Caribbean offshore Financial Centers
Past, Present, and Possibilities for the Future
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Contributor Notes

Authors’ E-Mail Addresses: esuss@imf.org, owilliams2@imf.org, cmendis@imf.org

The paper reviews the development of offshore financial activities in the English-speaking Caribbean islands and takes stock of the size and status of these sectors today. In view of the heightened concerns of the international community about money laundering, the costs and risks to countries of having or establishing offshore sectors have risen considerably.

Abstract

The paper reviews the development of offshore financial activities in the English-speaking Caribbean islands and takes stock of the size and status of these sectors today. In view of the heightened concerns of the international community about money laundering, the costs and risks to countries of having or establishing offshore sectors have risen considerably.

I. Introduction

The English-speaking countries of the Caribbean are, in general, small, very open economies, making them vulnerable to external shocks. In light of ongoing trade liberalization and economic integration, a challenge facing these countries is to implement appropriate structural changes in their economies to achieve higher real growth.

Although many of these economies have shifted away from agriculture toward tourism and other services, the loss of access to preferential markets in the current environment of free trade is likely to have significant adverse effects on employment and the external current account. Further diversification of the economies will require new investments, inter alia, in infrastructure and training of the labor force. The countries that have shifted the structure of their economy toward tourism are finding that growth in this sector has become insufficient to sustain continued per capita growth in the future owing to increased competition from new countries entering the market, the need for investments in infrastructure, and vulnerability to natural disasters, such as hurricanes.2 As a result, many of these countries have looked to establishing activities in other services or in niche industries, such as offshore financial centers (OFCs), internet gaming, and other electronic services.

This paper reviews the current structure and status of offshore financial sectors in various English-speaking Caribbean countries and makes an estimate of what might be the cost of compliance with international standards. The paper concludes that, under current international best practices, costs associated with these sectors have increased. Thus, the prospects for significant net economic benefits from development of this sector for new entrants appear to be limited.

The remainder of this paper is structured as follows: a brief history of offshore centers in the Caribbean, and a description of services provided by offshore centers generally is given in Section I; a brief summary of international concerns about OFCs in the context of money laundering is given in Section II; an analysis of the role of the offshore sectors in these Caribbean economies in terms of composition, size, and economic contribution is given in Section III. The conclusions and suggestions for further research are presented in Section IV. Some of the background information used in this paper is included in various annexes: Annex 1 contains the list of criteria used by the Financial Action Task Force to define a noncooperative country or territory, and Annex II presents a table listing the noncooperative countries as of September 2001. Finally, a short, more detailed discussion of each country’s offshore sector is presented in Annex III.

II. Establishment of OFCs in the Caribbean

The first offshore operations in the Western Hemisphere were established in The Bahamas in 1936 by British and Canadian interests to provide management services for the investments of wealthy international clients. These operations eventually became a wholly owned subsidiary of the National Westminster Bank, which was consolidated into the private banking operations of its parent company.3 Within a short period of time, these financial operations expanded to other British overseas territories, such as Anguilla, the British Virgin Islands (BVI), and the Cayman Islands. After observing how several countries in the region (e.g. The Bahamas, Cayman Islands, the British Virgin Islands, and Panama) enjoyed significant benefits from large offshore sectors arising from employment creation and revenue for the respective governments and authorities, other countries in the Caribbean viewed the establishment of offshore centers as a possible engine of growth for their economies. The establishment of an OFC does not require large capital investments other than a modern communications system, and frequently in recent times, there has not been need for a large skilled labor force. Within the Eastern Caribbean Currency Union (East Caribbean Central Bank, ECCB) countries,4 offshore companies began appearing in Antigua and Barbuda in 1982, soon followed by companies in Nevis. Grenada has had an active offshore sector for quite a number of years, and Dominica started fostering the sector much later in 1996, while St. Lucia and St. Kitts have just introduced with legislation for the startup of offshore companies.

Offshore financial centers provide a number of legitimate and important services, that can be broadly grouped into three categories: (i) private investments, in which investments are managed in order to minimize potential tax liabilities and maximize protection granted under statutory confidentiality provisions; (ii) asset protection, in which the use of an international jurisdiction separate from the client’s residence allows for the protection of income and assets from political, fiscal, and legal risks; and (iii) estate planning in which the administration of assets is done in the most favorable legal and fiscal jurisdiction.5 The various types of financial institutions and/or vehicles that can be used for these services include international business corporations (IBCs), offshore corporations, commercial banks, insurance companies, mutual funds, and more recently, gaming companies.

Uses of Offshore Financial Centers1

The list below gives the most important, or predominant vehicles through which OFCs can provide services, but is by no means meant to be exhaustive.

  • Offshore banking: Corporations or banks may open offshore banks to handle foreign exchange operations or financing needs; an individual may open an account in an offshore bank. The advantages of the offshore bank include no capital, corporate, capital gains, dividend or interest taxes, no exchange controls, and lighter supervision and reporting requirements.

  • International Business Corporations (IBCs): IBCs are limited liability companies that may be used to operate businesses, or raise capital through issuing shares, bonds, or other instruments. In many OFCs the cost of setting up an IBC is minimal and they are exempt from all taxes.

  • Insurance companies: Commercial operations may establish an insurance company in an OFC to manage risk and minimize taxes, or onshore insurance companies may establish an offshore company to reinsure certain risks in order to reduce reserve and capital requirements for the onshore company. The advantages of the OFC are favorable income/withholding/capital tax regimes and low (or weakly enforced) reserve requirements and capital standards.

  • Asset management and protection: Individuals and corporations in countries with weak economies and/or fragile banking systems may want to keep assets abroad to protect them against the possible collapse of the domestic currencies and banks, and free from any exchange controls; when confidentiality is desired, then an OFC is the choice for placing the assets. Individuals who face unlimited liability in the home jurisdiction may restructure the ownership of their assets through offshore trusts to protect those assets from domestic lawsuits.

  • Tax planning: Multinational firms may route transactions through OFCs to minimize total taxes through transfer pricing. Individuals can make use of favorable tax regimes in, and tax treaties with, OFCs often in the form of trusts and foundations.

  • Money laundering: proceeds from illegal activities such as drug trafficking, are processed through offshore centers to conceal the true source of the funds.

1 Source: “Report of the Working Group on Offshore Centers,” Financial Stability Forum, April 5, 2000, p. 14.

The benefits of OFCs in terms of financial development and growth to both an individual economy, and the global economy have been discussed in the literature.6 The benefits of establishing an offshore sector reaped by the early entrants, e.g. The Bahamas and the Cayman Islands came from several areas and developed over time. These economies realized development opportunities because the offshore sector required a trained and educated labor force, which was largely undertaken by the foreign company or companies establishing the sector. At first, these foreign institutions hired local staff only in lower level positions using workers from the home country for many of the professional positions, but over time realized that it was to the benefit of all to train the local staff to take over the professional responsibilities. Also, in general, as the financial services grew in the local economy, there were positive spillover effects to other sectors of the economy, such as services, (hotels, restaurants and catering) and infrastructure (telecommunications, transport, etc), which need to be upgraded and expanded. The publicity that accompanied the promotion of the offshore sector benefited other sectors and eventually led to additional foreign investment in the economy. Finally, there is the possibility of the development of a capital market to facilitate investments.7 All of these benefits had multiple effects on the development of an economy, and thus, it is easily understood why other countries would want to share in the benefits of this industry, the size of which is estimated at US$ 10–12 trillion and to grow at an average annual rate of 15 percent.8 For the Caribbean countries, significant benefits could arise from obtaining just a small part of this industry.

However, OFCs could bring some disadvantages, such as making small open economies and their domestic financial systems, in particular, vulnerable to sharp changes in global financial flows through the transmission of financial and banking crises. The operations of OFCs have recently come under increased scrutiny by international policy regulators, especially after the recent wave of financial crises in global markets and the subsequent debate on financial restructuring, regulatory reform and institutional capacity building. The role of OFCs in money laundering has also contributed to the heightened scrutiny. The fact that transactions through OFCs have increased significantly over the last decade has made their impact non- trivial. According to the Bank for International Settlements (BIS), the total value of OFC cross border transactions in the English-speaking Caribbean totaled about US$0.9 trillion dollars in 1999, which is several times the combined GDP of the Caribbean Community (CARICOM) region.9

III. International concerns about OFCs

In the late 1990s, enhanced concerns of the international community with money laundering and tax evasion have led to a number of concerted efforts being undertaken by various international committees. The fact that many OFCs exist in loosely defined regulatory and supervisory environments has increased the focus of policy makers and regulators on the possible role played by OFCs in the process of tax evasion and money laundering. This focus has become even more intensified since the events of September 11, 2001, as officials attempt to identity sources of terrorist financing. The two principle forums engaged in the international attack on money laundering are: (1) the Financial Stability Forum (FSF), and (2) the Financial Action Task Force (FATF).10 Both the FSF and FATF have established criteria for identifying countries that facilitate money laundering and have proposed the imposition of sanctions. As a result, the costs of an offshore sector to an individual country have increased, reflecting the need to have appropriate supervisory and regulatory agencies. In the absence of these agencies, the risk of sanctions being imposed by the international community has increased significantly.

In April 1990 the FATF issued a report containing a set of 40 recommendations,11 which provided a set of counter measures against money laundering and are related to the criminal justice system and law enforcement; the financial system and its regulation; and international cooperation. The basic issues addressed by these recommendations12 relate to (i) the criminalization of money laundering; (ii) international cooperation in investigating, prosecuting, and extraditing of crime suspects; (iii) the existence of adequate supervisory policies, practices and procedures, including “know your customer” rules which would shield banks from being used by criminal elements; and (iv) the international exchange of information regarding suspicious information.

In mid-2000 both the FSF and the FATF issued reports on the state of money laundering with a focus on various offshore financial centers, using various criteria to determine the degree of “cooperation” and/or the adequacy of legal and supervisory systems relative to international standards. However, since the FATF criteria were more straightforward in many areas than those used by the FSF, this paper deals only with the countries addressed by the FATF in its June 2000 report, with updates as of September 2001.

In the June 2000 report, the FATF evaluated 26 nonmember countries or territories using 25 criteria drawn up on the basis of the 40 recommendations.13 These criteria can be grouped into four main areas: (i) loopholes in financial regulations; (ii) obstacles raised by regulatory requirements; (iii) obstacles to international cooperation; and (iv) inadequate resources provided for dealing with money laundering activities. Of the 26 countries and territories initially evaluated, (9 were English-speaking Caribbean countries), 15 were declared to be noncooperative (NCCT). From the English-speaking Caribbean, these were The Bahamas, the Cayman Islands, Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines, and they met between 11 criteria (The Bahamas) and a maximum of 19 criteria (St. Kitts and Nevis).14 Grenada was added to the NCCT list in late 2001. Annex II lists the initial 26 countries, plus the four countries added in 2001, and the results for each of the 25 criteria.15

In general, being declared cooperative did not exclude the need to improve on measures to address money laundering, e.g. legislation, supervision, regulation, but rather that the country or jurisdiction had been taking measures to address any shortcomings. The report identified detrimental rules and practices that obstructed international cooperation against money laundering.

The bulk of the reasons for the five Caribbean countries being declared uncooperative related to (i) secrecy provisions regarding institutions, particularly in making public the owners and shareholders of institutions; (ii) lack of an appropriate system for reporting suspicious transactions; (iii) inadequate legal requirements for registering business and legal entities; and (iv) the existence of obstacles to international cooperation in investigating money laundering activities. In recent years, competition for international capital has resulted in some new entrants to the offshore financial market offering broad banking secrecy as one way to attract funds away from already established OFCs. Although professional secrecy in banking activities can be justified, to an extent, by the need to protect business secrets from rivals, this need cannot be allowed to take priority over the supervisory responsibilities and the investigative powers of the authorities.

Table 1 gives the institutions (bodies) responsible for supervising the various financial institutions in each ECCU member country. In general, the countries just beginning to create offshore sectors seemingly are lacking in terms of institutions which can regulate and supervise the offshore bodies; in many of these countries, the same agency is assigned the responsibility for regulating all the various offshore activities. In the new international architecture, increased secrecy or confidentiality is no longer an acceptable option, and the current atmosphere is one in which sanctions can be imposed on countries which do not conform, or at least work seriously toward conforming to international standards in the operations of OFCs. Succinctly stated, in the case of the banking sector, the standards for supervising and regulating of offshore banks should be the same standards as for domestic banks; in areas where there do not yet exist international standards, such as mutual funds, then best practice guidance should be implemented. What this implies is that countries will need to improve supervision, regulation, and sharing of information with other countries, and generally will need to promulgate and staff more institutions for these purposes, as well as broaden the scope of those that exist. One major development is the need for additional professional staff, such as auditors and supervisors, which will require additional expenses for training, or for paying for consultants in the meantime. One new institution, which can illustrate current thinking, is the Financial Intelligence Unit (FIU), which should be established to follow and share information on suspicious transactions with domestic bank supervisors and official enquirers.

Table 1.

Eastern Caribbean Countries: Regulatory Bodies for the Offshore Sector

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Sources: International Financial Sector Authority, Antigua and Barbuda; Ministry of Finance, Dominica; Nevis Financial Services Department; Financial Services Supervision Unit-Ministry on International Financial Services, St Lucia; Ministry of Finance, St. Kitts; KPMG, Review of Financial Regulation in Caribbean Overseas Territories and Bermuda, October 2000; Offshore Financial Authority (OFA), St. Vin1cent and the Grenadines.

Since the issuing of the FSF and FATF reports in 2000, several countries have indicated that their financial sectors and/or economies have suffered owing to the adverse publicity. Although Antigua and Barbuda received a good report from the FATF, the relatively poor evaluation of the FSF (even prior to the publication of the report) resulted in financial advisories issued by the United States and United Kingdom under which the banks in these countries were warned to refrain from doing business with financial institutions in Antigua and Barbuda. Banks that undertook transactions with financial institutions in Antigua were subjected to increased scrutiny by supervisors in their home country. The FATF recommended that financial institutions pay special attention to transactions with noncooperative countries, essentially increasing the scrutiny paid to these transactions that are more likely to be related to money laundering.

In light of heightened scrutiny following the reports issued by the FSF and the FATF, many countries took measures to address the concerns raised so as to avoid the imposition of sanctions. In June 2001 the FATF reviewed the progress made by the countries identified as noncooperative and at that time, inter alia, The Bahamas and Cayman Islands were removed from the list. In the meanwhile, Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines, as well as Grenada, which was added in September 2001, remained classified as noncooperative beyond end-2001.

Both The Bahamas and Cayman Islands enacted significant modifications to existing legislation as well as new laws to address their identified deficiencies.16 In the case of The Bahamas, a major improvement was the establishment and adequate staffing of a financial intelligence unit to oversee the offshore sector. In addition, the existence of anonymous accounts and bearer shares, as well as anonymous ownership of IBCs, was banned, and measures taken to improve international cooperation. In the case of the Cayman Islands, a more ambitious financial inspection program has been initiated, identification of all preexisting accounts required, and all banks licensed in the Caymans must maintain a physical presence. In February 2001 the Cayman authorities ordered 62 private banks to open and staff offices in the Caymans and to maintain records there if they wanted to remain licensed.17 Although Dominica, a late entrant, had enacted a Money Laundering Prevention Act in January 2001, there remained several major issues to be addressed, particularly in the areas of customer identification, record keeping, and the ability to share information. While both St. Kitts and Nevis, and St. Vincent and the Grenadines had enacted some modifications to their legislation since June 2000, both countries continued to have major outstanding issues in the areas of owner identification and international cooperation. As mentioned above, Antigua and Barbuda received a poor evaluation from the FSF (they were included on the list of deficient countries) notwithstanding their positive evaluation by the FATF, and to address these issues, several modifications to the existing legislation were enacted after mid- 2000. In particular, activities other than drug trafficking were made illegal in the context of money laundering.18 In May 2001 new provisions were added to the Prevention of Money Laundering Laws that (i) make it easier to freeze property belonging to offenders, and (ii) make it simpler for prosecutors in Antigua and Barbuda to introduce relevant information from other countries before the courts. Largely reflecting these measures, the number of licensed banks in Antigua was reduced from 58 in 1997 to 22 at end-2001. In December 2001 the Antiguan and United States governments signed a treaty facilitating the exchange of information on a range of financial and tax issues. For each of the countries covered in this paper, a brief summary of the major legislation addressing offshore issues is given in Table 1, Annex III.

IV. Structure and benefits of the Caribbean offshore financial sectors

The size of the OFCs in the Caribbean region varies significantly from one country or territory to another, and the nature of the offshore sectors—in the sense of area of specialization—also varies across the region. Table 2 shows the number of various institutions registered in each country or jurisdiction as of end-2000/2001 for which data were available. Of the older, established sectors, the British Virgin Islands (BVI) is the largest register of IBCs, and is estimated to account for 48 percent of global IBC incorporations. The Cayman Islands, estimated to be the fifth largest OFC in the world,19 has fewer registered IBCs, but significantly more banks, insurance companies and trusts registered. However, the Caymans was the market leader in the Caribbean in terms of the number of offshore banks registered. With regard to entrants from the ECCU to the OFC sector, St. Kitts and Nevis has the largest number of registered IBCs, while Antigua and Barbuda has the most diversified sector—having registered not only IBCs, but also banks, trusts and gaming companies.

Table 2.

Size of the Offshore Financial Sectors, 2000 and 20011/

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Sources: International Financial Sector Authority, Antigua and Barbuda; Ministry of Finance, Dominica; Nevis Financial Services Department; KPMG, Review of Financial Regulation in Caribbean Overseas Territories and Bermuda, October 2000; Offshore Financial Authority (OFA), St. Vincent and the Grenadines.

St. Lucia has not commenced activities in the offshore sector and is therefore not included in the table.

Reflects data for 2001.

There has been very little measurement of the contribution of OFCs to the general economy. One reason has been the limited availability of reliable, comparable data across countries, which is the reason why the contribution of OFCs to the economy used in this paper is based primarily on the fees collected by the central government.20 The fee structure for various services offered in the offshore sectors of these countries is given in Table 3.

Table 3.

Schedule of Fees for Offshore Services

(In U.S. dollars)

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Sources: International Financial Sector Authority, Antigua and Barbuda; Ministry of Finance, Dominica; Nevis Financial Services Department; KPMG, Review of Financial Regulation in Caribbean Overseas Territories and Bermuda, October 2000; Offshore Financial Authority (OF A), St. Vincent and the Grenadines.

The importance of the offshore sector to the general economy can be measured broadly by the extent to which it generates employment opportunities. In many cases where only offshore banks are established, and then with no real physical presence, they do not use large amounts of labor, and thus do not mitigate problems of unemployment or underemployment. Limited data were available on employment in these sectors in the various countries, as well as on wages and other relevant variables, such as taxes paid by these employees. The estimated employment in 2000 by the OFCs for which data are available, was 100 persons in Dominica (0.5 percent of the labor force); 940 persons in the Bahamas (1 percent of the labor force); 2,500 persons in Antigua and Barbuda (about 8 percent of the labor force); and 942 persons in the BVI (about 15 percent of the labor force). The high number of employees in Antigua and Barbuda is associated with internet gaming. With the exception of Dominica, the contribution of this sector to overall employment is significant. However, it was not possible to obtain information on wages, and thus it is not possible to comment on the size of the wage bill generated by this employment.

Within the ECCU, fees from the OFC have increased in importance since 1995 (Table 4). Fees collected by central governments were small relative to GDP for this group of territories by end-2000, with only Dominica and Antigua and Barbuda obtaining more than 1 percent of GDP. However, the importance of these fees relative to government current revenues21 is larger. As of end-2000, Antigua and Barbuda derived over 7 percent of central government current revenue from offshore sector fees, followed by Grenada at 4.5 percent and Anguilla at 3.6 percent. In Antigua and Barbuda, the majority of the fees are derived from internet gaming companies that are established in a Free Trade Zone.

Table 4.

Annual Fees Collected by Governments

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Sources: International Financial Sector Authority, Antigua and Barbuda; Ministry of Finance, Dominica; Nevis Financial Services Department; KPMG, Review of Financial Regulation in Caribbean Overseas Territories and Bermuda, October 2000; Offshore Financial Authority (OFA), St. Vincent and the Grenadines; and Fund staff estimates.

Fund staff estimates using data from national authorities.

EC$2.7=US$1.

Excludes revenues arising from the economic citizenship program.

The more established jurisdictions for which data were available differed in the degree of reliance on fees from the OFC. The BVI, which is the world market leader in incorporation of IBCs, was the most dependent on fees from the offshore financial sector, with fees collected accounting for almost 55 percent of government revenue or 13 percent of GDP by end-2000. The economy of the BVI is heavily dependent on the offshore financial sector and extremely vulnerable to adverse developments in the sector. The Cayman Islands also relies heavily on fees collected from offshore banks, but to a lesser degree than the BVI, as these fees accounted for 14.5 of government revenue by end-2000. In contrast, the governments of The Bahamas and Barbados were less dependent on offshore sector fees, which amounted to about 1 percent of government revenue and between 0.2 percent and 0.4 percent of GDP, respectively. The various fees for offshore services are given in Table 4

The above measurement of the contribution of the offshore sector to the domestic economies is overstated to the extent that relevant costs of the sector are not taken into account. Data on the costs associated with these sectors is difficult not only to obtain, but also to compare across countries and type of financial activities. Currently, only the banking industry has international standards elaborated, while for other financial services, such as mutual funds or trusts, there are only international best practices available for monitoring purposes. Data from several sources (in order to insure confidentiality of data provided), have been used to estimate what might be the cost associated with maintaining an offshore sector largely in compliance with international standards, has been estimated from data obtained from several sources. We assume that the cost of auditing a bank (as part of the supervisory requirements) is US$15,000; the cost of “auditing” a mutual fund is US$8,000, and general business costs for the center—e.g. advertising, office supplies, utility payments, are US$25,000 per year. Assumptions have been made about the costs of hiring (where needed) additional general staff, as well as additional professional staff, such as supervisors or auditors. In the beginning at least, the salaries of these professionals would need to be competitive with those employed in countries such as The Bahamas or Cayman Islands, and if new staff can not be hired, then professional services would need to be obtained through consultants. These estimated theoretical costs and resulting “net revenues” are given in Table 4.

Taking the estimated costs of complying with international standards into account reduces the overall revenues by about 0.3 percent of GDP. Of course, this does not take into account the need to close institutions, which most likely would result in a larger decline in income than in costs. Thus, the net benefits, assuming compliance with international standards, to the ECCU countries ranged between nil and 1.1 percent of GDP at end-2000.

There are other costs or disadvantages of offshore sectors. OFCs have the potential to affect the liquidity and stability of the financial system, particularly where local banks have offshore entities. A financial crisis affecting an OFC in one country could have massive implications for regional economies. Apart from sudden reversals of capital flows and liquidity, the adverse performance or insolvency of an offshore branch of a domestic bank may seriously undermine the stability of the domestic financial system. The greater the reliance on fees, the more vulnerable the economy becomes to movements in the offshore sector. In the case of the BVI, it seems that the tax base has been eroded with the increased reliance IBC fees—accounting for well over 50 percent of current revenue. Also, in an environment of inadequate supervision and “firewalls” separating the onshore and offshore sectors, offshore banks can lend to onshore clients for projects such as construction and general investments. While this lending could have a positive impact on real economic activity, it can also adversely affect resource allocation and governance issues. This is likely to be the case, the greater the extent to which these loans are a vehicle for money laundering. Additionally, if domestic banks become involved in these activities, possible defaults on these loans would have a negative impact on the deposits of residents and the overall fiscal accounts if the government would need to intervene. A prime example of this kind of development was the failure in 1991 of the Bank of Credit and Commerce International (BCCI) that significantly disrupted the financial markets of many countries throughout the world.

V. Conclusions

Many of the Caribbean islands depend heavily on tourism or are moving from a predominately agriculture base toward tourism, and are looking to other means of diversifying their economies. To this end, offshore financial sectors are attractive to these countries in the context of diversification. This sector has been viewed as a growing industry with the potential to provide significant growth in developing economies; it is seen as being able to generate large revenues without large investments in physical infrastructure. Under current international standards, these views are no longer widely held. There are certain stigmas associated with offshore centers to the extent that they are perceived to be involved in money laundering or other illegal activities.

The more established centers have been able to generate significant amounts of revenues (and perhaps employment). These economies, such as The Bahamas, the Cayman Islands, and the British Virgin Islands, have also developed relatively strong and extensive legislative and regulatory frameworks to address these sectors. However, even in these countries, additional measures have been required by the various international for a looking into the problems of money laundering. For the newer entrants to this sector, the benefits are not so clear-cut—and this does not even take into account the costs of setting up the required supervisory regulations and institutions together with the training of professional staff. Additional work should focus on refining the measurement of the benefits and costs.22 For example, in the Caribbean region, the scope of measuring the contributions or value-added of the OFC to the economy encompasses fees paid to government and registered agents, rental of office space, wages paid to local workers, utilities and other ancillary services. More detailed information on the gross contributions to the economies would need to be accompanied by more specific actual data on costs, and in this regard, the national authorities should undertake strong efforts to obtain, and provide these data to researchers.

The increased competition resulting from more entrants into this activity implies greater product differentiation or price reductions (i.e., lower fees or enhanced services). However, one of the major competitive factors—increased secrecy from even local supervisors—is no longer a viable option. As shown in Table 3, the fees offered by the various countries do not vary significantly, and it is most likely that the major competitive factor in the current international environment is a country’s established reputation. All in all, in light of the higher costs associated with an offshore sector and thus, the net gains limited, country authorities will need to evaluate carefully a decision to establish, or to expand any existing, offshore sector.

Caribbean offshore Financial Centers: Past, Present, and Possibilities for the Future
Author: Ms. Esther C Suss, Mr. Oral Williams, and Mr. Chandima Mendis