The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas faces “a significant issue” in complying with the latest OECD/FATF tax evasion crackdown because it has no tax code of its own, as the Government seeks to place the financial services industry in “the most advantageous position possible”.

Ryan Pinder, minister of financial services, explained that because the Bahamas had no tax code, and thus did not consider tax evasion a crime, it had a difficulty in meeting evolving “international best practices” as it related to this issue.

The Organisation for Economic Co-Operation and Development (OECD) and its Financial Action Task Force (FATF) affiliate have issued a new standard that seeks to make tax evasion a predicate money laundering offence.

While the standard is evolving it is still likely to be implemented globally over the next several years. It could cause particular problems for the Bahamas and other international financial centres (IFCs) when it comes to legacy business, as large sums now domiciled in this nation may not have been declared to clients’ home country tax authorities.

Describing the new OECD/FATF tax evasion standard as a “big, big issue” that the Bahamian financial services industry would have to “deal with”, one well-known attorney said this nation’s financial institutions had to begin determining how they would comply.

Michael Paton, a former Bahamas Financial Services Board (BFSB) chairman and partner in the Lennox Paton law firm, suggested that Bahamas-based institutions set a threshold, in terms of account size, above which clients would be subjected to enhanced due diligence to ensure the funds were not derived from tax evasion.

And, with the US Treasury Department and Internal Revenue Service (IRS) set to begin implementing FATCA, Mr Paton said the Bahamas would spend the next five-10 years dealing with similar issues as European nations pushed for their own automatic information exchange regimes.

Referring to the OECD/FATF plan to ‘criminalise’ tax evasion and other tax crimes, Mr Pinder told Tribune Business: “The question that arises with that in a country like the Bahamas, with no tax code and where tax crimes are not a criminal offence, is how you define that in the context of international best practices.

“That is a matter up for extensive public consultation. This will be subject, as people would expect, to review and dynamic analysis, especially for a country like the Bahamas with no tax code that has to make a policy determination with respect to international best practices.

“It’s a review and discussion approach the Government will take to comply with international best practices, but position the Bahamas and its financial sector in the most advantageous way possible.”

For his part, Mr Paton said the Bahamas should adopt the approach the US was taking to FATCA (Foreign Account Tax Compliance Act) in moves to comply with the new OECD/FATF standard.

Just as the US had set $1 million as the account size benchmark in FATCA, so the Bahamas and its various institutions should set a threshold above which a client relationship/account would “require you to do extra due diligence to make sure the funds are not a predicate criminal offence for money laundering”.

While the FATF had released no guidelines for its standard yet, Mr Paton told Tribune Business: “This is going to be a big issue, particularly if you are not prepared and ready, as you have to look at existing accounts.

“Once the standard is implemented you have potentially created a whole new class of illegal activity in the Bahamas that was not previously illegal.

“That’s the way I’m starting to think about implementing this. We have to implement this. The question is whether we will have 18 months, 24 months. I don’t know what the true percentage is, but I think we’d have to say: ‘Let’s be honest, a good 80 per cent of the funds in the banking system were at one point undeclared funds’.”

Pointing out that the issues the Bahamas would likely face on FATF/OECD compliance were largely related to legacy clients, Mr Paton told Tribune Business: “The trend is for new funds to be compliant money. The institutions are very strong on that.

“It’s the legacy funds. Fund inflows are coming into the Bahamian banking system as we speak, because people think they’re in danger in Europe. Not all those funds coming in are declared funds.

“There’s a big issue, and we have to be careful to implement this in a reasonable way. We don’t want to have a rules-based, prescriptive approach: ‘This is the law, this is the standard, you show us as a bank you are complying’.”

With the US currently negotiating with 50 countries over FATCA, Mr Paton said every Bahamian institution would need to have a system for identifying US taxpayer clients and reporting them to the IRS, either directly or via a government agency.

FATCA was seeking the automatic exchange of tax information, and alert to the wider implications, Mr Paton said: “Europe is going to want the same thing; all the other jurisdictions are going to want the same thing.

“That’s where I think all the countries are going to engage us; we have to deal with it. I can see the next five-10 year horizon is going to be a continuation of this.

“I don’t think it’s the end of banking in the Bahamas, but it’s going to require everybody to adapt, deal with the issues and there will be new business opportunities. Who’s going to take advantage of those, as it’s not going to be a cheap project to pull off?”