Local banking executives have thrown into question government's plans to "regularize" the web shops, suggesting that even once this occurs it may be difficult or impossible for banks to do business with them without the country facing a damaging potential 'blacklisting'.
Without banks being able to handle web shop proceeds, this would have a knock-on negative impact on government's intention to reap millions in taxes from the web shop sector, some have warned.
In an exclusive interview with Guardian Business, Ian Jennings, president of Commonwealth Bank, said with reference to the government's plans with respect to illegal web shops this year: "It's not as simply as just passing an act to regularize them; they also have to be seen within an international framework of FATF (the Financial Action Taskforce) and various other money laundering issues.
"It goes back to a reputational issue for the jurisdictions, and I think a lot of people don't appreciate that and what may be the issues that fall out of that. Just by regularizing the web shops is not going to get rid of the problem as far as the banking sector is concerned."
Jennings noted that the relationship of banks operating in The Bahamas with their "correspondent" financial institutions in the U.S. and elsewhere, which provide services on their behalf, is crucial and these foreign banks are under great pressure from their regulators to ensure that the Caribbean banks they do business with are operating to international standards.
In his Budget Communication late last month, Prime Minister Perry Christie said it is intended that with the regularization and licensing of web shops under an impending Gaming Bill, he expects such establishments to be operated in a way that upholds "laws and international obligations in accordance with best practices".
However, Jennings suggested that he has doubts that web shops would be able to meet these obligations and told Guardian Business that doing business with web shops that may be under a legislatory framework that legalizes them in the Bahamian context, but which may not be meeting international standards set out by agencies such as the FATF, could cause local banks to be called into question in this regard by their correspondent banks and international agencies.
"Internationally now the major economies continue to crack down on anything that's seen as tax avoidance, tax evasion or just offshore financial sector. We've seen developments with Switzerland; the U.S. has indicated they'll put a greater scrutiny on what's happening in the Caribbean and, certainly, for Bahamian banks who do not have any correspondent or any parents outside the country, the relationships with correspondent banks in the U.S. is extremely important because all of our transactions and trade is with the U.S. and they are coming under increasing scrutiny from their regulators to make sure that their Caribbean correspondents are performing to the highest levels.
"That's a relationship that no Bahamian bank can afford to give up so we have to make sure that we maintain our reputational position. These are all things that we are waiting to see how they develop coming out of the budget presentation and the legislation that goes behind it," said Jennings, in an interview with Guardian Business.
He called the matter one of "concern" for international agencies with respect to the reputation of the Bahamian financial system.
Jennings' comments were strongly supported by another senior banking executive locally, who spoke on condition of anonymity.
Money 'will not be accepted'
"(Jennings) is absolutely right. The government seems unaware that many banking institutions, as a matter of policy, will not deal with the gaming industry whether it is legitimate or not. At the extreme, simply because the government 'legalizes' the gaming industry in The Bahamas does not mean that their money will be accepted in the system.
"This is not simply a 'Bahamian issue' - it involves international banks who also provide correspondent banking facilities to Bahamian based institutions, and unless there is evidence of strong know your customer (KYC) procedures and anti-money laundering (AML) standards in place (and the gaming industry would need to demonstrate that), the international and local banks may be forced to distance themselves from the gaming industry."
Without local banks being able to offer banking services to the web shops, this in turn could hurt the government proceeds of taxation from the sector.
"Government's proceeds of taxation will also be impacted as the proceeds may not be accepted unless KYC and AML procedures are in place, and the industry is rid of persons who have run afoul of the law. The best solution for The Bahamas is for it to have a national lottery. Otherwise we will have a blossoming 'shadow banking system' that will be making loans, transmitting money, taking deposits etc. completely unchecked and unregulated. That can't be good for the economy," added the executive.
In his recent budget communication, Christie suggested that the government "conservatively" anticipates collecting around $12 million from the sector annually once the Gaming Bill is passed following the budget debate that is currently underway.
'Unaware'
Revenue collection potential is clearly one of the major benefits of regularizing the web shop sector, which has flourished in recent years. The anonymous banking source said it may be the case that the government is "focused simply on the revenue aspect of the legalization and seem unaware of the wider implications of their actions".
However, as Guardian Business exclusively reported in October last year, how the unregulated sector could factor into external reviews this country and its financial sector faces from entities such as the Caribbean Financial Action Taskforce, has also been recognized by officials as an impetus to regulate.
Before elected officials had suggested that legislation might be passed to make web shop gaming legal, the country's top anti-money laundering official, Stephen Thompson, coordinator for the National Anti-Money Laundering Taskforce, called the regulation of the web shops "the only responsible thing to do" in light of external pressures.
Thompson said in an interview that while he did not expect a "blacklisting" as a result of a lack of regulation, he did admit that "dire consequences" for the financial sector and economy could result from a perception among international agencies monitoring issues of money-laundering and terrorist financing that The Bahamas is being "lax" in its handling of web shops.

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