We look at The Bahamas no longer as a banking center... but as a service center.
- Beat Paoletto, managing director and CEO of UBS Bahamas
This week, the ground underpinning The Bahamas' financial services sector shook with the announcement that UBS Bahamas Limited will close its private banking unit here over the next 10 months, resulting in the displacement of 70 staff members. In June last year, in a three-part series of articles in this column entitled "The Looming Financial Earthquake", we predicted how the rapidly changing demands of the American and European governments will adversely affect our financial services sector, ultimately resulting in the downsizing and loss of business to other jurisdictions that are more business-friendly and less prone to the over-regulation of its primary stakeholders - the offshore banks and trust companies and mutual fund administrators.
Therefore, this week we would like to Consider This... what does the UBS decision portend for The Bahamas and what can we do to stand firm and survive in the face of these and other tectonic financial shifts that are likely to affect our offshore financial services sector?
The UBS decision
UBS Bahamas Limited has been operating in The Bahamas since 1968 and, although bank officials have stated that they remain committed to this jurisdiction, we should view its decision to wind up its banking business as neither insignificant nor inconsequential.
The UBS decision has to be viewed through the lens of both international and domestic developments.
There is no doubt that recent developments have resulted from adverse actions that have affected UBS. Its genesis can be traced to the efforts of industrialized countries, aided in part by the Organization for Economic Cooperation and Development (OECD), to successfully penetrate Swiss bank secrecy
First under the guise of thwarting terrorist financing and then to minimize money laundering, since the turn of the century, there has been a calculated, deliberate and systematic assault by the developed nations to penetrate offshore bank accounts, beginning with Switzerland.
Because the industrialized nations have done such a deplorable job of managing their own economies, resulting in record high fiscal deficits and exponentially unsustainable and increasing national debt, those countries have targeted the offshore centers where they believe their citizens have spirited away billions, far from the watchful eyes of insatiable tax collectors.
In recent years, pressure has mounted on Switzerland to end its long tradition of bank secrecy.
In the past five years, the United States and certain countries in the European Union have accelerated their efforts to collect revenue from undeclared assets of their respective citizens.
In 2009, UBS AG was caught red-handed by the United States government encouraging U.S. taxpayers to hide their assets in secret Swiss bank accounts, resulting in UBS paying a $780 million fine to the United States. In addition, the Swiss and United States governments negotiated an agreement, which required UBS to transmit to the U.S. authorities information concerning 4,450 American UBS clients suspected of tax evasion.
Other Swiss banks like Wegelin & Co., Switzerland's oldest private bank, Julius Baer and Pictet have confirmed that they were also under investigation by the U.S. authorities.
By June 2012, UBS employed 63,520 persons worldwide, including 22,500 in Switzerland. In October of that year, UBS announced that it would lay off 10,000 of its employees globally, including at least 10 workers in The Bahamas.
UBS has cited the economic viability of its Bahamian private banking unit for its decision to downsize its banking operations here. In explaining the reasons for its decision, a bank executive suggested that there were three questions that it sought to address: "Value proposition, economics and operational complexity."
He said that UBS "was not able to find the correct value proposition to attract assets to be booked in The Bahamas out of the different Latin American countries".
He continued that "the market is pushing us to consider, when it comes to offshore business, Latin America, they continue to think about Switzerland, the U.S. and eventually Panama, but to a lesser degree The Bahamas".
He also confirmed that although the company's board of directors had some questions about the future of UBS Bahamas, it will continue to grow and expand its trust and fund administration businesses here.
Our post-independent colonial regulatory culture
Political independence in 1973 did not witness a commensurate shift from pre-colonial behavior by some of our regulators, who in recent years have not kept pace with the rapidly changing needs of our financial sector.
Tremendous damage was done to the sector by the immediate past chief regulator of the Securities Commission.
Even the Central Bank supervision has become such behemoth-like regulators, who, along with too many compliance officers at both commercial and offshore banks, have done so much harm to the sector that it is questionable if we will be able to recover in time to reverse the exodus of offshore banks from the jurisdiction.
Thankfully, Hillary Deveaux has replaced his predecessor as the executive director at the Securities Commission. He now has the mammoth task of abating and reversing some of the injudicious decisions and the archaic and inane regulatory actions that were instituted by his predecessor.
Legal and accounting professionals, banks, trust companies, fund managers and the entire financial sector have breathed a collective sigh of relief by the decision to replace the former Securities Commission executive director, a decision that took the government nearly one year to make in order to arrest the damage to that sector.
Fortunately, other personnel changes have also been made to halt the Jurassic regulators who have seriously impaired this sector. We can only pray that it is not too late.
Urgent action is required
There is an urgent need for the political directorate to fully understand the changing realities of the international offshore financial services sector, to provide decisive leadership and to implement proactive, balanced and pragmatic measures in order to arrest the exodus of offshore business from the jurisdiction.
Above all, we must eradicate the overwhelmingly archaic bureaucracy that impairs the progress of the sector.
Conclusion
In the wake of the UBS decision last week, and in anticipation of similar decisions that will ultimately follow by other offshore banks, as well as an awareness of the shifting landscape that continues to shake the world with respect to bank secrecy, the criminalization of tax evasion, and the automatic exchange of information of citizens between governments, we can clearly see that we stand at the vital crossroads of a new financial world order that will wait for no one and from which none will escape.
As we observed in an article in July last year, "If we are to successfully emerge from this shifting financial landscape, endure the inevitable aftershocks, and embrace the new normal that is being imposed on us from the external forces, we urgently require innovative and visionary political and regulatory leadership that will see more than others see, see farther than others see, and see changes on the financial horizon before others see them".
In the final analysis, if we are to transform and grow our financial sector, we must now take immediate action to rid ourselves of unnecessary and harmful over-regulation.
It is imperative that we do this in order to extricate us from the quagmire of inertia and save this sector that must remain an important part of our economic landscape.
o Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.
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