The Tribune

By HUBERT EDWARDS

Until The Bahamas adjusts its business model or approach to delivering financial services it will be vulnerable to the vagaries of international (supra-national) agencies and developed countries seeking to destroy it as an international financial centre (IFC). Until it becomes more responsive to the fact that competitive strategy must be influenced by local stakeholders, the industry's potential economic value will consistently underperform.

In 2018, there was a great flurry of activity as the European Union (EU) targeted The Bahamas and other IFCs over so-called "co-operation on tax matters". This nation was even temporarily "blacklisted" by the EU for allegedly failing to give a strong enough commitment to redressing the 27-nation's blocs concerns over "ring fencing", and corporate entities having a substantive presence in this jurisdiction through which to conduct real business. Following a two-year effort, The Bahamas was deemed compliant by the EU and avoided yet another close call that could have had detrimental consequences for both financial services and the wider economy.

Two years later and we are back at "blacklisting" again, this time on money laundering, terror financing and combating financial crime. The EU has made it clear that The Bahamas will not be removed from its latest listing until it receives the all-clear from the Financial Action Task Force (FATF), the global standard-setter on anti-money laundering matters. Very colourful language was used to describe the latest threat to The Bahamas. According to Carl Bethel QC, the attorney general, senior EU officials and politicians have warned The Bahamas: "We won't take our foot off your neck until you implement a corporate income tax". It was noted that there was "nothing The Bahamas can say or do" to alter the "blacklisting" decision.

Whether we want to acknowledge it or not, there is no way of stopping the EU and others. They will keep coming after The Bahamas. We are all wise enough to understand the end game. For all the groups and countries that level attacks on The Bahamas and other jurisdictions, this is about repatriation of capital or the opportunity to eliminate IFCs as avenues for tax planning, thereby securing more taxes from their citizens. In the final analysis, the financial services industry and the economy will take a hit if the response to this initiative is not effective.

In 2003, the Internal Revenue Services (IRS) unveiled its Offshore Voluntary Compliance Initiative. Back then I wrote, in a paper carried by The Tribune: "This programme, lauded by IRS personnel as sound tax administration, designed to root out tax evasion, carries with it some very serious implications for offshore jurisdictions. So much like the cleverly-crafted PATRIOT Act, the initiative comes armed with the ability to catch the proverbial horse that has escaped while attempting to effectively lock the gate." The underlying principle of that initiative continues to be seen and felt today. However, since then the game has changed. The subtleties are gone and we have now evolved to "in your face" discussions with the admission of having foreign body parts fully planted on delicate parts of our anatomy, a symbolism that has certainly taken on great prominence in recent days.

This is certainly not a positive situation for The Bahamas. The upside, though, is that, such attacks cause decisions which should have been taken long ago to finally get the appropriate attention. The country seems to always be able to extricate itself, albeit temporarily, from the onslaught of these attacks. That, though, is only true when viewed from the discontinuation of whatever listing or action is being taken against The Bahamas. When viewed through the prism of the impact on the financial services industry, every single one has resulted in a loss of business and the sector's slow-but-steady contraction.

The EU's latest move may now have the same effect but with deeper implications. Its timing must be viewed against the backdrop of the current circumstances facing the country. The Bahamas is grappling with a global financial crisis. The largest contributor to the economy, the tourism industry, has seen significant curtailment as a result of COVD-19. While tourism contributes more as a collective, the financial services industry provides higher-paying employment, contributing approximately 27 percent of annual GDP (gross domestic product). COVID-19 has shown how vulnerable the economy is. With tourism's near-term production uncertain, the protection of other industries becomes paramount.

The EU threat also takes on greater significance in light of a projected $1.3bn fiscal deficit for the upcoming 2020-2021 budget cycle, and in the aftermath of Hurricane Dorian's $3.4bn worth of losses and devastation. Recovery from that one storm is still in the rudimentary stages. One thing that should not be lost on anyone is that the tax revenue space for The Bahamas has always been narrow and insufficient; the country runs significant deficits each year. There are questions, therefore, as to whether the current tax regime is effective. Is it serving the country well, and has the different treatment afforded to the economy's domestic and offshore segments affected the country's growth? The questions are: Should The Bahamas pursue a corporate income tax regime that will address the EU concerns? And how will such a regime change impact the viability of the offshore industry?

There is a clear dilemma here, and no one should pretend this is easy for policymakers. There could not be a worse time for the country to be dealing with this issue. However, in my opinion, if the situation or circumstance is properly assessed, analysed and solutions effectively executed, positive benefits could accrue, chief of which is a broadening of the country's tax base. What is clear, though, is that failing to take serious and strategic action will place The Bahamas in an imperiled position. One thing which continues to become clearer is that The Bahamas has to take a deep and well-considered, broad-based look at the financial services industry - and certainly a very clinical look at its tax regime. The way forward demands this. Left undone, the attacks will keep coming with the eventual potential loss of critical mass.

In 2010, I wrote a paper entitled Assessing the strategic approach to growth and development of The Bahamas financial services industry. Part of the opening statement taken from that paper reads as follows: "A careful assessment of various policy making and interest groups within the Bahamian financial services industry will reveal a real and overt aspiration to become, or be seen as, a leading IFC. However, that same careful assessment will quickly reveal there is no clearly articulated, comprehensive and cohesive vision, plan or strategy to achieve this noble objective". Since that time the National Development Plan (NDP) was drafted, but to-date has not been "ratified". While it makes for an uncomfortable discussion in certain quarters, the truth is there is a need to rethink comprehensively the underlying construct and arrangements of the industry.

The Bahamas' recent listing by the EU raises a number of questions. While in many instances the matter has been discussed, abstractly, as another occurrence to be addressed or survived, in my mind there are more fundamental issues at play which go to the heart of the well-being of the country and its economy. What is the strategic outlook for the financial services industry? How will it look after the fundamental shifts that may be needed to address this initiative? Is there a need for a definitive reengineering, reorganising and restructuring of the financial services industry, and what will that look like? Is the Bahamas serious about extending its growth as an IFC in its strictest sense? Is The Bahamas value proposition at risk of diminishing? Can the Bahamas remain competitive? How can it be better structured to balance the need for diversification? If the Bahamas were to see significant loss, what would that mean for the country? How serious is the issue of corporate taxation to the resolution? Is there a national will to move in this direction?

The play book seems to be the same each time The Bahamas happens to find itself on another adverse listing. We do what is necessary to be removed. Unfortunately, in my opinion, the same scenario is likely to play out forever and a day in the future unless there is a fundamental shift in the management of matters impacting the financial services sector, and a serious rethink of the approach to managing the industry that is led from the policy level of the country. I admit that the delicate balancing act required, and the dilemmas faced, are real and therefore there is always the temptation to address the short-term issues only. However, it is only when looked at through a long-term lens that the proper perspective emerges. Again, I am reminded that the current matter is not typical but its occurrence, together with other past events, suggests and underlines the need for a more defined and structured look at the industry and, by extension, the economy.

Remedial responses to these blacklisting initiatives demand a comprehensive and collaborative strategic outlook. We must protect the quality of the economic arrangements within the country on a sustainable basis for its citizens. The continued tactic of ad hoc responses is not sustainable as it plays to the aggressors' objective. Each response erodes aspects of the industry and weakens the economy. The time has long passed for us to become proactive in charting the future of the financial services industry for the next ten, 15, 20 years. The time has come for the adoption of a real strategic approach to growing The Bahamas' financial services industry. There is a clear argument to be made for a nationally appreciated, strategic approach in the management of The Bahamas' financial services sector. We will explore this further tomorrow.

To be continued..................