Book Review: Financial Evolution of the Caribbean Community (1996-2008)

Financial Evolution of the Caribbean Community (1996-2008) captures the efforts of the Caribbean Community and its members to manage the demands on financial regulatory frameworks, especially in the context of globalization. The book is an updated edition of the Financial Evolution of the Caribbean Community (1970-1996), edited by Laurence Clarke and Donna Danns. The book […]

By Bruce Zagaris

September 6, 2013

Financial Evolution of the Caribbean Community (1996-2008) captures the efforts of the Caribbean Community and its members to manage the demands on financial regulatory frameworks, especially in the context of globalization.

The book is an updated edition of the Financial Evolution of the Caribbean Community (1970-1996), edited by Laurence Clarke and Donna Danns. The book charts developments in Caribbean financial systems from the mid-1990s to 2008 and identifies the main policies and structural factors influencing their reconfiguration. After the editor provides an introduction and overview of global and regional economic and financial developments, different members of central banks discuss the market and regulatory developments in the financial sector of their respective jurisdictions. The book has individual chapters on the Bahamas, Barbados, Belize, the East Caribbean Currency Union (ECCU),1 Guyana, Jamaica, Suriname, and Trinidad and Tobago.

The Caribbean experience must be viewed in the context of factors affecting the real sectors of the economy; the quality of financial policies; the occurrence of debt, currency, and banking crises in various parts of the world; and the emergence and persistence of a severe recession in the developed countries toward the end of the first decade of the 21st century.

The chapter contributors seek to capture changes in the financial infrastructure and also discuss the challenges facing financial institutions and regulatory systems in the region arising from domestic factors and external influences. The chapter contributors also show that financial innovations driven by technology and market realities are increasingly in vogue and respond to consumer expectations and financial growth, imaginative company structures, unscrupulous managers, new financial products, and a liberalized policy environment that have severely challenged government regulations in recent years, raising issues of confidence and creating instability in some cases. The ineffectiveness of traditional tools of monetary control has also forced central banks to experiment with new instruments to manage liquidity, contain inflation, and defend the exchange rate.

Decline of International Financial Services

The book captures the decline of international financial services as the members of the Caribbean Community have responded to their blacklisting, in some cases, because of the need to revise their incentives and financial regulatory regimes. An example is the Bahamas. At the end of September 1995, 415 banks and trust companies were registered in the Bahamas. The blacklisting of the Bahamas by the Financial Action Task Force (FATF) and the OECD in 2000 resulted in the country’s adoption of new regulations (including minimum physical presence required). These new regulations led to the departure or closure of a number of registered financial institutions. At the end of June 2010, the number of registered financial institutions had fallen to 280. Of this number, 122 held a license to deal with the public, while 158 held licenses described as restricted, nonactive, or nominees. Most of these institutions have an external market (non-Bahamians). A limited number deal with the Bahamian public. Ramesh Ramsaran observed that there are only seven authorized dealers, six of which are clearing banks.2

Ramsaran noted that in recent years countries in the region have tried to promote themselves as centers for offshore or international banks, which are allowed to do business largely with nonresidents. Barbados, Belize, and some ECCU member states3 have attracted a number of such institutions. According to the most recent data (2008) at the time of the book’s publication, the offshore financial sector in Barbados contributed BBD 60 million (2 percent) to government revenue and employed 1,216 people, less than 1 percent of the labor force. In Belize the nine international banks registered there had assets totaling BZD 358 million in 2007. As of the end of June 2010, 280 banks and trusts were registered in the Bahamas, but only a small number of these were licensed to do business with local residents. In the ECCU, the offshore or international sector currently has 41 banks, over 54,000 international business companies, 1,187 trust companies, and 119 insurance companies. The amendments may have diminished the growth in mutual funds’ assets.4

Need for Better Economic Data

One of the issues that is not well addressed in the book is the overall revenue and macroeconomic impact of investments in international financial services. Such investments produce new and annual fees from entities, stamp taxes on documents, fees from real property that executives and employees of financial institutions pay yearly, fees on yachts and motor vehicles, duties on equipment, and other goods brought into countries. One limitation that each country has is the lack of comprehensive studies that show the precise contributions to the financial sector within the context of the entire economy.

An exception is the Bahamas. In 2006 the Bahamas Financial Services Board (BFSB) commissioned a study by Oxford Economics (OE). The study indicated that the direct contribution of financial services to the Bahamian economy then was 15 percent, but total direct and indirect services totaled some 27 percent. It was worth noting that the direct economic contribution of tourism was 21 percent for the same period. Of the 15 percent that was direct contribution of financial services, over one-third was generated by international financial service providers.

The report noted the financial services sector was responsible for oiling the wheels of other industrial sectors, encouraging investment and improving the quality of that investment, providing a secure home for savings and access to capital markets for firms and households alike, as well as providing high-paying job opportunities for Bahamians.

In its final report to the BFSB, the OE confirmed that financial services play a crucial role in supporting the Bahamian economy. This was done both directly, by providing highly rewarding employment opportunities for Bahamians, and indirectly, by procuring from
and providing vital services to other key sectors of the economy, such as tourism and real estate.

The study also produced very specific results regarding job opportunities, the amount of revenue generated by the financial services sector, the intensive training provided by the industry to employees (including more in comparison to tourism), and the fact that activities in the financial services sector bring high-end customers and high-end investment to the tourism industry and real estate industry in the Bahamas.

Policy Interventions

The book illustrates that in some jurisdictions, such as Barbados, the growth of some non-bank financial institutions is a result of policy interventions by the government regarding tax incentives. For example, in 1996 the government introduced tax incentives aimed at encouraging Barbadians to direct more of their savings to the credit unions and mutual funds. The significant expansion resulted in a situation where a few credit unions are approximately the size of the smaller commercial banks and offer similar services to those offered by the banking sector. In that regard, many credit unions now offer debit card facilities and are connected to the same automated banking network as the commercial banks.

Barbadians have also been investing in mutual funds as a result of the income tax amendment in 1996. The tax benefits of holding mutual fund accounts have encouraged some individuals to shift into these assets. The Income Tax Amendment No. 2, 1996-30, allowed persons to deduct up to BBD 10,000 of investments in mutual funds from the calculation of taxable income. The investors had to hold these amounts for at least five years. If investors withdraw their investments within the five-year period, they are subject to personal income taxes during the year in which the withdrawal is made. In 2007 amendments were passed to the tax benefits that effectively reduced the attractiveness of these assets.5

One of the decisions that will require interaction between financial and law enforcement policy and tax policy in the Caribbean Community and illustrates the continuing importance of international standards on small international financial services jurisdictions (SIFSJ) is the requirement in the revised FATF Forty Recommendations of February 2012 that member countries criminalize as money laundering predicates of tax crimes. Some Caribbean Community (CARICOM) countries, especially ones that do not have an income tax law, have discussed how to meet this new soft law requirement.6 The FATF mutual evaluation reports, which will start at the end of 2013, will review for the first time how effectively member countries are implementing the FATF recommendations. Hence, jurisdictions can no longer comply just by enacting legislation and/or promulgating regulations. The pressures and standards set forth by international organizations seek to strengthen financial regulatory mechanisms to detect and minimize the potential of financial crises.

Challenges to Caribbean Regulatory Systems

In 2009 the failure of CL Financial, the conglomerate based in Trinidad and Tobago, was a shocking blow, not only to the stability of the Trinidad and Tobago economy and financial system but also to other regional economies where the company was a major player in the insurance industry. In 2008 CLICO and the British American Insurance Company (BA) accounted for about half of the total assets of the insurance sector in Trinidad and Tobago. The quick intervention of the Trinidad and Tobago government, and the subsequent injection of several billion dollars into the company, mitigated a more catastrophic impact on the local economy.

In the Caribbean, significant government intervention occurred in the various countries to avert a major financial catastrophe. Many Caribbean countries are still trying to manage the fallout effects of CL Financial’s failure, including the impact on savers and policyholders.

The problems experienced by CLICO, CLICO Investment Bank (CIB), and BA show financial and managerial adventurism, as well as a serious lapse in supervision. Many of the problems were due to deficiencies in the regulatory frameworks. The deficiencies may have endured because of the close association between senior officials of the company and the major political parties in Trinidad and Tobago, which was used to shield the company from close scrutiny.

The collapse of CLICO raised questions about the sufficiency of the legislation to deal with ambitious conglomerates, the enforcement of regulations, the role of auditors, and the responsibility of management in a fiduciary role. After CL Financial, CIB, and CLICO iolated all the prudential guidelines of financial management over a prolonged period, only the collapse of the real estate market in the U.S. and the fall of methanol and ammonia prices brought about their collapse. Their problems reflect the continued absence of a proper regional regulatory framework for transnational financial companies. Other Caribbean regulators apparently thought that CLICO was being properly monitored in its home state and paid little attention to the disparity between local assets and liabilities. The collapse of CLICO was a regional failure, and the experience should provide major guidelines for the reform of the regulatory framework in the Caribbean.7 Another regulatory shortcoming relating to regional financial services, globalization, and the regulation of offshore banks is reflected in the difficulties of the Bank of Antigua, a domestic registered bank under the regulation of the Eastern Caribbean Central Bank (ECCB). Despite assurances by the ECCB that the Bank of Antigua was not in trouble, revelations about the group and the reported use of the Stanford International Bank in illegal operations resulted in an intense run on the Bank of Antigua. Eventually, the ECCB had to take over the Bank of Antigua and transform it into a new organization.8

The book captures one of the financial regulatory challenges at national, regional, and extraregional levels. With globalization and the information technology revolution, transactions are increasingly regional and extra-regional. Trinidadian banks have become more aggressive and have engaged in a regional and international marketing strategy over the last 10 years. Trinidadian banks have issued bonds to assist regional governments in raising capital for investments. Many have made alliances and are developing a strong presence with subsidiaries in Grenada, the Cayman Islands, Guyana, St. Maarten, Jamaica, Suriname, Curaçao, and St. Vincent and the Grenadines. Republic Finance and Merchant Bank Limited (Fincor) financed projects in Grenada, St. Lucia, and St. Kitts and Nevis. A proposed financial arrangement will fund an Eastern Caribbean Gas Pipeline project from Trinidad to Barbados and an ethanol plant in Guyana.

Regulatory and supervisory systems of the financial sector are receiving global attention in response to the effects of the current financial crisis. In this regard, the Trinidadian government has revised the Financial Institutions Act to provide for consolidated supervision as well as cross-border supervision and information sharing. Also, the government has redrafted the Insurance Act to allow for more stringent supervision and regulation. With rapid expansion of the financial sector, an issue globally, regionally, and nationally is whether the supervisory and regulatory frameworks exist to support the expansion and stability of the industry. Sometimes individual regulators specifically assigned to each of the various branches of the financial services sector are distinct and isolated from others. Better coordination among the various branches of the financial sector may be required to deliver a comprehensive analysis of the potential systematic risks that may be faced in the sector and the national economy.

One of the greatest challenges to monetary and regulatory policies will come from the greater use of digital money, since it can affect the balance sheet and reduce seigniorage income of central banks, while any security breach could severely disturb the financial system and facilitate money laundering, fraud, and tax evasion.

The Financial Stability Board is acting to impose more controls over non-bank financial institutions to minimize the likelihood of more collapses like CL Financial and its related entities. The response of the Caribbean Community and its national regulators should be more important than the response by international organizations.

Analysis

The book shows that SIFSJs and the Caribbean Community itself have significant challenges to adjust and strengthen their financial regulatory frameworks to meet the market and consumer demands of globalization and the information revolution as they try to avoid the contagion effect from the inevitable periodic global and regional downturns at the same time. National tax policies continue to play an important role in the national economies. As of today, even with the achievement of the single market in the Caribbean Community, regional tax policy is only in the beginning stages.

In the Caribbean Community, tax reform is underway, in part to make the transition from heavy reliance on import taxes to other revenue sources.9 Tax reform efforts include programs funded by the European Commission, by individual countries (for example, CIDA, U.K. Department for International Development, USAID), by various nongovernmental donors (for example, the Inter-American Development Bank), by the various regional bodies (for example, CARICOM and Organization of East Caribbean States), and more importantly by the CARICOM member states, based on existing strategies and legislation. This support covers a wide range of areas, including reform of taxation, management and public expenditure, regulation of credit unions, upgrading facilities, human resources development, and new management and computer packages.10

Regarding upgrading facilities and computer packages, an area where financial regulatory matters and tax policy/administration will interact is automatic exchange of information. Because the Foreign Account Tax Compliance Act will rely on direct computer exchanges to send automatic information, partly to safeguard the confidentiality of the information, the ability of some CARICOM members to participate will depend on whether they have access to the computer hardware that is required to make the exchanges. If they do not, financing the upgrades will be an issue.

Other major policy issues are the proper tax policies and administration for financial services within CARICOM.11 An important CARICOM organ is the Caribbean Organization of Tax Administrators, which was established in 1971. It meets twice yearly and considers both procedural and substantive issues.12

As a result of the dynamic global, regional, and national tax changes occurring and their interaction with financial regulatory systems, the next edition of the Financial Evolution of the Caribbean Community will have to focus more on tax policy and its interaction. In fact, a study of the tax policy of CARICOM and its members and their strategic position in the world is badly needed.


1 The members of the ECCU are six independent countries (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines) and two British overseas territories (Anguilla and Montserrat).

2 Ramesh Ramsaran, ‘‘Introduction,’’ Financial Evolution of the Caribbean Community (1996-2008), 12 (2013).
3 A key characteristic of the financial system in the ECCU is that the currency union allows separate regulatory framework for the non-bank component of the financial system.
4 Ramsaran, ‘‘An Overview of Global and Regional Economic and Financial Development,’’ Financial Evolution of the Caribbean Community (1996-2008), 21, 61.
5 Stacia Howard, ‘‘The Evolution of the Barbadian Financial Section,’’ Financial Evolution of the Caribbean Community (1996-2008).
6 See, e.g., Neil Hartnell, ‘‘Bahamas Faces ‘Big Issue’ on OECD Tax Evasion Move,’’ Tribune 242, Nov. 19, 2012, available at http://www.tribune242.com/news/2012/nov/19/bahamasfaces-big-issue-oecd-tax-evasion-move.
7 Ramsaran, supra note 2, at 7-9.
8 Ramsaran, supra note 4, at 75.
9 See, e.g., Ehurd Cunningham, Bahamas, ‘‘Impact of Trade Liberalization on a Modern Tax System,’’ presented at the Caribbean Organization of Tax Administrators (COTA) Assembly, July 21-24, 2008, in Belize, available at http://www.caricom.org/jsp/community/cota/general_assembly/20_cota/trade_liberalization_bahamas.ppt#272,2,Slide 2.
10 Sacha Silva, ‘‘Impact of the Economic Partnership Agreement on Tax Systems in CARICOM,’’ prepared for the Meeting of Caribbean Organization of Tax Administrators, in Belize City, Belize, July 21-24, 2008, available at http://www.caricom.org/jsp/community/cota/general_assembly/20_cota/epa_tax_systems_caricom_silva.pdf.
11 Peter Mullin, senior economist, Fiscal Affairs Department, ‘‘IMF Options in Tax Policy and Administration for the Financial Sector,’’ CARICOM Secretariat (undated), available at http://www.caricom.org/jsp/community/cota/general_assembly/19cota_tax_policy_cartac.jsp.
12 For a historical overview of COTA and its activities, see ‘‘Historical Overview of the Caribbean Organization of Tax Administrators — COTA,’’ CARICOM Secretariat, available at http://www.caricom.org/jsp/community/cota/cota_historical_overview.jsp.

Bruce Zagaris

Attorney in Washington, DC . A former lecturer at the University of the West Indies Law Faculty, he testified in Congress on the Caribbean Basin Initiative, and his practice has focused on Caribbean financial services and investment.