observed, financial services business will migrate from one financial services centre to another and the stated objectives of the OECD initiative will, thereby be defeated.
'On that basis and with that understanding The Bahamas is participating in the process and is pleased to have concluded with the OECD a form of Commitment which meets our mutual interests. This also brings to a close speculation regarding the possible inclusion of The Bahamas on a list of non-cooperating tax havens.'
Predictably, Dr Gilbert Morris, Executive Director of the Nassau Institute, was quick to criticise the administration for its volte-face:
"It must be met with some alarm that only days ago, fresh from travels in Australia, the government trumpeted its having won Australia - and even Britain - to its position, only to discover that its position has been to draw its own words into question.
"I am given to understand that the language used was to that of a subjunctive conditional, that is, the undertaking will come into force at a designated time if OECD members adopted the measures they demand of others for themselves. This appears clever, but is it ?
"The fact is that we said to the world that we would not sign unless the OECD members undertook so to do. They have not. Moreover, to have signed at all gives credence to the notion that the OECD is an authoritative body in international law. It is in fact a "think tank" with no recognizable authority in law. To have signed at all is to subject of constitutional sovereign state and its moral obligation to defend the content and quality of the rights of its citizens to an ad hoc body, for reasons which the members of that body do not apply to themselves."
However, the Bahamas Financial Services Board issued a statement accepting the move as a necessary measure while still stressing the necessity for a level playing field for OECD members and non-members alike.
In its statement, the Board explained that: 'As one of the world's leading centres for international financial services, The Bahamas recognises the value of a robust and constructive relationship with the US and other OECD member countries.'
However, echoing the words of Prime Minister Hubert Ingraham, the BFSB reiterated that the jurisdiction would not be bound by terms more onerous than those imposed on other, rival jurisdictions, and would not act on tax practices and information exchange until all OECD members had been brought into line.
Illustrating this point, the BFSB pointed to the fact that: 'Four OECD members, including Switzerland and Luxembourg, abstained from the OECD's 2001 Progress Report on Harmful Tax Practices,' warning that: 'the OECD will need to ensure that its own membership backs its proposals before pressing others to adopt onerous obligations.'
A New Bahamas Government Backtracks On Financial Services Legislation
Within weeks of submitting to the OECD, the Bahamas government was turfed out by the electorate, which gave a sweeping victory to the Progressive Liberal Party under leader Perry Christie, who had promised to review the legislation put in place in 2001 if elected.
Speaking on national television, PLP Deputy Finance Minister, James Smith promised that the new government would re-examine the laws tightening regulation of the offshore sector put in place by the previous Free National Movement government, in order to secure removal from the OECD blacklist. Mr Smith went on to explain that although the Bahamas recognised the necessity of internationally recognised standards, there had been complaints from businesses based in the jurisdiction that compliance with the new rules is costly and overly bureaucratic.
Although the new government came in for some criticism as a result of the proposed review, several leading offshore commentators came out in support of the PLP's stance.
Christie stated that the creation of a new Ministry of Financial Services and Investment was the clearest indication of the determination of his government to place the country’s financial services sector in the strongest possible position.
“This Ministry will consult closely with the industry and related professions to develop policies and measures that will place the financial services sector at the forefront of international competition,” he said.
The Prime Minister went on to pledge that the government would ensure The Bahamas met all of its international obligations, especially those which involve the participation of the country in the concerted international effort to combat the financing of crime and terrorism. He added however that: “We will ensure that every action which we take in response to international developments is not an avenue through which competing jurisdictions can impose burdens on The Bahamas which they themselves are not willing to accept or is not an avenue through which other countries can impose burdens on us with the aim of diminishing our competitiveness and enhancing their own”.
Minister of Financial Services and Investments at the time, Allyson Maynard Gibson told the House of Assembly that integrity, transparency, accountability, efficiency and professionalism would be the watchwords of the Ministry.
Recognising that it was imperative for The Bahamas to clearly define itself as a financial service provider and pursue policies in accordance with that definition, the Minister also reaffirmed earlier pledges that all interested parties should be at the table as the Government evaluated development and pursue policies to keep The Bahamas on the cutting edge.
The Government Extends KYC Deadline
In July 2002, the Government of The Bahamas, in response to requests from financial service providers and in recognition of their commitment and efforts to date to be in full compliance with the Know Your Customer Regulations, promulgated pursuant to the Financial Transactions Reporting Act, agreed an extension to December 31, 2002 for the identification of all accounts established prior to January 1, 2001. The government had already extended the initial deadline of December 31, 2001 to June 30, 2002.
"International and domestic financial services firms have committed tremendous effort and resources to this exercise. They indicated to government that whilst they were able to substantially complete the exercise, they are unable to meet the 30 June deadline”, stated Wendy Warren of BFSB. “ All involved in this very important sector of our economy want to ensure that every opportunity is given for financial service providers to be in full compliance with the Regulations. It is expected that by December 31, 2002 industry should be able to complete the review of all facilities established prior to January 1, 2001”.
The Bahamas introduced legislation in late 2000 that required all accounts, including accounts established prior to the introduction of the legislation, to be in full compliance with the country's modernized Know Your Customer regulations.
The Bahamas legislative and regulatory framework was designed to prevent, and if necessary, detect money laundering had been recognized as being in full compliance with international standards.
“The financial service providers are pleased with Government’s decision to extend the deadline” stated Ms Warren “They are committed to growing a blue chip financial center and look forward to continued collaboration with the Government in this regard. They support Government’s commitment to position The Bahamas as a blue chip, well regulated and cooperative international financial centre”.
The Bahamas' Courts Start To Interpret The New Legislation
In November 2001, the Bahamas' Supreme Court had ruled on an application from Financial Clearing Corporation that the country’s Financial Intelligence Unit (FIU) was not entitled to issue freezing orders independently of the Court, and that parts of the FIU Act – one of the cornerstones of the revamped regulatory regime that was introduced in December 2000 – contradicted the Bahamian Constitution.
The Attorney General’s office appealed the Supreme Court ruling, and the Court of Appeal overturned the ruling, adding that the FIU may request the production of information from banks and trust companies without a court order. In attacking the Supreme Court’s decision, the Attorney General’s office argued successfully that the granting of powers of seizure to senior FIU officials did not give to unelected civil servants powers which only the judiciary should hold under the Constitution.
Financial Clearing Corporation did not contest the appeal by the Attorney General’s office.
Then in August of that year, the Bahamas' Supreme Court supported the jurisdiction's Appeal Court in confirming that legislation pased in 2001 in response to pressure from the OECD and FATF over-rode the duty of a lawyer or other professional adviser to keep confidential details of communication with her clients.
Maurice O. Glinton and Leandra Esfakis, joined by the Bahamas Bar Association, had claimed that to the extent that the legislation subjected "financial services providers" (including lawyers) to routine inspection of their offices and client lists, this placed the lawyer in direct conflict with his or her sworn duty to protect the client’s confidentiality.
The Chief Justice insisted that he was bound by a previous ruling of the Bahamas Court of Appeal, suggesting not that the arguments presented were wrong, but that there could be no injunction on a constitutional matter against a piece of legislation already in force.
Then in October, the jurisdiction's Court of Appeal set aside the judgement of the Supreme Court under which new financial services legislation was protected from constitutional review.
Glinton-Esfakis-Maynard had argued that the learned Chief Justice erred in his reliance on McEwan, since the Supreme Court had original jurisdiction under Article 28 (1) of the Bahamas Constitution to grant interim relied on an interlocutory application in constitutional matters. They argued further that even if the learned Justice’s reliance upon McEwan was right, he could not do so without hearing the parties objections on the grounds of natural justice.
The Appeals Court ruled that Mr. Justice Sir Burton Hall must grant the order of interim relief and hear the substantive matter in the Glinton-Esfakis Statement of Claim. This meant that the constitutionality of the 11 pieces of Financial Services legislation, the Qualified Intermediary Rules, the powers of the FIU and the validity of the TIEA and the OAS Agreement on Terrorism would all come under review for their constitutionality under the Constitution of the Bahamas.
"The Justices of Appeal were in excellent form" observed Dr Gilbert Morris. "In a real sense, Glinton-Esfakis have already won their argument in other jurisdictions insofar as the application of the financial services laws to lawyers is concerned. For two years we have been saying these laws will not stand up to legal challenge…and they have not".
The dispute was still rumbling on two years later...
The Government Sets Out Its Stall
In October, 2002, Bahamas Minister of Financial Services and Investments at the time, Allyson Maynard-Gibson, announced a 5-year overhaul of the country's financial sector.
"During the summer," said Ms Maynard-Gibson, "I have been in dialogue with the private sector so that our 5 year strategic plan can be one derived by consensus. Overwhelmingly, I heard messages from Financial and Corporate Service Providers:
- Cut the Red Tape in the applications process;
- Address inefficiencies at the Registrar General’s Department;
- Streamline the KYC requirements;
- Let us know this administration’s policy on IBCs.
"Let me say a few words in response to these points. In doing so, I ask you to remember that I speak as a promoter of financial services, not as a regulator. Having said that, as you will have seen in relation to the OECD accounts letter, this administration is making every effort not only to encourage public/private sector dialogue but also to let it be seen that there is interministerial dialogue. While we each perform our distinct roles, The Ministry of Finance, the Central Bank and my Ministry will continue to cooperate and communicate with each other and where possible, together with industry.
"Cut the Red Tape in the applications process. This applies to many agencies, not just the Inspectorate of FCSPs. My Ministry discovered that many applications are incomplete when submitted. The problem is that there is neither speedy response to address this situation and project management systems are either not in place or are not followed. We propose to address this as follows: (a) by reevaluating the application forms to ensure clarity and completeness; (b) tightening up on project management systems and training and retraining those who utilize them; and (c) working closely with FSCPs encouraging them to train and retrain their staff.
"Address inefficiencies at the Registrar General’s Department. As previously indicated, we propose to address this by a full computerization of the Corporate Registry by December of this year and to make utilization of its services web based.
"Streamline the KYC requirements. We have requested a meeting with industry in a forum similar to that of the OECD accounts consultation. In this way, the Ministry of Finance, the Central Bank and my Ministry can all hear from and respond to observations and requests. Also, the government and the Central Bank, so far as is possible, will be seamless in our proposals, which we want to ensure comply with our policy of being “blue chip, well regulated and cooperative" and our international obligations.
"Let us know this administration’s policy on IBCs. IBCs, like companies incorporated under 1992 Companies Act are Bahamian legal entities. We do not intend to revoke the IBC Act. Dialogue with industry makes at least 2 things clear: (a) industry feels that there was not sufficient consultation with industry in 2000 when the 11 pieces of legislation were rushed through and (b) as a result there are many lacunas in the Act. These make it difficult, if not impossible for lawyers to advise with certainty. In this light, we do intend to review the Act."
Later in the month, the Bahamian Attorney General, and recently appointed head of the Caribbean Financial Action Task Force (CFTAF), Alfred Sears revealed that the Bahamas had so far spent around $35 million implementing and maintaining its anti-money laundering regime.
Mr Sears insisted to fellow CFTAF ministers: 'Having borne this high cost of implementing the international standard against money laundering, we insist on equality of treatment of all countries, including FATF member countries,' adding that:
'While the Bahamas has managed the costs of implementing this new regulatory regime with minimum domestic instability, other countries have found it considerably more difficult to make these adjustments.'
Mr Sears outlined the various pieces of legislation put into force by the Bahamian government, and concluded that:
'We must be determined in the fight against money laundering. The Bahamas, however, takes pride in the fact that it is a well regulated financial centre, committed to the highest standards in the provision of financial services and is serious about the integrity of its financial services sector.'
In November, Allyson Maynard Gibson outlined the new legislation planned by the Government, and improvements expected to be implemented in KYC and other compliance procedures.
Emphasizing that the Ministry's 5 Year Strategic Plan recognized the need for The Bahamas to “deepen its bench” if it intends to remain strong and grow, the Minister said that new legislation would be tabled to enable The Bahamas to provide new and better services and products such as e-commerce, captive insurance, foundations, Protected Cell Companies, pensions products (domestic and external), an Aircraft Registry, and an Arbitration Centre.
Ms Gibson revealed that there had been complaints about the lack of coordination between the regulators and the resulting inconvenience, red tape and expense. She said that the Bahamas now had 4 primary regulators and 1 supervisory body – the Central Bank, the Securities Commission, the Registrar of Insurance, the Inspector of Financial Services, and the Investors and Compliance Commission.
The Minister said that the regulators had executed a Memorandum of Understanding, which sought to ensure:
- Co-ordination with on site inspection – a single team of regulators will conduct inspections rather than separate teams following each other with the resulting disruption of and cost to the business;
- Acceptance of due diligence competed by other regulatory bodies. The acceptance by one regulator that an investor or subject of its jurisdiction as a fit and proper person, in the normal course of events, will be accepted by other regulators. If an application requires the attention of several regulators, common information requirements once accepted by the lead regulator will be accepted by all and only additional information specific to the other regulator will be required from the other regulator.
Then Prime Minister, Perry Christie warned that although the immediate crisis appeared to be over, the jurisdiction was likely to come under continued pressure from the OECD and the FATF, and also from the United States as a result of the Patriot Act, Qualified Intermediary requirements, and the Sarbanes-Oxley Act, saying: 'The actions of the OECD will continue and we can only expect more regulations and pressure to comply with their initiatives.'
The Government Further Delays The KYC Deadline
In December 2002, the Bahamian government said it planned to extend the deadline for local financial institutions to apply KYC procedures to existing clients from the end of 2002 for a further twelve months. Allyson Maynard Gibson explained that the requirements were too onerous in many cases, and the government was planning amendments to the legislation to simplify them.
Introducing the amendment to the deadline, the Minister announced that the the government had received extensive and unanimous representation from the industry to extend the deadline for the verification of existing customers from 31st December 2002 to 31st December 2003.
'There are a number of other amendments that the industry is seeking and which will in due course be brought forward,' said Ms Gibson. 'We expect to present a comprehensive schedule of amendments in this regard within the early part of the first quarter of next year.
'The amendment is urgent because section 6(6) provides that where a financial institution has not verified an existing customer by 1st December 2002, the account of that customer must be transferred to the Central Bank. Financial Institution is widely defined to include banks, trust companies, mutual fund administrators and operators, casinos, insurance companies, lawyers, real estate brokers, cooperatives, financial and corporate service providers, car dealers etc. Due to the onerous requirements to produce documentary evidence placed on clients of financial institutions, the compliance level for existing clients has been fairly low. Indeed, as at October 2002, only 229,001 accounts had been verified of 538,861. That is approximately 57.5% of all accounts that would have to be to the central bank. This does not include other unverified accounts of others defined as financial institutions under the Act.
The Minister made it clear that the proposed amendments in no way weakened the Bahamas' commitment to effective regulation, observing that:
'Very clearly, no serious financial centre and certainly not The Bahamas, whose credentials are well established and whose vintage is almost 60 years, could be taken seriously if it did not do as we have done i.e. make clear its condemnation of money laundering, terrorist financing or any other use of its system of launder proceeds of nefarious trade. These illicit activities undermine the foundation of the country's financial system and the world's banking system.
We do not support drug trafficking.
We do not support money laundering.
We do not support terrorist financing.
'At the end of October, the IMF mission conducted a module II assessment of our financial services sector, with particular emphasis on our anti-money laundering and combating terrorist financing regime. Again this exercise which involved, like the CFATF mutual evaluation, private and public sector participation, also focussed heavily on areas for rationalising what has come to be regarded in some quarters as a cumbersome framework. This observation is especially true of the KYC requirements for verification of existing accounts.
Speaking during the debate on the extension of the Know Your Customer (KYC) deadline to December 2003 in the Bahamas, Hubert Ingraham warned that despite being in compliance with the FATF's anti- money laundering recommendations, the jurisdiction was likely to face continued scrutiny from the multilateral organisation.
The Bahamas Sails Into Calmer Waters In 2003
In February 2003, chairman of the Bahamas Financial Services Board at the time, Michael L. Paton predicted a busy year ahead for the jurisdiction's financial services centre.
Welcoming the fact that the Bahamas was not on any of the international 'blacklists' which had posed such a threat in recent years, Mr Paton nevertheless observed that: 'There are several storms on the horizon, however, which will have to be closely tracked, including the proposed FTAA agreement and its impact on financial services.'
The then BFSB chief went on to add that: '2003 should be a very active year for the Bahamas financial services industry. The short-term legislative agenda contemplates, inter alia, new investment funds legislation, foundation legislation, protected cell legislation and netting and set off legislation.'
'The purpose of the proposed new legislation is to demonstrate that the Bahamas is an attractive jurisdiction for the domiciliation of investment structures and that Bahamian law provides certainty and clarity with regard to these structures.'
Mr Paton also revealed that the Bahamian wealth management sector was undergoing a major shift.
'Within private banking the emphasis is now shifting to investment management, which generates significant fees for private banks. The new model of private banking includes a variety of structured banking products, which facilitates access to investment products hitherto unavailable to the majority of private banking clients,' he explained.
In April of that year, Attorney General Alfred Sears confirmed that an Act allowing bilateral tax and information exchange with the United States was in its first draft. It was to commit the two nations to sharing information on criminal matters by 2004 and on civil proceedings by 2006.
Tax and Information Exchange Agreements (TIEA) are considered an essential weapon in the ongoing fight against money laundering, terrorism and general financial crime, Mr Sears explained at the time, talking to the Bahamas Institute of Financial Services, but added that any other OECD nation seeking a TIEA with the Bahamas would have to engage in similar bi-lateral negotiations.
The Bahamas remained committed to selling itself as a "responsible and significant player" in the international finance industry, Sears assured the banking representatives.
The Attorney General explained that there were a number of main commitments in the broader area of transparency that the Bahamas was obliged to adhere to. These included: revealing when required beneficial ownership information to the tax authorities in the case of companies, partnerships and trusts; maintaining audited accounts to internationally accepted standards; and allowing access to banking data for the Bahamian authorities in respect of the TIEA rules.
Addressing concerns that these extra regulations could cause a flight of capital away from the country, Sears repeated that the government expected competing jurisdictions to have similar commitments in place by the time the Bahamas was required to implement such provisions.
In May of that year, Mr Sears was able to report that the OECD (Organisation for Economic Cooperation and Development) appeared to be making good on its promise not to impose sanctions on non-members that were not imposed on OECD member states. The Attorney General revealed that he was still critical, however, of the organisation's record on its commitment to the level playing field principle, which he observed: "remains the major challenge of the OECD's harmful tax project."
In his role as Chairman of the Caribbean Financial Action Task Force (CFATF) Mr Sears urged UN intervention to ensure that anti-money laundering principles were fairly applied to all countries. Speaking to lawyers at a workshop for Central Bank Lawyers on the Prevention of Money Laundering and Terrorist Financing, Sears said that pressure was being brought to bear on the FATF to host a forum under the UN's umbrella to seek agreement on the issue.
Sears argued that there had not been a level playing field with respect to regulatory requirements in FATF and non-FATF member nations, a situation that he said was unfair and must be changed.
"Some members of the CFATF, under the direction of the NCCT Initiative (Non-Cooperative Countries and Territories), have abolished or immobilized bearer shares, nominee directors, and numbered bank accounts and have regulated the gatekeepers such as lawyers, accountants, stockbrokers and real estate agents," Sears observed.
"However, in FATF member countries, bearer shares, nominee directors, and numbered accounts are allowed and the bureaux de change and gatekeepers such as lawyers, accountants, stock brokers and real estate agents are not regulated."
The implementation of a myriad of new regulations had cost some jurisdictions a considerable amount, according to Sears, who revealed that the extensive new rules imposed on the Bahamas had cost $35 million by that point. In addition, large sums were still being spent by the Compliance Commission, the Inspector of Financial and Corporate Service Providers and the Inspector of Banks and Trust Companies, amongst other organisations, the Attorney General announced. He added that this was also the case in other regional jurisdictions, and was being made all the more difficult by current economic conditions.
"The economic downturn across the region, the decimation of the offshore banking sector in some jurisdictions is causing governments' revenue to dwindle, and therefore the ability of regional governments to support the new anti-money laundering regime and combat the financing of terrorism regimes may be placed in jeopardy since public sector and private sector officials can be easily suborned by the blandishments of the wealth, power and influence of the criminal gangs. This would make the work of the CFATF more difficult," Sears warned.
Therefore, some measure of outside assistance was required to help the Caribbean region in this regard, the CFATF chairman concluded. As a consequence, the organisation was lobbying the IMF, the World Bank, the Caribbean Development Bank, the Inter-American Development Bank, Cariforum and the European Union for help with technical assistance and training.
Backwards And Forwards In 2004
In early 2004, a Memorandum of Understanding (MOU) was signed by director of AUSTRAC (Australia's anti-money laundering regulator and specialist financial intelligence unit) Mr Neil Jensen, and the director of the Financial Intelligence Unit of the Bahamas.
In March of that year, the FATF said it was pleased by the Bahamas' progress on legal assistance treaties. Attorney General Alfred Sears said: "The executive director of the CFATF (Caribbean Financial Action Task Force) informed me that the Financial Action Task Force members are generally pleased by the progress of The Bahamas in dealing with judicial requests."
"Canada, France, the United Kingdom and the United States of America all indicated that they were pleased with the significant progress made by The Bahamas in responding to outstanding MLAT (Mutual Legal Assistance Treaties) and other judicial requests," explained Mr Sears.
However, on outstanding regulatory matters, the United States reported that insufficient progress had been made, the Attorney General revealed. Sears noted that the Central Bank of the Bahamas was in possession of six outstanding requests from US financial regulator the SEC (Securities and Exchange Commission) relating to information on accounts held with banks licensed in the jurisdiction.
However, the FATF summed up: "While the Bahamas has shown significant progress in many areas, the FATF will continue to monitor the Bahamas as concerns persist concerning the Bahamas' ability to fully cooperate internationally."
In September 2004, the cause of financial confidentiality took a blow when a Dallas, Texas court ordered that the settlor of a Bahamas trust, John Eulich, should pay a fine of US$5,000 a day until he complied with a court order to supply trust documents to the Internal Revenue Service. After 30 days, the daily fine was set to increase to US$10,000.
When the IRS served a formal request for documents from the trust, Mr Eulich refused to provide the documents and claimed that he had no control over the trust and had exhausted his powers to try to get the documents. Judge Sam A Lindsay of the District Court disagreed, holding that the Settlor could still attempt to get the documents from the trust by appointing new administrators and by filing a lawsuit in the Bahamas. At any rate, the Court stated, it was not going to recognize the Settlor’s “impossibility defense” because the impossibility was self-created, i.e., the Settlor’s own drafting caused the impossibility.
The IRS was investigating Eulich and his wife, Virginia, for the tax years of 1995, 1995 and 1997, and as part of its investigation, sought documents relating to the Bahamian trust, the Mona Elizabeth Mallion Settlement Trust No. 16, and to various corporations controlled by the Trust. To that end, the IRS issued formal document requests and summonses seeking the information.
The Eulichs gave their 'impossibility' defence in 1999, filing an action to quash the document requests relating to the Trust, and the Government subsequently filed counterclaims seeking to enforce the summonses. In 2002, a Magistrate Judge recommended enforcement of the IRS's requests, but both the Eulichs and the government objected to various terms of the Judge's ruling. In a Court of Appeal hearing in 2003, the judge excluded Virginia Eulich from the action, but affirmed the enforcement order against John Eulich.
On June 27, 2003, the Government filed a Motion to Hold Petitioner in Contempt of the Court's 2002 Order of Enforcement, and after a hearing on March 12, 2004, the Magistrate Judge recommended that the court hold Eulich in civil contempt of court, imposing a fine of US$1,500 a day pending production of the documents. Once again, both parties objected to the findings.
The judge at the later hearing (18th August) imposed the larger fine in response to the government's objection on the grounds that the trust's assets of between US$70m and US$100m were or could be generating up to $14,000 in interest a day. The judgement contains a detailed and highly interesting discussion of various aspects of Eulich's efforts - or otherwise - to comply with the terms of the IRS's requests, by no means entirely in the government's favour.
Developments In 2005-06
In May, 2005, the Central Bank of the Bahamas announced the release of new Guidelines on the Prevention and Detection of Money Laundering for Licensees for industry consultation, as follows:
'The amendments made in December 2003 to the Financial Transactions Reporting Act, 2000 and the Financial Transactions Reporting Regulations, 2000, had the effect of facilitating a risk-based approach to customer due diligence on the part of financial sector institutions. Consequently, the anti-money laundering guidelines issued to licensees of the Central Bank by the Financial Intelligence Unit (FIU) required revision in line with the above statutory amendments.
'These draft Guidelines seek to address customer due diligence issues arising in respect of, inter alia, foundations, investment funds, segregated accounts companies, financial and corporate service providers, as well as the treatment of accounts in existence prior to 29th December, 2000. The draft Guidelines do not address suspicious transactions reporting which is to be addressed by the FIU.
'The objective of these Guidelines is to provide assistance to licensees in determining appropriate measures for verifying customer identity. The Guidelines set out those procedures and practices which the Central Bank considers to be "best practice" for verifying customer identity.'
It was reported in June 2005 that the Swiss Prosecutors Office had accused the Bahamian regulatory authorities of failing to give "a useable response" to a request for assistance in a three-and-a-half year investigation into the Al-Taqwa network of companies, which has been accused by the United States of financing several Al-Qaeda terrorist operations.
However, since the banking arm of the Al Taqwa organisation ceased operations in the Bahamas in 2002 as the result of a government crackdown on 'brass plate' banks with no physical presence in the jurisdiction, and given the wide-ranging geographical reach of the organisation's network, the report concluded that the Central Bank of the Bahamas would, in all probability, not have been able to materially assist Swiss investigators.
The Swiss authorities called a halt to their investigation in June 2005, after the Federal Criminal Court ordered it to either prosecute the Al-Taqwa Management Organisation, which has since been renamed Nada Management Organisation, or cease its probe. According to the Prosecutor's Office, there was insufficient evidence for the case to go to trial because "several key elements" were missing in the chain of evidence.
However, in a parting shot, the Prosecutor's Office accused the Bahamas of hampering the investigation by failing to respond to a request for information.
The Swiss authorities cooperated with several other jurisdictions during the investigation, including neighbouring Liechtenstein, which froze the accounts of an affiliate firm, the fiduciary company Asat Trust, and Saudi Arabia, where the group was said to hold key accounting documents. In addition Al-Taqwa's presence was suspected in numerous jurisdictions, both onshore and offshore, such as Italy, Saudi Arabia, Jersey, Isle of Man, Turkey, Kuwait, the United States, Germany, Belgium, Albania, Austria, Bahrain, Singapore, Thailand, Bangladesh, and Pakistan.
The Al-Taqwa organisation, which operated along Islamic principles, was founded in 1988 by its Egyptian-born managing director, Youssef M. Nada, and his Syrian-born associate, Ali Himmat. It was based in the southern Swiss canton of Ticino until being liquidated in December 2001.
It was announced in October, 2005, that the Bahamas had been removed from the Financial Action Task Force’s monitoring list of countries with weak anti-money laundering or terrorist financing laws.
Attorney General, Alfred Sears said that the process of complying with FATF demands had been lengthy and costly, but had led to mainly positive changes for the islands' financial industry.
Minister Sears said the years of working to remove the Bahamas from the FATF’s list had led to the build up of a remarkable level of expertise, and that the Bahamas' Director of Public Prosecutions hasd been recognized by the FATF as “a specialist”, assisting with the evaluation of other countries.
Speaking from New York City, Dr Gilbert NMO Morris, who has been a long-time commentator on the Bahamas' financial regulatory systems, suggested that there was nothing significant in the FATF’s decision to cease its monitoring of the Bahamas. He said: “I would have found it more interesting if The Bahamas - given its long history in this industry – had ceased its monitoring of the FATF”.
In February, 2006, the financial authorities in The Bahamas defended the jurisdiction's anti-money laundering controls and legislation after law enforcement agencies arrested the head of a Bahamas-based financial services firm, Dominion Investments, for allegedly laundering more than $1 billion derived from tax evasion, drug trafficking and other crimes.
In a statement addressing the ramifications of the Dominion Investments affair, the Securities Commission of The Bahamas said that the jurisdiction had an "excellent record" on combating money laundering dating back to 1987, when The Bahamas first criminalised the proceeds of drug trafficking with the enactment of the Tracing and Forfeiture of Proceeds of Drug Trafficking Act.
The Commission also stressed that The Bahamas became the first country to ratify the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, and followed this up with more comprehensive anti-money laundering legislation in 1996 which increased the offences to encompass proceeds of other crimes besides drugs.
"Anti-money laundering procedures in The Bahamas are rigorous and are enforced," the Commission stated.
However, the statement added that no jurisdiction "is immune to the risk of criminal activity".
“Our task is then to limit the damage from any such activity when discovered and to establish if there are wider lessons for the future," the Commission noted.
An indictment unsealed in Manhattan federal court charged that from approximately 1998 through December 2005, Tremblay had used Dominion Investment accounts to receive hundreds of millions of dollars in proceeds from international narcotics trafficking, securities fraud scams, income tax evasion, mail and wire fraud schemes, and bank fraud, among other crimes.
Tremblay was then said to have laundered the illicit funds by transferring them into United States bank accounts and offshore bank accounts in Canada, the Bahamas, and elsewhere around the world.
According to a comprehensive global money laundering report by the US State Department issued in March, 2006: 'money laundering in the Bahamas is related to financial fraud and the proceeds of drug trafficking. Illicit proceeds from drug trafficking usually take the form of cash or are quickly converted into cash.
The report continued:
'The strengthening of anti-money laundering laws has made it increasingly difficult for most drug traffickers to deposit large sums of cash. As a result, a new trend has developed of storing extremely large quantities of cash in security vaults at properties deemed to be safe houses. Other money laundering trends include the purchase of real estate, large vehicles, and jewelry, and the processing of money through a complex national or international web of legitimate businesses and shell companies.
'The GCOB has enacted substantial reforms that could reduce its financial sector’s vulnerability to money laundering; however, it must steadfastly and effectively implement those reforms. The Bahamas should provide adequate resources to its law enforcement and prosecutorial/judicial personnel to ensure that investigations and prosecutions are satisfactorily completed, and requests for international cooperation are efficiently processed.'
Developments In 2006-07
In March, 2007, the authorities in the Bahamas were reported to have alerted Nigeria's Economic and Financial Crimes commission to a bank account belonging to a former Nigerian regional governor holding US$5m of illicit funds.
The EFCC's chairman Nuhu Ribadu said he could not disclose the name of the individual since the case was sub judice, but that the person concerned was planning to stand in next month's governorship elections.
The Commission was set up by President Olusegun Obasanjo in 2001 to fight corruption. Ribadu said that many of Nigeria's 36 state governors had been investigated for corruption, with four having been removed from office. He said the agency planned to use the Constitution to prevent indicted individuals from standing in the elections.
Said Ribadu: "We identify such monies all over the world and make the request and freeze them after getting restraining order against such monies. When the whole process is complete then the monies will be returned to Nigeria."
"The laws have made it possible to trail and follow all illicit wealth. No such wealth can be hidden again today. It will be traced and recovered and the EFCC has the capacity and is in a position to trace all financial transactions locally and internationally. It is therefore fruitless to attempt to hide assets. The EFCC international networks are also far reaching."
In national elections held in May 2007, Bahamian voters threw out the government of Perry Christie in a 90% turnout and brought back former Prime Minister Hubert Ingraham's Free National Movement, with 24 of the 41 House of Assembly seats.
Outgoing Prime Minister Perry Christie's Progressive Liberal Party had campaigned on its economic record, but the FNM attacked the government on ethical grounds.
In October 2007, meanwhile, Bahamian Attorney General, Claire Hepburn told a conference that the jurisdiction's national strategy for the prevention of money laundering and terror financing (AML/CFT) was central to the Bahamas's goal of sustaining its place as a well-regulated financial services jurisdiction.
“It is accepted that the first step in the fight against money laundering must be the enactment of effective anti-money laundering and financing of terrorism legislation," Sen. Hepburn, who is also Minister of Legal Affairs, told the seminar hosted by the Bahamas Financial Intelligence Unit (FIU).
Commenting on the series of legislative and regulatory initiatives to strengthen the country's anti-money laundering regime implemented by the Bahamian authorities since 2000, including the Anti-Terrorism Act passed in 2004, the Attorney General noted that further legislative amendments may become necessary in the future to address both local and global developments.
However, Hepburn stressed that when determining the need for any such changes, the government’s overriding consideration will be to act in the best interest of the Bahamas and its people.
The Bahamas now has an ad hoc 'Task Force' which serves to review and make recommendations to the government on AML/CFT matters at a policy level. Comprised of representatives from various government agencies, the Task Force meets on a monthly basis, with special meetings scheduled as necessary. Efforts are underway now to formally establish the Task Force by way of legislative statute, positioning it as an “umbrella” review group, Hepburn explained.
Developments in 2008-09
In January 2008, the International Monetary Fund (IMF) concluded that The Bahamas' financial system remains "sound and well regulated."
"They (the IMF Directors) commended the authorities' efforts to further strengthen the regulatory and supervisory framework and bring it to international standards, including by modernizing the regime to combat money laundering and terrorism financing and introducing a risk-based approach to supervision," an IMF Executive Board statement announced.
Wrapping up a debate on proposed amendments to the Central Bank of the Bahamas and the Banks and Trust Companies Acts, which focus on the regulation of Money Transmission Business (MTB) services like Money Gram and Western Union, Prime Minister Ingraham would frustrate efforts to launder money and bring the Bahamas into compliance with the Financial Action Task Force’s (FATF) Special Recommendation VI on alternative remittances.
The FATF Recommendation states that: “Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all FATF Recommendations that apply to banks and non-bank financial institutions.”
The Recommendation goes on to state that each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.
“There was a time,” the Prime Minister noted, “when the financial services sector enjoyed the unanimous support of all sides of the House and we always agreed to legislative changes and initiatives because both political parties determined that the financial services sector was a sector that was in the interest of the Bahamas."
“A divide took place after the year 2000 and we are still following along that path,” he continued. “Hopefully the time will come when there will be bipartisan support for legislative and policy initiatives related to the financial services sector because it is very important for the sector to have certainty that irrespective of which political party is in office, there is a commitment to the sector; to regulate it and have policies that are consistent and are known and that are not easily changed.”
Ingraham’s call for bi-partisan cooperation foreshadowed his responses to questions and criticisms levelled by the Opposition during debate on the Bills.
Ingraham confirmed that the proposed legislation is intended to rationalize and simplify the regulatory framework for stand-alone money transmission businesses operating in the Bahamas by streamlining the supervision of MTBs in the Bahamas under the regulatory authority of the Central Bank.
In February 2008, The Bahamas sought the cooperation of the Dutch government in the field of financial services in the hope of securing support to secure for a level playing-field for financial services regulation within the OECD.
The announcement was made by Bahamian Governor General Arthur D. Hanna as he accepted Letters of Credence from Christiaan Mark Johan Kroner, non-Resident Ambassador of the Kingdom of the Netherlands to the Bahamas, at a ceremony at Government House on 7th February.
Hanna noted that the Netherlands Antilles and Aruba form an integral part of the Kingdom of The Netherlands, which like the Bahamas, is built on tourism and financial services.
“The Bahamas would like to embrace opportunities to fortify our relations in these areas,” the Governor General remarked.
“We, therefore, count on the Kingdom of The Netherlands to ensure the OECD’s regulations on financial services are fair, just and equitable for all,” he went on to add.
In March 2009 the Bahamas and Canada signed an Asset-Sharing Agreement, formalising an arrangement to confiscate the proceeds of drug trafficking, money laundering and other criminal activities.
In March 1990, both governments entered into the Mutual Legal Assistance in Criminal Matters Treaty. This treaty facilitates the gathering of evidence and intelligence in the investigation and prosecution of criminal offences. It also enhances the capabilities in the confiscation of the proceeds of crime.
“Mutual legal assistance treaties are concluded between two countries for the purpose of gathering and exchanging information in an effort to enforce criminal laws and confiscate the ill-gotten gains of criminal activity," said Minister of Foreign Affairs Brent Symonette.
“Notwithstanding the excellent cooperation that already exists between the Bahamas and Canada with regard to sharing such assets even in the absence of a formal agreement, in 2001 our governments commenced negotiations on an Asset Sharing Agreement to formalise the arrangement,” he added.
The aim of the agreement is to improve the effectiveness of law enforcement in both countries in the investigation, prosecution and suppression of crime through the tracing, freezing, seizure and forfeiture or confiscation of assets related to crime and the creation of a framework for sharing the proceeds and disposition of such assets.
“Despite our limited resources, the Bahamas government remains committed to fighting the war against drugs and other criminal activities and prosecuting those criminals that transcend international borders," Symonette continued.
“Cooperation between our governments in joint criminal investigations such as narcotics trafficking and money laundering envisaged by the Mutual Legal Assistance Treaty has been mutually beneficial to both our governments," he added.
Pursuant to the 1988 United Nations Convention Against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the government of The Bahamas implemented the Proceeds of Crime Act 2000, where Sections 52 and 53 provide for the establishment and administration of the Confiscated Assets Fund.
On March 25, 2009, Bahamian Prime Minister and Minister for Finance Hubert Ingraham reaffirmed the Bahamas’ commitment to the OECD’s standards of transparency and exchange of information in a statement made before the Bahamas' parliament.
Ingraham, noting the Bahamas’ adherence to the OECD standards on March 15, 2002, stated:
“My government is satisfied that much progress has been made toward the establishment of a ‘level playing field’ which we sought in 2002. It is clear that the OECD standards of transparency and exchange of information are being accepted by OECD member countries and by those non-member jurisdictions which provide financial services similar to those provided in the Bahamas.”
Referencing conversations with the Bahamas Financial Services Board (BFSB), the Association of International Banks and Trusts (AIBT) and the financial services industry generally, Ingraham delivered the following statement on behalf of the jurisdiction:
“The Bahamas notes significant recent progress towards the adoption of standards on tax transparency and information exchange set by the Organization for Economic Co-operation and Development. The Bahamas reaffirms its commitment recorded in a March 2002 agreement between The Bahamas and the OECD. The Bahamas recognizes significant advances in commitments to broader application of OECD standards of transparency. The Bahamas is ready to negotiate and conclude appropriate arrangements to accommodate these OECD standards.”
”It is the intention of the government to enter into negotiations [on tax information exchange agreements] as a matter of priority. There are a number of outstanding requests for the Bahamas to enter into agreements. Each request will be considered on an individual basis,” concluded Ingraham.
At the fifth Summit of the Americas in Port of Spain, Trinidad on April 18, leaders of the Caribbean Community (Caricom) met with members of the US House of Representatives Financial Services Committee and a Congressional delegation led by Chairman of the House Ways and Means Committee Charles Rangel and Chairman of the Western Hemisphere Subcommittee Eliot Engel on the United States’ Stop Tax Haven Abuse Act.
Reaffirming that there is no justification for the United States to name the Bahamas in a 'stop tax haven' bill, Ingraham said the Bahamas does not expect that its name will ultimately appear in such legislation.
Such an initiative could affect the Bahamas to the extent that legislation including the Bahamas on a list of countries regarded as tax havens could negatively affect the country’s reputation as a place to invest and do business.
Ingraham said, “The US Congressmen were not able to provide a justification for naming the Bahamas as a tax haven - the facts do not square with that title. We expect therefore that at the end of the day our name will not appear in any such legislation.”
Prime Minister Ingraham said he previously wrote to Congressman Rangel on the Bahamas’ position, and had also written on behalf of Caricom at the Community’s request.
“I think he gave us sufficient assurances about the bill to cause most of our members to be comfortable,” Ingraham advised, adding: “There will be some additional discussions with the Congress.”
Calling the initiative ‘misguided’ insofar as the Bahamas is concerned, Prime Minister Ingraham explained: “We have cooperated with the United States fully, we have a tax information exchange agreement with them, the Treasury Department and the Internal Revenue Service (IRS) would all certify that all requests made in The Bahamas have been responded to appropriately.”
Ingraham underlined that negotiations on Tax Information Exchange Agreements (TIEAs) with Canada and other countries were underway.
In October, 2009, the Bahamas’ Deputy Prime Minister, Minister of Foreign Affairs and Attorney General, Brent Symonette, presented an amendment to the Criminal Justice (International Cooperation) Act, 2000 in parliament that will allow other countries' tax authorities to gain access to Bahamian tax records in cases that relate exclusively to tax crimes.
Under the 2000 Act, the Bahamas provides assistance in criminal matters to countries with which it does not have a treaty to provide mutual legal assistance. The Bahamas currently has mutual legal assistance treaties with the United States, the United Kingdom and Canada, under the Mutual Legal Assistance (Criminal Matters) Act, Chapter 98.
The amendment, which was adopted by parliament on October 15, will allow the Bahamas to exchange tax information under OECD model treaties with third countries, allowing it to enter into further tax information exchange agreements to gain a place on the OECD "white list" of territories that have substantially implemented the internationally agreed standard.
Under the Act, the Attorney General is designated as the authority to receive requests, which emanate from a court or tribunal exercising criminal jurisdiction, or a prosecuting authority, or any other authority which appears to him to have the function of making requests of this nature.
The Act stipulates that the court, tribunal or authority should ensure that an offence under the law of its country has been committed or that there are reasonable grounds for suspecting that an offence has been committed before submitting information to aid in the investigation of a tax crime by a third country’s authority.
“This change to the law of the Bahamas is in line with prevailing international standards,” Symonette explained. “There has been pressure from international organizations, namely the Organization for Economic Cooperation and Development (OECD), for offshore countries to increase the transparency in tax structures, facilitate requests for information on tax matters, and assist countries in tax enforcement initiatives.”
“The Bahamas has always held in the highest regard the international legal principles of comity and cooperation. Thus, the Bahamas is now seeking to extend the scope of the Criminal Justice (International Cooperation) Act, to provide for assistance to be granted to foreign countries in tax matters.”
In March 2002, the Bahamas made a commitment to improve the transparency of its tax and regulatory systems and to establish effective exchange of information for tax matters with the OECD. The Bahamas currently has three tax information exchange agreements (TIEAs), with the United States, Monaco and San Marino. It must conclude 12 TIEAs before being recognized as a territory that has substantially implemented the OECD standard.
“The amendment to the Criminal Justice (International Cooperation) Act to remove the restriction of the Bahamas not being able to provide assistance in requests relating to criminal tax fiscal matters is a necessary step to achieving the goal of effective exchange of information in tax matters,” Symonette said. “The Government is committed to implementing the standards of transparency and information exchange in tax matters as developed by the OECD, and providing the fullest measure of cooperation in requests relating to tax matters.”
In another announcement this week, the Bahamian Prime Minister, Hubert Ingraham, said that the territory had concluded technical agreements with eight additional countries. He added: “We expect to be in a position to begin signing TIEAs during the period beginning the last week in [October] leading up toward the end of this year."
“We are not yet in a position to publicly disclose the names of the countries that we have concluded technical agreements with because they too, have their own internal processes that they must go through in order to conclude formal TIEAs," he concluded.
In March, 2010, The Bahamas achieved a place on the Organization for Economic Cooperation and Development (OECD's) ‘white list’ following the signing of Tax Information Exchange Agreements (TIEAs) with the seven Nordic economies of Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden, on March 10.
The Bahamas had previously signed eleven such agreements – including agreements with important regional and economic partners Mexico, the United States and the United Kingdom.
The agreements with the Nordic Council brought the Bahamas' tally of agreements that adhere to the internationally agreed standard on transparency and tax information exchange to 18. For the purposes of the OECD progress report on the implementation of the standard, jurisdictions having signed at least 12 such agreements are considered to have substantially implemented that standard. Accordingly, the Bahamas now moved onto the 'white list', becoming the 22nd jurisdiction to do so since the progress report was first issued in April 2009.
The Bahamas is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and an active member of the Global Forum’s Peer Review Group, and it is participating in a peer review of its laws and practices in this area.
Welcoming the territory’s white-listing, Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration, said: “Given the role that the Bahamas plays in the financial world, I am particularly pleased that they have made significant progress and they continue to expand their network of partners with whom they can exchange tax information.”
In August, 2010, a Supreme Court judge in the Bahamas spoke out against the labeling of tax minimization arrangements in the Bahamas as ‘fraudulent activities’, underscoring that in English and international tax laws tax avoidance by way of tax-efficient planning through the use of tax neutral jurisdictions remains legal despite rhetoric circulating as a result of the Organization for Economic Cooperation Development’s crackdown on so called ‘tax havens’.
The highly complex case, in which the comments arose, relates to a thrown-out request by Ecuadorian banking authorities for assistance in the prosecution of the Ortega family with respect to their ownership of now-collapsed Ecuadorian commercial bank, Banco Continental, a number of Bahamian International Business Companies, and a Bahamian-domiciled mutual fund, Inter-American Asset Management Fund, in a case dating back to the mid-1990s.
Delivering a defense with respect to those operating financial services business from the Bahamas, Justice Neville Adderley, said:
“The court takes judicial notice that the Financial Services Sector has long been recognized as the second most important economic sector in The Bahamas next to tourism in terms of employment and contribution to the Gross Domestic Product.”
“It has gained, and had done so by 1995, an international reputation as a non-tax international financial centre known for bank secrecy which produced numerous financial products including international business companies, trusts, mutual funds, and other vehicles to facilitate the lawful and legitimate avoidance of taxes, proper estate planning, private wealth management, and private banking. This proved attractive to and was extensively utilized by citizens and institutions of high tax jurisdictions including Ecuador.”
“We must resist the temptation to pin a badge of fraud on persons who make use, legitimate use, of offshore jurisdictions like the Bahamas.”
“We see today the manifestation of frustration of the high tax countries in not being able to keep up with the various legitimate schemes devised by and for international financial centres like the Bahamas.”
“Specifically, what some have called a heavy-handed and unilateral approach has been taken by the countries of the Organization for Economic Cooperation and Development (OECD) vis a vis the international financial centres (which when located outside the OECD have the depreciative label of “tax havens”). They have devised various lists: the “white list” “grey list” and the “blacklist”. These initiatives appear to be designed to set new evolving standards of disclosure in financial services required by the OECD countries irrespective of the legislative framework of the respective offshore jurisdictions.”
“It has long been settled in English and international law that there is nothing wrong with a person so ordering his affairs to lessen his burden of taxes by lawfully avoiding (in contradistinction to evading) or otherwise making lawful use of offshore jurisdictions. I would doubt that as a matter of practice or prudence professional advisors who devise legitimate schemes to avoid taxes or otherwise to lawfully avoid provisions of the laws of their countries first discuss the details with the authorities of their countries… as legislators would very likely plug the legal loopholes.”
“The court does not accept, therefore, without other admissible evidence that failure to discuss with or disclose to the regulators of their home countries the details of lawful schemes of avoidance (or which they believe to be lawful) set up in international financial centers like The Bahamas is in itself a badge of fraud or an indication of dishonest intent."