By NEIL HARTNELL
Tribune Business Editor
The US Foreign Account Tax Compliance Act (FATCA) and similar initiatives are “not a death blow or beginning of the end” for the Bahamian financial services industry, a former finance minister said yesterday, although the sector’s near-term growth will continue to be modest.
James Smith, who is also a former Central Bank governor, told Tribune Business that the Bahamian financial services industry was “mentally prepared” to deal with FATCA’s additional due diligence requirements, having been alerted to the issue for some time.
But, given the industry’s diverse business base of foreign-owned and Bahamian institutions, Mr Smith said it was vital that the Government consult it over the proposed Intergovernmental Agreements (IGAs) to determine the “best fit” for FATCA compliance.
Still, noting that many providers were domiciled in the Bahamas for ‘non-tax efficiency’ reasons, the CFAL chairman said these businesses were likely to remain “for quite some time” and be unaffected by FATCA-type regulatory initiatives with global reach.
He added that the Bahamas now had to compete on service quality, rather than regulatory arbitrage and ‘bank secrecy’, as it had done in the past.
Asked whether the Bahamas should go the IGA route to FATCA compliance, given that the US Treasury/Internal Revenue Service (IRS) were already claiming to be negotiating with 50 countries on this issue, Mr Smith said this nation needed to balance its competitive advantage with the need to meet Washington’s demands.
An IGA would likely require Bahamas-based financial institutions to pass information on US taxpayer clients to a Bahamian government agency, which would then forward the details to the IRS.
But Mr Smith cautioned: “The Bahamas has such a diverse client base in terms of licensees, what might work for banking subsidiaries of European banks may not fit very well with Latin American and American banks.
“They need to sit and talk with stakeholders to see what the best fit is to obtain compliance, and at the same time not dilute the strength of the sector.”
Referring to descriptions of FATCA as the US’s existing Qualified Intermediary (QI) initiative “on steroids”, Mr Smith said any impact had already been ‘discounted’ by the financial services industry.
“It’s been on the drawing board for a while, preparations have been made, so I think there’s generally a mental preparedness by the centre far out. It’s not been sprung on us or anything like that,” he added.
The Bahamian financial services industry had been “shying away” from US clients for some time due to the overbearing compliance/regulatory costs and IRS oversight, Mr Smith said.
“My guess is that non-compliant Americans do not constitute a large part of the offshore world for the Bahamas,” he said. “They’ve been doing a kind of ‘weed out’ or making them compliant.”
FATCA’s impact would depend on the nature of business, and client portfolios, held by individual Bahamas-based institutions, with those here for non-tax reasons largely unaffected.
Noting that Bahamian commercial banks held large books of compliant offshore business, Mr Smith said of the US initiative: “I don’t see it as a death blow or beginning of the end.
“The Bahamas is a very mature centre, in the sense that it’s been dealing with clients for some time. They’re established in the Bahamas for non-tax reasons; sometimes it’s easier to do business offshore; asset management, invoicing, mergers and acquisitions. I think that traditional part of the business will remain.”
Still, Mr Smith conceded that “the offshore world as we know it has changed dramatically”, and the Bahamian financial services industry’s growth prospects were modest.
“I don’t see any dramatic prospects for growth,” he told Tribune Business. “The efficient ones will survive, and the surviving units will probably come out much stronger.”
Mr Smith said European banks seemed to be under the most pressure, pointing to the downsizing at UBS (Bahamas) and Credit Agricole, plus departures of BNP Paribas and Finter.
He added, though, that it was difficult to separate global economic woes from regulatory pressures as the factors behind this.
The Bahamas’ history in the industry, US proximity and response time to global initiatives had all worked in its favour, Mr Smith said, but service - rather than regulatory arbitrage - would be critical to maintaining a competitive advantage going forward.