Global tax bodies are ramping up regulatory pressure. Is Saint Lucia ready or will it find itself back on the EU blacklist?
[dropcap]W[/dropcap]hen Saint Lucia found itself on the EU’s tax haven blacklist in December 2017, it was a wake-up call for the financial services industry. The government moved quickly to address the EU’s concerns and earned a reprieve just four months later, but Saint Lucia’s banking sector still faces intense pressure from regulators and a host of compliance-related challenges.
Global regulators have increased pressure in recent years on so-called ‘tax havens’ in an effort to thwart tax competition. Being a small island nation with a relatively young financial services sector, Saint Lucia has been hard hit by waves of burdensome regulation beginning in 2013 with the Automatic Exchange of Information and culminating in the latest compliance framework, the Common Reporting Standard (CRS).
Under the CRS, financial institutions are obligated to report on the assets of foreign clients – delivering that information to tax authorities in the client’s country of origin. Saint Lucia committed to its first reporting under CRS by September 2018 and, as that deadline looms, it’s crucial that the country is seen to meet its obligations if it wants to remain off the EU’s radar.
Managing Director of 1st National Bank St Lucia Ltd, Johnathan Johannes is confident that the industry is ready, saying: “The banks are well on their way to being fully compliant [with CRS]. We have been having meetings to ensure we make the deadline and it has all been very positive.”
Johannes, who is also Public Relations Officer for the St Lucia Bankers Association, says getting the sector compliant hasn’t been without its challenges, however. “The hard part is generating the new information from customers. We have had to update our entire database. We try to comply in a way that is not disruptive or intrusive to our clients.”
And there is also the issue of resources. Banks have had to absorb the costs of compliance, which can be high. “To remain in compliance drives up your costs,” says Johannes. “You have to increase your budget, invest in new software, hire additional people. It can be expensive.”
Getting CRS-ready may be an expensive, time-consuming and complicated process but non-compliance is not an option. Failing to appease regulators can land countries on the EU’s blacklist – as Saint Lucia discovered last year.
FROM BLACKLIST TO GREY LIST
In December 2017 the EU released its tax haven blacklist – naming and shaming Saint Lucia alongside 16 other countries. According to the bloc, the list is designed to clamp down on nations that have failed to meet international tax standards, encouraging transparency and discouraging unfair tax practices. The blacklist is not without controversy. Critics have labelled it a ‘white list’, pointing to the glaring omission of well-established financial centres such as those in the US and the Cayman Islands, as well as the hypocrisy of ignoring tax havens within the EU’s own borders such as Ireland, Luxembourg and the Netherlands.
Its validity may not be acknowledged by everyone but inclusion on the list is no small matter. Not only does it come with the threat of heavy sanctions from one of the world’s most powerful trading blocs, it can also damage a country’s reputation internationally, directly affecting its ability to forge and maintain correspondent banking relationships.
“We were all a bit unnerved but did not expect much to come out of it,” says Johannes who believes that Saint Lucia’s reputation remains intact after the blacklisting, aided by a swift response from government. “We felt that the government had the capacity and the wherewithal to get off the list. They looked at the actions that were required, which were just a formality. They needed to move quickly and that is what they did.”
Saint Lucia was moved from the blacklist to the grey list in March 2018, after meetings and negotiations with the EU Code of Conduct Group.
STAYING SAFE
The EU may have welcomed Saint Lucia back into the fold, but that security is not guaranteed. With continual revising of the blacklist, countries can find themselves in a dizzying whirl of being on again, off again. “In order to stay off the list we need to understand what is required of us, have people research the changes taking place in the industry, and move swiftly to discussing these things at a national level,” said Johannes. “We need to stay on top of these things; we cannot circumvent these regulations.”
The EU blacklist has been highly criticised for its vague methodology and its willingness to play the shame game. For those nations in its crosshairs, it’s not always clear why they are being targeted or what they can do to protect themselves. Johannes says preparation is key, as well as the ability to be nimble and pivot when necessary. “We need to stay relevant. The landscape has changed and the faster we can change with it, the easier it will be.
“Lobbying does play a key role but the OECD, EU and US have demonstrated that they will get their way. What we need to do is start falling in line with compliance whilst continuing to lobby, not scrambling to be compliant when the lobbying efforts fail. We can explain [to regulators] how it affects our economies and our livelihoods but, at the end of the day, we need to find a way to be compliant because the regulators will not wait, the rules will come into play.”
AN INNOVATIVE FUTURE
Five years ago Johannes left the banking sector to move into retail. After just four years he returned to finance and says this is indicative of his faith in the industry and its future. “I would not have come back to banking if I did not believe in the resilience of our industry.”
One of the mainstays of the Saint Lucian economy, Johannes believes that banking will rise above any regulatory challenges and evolve to explore new areas of opportunity. He predicts that financial technology will force the sector to embrace a more digital future saying: “I see increased competition but not from banks, from FinTechs. This competition will lead to increased collaboration as banks partner with FinTechs and a whole new ecosystem emerges.”
This new spirit of innovation and collaboration within the sector is a result of tackling the regulatory challenges, according to Johannes who says bankers are becoming more creative and more united in the face of the international threat.
“We are prepared to survive and thrive,” he says. “There are exciting times ahead; we just need to be prepared for change. We need to hold on tight and enjoy the ride.”
