By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian accountant is voicing optimism that this country’s latest threatened blacklisting by the European Union (EU) will have “minimal” impact on its ambitions to become a global digital assets and crypto hub.

John Bain, the HLB Galanis firm’s advisory partner, told Tribune Business that the “rule breakers” and “disruptors” in the digital assets space are less likely to be impacted by such adversity when compared to traditional financial services because they are used to overcoming seemingly-impossible challenges.

“Remember, the digital assets space is populated by people who are innovators,” he said. “They’ve been pushed back before; everybody tells them it can’t be done. They’re not people who are intimidated by that stuff; they’re pushing through the forests. I don’t think it will affect them as much as a conservative banker or a conservative institution.

“These guys are in the IT (information technology) world. They’re innovators who are out there, breaking the rules and what people say cannot be done. They’re going against the mainstream. I think any impact for digital assets will be minimal because they’re going against the mainstream. They said crypto currency couldn’t be done, they said What’s App couldn’t be done. They’re rule breakers. They’re disruptors.”

The EU’s threatened ‘blacklisting’ of The Bahamas for purportedly being non-cooperative in the fight against global tax evasion and avoidance will likely take effect in October when the 27-nation bloc’s Council meets to ratify such a move. Anguilla and the Turks & Caicos Islands, fellow Caribbean territories, are also reported to be in line for inclusion on this list. It comes just as this nation is striving to position itself as a well-regulated digital assets hub.

The Government, in a subsequent release, confirmed that The Bahamas, which was previously ‘blacklisted’ by the EU for tax-related matters in 2018 only to then secure its removal, is likely to be added to the list come October. Territories currently blacklisted, and whom it will join, include Panama, Trinidad & Tobago, the US Virgin Islands and a host of small island Pacific states such as Fiji, Samoa, American Samoa, Vanuatu, Guam and Palau.

Mr Bain said he was “kind of surprised; I didn’t see it coming” by the EU’s threatened action. “We’ve been blacklisted so often that the impact might be really minimal,” he added. “What it does is that it makes credit a little bit more stringent, and it puts off potentially people that pay attention to that kind of stuff... investors coming here might not want to put their money in The Bahamas.”

Still, he questioned how big an impact the EU’s action would have on the financial services industry and wider Bahamian economy. Mr Bain pointed out that The Bahamas’ main correspondent banking relationships are with US and Canadian institutions when it comes to clearing international financial transactions, rather than European ones, and the majority of our trade and commercial activities is with the US.

And, traditionally, The Bahamas’ main European contact point has been the UK, which is now no longer an EU member. “It may not be that impactful,” he added. “We’ve been blacklisted by everybody. There’s been so many; the OECD, EU, Financial Action Task Force (FATF).... all kinds of blacklistings. At least it’s not for money laundering or terror financing.”

Still, the EU’s imminent ‘blacklisting’ carries with it potential reputational damage and risk for The Bahamas and its financial services industry. There is also the likelihood that financial transactions involving Bahamas-based banks, companies and residents will be subjected to greater scrutiny by European counterparts, increasing time and money and impacting the cost/ease of doing business.

Accessing the EU financial services market may also be problematic, and pressure may also be applied to European-based head offices who have banking and corporate subsidiaries located in The Bahamas. “The bigger concern is the response from people not even in the financial sector,” one government insider, speaking on condition of anonymity because they were not authorised to talk publicly, said yesterday.

“International businesses are very skittish about being in jurisdictions without any kind of risk because they know the regulators will shine a bright spotlight on them. They may have to file additional information, go through a more rigorous audit and face additional scrutiny.”

The KPMG (Bahamas) accounting firm spelled out the consequences for The Bahamas if it failed to address the EU’s concerns in a report issues earlier this year after the nation was included on the bloc’s so-called ‘grey list’, whose members are deemed worthy of further monitoring to ensure they follow through on pledges to address purported deficiencies in their tax regulatory regimes.

KPMG (Bahamas) warned being ‘blacklisted’ by the EU will also result in this country’s inclusion on the national blacklists of EU member states. “What happens if The Bahamas does nothing in relation to meeting the requirements? The Bahamas will likely be added to Annex I, the list of non-cooperative jurisdictions (i.e. blacklist),” the accounting firm wrote.

“[This] means all the known sanctions will apply to The Bahamas and entities doing business in and through The Bahamas. Many jurisdictions have a blacklist running in parallel, but which is linked to the EU blacklist and, therefore, The Bahamas would also be included on such lists.”

The Government on Friday confirmed that the EU’s imminent decision to ‘blacklist’ The Bahamas related to concerns the bloc has over this nation’s implementation of so-called “economic substance” requirements and their related reporting. This requires companies to show they are doing real, legitimate business in a jurisdiction and are not merely brass plate, letterbox fronting companies acting to shield taxable assets and wealth from their home country authorities.

The Commercial Entities (Substance Requirements) Act 2018 requires all companies conducting “relevant activities” to confirm they are carrying out real business in The Bahamas via annual electronic filings, and Tribune Business was told that the former Minnis administration had been aware there were weaknesses with the database of information that had been reported electronically by local companies.

This newspaper understands that a New Zealand company, which created the electronic portal through which these details are submitted, had been re-engaged by the former administration to make the necessary upgrades and address the EU’s concerns. However, well-placed sources have questioned whether the work was completed or brought to a conclusion under the Davis administration.

“This is an own goal,” one adviser, speaking on condition of anonymity, said of the EU blacklisting. “The Government knew we had to upgrade some of the database facilities for the substance reporting. In order to remedy that, they had to engage a company to the upgrades. I suspect that project may have been put on pause for reasons that cannot be understood because it was mission critical.”

Another insider, also speaking on condition of confidentiality, said the Davis administration appeared to have “basically dropped the ball”. They added: “A plan had been left in place to upgrade that substance reporting database. There were some issues; they couldn’t do the interrogatories of that database as they needed to. The Minnis administration had left a plan in place to do the upgrades.”

The same contacts also said the Government may have created a void in its monitoring of, and response to, international tax initiatives by the EU and OECD through dismantling the international tax unit that was created by the former Minnis administration in the Ministry of Finance. Stephen Coakley-Wells, who headed the unit and sat on the OECD steering committee for harmful tax practices, left in December 2021 and it is unclear if he or the unit were replaced.

A source described Mr Coakley-Wells as The Bahamas’ main source of “intelligence” on OECD and EU plans. “He was there to do the networking and eavesdropping so we could know what their next move was going to be and pre-empt it,” they added. This newspaper was told that it was impossible to stay abreast of international tax developments without such a unit to co-ordinate the Government’s response.

Clint Watson, the Prime Minister’s press secretary, did not respond to Tribune Business questions on the “economic substance” database or international tax unit before press time last night. However, they were later picked up on by Kwasi Thompson, the Free National Movement (FNM) shadow finance minister, in a press statement.

“Why did the Government disengage its lead adviser in this very technical area in December 2021 and essentially dismantle the special tax unit at the Ministry of Finance set up under the last administration precisely to monitor and handle these issues?” Mr Thompson asked.

“The former FNM administration approved enhancements to the economic substance reporting system prior to the 2021 election, which this current administration was advised by the technical adviser to follow through with to ensure that The Bahamas received a favourable rating by the international taxation standard-setters. Why did the Government not proceed with the former administration’s planned upgrades which were approved by the technical staff?”

Suggesting that the EU blacklist may have been avoided if the Government had acted quicker and followed through, Mr Thompson said it had not answered “why the recommendations that the lead technical adviser presented to the Government to upgrade the compliance monitoring protocols and statistical reporting systems for tax exchanges with foreign jurisdictions, which was a critical element in The Bahamas’ assessments by the EU, along with amendments to the substance reporting legislation, have not been completed even after being given an additional six months from the original deadline of March 2022....

“Why did the Government not follow advice given in November of last year to meet, as a priority, with officials of the European Union when the threat of blacklisting appeared to be on the horizon and the matter required urgent political engagement at the highest levels?” Mr Thompson continued.

“The Government must share with the industry what immediate steps will be taken to mitigate the effects of any potential defensive measures from EU member states that are likely to have an impact on European persons and companies that conduct business with or within The Bahamas, in addition to the reputational damage to the financial sector and loss of confidence in The Bahamas as a jurisdiction.

“This is most critical as being blacklisted could force companies, in particular banks, to face a higher compliance burden and potentially could result in them reducing or completely withdrawing their operations that are connected to The Bahamas.”