The Tribune

By The Grand Bahama Chamber of Commerce Board

As the marketplace continues to ponder the implications of regulating web shop gaming in the Bahamas, the Board of the Grand Bahama Chamber of Commerce (GBCC) joins in the ongoing conversation that is no doubt being held at water coolers, dinner tables and lunch rooms across the archipelago. Sharp, and often divergent, arguments form intense public and private discourse regarding the matter. On the one hand, there is a widely-held jingoistic view that the position taken by the majority of the nation’s commercial banks (save for the Government-controlled Bank of the Bahamas) not to accept web shop deposits smacks of discrimination and hypocrisy. But for the very same banks, it is simply a business decision, where the perceived - and very real - risk of accepting such deposits outweighs any real benefits expected to be derived.

All of this occurring after a controversial national referendum or opinion poll, where the Government ultimately had the final say regarding the matter. Whether or not these “politicians”, turned “economists”, anticipated the current dilemma is debatable, but the fact of the matter is, that a real dichotomy exists which, if not corrected in a timely manner, has the potential to once again place the Bahamas on the ‘blacklist’ of international regulators. Simply put, we cannot - and must not - allow this to happen to the financial services sector.

The purpose of this short paper is to take a clear-eyed and dispassionate look at the issue of web shop gaming in the Bahamas and contributeto the national debate. The two major risks that banks face in this moment in our economic history are, firstly, a stymied local economy that, according to recent reports from the Central Bank and Department of Statistics, is characterised by anemic consumer credit growth, credit writedowns and subsequent banking industry lay-offs as institutions rush to adjust cost structures in line with the new ‘slow growth’reality. Second, banks also face a compliance risk and the resulting imposition of heavy fines.

The Department of Statistics recently released the 2014 GDP figures, which show that the economy grew at 0.93 per cent in current prices (1.02 per cenr in constant prices, with 2006 as the base year) - a less than 1 per cent growth rate. Not only is national output downward trending, but average consumer prices are rising faster than GDP growth, largely due to the implementation of Value-Added Tax (VAT) earlier this year. The aforementioned is a key metric that bankers, financial analysts and ratings agencies generally take into consideration when assessing the outlook of the general business environment, now and in the near future.

Therefore, is not surprising that the notion of accepting - or not accepting - deposits from a web shop industry, already deemed “high risk” globally, is not high on the agendas of bank Boards of Directors. Yet these banks are viewed by some in the Bahamian Government, and certain residents and citizens for that matter, as ‘recalcitrant’.

It is the considered view of the GBCC’s Board that gaming is a counter cyclical industry where, during the valley of recessions, high unemployment and wage regression, this sector itself experiences an increase in demand as lower incomes increase the propensity to gamble more. While gambling (legal and illegal) has been going on for many decades in the Bahamas, let’s focus on the proliferation of ‘web shops’ opened between the years 2008 to 2014. It would also be interesting to compute the correlation between the Bahamas’ unemployment rate and web shop participation.Anecdotally, we have seen the increase in web shop locations and brands that have ubiquitously ‘sprung up’. Empirically, we may not be too far off from our anecdotal assumptions.

The aforementioned is not a philosophical investigation into the ‘morality’ or ‘choice’ of individuals that participate in web shop gaming as operators and players, as this is beyond the scope of the GBCC’s Board. Instead, the creation of a new industry - and its impact on national output past, present and future - is of interest. It must be acknowledged that the recent web shop expansion has contributed to employment and rental income for property owners, in as much as the objective of free enterprise is promoted. That said, online gaming is a prohibited business that most international banks elect to stay away from, given its susceptibility to money laundering, reputational risk and the resulting fines.

The GBCC’s Board understands that general noncompliance fines imposed on the global banking industry have reached into the billions recently. So, is it any wonder that banks therefore opt to stay away from enterprises that increase their exposure to such fines? We have assumed that the refusal to accept web shop funds by the majority of banks is a form of blatant discrimination when, in fact, those policies that deem some industries/enterprises ‘un-bankable’, given their inherent risk/reward profile, existed before there was a desire to regulate the industry in the Bahamas.

In the case of banking as it relates to local hotels, the process of gaming usually takes the form of registered guest involvement, thereby identifying who are in the casinos. The source of payment for games (debit/credit cards) is bit more transparent. Also, tourists travelling to the Bahamas with any large sums of cash are prohibited and discouraged from doing so by the countries from which they originate.

An important feature of money laundering is giving illegal activity the appearance of legal means through the financial system. Most tourists that are here on vacation for a few days have no use or interest in the local banks. Their own banks have money laundering mechanisms when their winnings need to be banked. The risk, therefore, is not as great with the tourist and, for that matter, the average ‘Joe’ or ‘Jane’ local numbers players. The real risk resides with the numbers houses themselves, which seek to move copious sums of cash into the banking system. Should international banks operating in the Bahamas take on the risk of being fined in a jurisdiction that has a 1per cent growth rate, when not taking on that same risk in jurisdictions with much higher growth rates? Can the profits made by banks from dealing with gaming operators more than cover the risk of the fines that can potentially be imposed? In April this year, the Wall Street Journal reported that Royal Bank of Canada (RBC) is looking to exit once-promising international wealth management businesses in Latin America and the Caribbean after being swept up in “a net of global money-laundering probes”. This example highlights the fact that financial institutions globally are being closely monitored, and that they are acutely sensitive to money laundering risks.

Additionally, regulation today does not speak to the source of funds yesterday. How was the wealth in the web shop gaming industry amassed? Does this money become ‘clean’ overnight by the simple passage and enactment of legislation? How reliable are the documents produced by the web shop operators evidencing past wealth accumulation? Should the funds, which are presumed to be in the tens of millions of dollars, be placed into the country’s banking system?

One would be curious as to the huge push by the gaming operators and the Government to seek the approbation of the Canadian-owned banks. Is not Bank of the Bahamas sufficient? What about other deposit-taking institutions such as credit unions or financial instruments like Government securities? A fix could be that gaming operators simply bank at and/or purchase the only bank that has expressed a willingness to accept deposits, or start another bank.

The Chamber is an ardent advocate for free enterprise. However, on the business side, what return on gaming deposits would be earned in a banking system paradoxically cursed with excess cash deposits? Very little. What does the placement of tens of millions do to a bank’s net interest margin when credit growth has been tough, and when the one bank that will accept gaming deposits is itself attempting to turn the corner towards profitability? While public pronouncements have been made regarding one international financial institution’s willingness to risk having a correspondent relationship with such a bank, and while the GBCC’s Board accepts the stated position of the Government to-date, what does the general public know about this arrangement in terms of any qualifications or preconditions?

The concerns raised are truly cause for pause by the Government to reevaluate its decision and the implications moving forward. The reality is that we live in a global village, and therefore we as a country are expected to play by the rules or risk potentially being isolated. Some other options that the Government, even now, may want to consider or reconsider, as the case may be, are as follows:

• Establishment of a national and independently managed lottery, having regard to any agreements or undertakings already given to web shops already operating here in the Bahama

• Seizure and confiscation, either by way of penalties or through other means, of all proceeds which cannot be properly supported by the web shop owners as being earned from legitimate business activities;.

• Until the licenses or conditional licenses have actually been issued and as a matter of principle, cause all operators to cease and desist from engaging in any gaming activities. Those operators failing to comply should be immediately disqualified.

• Once full and transparent compliance has been achieved, invite international agencies such as the OECD, the FATF, or the CFATF to carry out a compliance audit, and implement their findings, to minimise the possibility of any regression regarding the advances made with respect to Know Your Customer (KYC) post-2000.