Blacklist reshuffle: The Caribbean responds as the EU revises its tax haven list

The European Union revised its dreaded tax haven blacklist last month and while many Caribbean countries were spared, others were caught in the crosshairs as the taxation watchdog sought to name and shame those it deems non-compliant.

The EU list of non-cooperative jurisdictions for tax purposes has four new additions: the Cayman Islands, Palau, Panama and the Seychelles. The Caymans may have suffered a blow but elsewhere in the Caribbean there was reason to celebrate as many countries made the welcome leap from Annex II, the so-called ‘grey list’, to full compliance.

Antigua and Barbuda, the Bahamas, Barbados, Belize, Bermuda, the British Virgin Islands, and St Kitts and Nevis all satisfied EU regulators with their revised tax regimes and were cleared from the grey list, leaving behind Anguilla and Saint Lucia who are still under scrutiny.

Welcome news

The EU blacklist began in December 2017 as the bloc moved to expose and reform countries with permissive tax structures deemed liable to abuse from tax evaders. With most of the Caribbean ensnared by the EU’s black and grey lists (some repeatedly hopping between the two), the region’s financial services industry has been under siege for several years, and many in the sector are now breathing a sigh of relief with this month’s revisions.

The Bahamas, whose financial services industry is the country’s second economic pillar after tourism, welcomed the news that it had satisfied the watchdogs, with Minister of Financial Services Peter Turnquest commenting: “Coming off this list was not an easy process. The Bahamas has worked diligently to demonstrate its commitment at the highest political level to international standards.”

Bermuda was similarly thankful, following extensive work to reform its funds regime, and St Kitts and Nevis’s Prime Minister Timothy Harris took time to credit his staff with a veiled comment on the punitive nature of the EU requirements, saying: “Commendations to the Ministry of Finance, our consultants and other stakeholders for their work leading to our compliance with strenuous and onerous EU standards.”

At the other end of the spectrum, the Cayman Islands – blacklisted for not having ‘appropriate measures in place relating to economic substance in the area of collective investment vehicles’ – struck a confrontational note. The British Overseas Territory has already petitioned the EU for its removal, pointing to the fact that, at the EU’s behest, it has adopted more than 15 legislative changes since 2018. ?

The Cayman Islands’ Premier Alden McLaughlin said it was “deeply disappointing” and suggested that it was simply down to poor timing as the country’s new Private Funds Law and Mutual Funds (Amendment) Law only came into force on February 7, just days after the Code of Conduct Group met to advise EU Finance Ministers on blacklist revisions. McLaughlin says he will continue to push for removal, but he may have to wait as the next update to the list isn’t expected until October.

The Saint Lucia situation

All the jurisdictions under EU review were assessed by the Code of Conduct Group for their particular weaknesses and commitments made to implement changes by the end of 2019. Those that failed to make any headway were blacklisted; those who were in the process of making the necessary amendments but needed more time made the grey list; and those who did everything by the book were removed from all lists. Saint Lucia falls into the second category.

First blacklisted by the EU in December 2017, Saint Lucia was quick to act and had transitioned to the grey list by March 2018. In early 2019 the EU still had concerns, relating to certain tax exemptions on foreign income. Following a series of amendments, Saint Lucia now has until August 2020 to fully satisfy EU regulators that it deserves to be whitelisted.

Repairing the region

As of last month, the only Caribbean territories left on the EU blacklist are the Cayman Islands, the US Virgin Islands and Trinidad and Tobago. But it’s been a long and difficult road for the region that is still recovering from the impact of repeated censure and scrutiny.

Being blacklisted by the EU not only affects funding from the bloc, it also sends a powerful signal to the global community that a nation cannot keep its financial house in order. The reputational damage to the Caribbean over the years as islands move from blacklist to grey list and back again cannot be overstated. It has directly contributed to the de-risking crisis facing the banking industry as international providers view Caribbean jurisdictions as too high-risk and compliance measures too costly. The EU’s punitive actions have also had a dampening effect on foreign investment and cross-border business. As the sector begins the hard work of putting the worst of the de-risking crisis behind it, this latest whitelisting of much of the Caribbean is an early step in repairing the damage done.

Any real recovery, however, is dependent on stability and good faith. Critics of the EU claim that the bloc is constantly shifting the goalposts, with countries unable to keep up with escalating demands. And, as Antigua and Barbuda’s Prime Minister Gaston Browne recently pointed out, there is little consistency with jurisdictions winding up on the EU’s blacklist even when deemed compliant by the Financial Action Task Force and the OECD Global Forum.

The integrity of the EU lists has long been questioned because large tax havens, such as the United States, are overlooked in favour of squeezing less developed countries. Each time the EU revises and updates its blacklist, critics accuse the bloc of playing politics – an accusation that’s particularly hard to refute this time around.

?Less than a month after the UK formally left the European Union, the bloc’s Finance Ministers targeted the Cayman Islands, making it the first UK territory to ever appear on the blacklist. Bavarian MEP Markus Ferber suggested the timing was not a coincidence, commenting: “This sends a clear signal that the idea of turning the UK into a tax haven will not be acceptable to the EU.” At the same time that the EU was sanctioning the Caymans, the European Parliament formally added a new amendment to its post-Brexit negotiations, warning the UK that it should address the situation of its Overseas Territories and Crown Dependencies and their non-compliance with EU good governance criteria.

With such obvious political machinations behind the scenes, it’s difficult for the EU to maintain the neutrality of its blacklist regime. The reality for the Caribbean, however, is that it has no choice but to comply if it wants to remain a player in financial services markets. In the meantime, CARICOM is on the offensive, calling blacklisting “an existential threat” and adding: “The measures have the potential of causing devastating economic, social and political consequences as a result of the harm inflicted on our global image, our economic competitiveness and resource mobilisation.”