Regulation of International Financial Services in the Caribbean

• Author: Bruce Zagaris
• Pages: 179-229

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Regulation of International Financial Services in the Caribbean

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Regulation of International Financial Services

in the Caribbean

Bruce Zagaris

This paper reviews the regulation of international financial services in the

Caribbean.

I. Introduction

THE ISSUE OF regulating international financial services depends partly on

one’s perspective. Law enforcement officials and international regulatory

officials are intent on preventing and combatting financial crime, such as

fraud, money laundering, business failures; and helping the millions of victims

of such crimes who often need the assistance of states and/or their societies.

Consumers of international financial services are looking for more flexible

regulation, generally lower taxation, financial confidentiality, lower

administrative burdens, less bureaucracy, and the ability to minimize

administrative costs and time to comply with financial regulation.

The countries that are hosting international financial services need to

strike a balance. They need enough flexibility, low taxation, confidentiality,

and flexible regulation to attract investment in financial services. They also

need sufficient financial supervision and regulation so that the financial service

providers are vetted, supervised, and regulated sufficiently to provide consumers

with the confidence to invest. Quality supervision over time will also provide

a perception of stability for potential investors. Sometimes small governments

that initiate an international financial services programme tend to change

regulatory policies significantly from year to year as their administrations

and regulators change.

This paper reviews threats and responses to the sector, the development

of Financial Services Commissions and international regimes for preventing

and combatting international financial crimes and regulatory supervision.

The implications of expanded exchange of information among financial

LEGAL ISSUES IN OFFSHORE FINANCIAL SERVICES

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supervisory agencies, international tax enforcement, and financial fraud

enforcement are considered. Thereafter, the paper discusses regulation of

specific products and entities, such as offshore banks, companies and related

commercial entities, international trusts, companies and trust service providers,

and insurance. The paper then discusses strategies for integrating an anti-

laundering prevention plan with a financial services policy for the Caribbean

and small offshore jurisdictions. Finally, prevention planning and due diligence

are considered as essential elements of financial service regulation.

II. Threats and Responses

A. Transparency and Accountability

One problem in the regulation of international financial services arises from

lack of transparency and accountability. The definition of transparency is

that investors can access the laws and regulations and ascertain their operation

quickly and with a minimum of cost. Investors, foreign regulatory officials,

officials of international organisations, and the public as a whole in the host

country must have easy access to the rules, procedures, and statistics generally

governing the sector and the products within the sector.

Accountability means that the regulatory authorities produce statistics at

least annually which show the usage of the sector generally, the individual

products, the government revenue from various types of fees and taxes, the

distribution of such fees and taxes, and macroeconomic linkages from the

sector and various products. Accountability enables persons concerned to know

that the regulation is efficient, honest, and operating according to plans.

Inevitably, accountability may raise questions and enables the government

and/or parties to press for changes in the operation of the sector or parts of it.

Accountability can also serve as an instrument to show the public that the

sector and/or parts of it are worthwhile and yielding the results promised in

the legislation.

B. Products

The type of financial regulation varies with the products in the international

financial sector and country. Some products, such as offshore banks and mutual

funds, require a more intensive and specialised regulatory regime than

international business companies (IBCs). Sometimes, investors and consumers

can achieve similar goals through alternative products. Hence, uneven

regulation among products will result in skewed investment patterns. For

instance, a pattern in anti-money laundering has been that, as governments

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Regulation of International Financial Services in the Caribbean

intensively applied anti-money laundering regulations to banks, launderers

and criminals resorted to non-bank financial institutions (for example, money

transmitters) and vehicles (for example, jewellery companies, car dealerships,

and real estate). Another example is that, depending on incentives and

regulatory regimes applicable to different business entities, investors may

decide to invest in IBCs, limited liability companies (also known as societies

with restricted liability), cell companies, limited partnerships, or trusts.

C. Licensing

A government can solve many of the regulatory problems by addressing the

risks through licensing. If a regulatory agency properly vets applicants through

obtaining enough information about applicants, verifying the information

both by investigating the references and by independent checks, they should

be able to avoid many of the future problems, costs, and potentially adverse

information that spring from problem service providers. A regulatory authority

should design forms that obtain the information required. If necessary, it should

require that the applicant enable it to spend the time and money to verify all

the information relevant to the application.

Regulatory authorities must establish minimum standards that prospective

applicants should fulfil prior to the issuance of a license. The standards must

be clear, objective and readily available to the general public, thereby fulfilling

the transparency standards mentioned above.

The licensing process should be independent and sufficient to be able to

assess ownership, structure, directors and senior management, operational

plan and internal controls, the capital base, and projected financial condition.1

The Caribbean Financial Action Task Force has reported problems with

due diligence.

For instance, an Eastern Caribbean official confirmed that it does not

supervise the offshore sector, but it does conduct due diligence in licensing

investigations on behalf of its member states. The same official has advised

that Russian nationals have shown considerable interest in establishing banking

institutions in the region. However, when assistance is sought for background

checks from developed countries, such information is not obtained easily.

When it is obtained, the information lacks sufficient specificity.

A very low volume of exchange of information exists between officials of

Caribbean jurisdictions, but higher levels between the region and metropolitan

centers of the developed countries.2