In the past four decades since The Bahamas became an independent sovereign nation in 1973, its second largest economic sector, financial services, was among the premier destinations for foreign capital accumulation by way of banking deposits, collective investment funds, captive insurance and various forms of wealth management activities.

That success depended in part on a very accommodating regulatory and investment environment. Banking laws and regulations contained strict provisions to underscore confidentiality and secrecy in financial transactions and minimal reporting requirements to the authorities by the licensed financial institutions.

Then, as now, no taxes are levied on personal, corporate or investment income, capital gains and the proceeds from inheritance.

In early 2000, the sector contained over 700 banks, trust companies and other financial services institutions, with more than half a trillion dollars of assets under administration and/or management. High salaries and employment in the sector contributed significantly to GDP and to government revenue, which by some estimates, exceeded $100 million per year.

Regulatory game changer
That success story came to an abrupt end that same year when the Organisation for Economic Co-operation and Development (OECD) initiated its Harmful Tax Initiative in an attempt to stamp out tax evasion in Europe and ultimately, reduce substantially, or eliminate entirely, the use of “tax havens” by their citizens.

That process started what has now emerged to be an existential threat to all low-tax jurisdictions in general and to The Bahamas in particular.

The OECD developed and superimposed a set of rules and regulations that became global standards for transparency and information exchange of financial transactions within and across international borders.

The Bahamas subscribed to the new rules and regulations by reforming the laws and practices in its jurisdiction and by so doing, lost some of its attractiveness and a great deal of business. The number of licensed financial institutions was reduced to about 270 today.

More global rules are on the drawing board, including the adoption of CRS, which are equally disruptive to the traditional offshore financial centre. Those ever-changing rules and regulations and the omnipresent threat of “blacklisting” and/or the denial of access to the international banking clearing and settlement system (correspondent banking relationships) will continue to be a major challenge to the expansion of the offshore financial services sector in The Bahamas.

Outperform the competition
Although the rules and regulations with respect to the provision of financial services in The Bahamas have changed dramatically over the years, the sector has been able to retain a substantial amount of legacy business, while at the same time attracting new clients from different geographic areas. It is quite probable that most of the business in this jurisdiction was already “tax compliant” in their home countries and the clients are therefore quite content to remain in The Bahamas.

Of the few that have left (mostly from Europe), anecdotal information suggests that they have been largely replaced by other nationalities particularly from Latin American countries. It is no secret that wealthy individuals generally seek to protect and grow a portion of their assets by placing them under expert management in a jurisdiction other than the one where they are resident.

Going forward, The Bahamas should continue to concentrate on attracting high-net-worth clients with a view to offering competent, efficient and cost- effective asset management services on leading technological platforms. In short, aspire to outperform the competition, whether onshore or offshore, and by so doing, secure a sustainable base for providing financial services well into the future despite any changes in the global rules or regulations.

That effort should be augmented by continuous research and development of modern financial products (new and improved structures) that would meet the needs of a geographically diverse client base.

To the extent that there continues to be political uncertainties, social unrest and economic dislocations in various parts of the globe, there will always be a demand for the asset management and other services performed in offshore financial sectors and opportunities. It would therefore be in The Bahamas’ best interest to continue to strengthen the jurisdiction by meeting the global standards on transparency and information exchange. At the same time, it should increase the service capacity of its service providers (by training or importation) and adopt leading-edge technology wherever appropriate for use in the financial services industry.