Wednesday, June 25, 2008

Will Jamaica beat T&T, Dom Rep to an offshore financial centre?

Published: Wednesday June 25, 2008

On Monday, Reuters reported from New York that Trinidad and Tobago planned to open an international financial centre to compete with Miami and Panama in September, which could include a commodities exchange, as part of their plan to diversify their economy into financial services and away from energy.

Trinidad's Minister of Finance, Karen Nunez-Tesheira, who was in New York to meet with investment banks and credit agencies, told Reuters that such a commodities market could, for example, trade liquid natural gas, methanol, ammonia and other products it exports. She added that accountants PricewaterhouseCoopers are now helping Trinidad and Tobago to review how they might change their tax structure.

The new centre is to be marketed to hedge funds and banks for a range of activities, from transportation finance to capital markets and credit card transactions, whilst in the next couple of weeks, officials from Dubai will visit to explore "using Trinidad and Tobago as hub for monies coming out of the Middle East".

According to Reuters, the Minister advised that the list of banks weighing opening offices in the new financial centre, which will have two 26-storey buildings, includes international investment banks JPMorgan Chase, Lehman Brothers, and Credit Suisse.

This visit to New York follows closely the recent Euromoney Conference, the Caribbean Investment Forum, held in Port of Spain June 11-12, which was well attended by an audience of fund managers, bankers and other financial professionals from all over the region and the US.

The panel discussions primarily focused on Trinidad's planned International Financial Centre (IFC) in Trinidad, and the forum was described by some of the attendees almost as the Trinidad IFC's launch party.
Stocks and Securities analyst Michelle Hirst, in a report on the conference posted on their website, advised that the developers of Trinidad's proposed IFC noted that they had examined many IFCs around the world, particularly Ireland's financial centre located in Dublin, as well as looking at emerging IFCs such as Dubai and Qatar. In fact, one strategy that Trinidad is apparently looking at very closely is halving its overall corporate tax rate (for the entire country), from the current 25 per cent (already much lower than in years past) to close to Ireland's single corporate tax rate of 12.5 per cent.

She believes, however, that Trinidad has not yet decided on the regulatory framework and tax structure that it will implement, a difficult decision as IFCs can either have different taxes and regulations than the other financial institutions in the country, or have the same regulations and tax structure for everyone eg a single rate of corporation tax.

She notes that the panels did not disclose details on the structure of the IFC, merely that it will cover capital markets, banking, insurance and asset management. She adds in her report that the Trinidad Central Bank is in the process of developing four sets of new legislation, namely rules to govern pension plans, banking, insurance and credit unions as part of the
process of updating its financial framework.

In many ways, the recent conference appears to be a follow-on from last year's very similar Caribbean Investment Forum conference in Montego Bay held around the same time, which was unfortunately largely ignored by government officials as well as much of the local media. A report on that conference was only covered in the Gleaner just before Jamaica's election when the issue became hot after the JLP proposed an offshore financial centre for Jamaica in
their manifesto.

That conference had a very high-powered panel, comprised of chief executives from the Caribbean's leading offshore financial centres in Cayman, The Bahamas and the British Virgin Islands.

The Montego Bay forum had been arranged to ask the question as to why Bermuda and the Cayman Islands were so successful as offshore financial centres, and whether other Caribbean emerging offshore centres such as those planned for Trinidad and the Dominican Republic would be able to take advantage of what was at that time described as the "perceived excess demand".

In Montego Bay, Mr Ridley argued that the problems with many International Financial Centres (IFCs) have been based more on perception rather than reality. He noted that in addition to competing with the leading IFC, which is London, much of the business of Cayman, Bahamas and
BVI was really to facilitate London's business.
Caribbean IFCs were therefore merely a small piece of the puzzle in the recycling of the world's money, and are dependent on getting the balance of regulation right for their success in the very competitive environment.

He noted that Cayman operated on the principle that for each regulatory measure introduced, they must be satisfied that: it is necessary; it is appropriate for the nature of financial services business in the Cayman Islands; it is proportional to the identified risks; the regulatory impact is understood; and the
benefits outweigh the cost of the regulation.

Wendy Warren outlined the Bahamian national commitment required to make the business a success. According to her, this requires not just the cross party commitment of current and future policy makers, but the buy in of the general population.

Just as with the tourism industry, Warren advised that every Bahamian realises that they must not let something kill the golden goose of the offshore industry. In her view, the more intimate nature of small populations allowed buy in of the benefits of the offshore industry much more rapidly than in larger jurisdictions.

Other key requirements to successfully conduct offshore businesses include political stability and a strong legal system. For Bahamas, this means specifically, "Respect for the rule of law, due process and the right to privacy of personal financial information".

Additional critical areas include: direct tax system, good telecommunications and the correct skill sets. In the case of The Bahamas, a historically attractive lifestyle is complemented by geographical proximity to the US.

All agreed that, as in any business, the most important thing was to know who was your client, and what market you were in.

Mathavious argued that a successful offshore business required not "a light touch but the right touch", with the key being able to take advantage of opportunity when it came knocking. BVI's growth took place when Panama was in crisis, when BVI took the unusual step of licensing Panamanian service providers. Their further growth had benefited from the uncertainty in the run-up of the transfer of Hong Kong from British to Chinese rule.
Ridley again noted that at one time Cayman had been little more than a mosquito swamp, but had been almost handed the offshore business by Bahamas due to mistakes made by their then Prime Minister Pindling several decades ago. In the case of Panama, it was the invasion by the first President Bush that had really helped BVI.

Whilst all the panellists believed that OECD pressure on their jurisdictions was likely to continue, they argued there was a lot of hypocrisy in this pressure, as they
claimed that all their jurisdictions met international standards, often exceeding those in OECD countries.
Quoting from a background paper written on Cayman's offshore industry, Ridley fully accepted that Cayman should adhere to generally accepted and applied international standards - and not just as they are, but as they evolve. Cayman's experience has been that it was not the absence of regulation that has
promoted business, but the introduction of sensible and balanced regulation as circumstances demanded.
According to the panellists, the most important thing to remember was that international financial services is a business, just like tourism. The market was, however, very sensitive, and countries looking to get into the industry needed to understand what was their advantage eg cost of labour, skills, geography, tax treaties etc.

Countries entering the offshore industry also needed to decide what was their target niche. Bermuda had successfully specialised in insurance, whilst the major international law firms had the power to move the business to various jurisdictions, such
as Cayman.

Mathavious believed that for a new jurisdiction to succeed, it would need a very strong partnership between the private sector and government. This point was echoed by Ridley, who stressed Cayman's culture of consultation and co-operation between the government and private sector. Mathavious added that the jurisdictions that succeeded would be those, like the BVI, that "reputation was a currency".

At that conference over a year ago, the intention of the Dominican Republic to move into the offshore financial business was particularly interesting, bearing in mind their very recent financial crisis and associated debt default. At that time, the Dominican Republic's intention left Jamaica as virtually the only Caribbean country without such a plan. This was despite the fact that, in the opinion of one international consultant involved in BVI's success, Jamaica was one of the most ideal locations in the Caribbean for such an industry.

At the same conference, a former investment banker very familiar with both countries advised that he thought that Dom Rep was a long shot due to its weak banking regulation, recent default and unsophisticated local financial market, all of which he argued was not true for Jamaica.

Nevertheless, it is noteworthy that Economist Conferences, in association with the Commercial Banking Association of the Dominican Republic (ABA), plans to have a Regional Financial Forum on the topic: Harmonising financial regulations in Central America and the Dominican Republic, between July 31 and August 1 in Casa de Campo, La Romana, Dominican Republic.

All of this suggests that the space for Caribbean international financial centres is about to become even more crowded, with Trinidad as a very serious competitor (albeit focusing on its energy niche), and continuing ambitions to create an IFC in the Dominican Republic. It is, therefore, clearly unfortunate that Jamaica's Government did not start the process for the creation of such a centre when it was called for by the Jamaica Chamber of Commerce nearly five years ago, as well as slightly ironic that it is Trinidad that is so carefully studying Dublin's success.

Source: Jamaicaa Observer

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