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Financial Model Requires 'Very Serious Rethink'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas requires “a very serious rethink” on the business model for its financial services industry, a leading attorney warning yesterday that the continued push for automatic information exchange and to criminalise tax evasion represented a major “challenge”.

Emphasising that the Bahamas, and its financial institutions, could not continue to build their business based primarily on confidentiality, Michael Paton said this nation would instead have to focus on “providing a rationale for the client being here”.

The Lennox Paton partner, and former Bahamas Financial Services Board (BFSB) chairman, told Tribune Business that the Bahamas needed to become a jurisdiction that offered ‘value added’ services’.

His comments came as the French president, Francois Hollande, yesterday further increased the pressure on the few French-headquartered banks remaining in the Bahamas by threatening to shut down all international financial centres (IFCs).

Mr Hollande’s remarks served as a further indication of the direction being taken by the G-20/OECD, particularly the socialist European states, when it comes to cracking down on capital flight and collecting their tax dollars.

Mr Paton said 
“there appears to be a determined and concerted effort” led from Europe when it came to ‘a new push on tax evasion issues - both the criminalisation of tax evasion, and moving to the automatic exchange of information.

With the US moving to implementation of the Foreign Account Tax Compliance Act (FATCA), and five European nations - the UK, Germany, France, Spain and Italy - doing similar by agreeing to automatically reciprocate the exchange of tax information, Mr Paton told Tribune Business: “You’re getting all these issues coming together.”

While the current global standard was the exchange of tax information upon request, the former BFSB chairman said ‘automatic exchange’ was “starting to gather momentum and it is going to be more difficult to resist that becoming the standard”.

He added: “All this coming together is really going to be a challenge for the industry here and in any IFC.

“The implications for us are that there has to be a very serious rethink on what the business model is for the financial institutions here. It cannot be predicated on confidentiality alone. We have to develop strategies and business models that provide a rationale for the client being here.

“We’re all going to have to be providing some justification for our existence going forward. At the end of the day, if there’s no privacy advantage in the Bahamas versus other financial centres, we will have to compete on cost, service and product,” Mr Paton told Tribune Business.

He added that traditionally, IFCs, even Switzerland, had been able to charge higher fees based on the confidentiality they offered from their locations.

Those days, though, might be coming to an end. Mr Paton told this newspaper: “We are going to have to be a serious centre that provides value-added to the client, and that’s what banks here have to seriously consider.

“Some are doing it already. There’s a harbinger of serious change in the next four-five years.”

He added that given the tax and pension pressures many European countries are under, and citizen clamours for entitlements, these issues were unlikely to “blow over”.

Noting the wider ramifications if the Bahamas signed an Intergovernmental Agreement (IGA) to comply with FATCA’s strictures, Mr Paton said it would open the door for other nations to demand the same treatment.

With the Government receiving information from Bahamas-based financial institutions, then passing this to the IRS, Mr Paton added: “If we put that infrastructure in place, it’s not difficult legislatively or technically to bolt on mechanisms for other countries.”

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