Raising standards to serve a changing global market
NEW LAWS HAVE BEEN INTRODUCED, ENHANCING THE IMAGE OF THE BAHAMAS AS AN INTERNATIONAL FINANCIAL CENTER. THE ISLANDS’ FINANCIAL SYSTEM IS NOW ONE OF THE BEST REGULATED IN THE WORLD , BOOSTING ITS ATTRACTION FOR BLUE CHIP CLIENTS

JULIAN FRANCIS Governor of the Central Bank of The Bahamas

JULIAN FRANCIS, the Governor of the Central Bank, believes The Bahamas is about to enter a new phase as an international financial center. According to Mr. Francis, rapid change and development in the world economy and the international financial services industry are creating opportunities from which the islands can benefit.
“The Bahamas is on the threshold of an entirely new period in its success as a developing center for the delivery of high quality financial services to a global industry which increasingly requires such services,” he says.
He believes the nation can “reassert its position as one of the leaders in this business, not following but imposing innovative ideas on an industry which is still hungry for a true leader.”

Significant steps have been taken to ensure that The Bahamas is best positioned to seize these new opportunities. The aim has been to bring the islands up to speed with evolving international standards by introducing an enhanced regulatory regime for effective supervision of the entire financial system.
A new legal framework governing the regulation of banks and trust companies came into force at the end of 2000 and has initiated a process of restructuring. Institutions that have proved unable to comply with the new rules have been asked to discontinue operations.

“Since this process started early last year, we have closed about 30 institutions,” says Mr. Francis. “Our licensing standards have been further tightened and we are extremely selective in licensing banking institutions.
“We look at the nature of the project to ensure that it is consistent with what we believe banking institutions will be doing in The Bahamas or from The Bahamas. We look at the sponsoring parties to ensure that they are credible. And we need to determine that they have the kinds of resources that would warrant giving them a banking license.

SAFE HAVEN The Bahamas has a consistent record of success in attracting internationally-recognized financial institutions and substantial investors

“We had banks which had been established earlier which did not have a physical presence in The Bahamas–124 out of 400,” he adds. “Now all of them are required to establish a physical presence here.”
Self-regulation has now been replaced by a legal requirement that all institutions and persons providing financial services in The Bahamas ensure that they are not involved with illegal activities. There is also increased provision for sharing information with
overseas regulators for supervisory purposes. On-site examinations are carried out–around 90 last year–to check that financial institutions are following know-your-customer, anti-money laundering requirements.

Last year, the Central Bank budgeted $2.7 million to provide for expansion of supervisory resources and facilities, and for a newly established Financial Intelligence Unit.
James Smith, Minister of State in the new PLP government’s Ministry of Finance, has said it “recognizes the need for The Bahamas to meet international standards.“
The financial services sector represents about 20 percent of the economy and is growing steadily. Private banking business, the most important part of it, accounts for about $1 trillion managed from the islands today. There is a substantial offshore funds industry, with some 700 mutual funds based in The Bahamas, valued at around $100 billion.

“The Bahamas has been in the business of international financial services for about 65 years,” says Mr. Francis. “Some of the world’s most important banking institutions have been established here for 30 or 40 years. We have a very rich community of attorneys, accountants, people in information technology and other services, which support the financial services sector, and this is certainly one of our competitive advantages.”

The Central Bank is, by statute, quite independent of the government, a critical factor for the perception of The Bahamas as a regulator of financial services in the eyes of the international community.
“If they think that the Central Bank, or the regulator, is not independent of the government they will question our regulatory regime because then you are opening the door to influence by politicians, and nobody wants politicians to interfere,” says Mr. Francis.
“The bank does not depend on the government at all, its budget is entirely its own. In fact, it works the other way around–the government has to come to the Central Bank for money.”
If the bank works ‘in concert’ with the government that is because it believes that the policies the government is following are correct.

NEW RULES Foreign banks must have a physical presence in The Bahamas

“There isn’t very much, if anything, that the Central Bank is obliged to have the government’s agreement for, but there is a cooperation between the bank and the government,” says Mr. Francis. “The reason for that is that we perceive that in a small economy such as ours there does need to be a coordination of fiscal and monetary policy in order to achieve the best results.”
The Bahamas has taken several steps at an international level this year to improve its image as a well-regulated and transparent financial center.
After agreeing to demands for greater transparency, it has been removed from a blacklist drawn up by the Organization for Economic Cooperation and Development (OECD). The Bahamas emerged from discussions with a negotiated agreement conditional on the application of a level playing field in relation to all jurisdictions with which it is competing to provide cross-border financial services. Insistence on a level playing field has been the position held by The Bahamas since 1999.

The agreement outlines the measures that The Bahamas is prepared to take to improve transparency and exchange of information. No changes were proposed to the islands’ longstanding tax-free environment for international business, including no income tax, no corporation tax, no capital taxes and no withholding taxes.
In January, the official signing of a tax information agreement (TIEA) with the U.S. took place. The then Finance Minister, Sir William Allen, said The Bahamas was pleased to have been able to reach a balanced agreement, which takes full account of “fundamental interests” of both nations.

“The Bahamas is firmly against the use of its financial system for illicit purposes. We are determined that the same financial standards apply in The Bahamas as apply in other recognized financial centers,” he declared.
At the signing of the agreement in Washington, U.S. Treasury Secretary Paul O’Neill said: “The Bahamas leaves no doubt that it should be counted among the financial centers of the world that are committed to upholding international standards, and simply will not tolerate the abuse of its financial institutions for illicit purposes.”

An International Monetary Fund (IMF) team has visited The Bahamas and met with regulators and private sector representatives as part of a preliminary appraisal, leading to the nation’s eventual participation in a Financial Sector Assessment Program (FSAP).
The FSAP, a joint IMF and World Bank scheme, aims to “increase the effectiveness of efforts to promote the soundness of financial systems in member countries.”
Sir William described it as a way for The Bahamas to demonstrate to the world that it now has in place a system equal to any other international financial system.