Remarks by Dan Clune
Deputy Chief of Mission
I would first like to talk
about the terminology that we use to discuss these initiatives. They have been described as
"blacklists" in the media, but that term is used nowhere in the
reports issued by the OECD, FATF, anf FSF.
In fact, the people involved in these issues would be shocked to hear
their reports referred to as "blacklists." There is an important difference between a blacklist and
initiative. A "blacklist"
refers to something at the end of a process.
Initiative -- from the Latin, initium
-- refers to the beginning of a
process, which more accurately describes these reports.
I would like to emphasize that
these "lists" were issued by different organizations that have
different purposes and address different policies.
OECD REPORT ON HARMFUL TAX PRACTICES
First, I would like to discuss
the OECD Report on Harmful Tax Practices.
The Organization for Economic Cooperation and Development is an
organization of 29 industrialized democracies headquartered in Paris. Its report is part of a larger exercise,
addressed at both OECD and non-OECD jurisdictions designed to secure the
integrity of tax systems by addressing practices that unfairly erode the tax
bases of other countries.
This is not just a concern of
OECD countries: The Bahamas would be similarly concerned if other countries
adopted policies that encouraged Bahamians to evade the payment of customs
duties. In fact, recognizing that the
Bahamian Government has a legitimate concern about practices such as
"under-invoicing," of imports to The Bahamas, the United States and
The Bahamas have entered into a Customs Cooperation Agreement, whereby the US
Customs Service has undertaken to investigate these kinds of cases. This is the kind of cooperation that exists
between good neighbors and kind sought by this initiative.
Let me explain the criteria the
OECD used to develop its list. To be included on list, a country that
imposes no or nominal tax on financial services income also had to have a
non-transparent tax regime, or refuse to exchange information with other
countries, or encourage the establishment of foreign entities with no
substantive local presence.
The main reason The Bahamas was
included on the list was its refusal to exchange information, particularly with
respect to civil tax cases, with other countries. In the case of the United States, this concern would be addressed
through a Tax Information Exchange Agreement (TIEA). Prime Minister Ingraham has indicated his willingness to sign
such an agreement. One of the benefits
of entering this agreement for The Bahamas would be that US taxpayers would be
able to deduct the costs of holding a convention in The Bahamas from their US
taxes. This would encourage more
business for the Bahamian tourist industry.
I mentioned earlier that this
is the beginning of a process. I would
like to tell you now where we go from here.
Over the next twelve months, the OECD will engage in a dialogue with the
35 listed jurisdictions in an attempt to obtain a commitment to adopt mutually
acceptable policies. Six jurisdictions
– including the Cayman Islands and Bermuda – were not considered for the OECD
list because they were able to make such a commitment before the list was
issued.
At the end of the twelve-month
period, those jurisdictions that have chosen not to make such a commitment will
be included in a new list of “non-cooperative tax havens.” At that point, OECD countries will consider
implementing what they call "coordinated defensive policies,"
including the imposition of withholding taxes on bank transfers and the
disallowance of tax deductions for activities related to the uncooperative tax
havens.
Let me emphasize what this
initiative is not about: The OECD is not trying to force The Bahamas to adopt
an income tax with rates comparable
to those of OECD members. What it is
about (in case of The Bahamas) is greater cooperation and exchange of
information
FINANCIAL ACTION TASK FORCE (FATF)
Next, let me address the
FATF list. The Financial Action Task
Force (FATF) was established by the G-7 in 1989 to combat money
laundering. FATF now has grown to 29
member countries. While The Bahamas is
not as member of FATF, it participates in a related regional organization, the
Caribbean Financial Action Task Force (CFATF).
The FATF report identifies 15
countries considered to have serious, systemic deficiencies in their anti-money
laundering regimes because of loopholes in financial regulations, inability to
identify the real owners of bank accounts, and lack of international
cooperation. The criteria it used in
its report has been around a long time.
FATF’s 40 money laundering recommendations were written in 1990 and
there has been no serious argument about whether these are the appropriate
standards. FATF used these recommendations as its criteria in drawing up its
"list."
The FATF initiative, like the
OECD initiative, envisions an ongoing dialogue. Over next year, there will be a series of meetings to discuss the
concerns raised in the FATF report. The
Bahamas has made real progress in recent years in the fight against money
laundering, but it was identified in the report because additional steps needed
to be taken. These include better
responses to requests for mutual legal assistance, legislation that makes it
easier to identify the real owners of bank accounts, and the establishment of a
Financial Intelligence Unit.
Even before the list was
issued, The Bahamas had begun to address some of these problems and has
developed a strategy to address the remaining concerns. In the event that
identified countries fail to address these deficiencies, FATF countries will
consider further steps to encourage
compliance with international standards.
FINANCIAL STABILITY FORUM
The third initiative was
launched by the Financial Stability Forum (FSF), a 40-member organization
established by the G-7 in 1999 to promote the stability of the global financial
system. One of its goals was to help
prevent a repetition of the Asian and Russian financial crises by encouraging
offshore financial centers to improve the supervision of their banking systems.
The FSF report divided 43
significant offshore financial centers into three categories, based on the
perceived quality of banking supervision and the level of international
cooperation. The Forum encouraged the International Monetary Fund (IMF) to
assess the jurisdictions in the two lowest categories. The Bahamas was included in the lowest
category.
What is important point to
remember about this list is that it is not a assessment; it is based on the
perceptions of bank regulators around the world. Like other two lists, the FSF list is very much the beginning of
a process. The FSF asked the IMF to
perform the assessment. As far as I’m
aware, the IMF has not formally responded to this recommendation.
QUALIFIED INTERMEDIARIES
Finally, I would like to talk
about a new program of the US Internal Revenue Service, known as
"Qualified Intermediary," or “QI.”
This is a program that affects the private sector rather than
government. Certain banks in The
Bahamas are applying to the IRS to be “qualified intermediaries.”
Let me first give you a short description
of U.S. law on taxation of U.S. source income.
As a general rule, the United States imposes withholding tax on U.S.
source income paid to foreign persons.
One exception is "portfolio interest," such as interest paid
on treasury securities and corporate bonds.
To qualify for the exception, the IRS needs assurance that the owner of
an account is not a US person.
Under the old system, the
account owner fills out a form, which the foreign bank would pass to its US
correspondent bank. Under the new
system, effective January 1, 2001, foreign banks are required to verify that
customers are not U.S. persons. They
will no longer have to fill out all the old paperwork, but will have to undergo
periodic audits. Banks that do not
qualify have to follow old procedure, but the new program may be more
attractive to customers and correspondent banks.
Some have asked whether there
is any connection between this program and the three initiatives already
discussed. The answer is no, but there
is one similarity. The IRS will not
allow banks in jurisdictions that have inadequate know your customer rules to
be "qualified intermediaries."
In conclusion, let me stress
again that the three initiatives I’ve discussed are the beginning of a
dialogue. The Bahamian Government has
already responded to these
initiatives and has begun to resolve the problems identified in these
reports. In his speech before
Parliament on August 9, Prime Minister Ingraham expressed the determination of
his government to follow through with quick and effective action.
Finally, let me stress that a
healthy and vibrant financial sector in The Bahamas is in the interest of the
U.S. and other members of these multilateral organizations. The purpose of the initiatives is simply to
encourage greater international cooperation and improve the quality of the
regulation of the financial sector. We
have offered technical assistance to help The Bahamas accomplish these goals.