The islands of the Caribbean and Atlantic are well known for being popular holiday destinations, but most of them also have highly sophisticated offshore financial centres.
Almost every island in the area is jumping onto the offshore financial services bandwagon to give it an economic alternative to declining revenues from the region’s staple crop of bananas.
But four countries in the region stand out: Bermuda; the Bahamas; the Cayman Islands; and the British Virgin Islands.
Not only are they the longest established offshore financial centres, but they have each developed reputations as specialists in particular areas.
All the islands’ offshore regimes, whether long established or not, are under scrutiny from the Organisation for Economic Co-operation and Development (OECD).
At the end of this month, the OECD is due to publish a ‘blacklist’ of offshore centres as part of its offensive against “harmful tax competition”.
It has 47 tax havens in its sights, which it defined in a 1988 report as “centres that combine no or low effective tax rate with other features such as an absence of legal and administrative transparency or arrangements that do not allow an effective exchange of information”.
The aim is to shame jurisdictions seen to be at fault into greater transparency and openness so that they co-operate with tax evasion investigations. The more established jurisdictions believe they have introduced the necessary measures in tax and money laundering legislation. They also believe they have been spared the brunt of the OECD’s fire, although there will undoubtedly be some jitters as the deadline for the list’s publication draws nearer.
Bermuda
The self-styled World’s Insurance Laboratory has built its reputation on providing a friendly environment for the insurance market, but it has also grown into a major player in other areas of financial services.
During the past decade, international business has eclipsed tourism as this British overseas territory’s biggest money-spinner.
Companies are attracted by the absence of many forms of tax, but this is not the only attraction.
Insurance specialist Chris Collies, of Nassau law firm Conyers Dill & Pearman (CDP), believes there are other factors behind the island’s growth. “We are a relatively small country. When issues arise we can look at modifying legislation to allow legitimate business to flourish.”
He adds that companies have freedom of contract on the island, which they do not have elsewhere.
The insurance sector generates the most financial services work for Bermuda, which has enjoyed a favourable tax and regulatory regime since the 1950s.
Companies based in Bermuda are not liable for tax on their profits or on their investment income, which makes it easier for insurance companies to build up reserves more quickly than their onshore counterparts.
At the moment it is securitisation – the packaging of insurance risks in a format that is acceptable to the capital markets – that is leading the way in the insurance sector.
Insurance lawyer Alan Bossin of Appleby Spurling & Kempe says: “Some of Bermuda’s largest insurance companies were formed in response to the global need for property catastrophic loss insurance. In the mid-1990s, insurance companies wishing to purchase reinsurance for these types of risks began looking at securitisation as an alternative.”
Insurance might be the island’s best-known service, but one-fifth of its financial service income comes from private banking and trust work, which is a growing area.
Alec Anderson, a partner at CDP, says: “We have seen an increased use of trusts in the commercial field during the last five years, but Bermuda has been slightly more geared towards commercial work anyway. It is not growing in percentage terms against all other business, but it is still growing. Some trust business is coming from the Channel Islands and Switzerland because of some perceptions about pressures there on tax and confidentiality issues.”
He adds that some of the same factors apply in Bermuda, but foreign investors have confidence in the island due to its location, reputation and a treaty with the US.
Competition for business in offshore financial centres has intensified, but Bermudan lawyers do not see it as being in competition with one particular jurisdiction.
CDP partner James Macdonald says: “It is difficult to say which particular jurisdiction is our closest competitor. Sometimes clients will make decisions based upon geography, which jurisdiction is easier to travel to, or its reputation in a particular industry.
“For insurance, Bermuda might be seen as the prominent jurisdiction, therefore a company formed in Bermuda might have more credibility than if it is formed elsewhere.”
