Extra-territorial legislation, sanctions and their deployment are set to become more contentious

Sanctions and large fines are becoming the weapon of choice for the United States and others as they seek ways to stop nations facilitating trade or financial transfers that touch countries they are engaged in a political dispute with.

The issue is becoming more acute as huge fines and restrictions placed on international banks threaten to stop what can be the quite legal free flow of funds to nations regarded as transgressors of rules relating to tax, money laundering, terrorism or international organised crime. The issues are complex as the administrative approach being adopted in some cases intentionally confuses quite proper objective concerns about illegal payments with subjective considerations based on political judgements.

Although so far not subject to the huge fines that a number of international banks are now facing, the Caribbean and its financial sector is now under intense scrutiny and can no longer expect to be immune from the effect of increasingly invasive extraterritorial legislation.

The longest running and most questionable example is the US trade embargo on Cuba and the way that the US Treasury is now interpreting the legislation. Through a series of complex and difficult to unravel US laws such as Helms Burton, and the continuing inclusion of, by its own admission, the hard to justify US designation of Cuba as a terrorist state, the US authorities have been extending their pressure internationally on the Cuban Government.

They have done so by taking legal action against international banks operating in the US and the threat of extradition of their executives. So serious has this become that in Europe, despite it being illegal to comply with such external trade legislation, many of the continent’s largest banks have not only withdrawn from undertaking any transaction that even vaguely involves Cuba, but have shut down individuals’ bank accounts and recalled loans out of fear of huge fines on their operations in the US.

20100725theviewfromeuropeAt its most serious is the announcement last week of a fine of US$8-10 billion on the French bank, Banque Paribas, for allegedly violating US sanctions and anti-money laundering rules. Washington has said that between 2002 and 2009 the bank made hidden transactions in US dollars to Cuba, Sudan and Iran and other nations against which the US has sanctions. If the French bank concerned admits its guilt not only will it cease to be able to clear US dollar transactions, but so big is the fine that it will lose its credit rating, its profitability, and have to raise new capital to meet European banking requirements.

The French Government is concerned about the impact of this and the broader political implications. Its President, François Hollande, will raise the issues with the US President and may halt transatlantic trade negotiations. The country’s Foreign Minister has declared Washington approach “unfair, unilateral and irrational.”

According to research undertaken by the Financial Times, such US pressure on foreign banks has become so pervasive that they now occupy 12 of the top 20 places in a league table of post economic crisis penalties levied by US authorities. Just as strikingly, foreign banks now account for 27 per cent of the $96.4B of the fines and settlements that US authorities have levied for a whole range of financial misdemeanours since 2008.

In the context of Cuba there is a growing suspicion in Europe that as US corporations begin to take a greater interest in the future investment and trade opportunities on the island – the powerful US Chamber of Commerce led a small delegation from major US corporations to Havana last week – they are actively encouraging the US administration to more strictly enforce US extraterritorial legislation in order to exclude European and other international corporations from investing in or trading with Cuba.

The sanctions issue, as far as the Caribbean is concerned, is also manifesting itself in other ways. The approach of the OECD – the grouping that brings together the world’s richest and most developed nations – and which blacklists nations that have not passed the required Anti-money Laundering and Combating the Financing of Terrorism legislation, could soon halt many financial transactions across the whole Caribbean region.

Although the rest of the Caribbean is compliant with OECD rules, Guyana’s failure to do so, which is fundamentally a reflection of domestic politics, has resulted in its referral by the Caribbean Financial Action Task Force (CATF) to its parent body, the OECD Financial Action Task Force (FATF) in Paris and almost certain retaliation.

The CATF, an organisation of twenty-seven Caribbean Basin jurisdictions, said on May 29 that Guyana’s posed “a risk to the international financial system” as a result of it not meeting agreed timelines. It therefore called on members to implement counter measures to protect their financial systems “from the ongoing money laundering and terrorist financing risks emanating from the country” and formally referred Guyana to the FATF.

What is clear is that the measures that will follow – enhanced due diligence; enhanced or systematic reporting of financial transactions; refusal to permit the establishment of subsidiaries or branches or representative offices in Guyana; limiting business relationships or financial transactions with Guyana or

persons in our country; and other measures – will rapidly impact on the whole region if the rest of the Caribbean does not respond by isolating Guyana to protect their own financial systems and to remain in compliance.

The issue of sanctions at a Caribbean level is also complicated by the use of offshore financial services such as those offered by the BVI or Cayman to international investors. For instance, restrictions imposed by the G7 on Russia following the annexation of Crimea has resulted in the freezing of some Russian-owned Caribbean-held assets and transactions, and the imposition of reporting requirements on Russian use of the UK’s dependent territories.

There are also a growing number of other forms of regulation or legislation, such as the US FATCA, which impose reporting requirements for tax purposes on the region in relation to accounts held by US citizens overseas. These too are becoming a challenge to Caribbean financial institutions and governments in terms of compliance.

Extraterritorial legislation, sanctions and their deployment are set to become more contentious.

For most people it is acceptable in a globalised economy to control and regulate financial flows, halt criminality and enhance tax revenues so that states can fund their social commitments. However, measures such as those relating to Cuba, where sanctions have become a means of protecting economic self-interest or political objectives, are not.

 

Previous columns can be found at www.caribbean-council.org

 

 

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