By David F. Allen Jr
Bahamas Law Chambers
LLM in International Comparative Business Law
Do you consider yourself a gambler? Opening the Bahamian legal system to foreign law firms is just that: A gamble. There is only a small chance (20 per cent, give or take) that opening the legal system to foreign law firms will drastically increase offshore financial services bsiness for the Bahamas.
The ship for establishing the Bahamas as a powerhouse in offshore financial services has already sailed. With the coming into force of FATCA and other compliance-related legislation, offshore financial services have become an endangered species, both locally and globally. Opening the Bahamian legal system will not likely increase the offshore financial services industry in the Bahamas, and will canabilise the business of Bahamian attorneys.
The Bahamas has, per capita, one of the largest (if not the largest) number of lawyers in the world. It has more lawyers per capita than New York city. Recently, it has experienced a decline in its offshore finacial services business. Some have placed the blame for this on the ‘closed legal system’, abn explanation that neglects other, more plausible, reasons.
The presumption that an open legal system is a requirement for a vibrant offshore financial centre is simply not true. Prior to enacting compliance legislation, which eroded bank secrecy and privacy, the Bahamas had a booming offshore financial services sector. But as soon as banking secrecy was removed, the sector’s real deterioration began. The reason for the loss of banking business was not due to a closed legal system, but the passage of laws that killed banking secrecy and privacy.
Two of our main competitors in offshore financial services are the Cayman Islands and Bermuda. Aside from housing international firms, these nations are still British colonies. I would assert that the reason these jurisdictions are so successful at offshore financial services in a post-secrecy world is due more to them remaining British collonies than having ‘open’ legal systems. London has recently been crowned the number one financial centre in the world. It would follow that British colonies have a clear advantage in attracting a larger portion of London’s high net worth clientele, due to their Crown dependency status. If the Bahamas was still a British colony, it is likely its financial services would be 100 times’ bigger than today.
What if the Bahamas opens up its legal system and nothing changes? What if offshore financial services continue to decrease and banks continue to exit? Is that a risk we are prepared to take? While touting the mantra of open, open, open, the Minister of Financial Services has said foreign law firms will not be able to partake in real estate, family and criminal matters.
If the Bahamas joins the World Trade Organisation (WTO), these restrictions could be considered discriminatory treatment and Judicial Review lawsuits would ensue. Ultimately, foreign law firms would win these suits, and the remaining legal sectors opened.
Further, small Bahamian commercial law firms do not receive the majority of real estate work. Nor do they practice criminal law, so there would be little advantage in reserving these sectors for them. The ‘bread and butter’ of some small commercial law firms in the Bahamas are: Trademarks, personal injury, probates, IBC incorporations, company opinions and commercial contracts. If the doors to these sectors open, large foreign law firms would steal the majority of the work, decimating the private practices of numerous Bahamian attorneys.
While it is true that some well-known Bahamian attorneys have advocated opening the legal system, the majority of them would not be affected, because they are gatekeepers of their respective legal specialties. Foreign law firms would partner with the larger Bahamian law firms, and they would make even more money. What about the smaller law firms, which are the majority of law firms in the Bahamas?
Currently, a boutique commercial law firm in the Bahamas may receive an array of large matters and powerful foreign clients. Small firm practitioners represent multinational conglomerates, including broadcast companies, automobile manufacturers and even movie stars. They receive a significant number of personal injury matters from tourists, and trademark matters from foreign companies. If the Bahamas legal system opens, US clients would seek US law firms resident in the Bahamas, instead of seeking a Bahamian attorney.
There was a brief span of time a few years ago, before multiple offshore banks closed, when it may have been advisable to open the Bahamian legal system to stem the losses, but the ship has sailed, and the window for saving the Bahamas’ offshore financial services industry has shut. It is now inadviseable to believe simply flinging the doors open to foreign law firms will make a substantial difference, as it is unlikely they could rally enough new business to make a major difference to the ebbing tide of offshore financial services in the Bahamas. Rather, foreign law firms would likely be forced to compete and cannibalise the sparse commercial legal work left for Bahamian attorneys.
Moving forward, the Government should tread very carefully before gambling the welfare of its people on a roll of the dice. Before taking the draconian, irreversible step of opening the Bahamas legal system, it should attempt to boost the offshore financial sector through other avenues, such as computerising the companies registry, and advertising and consulting international tax experts on new products and revenue streams. If it does move forward with liberalisation, I would suggest permitting only a small cadre of top foreign tax lawyers to set up shop in the Bahamas; their Bahamian practices should be limited to providing specific tax advice on trusts, foundations, investment funds, foreign exchange companies, FATCA and IRS compliance for US residents.