The Kalorama Letter
Concerning The Bahamas the Blacklist & Creative Diplomacy

by:
Gilbert N.M.O. Morris


note: Dr. Morris is a Bahamian scholar who once organized the Sir Milo B. Butler Lectures on The Bahamas Constitution. He is Co-Director of the Security Policy Group International (SPGI) - which conducts studies on international relations, economic policy and security issues. Morris is a member of the Committee of Mentors at the London School of Economics (LSE), has taught English Banking Law and is Professor of The History of Systems of Thought at George Mason University in Virginia. He is also Lecturer in International Law and Diplomacy for The National Student Leadership Foundation.


Summary of Policy Recommendations

1. Refuse any and all attempts to undermine
bank secrecy in the Bahamas.

2. Set up a think tank staffed by Financial
Policy specialists to examine Money Launder-
ing and discreet financial arrangements in the
Bahamas.

3. Call for and establish an international body
(along the lines of OPEC), made up of the
finance Ministers of the more prestigious Off
-shore financial centres. This body would set
down membership guidelines for each state
wanting to attain or retain bank secrecy.

4. Create Chart of Account Formation which
shows all of the check points in establishing
accounts under bank secrecy in the Off-shore
centres. (This allows all to see the procedures
for establishing accounts, while keeping the
accounts themselves secret).

5. The additional duties of the body would be
defending bank secrecy against the encroah-
ment of external interests.



Today, I write as a concerned citizen for whom the Bahamas is beloved, for what seems to be - with all due respect - a rather timid policy on the Blacklist sponsored by The Financial Action Task Force (FATF); created by the Organization for Economic Corporation and Development (OECD) - in the interest of stemming the tide of money laundering. The danger of this initiative is breath-taking: if we comply with the current FATF proposals, and lose banking secrecy, as has been reported, we would effectively lose even the strategic sovereignty we possess, our banking industry would be

dead...positively; and this may have a catastrophic effect on the standard of living of every Bahamian.

We have approximately 400 banks registered in the Bahamas, with some $ 200 billion dollars in financial assets. Listen: we cannot begin to calculate the value of such a privilege. These dollars distingush us from many small countries who spend their time hustling to get the attention of larger more powerful countires. Some readers may question whether these banks hire Bahamians directly, as a consequence of which they question the importance of banking to the economic life of the Bahamas. Let me, in answer to that attitude tell a little story.

In 1992, while participating in a roundtable on The Economics of Freedom at a Mont Pelerin Society meeting in Vancouver, I turned to the scholar next to me and said: Freedom is not merely a set of privileges, but a series of costs. That scholar introduced himself to me as Dr. Milton Friedman - the Noble Prize winner for Economics. in 1976. We talked a little about my country - The Bahamas - and the Commission of Inquiry which convened after the 1992 elections in which the FNM became the government of The Commonwealth of the Bahamas. Sovereignty is a series of costs too, he said. I thought on that conversation extensively at Vancouver. I thought about our fragile situation in the world, and how the loss of confidence in the Bahamas could mean that we are reduced to basket-case status in the world community. With all due respect to our tourism professionals, we would be-come a financial back-water where
people from wealthy countires come only to play native. In this respect tourism maybe our largest industry, but banking is the most important.

As result of this thinking, I wrote a letter called the Vancouver Letter - Concerning the need for a Thorough Commission of Inquiry, which was published in some of our leading papers.

My concern was that the drama of our domestic issues were being played onto a world stage. How we handled ourselves, determined how we would be treated in the international community, again, as a series of costs. Respectfully, I have concerns with the way the Inquiry proceeded, and with its conclusion, which are not fully relevant here. I will say only, in a world where impressions are now more immediate than ever, our approach to our own internal issues are no longer internal matters. And new economic partnerships in a highly competitive world may hinge on the perceptions our own actions tend create.

That is why we must act with a mature foresight in the current crisis. Itell you in the strongest terms, whether or not the many banks we have employ Bahamians directly is not an issue. Since we have $ 200 billion dollars it means that the world financial community cannot ignore us. It means that through our contacts with that community over money and banking, we may win other concessions on trade and immigration or allowances for education for instance. It means opportunities for the development of venture capital enterprize, that prestigious international corporations with specific needs have to deal with us because of the skill
pool we developed handling those funds. Through such relationships, the international partners of our banks, or their own clients may decide to give the Bahamas a try for investment purposes. That, my fellow Bahamians, means jobs and the maintanence of our standard of living ! Therefore losing our banking industry and our sovereignty may very shortly become a set of costs, and bluntly, a disaster for our way of living.I am sure we all agree that money laundering is dangerous to our economic health. We could start by saying it is morally wrong. If we examined the possible corruptions to our reputation and our banking system, we may simply say money laundering is:

a. inflationary - it causes prices to rise and fall sporadically
- since it introduces loose or arbitrary credit and cash into an economic
system, often outside the discipline of the legitimate economic
institutions, such as in our case the Central Bank.

b. Depending on its point of entry into an economic system, money
laundering can have a variety of effects. In some cases it develops
through bogus corporations and companies. The effect of this can mean that
earnest Bahamians could find themselves suddenly out of jobs they thought
had long term prospects. As such, it could have a punishing effect on the
loss of skilled labour applied to production and services, which enriches
the economic life of the Bahamas.

c. Direct money laundering through the Banks is yet another type
of money laundering which has altogether different effects. One of the
main issues here - which one may accept as a rule is that going after bad
money interferes with good money. That is, in an effort to smoke out the
dubious investor, we may give the legitimate investor the wrong
impression. He or she may decide that it is not worth the hassle to have
to deal with the inquiries into such private matters, and decide to take
their business elsewhere.

Though I believe we in the Bahamas have acted during the 1980s to defeat
the notion that our Banks are engaged in discreet money laundering, if we
are not careful, if we allow others to dictate to us, if we become
reactionary and panic-stricken, we could lose our second largest industry
by accident.

I would like therefore to outline some of the issues in ways which I have
not seen so far in the press. First, let me lay out very shortly, some of
the basic questions before us. I will say someting about the OECD, the
reason they support this policy, what I really think it is all about and
what we can do about.

Who are the OECD ? They are a group of the 29 richest countries, based in
Paris. USA, Britain, Germany, France, Italy and Canada, or the major
industrialized countries in the world operate through this group, whose
polices can have profound effects on international bodies such as the the
IMF, the World Bank, the WTO and the GATT. All this should tell us that
any sanction initiating from the OECD must be taken seriously.

The Blacklist itself is not a sanction. It is a first step in that
direction. Although, if investors are frightened away because we may be
blacklisted, again we are the losers. What about the Blacklist itself
? How does a country end up on it at all ? It is believed that over $
600 billion dollars in illicit funds are roaming through the banks of
off-shore financial centres like the Bahamas. The big countries have
decided to get tough, since if this money is laundered, drugs traffickers
will have access to clean funds.

Does this mean that these threats of blacklisting are about getting after
the proceeds of drug dealing ? In my view, yes and no. Obviously, we must
develop comprehensive strategies to deal with drugs trafficking. If Mafia
leaders and drugs traffickers have access to substantial amounts of clean
funds they could pose a danger to legitimate business and
governments; wrecking havoc on regional economic systems, costing billions
in policing and security. In a country of our size they could have a
deleterious effect on small business by financing false competition and
again, causing wild movements in prices. However, FATF - the OECD body in
Paris - have been very sloppy if they are really targeting drug dealers
attempts to clean money. First, their efforts are only concerned with bank
accounts. I indicated at the beginning that there are many types of money
laundering. Bogus businesses, land deals, trust arrangements and so
forth. It is not enough to say money ends up in the bank from these
practices anyway, since funds maybe cleaned BEFORE it gets into the
banks. In fact, structurally, banking is the least interesting way to
clean money.

Why then this evangelistic approach to getting countries like the Bahamas
to comply such haphazard policies ? In my view it is not drugs money at
all, but tax dollars that they are after. That means they are after what
they have always been after: BANK SECRECY in off-shore centres. It is also
interesting that countries like the Bahamas and Israel are under fire
when, most of the off-shore centres are under G-7 control, particularly
the U.K. with Jersey, Isle of White, Bermuda, Cayman and Turks and Cacois
Islands; and the USA with Delaware and Alsaka.

However, you must see that the OECD countires are not being all that
unreasonable either. It is no exaggeration to say that this crisis shows
that we have underestimated the field in which we have been playing. Like
Microsoft discovered the hard way, we cannot hope to sit in the balmy
breeze and make billions of dollars without taking into account how other
powerful interests may react. In the OECD countries, populations are
aging. They face statistical forecasts in their countries showing in some
cases, that more than 50% of their populations will be of retirement age
in the next 12-15 years. This is a serious issue. It means these countries
will have to face a shrinking tax base or fewer working people, therefore
fewer people from whom to draw taxes. The shortfall in tax revenues could
amount to an important security issue. As such, they must go after every
tax dollar, Franc, Pound, Euro etc., in the off-shore centres. I think we
all can understand their concerns, yet it is a well established rule of
international law, that one country does not enforce anothers financial
laws; they should control their own citizens.

But what shall we do about this problem that does not hurt us in the final
analysis ? First, we are an adult nation, seasoned by centuries of
dealing with crisis. We must not panic. We must accept some blame. The
statistics on population aging have been around for decades now. We should
have formed our financial policies to anticipate the current
attitudes. Respectfully, officials at the Central Bank, The Bar
Association, The Bankers Institute, Accounting Assoc-iations and the
Chambers of Commerce, should have seen it as being in our vital national
interests to have foreseen this sort of thing, and should have advised the
governments of the day to form policy reflecting this understanding of the
world. As an adult nation we cannot be put in the position of reacting to
so profound a challenge or be seen to be reacting, since it diminishes our
bargaining position and our prestige.

A few months before FATF announced the intention to form a blacklist, The
Hon. Padideh Tosti - an international security scholar at the London
School of Economics - wrote an article exploring the options which faced
the Bahamas and other countries squeezed between the powerful drugs barons
and the international enforcement authorities. It seems as if each of
these sides will destroy the parties in the middle to avoid or attack the
other. Tosti suggested that we in the Bahamas form a think tank to examine
the issues before our country, so that we determine our policies by
anticipating the possibility of initiatives such as blacklisting (I quote
at length):

As concerns rise globally regarding the threat of illicit activities, the
Bahamas will come under increasing pressure to find a solution to a
problem it had little hand in creating. While the type of trafficking and
money laundering occurring today may be new to the Bahamas, these concerns
are certainly not a new phenomenon to the region. Historically, the
Bahamas has been a stopping point for international shipping as well as a
refuge for those escaping duller climates or the reach of authorities. The
Bahamas enjoys an elegant and romantic history from the late 1600s, when
it was known for the notorious pirates who assaulted European ships on
their way home from the Spanish Americas. It has since survived by sheer
determination, creativity and not without some luck. The solution to the
current concerns will require the same variables. The solution lies in a
new modes of thought, a restructuring of perceptions combined with a
uniformly committed Bahamian effort. A committed Bahamian effort would
manifest itself in two ways:

A) First, the Bahamas must actively set forth a plan to seriously research
these issues with the input of its academic and policy communities, from
the Bahamas and other transshipment countries. The proposal here is for a
long term plan which includes foundational work in the research and
understanding of narcobusiness and its effects as specific to the
Caribbean region. There needs to be created a think tank which puts forth
ideas for business, economy, social issues related to the drug trade. It
is an absolute that participants be drawn from not merely diverse
backgrounds, but from diverse ideological perspectives. A group of people
with the same basic ideology, and often from similar social circles would
not suffice regardless of their workplace affiliations. Their task would
be to answer questions such as: what is a black market? A gray market? Who
defines it? Is the economic prosperity of the Bahamas due to its thriving
industries or daily infusions of laundered money? If a Bahamians citizen
stockpiles US dollars, are they [to be thought of as] criminals ? How do
we make such determinations? How do we protect Bahamian sovereignty and
attack the drug trade fully? What alternative approaches are there to
coping with narcobusiness which will not worsen our social and economic
satiates in the future? Has narcobusiness really expanded to threaten the
Bahamas, or is this another scenario of arbitrarily legitimized activities
(pirates and privateers ) used for political gains? Incidentally, answers
to such questions will also provide answers for other issues such as
technology, cutting edge policing and so forth. The Bahamas should and is
able to lead in this. The final and most difficult task of the Bahamas is
to, with diligence and consistency, apply this new thinking as an effort
to deter a situation of social and economic despair, and maintain control
over its future.

B) Second, once the task entrusted to the committee has been completed,
government officials must support the implementation of the committees
recommendations. The support must be sustained or else the
recommendations, no matter how sound, will necessarily fail. This grave
error would once again throw the future security of the Bahamas and its
people into the custody of
narcobusiness. (See: www.spgi.org/articles.htm)

Tostis speculations are becoming the sources of prophesy. I would like,
respectfully, to add some few tough-minded policy moves to all the above:

a. As Tosti suggested, we form a think tank as an
act of national maturity and sovereignty, to explore
these and other issues related to our vital national
interests. This would demonstrate good faith to the
international community.


Policy point: we should never again allow ourselves to be
put in such a fix. We must use our professional bodies to
keep on top of such things advising our governments of the
day appropriately.

b. We take the lead, and invite other off-shore centers to join
an international association - headquartered in the
Bahamas - which sets standards for financial services
regulation; while conducting our own comprehensive
study of money laundering and its structure in the
Bahamas , determining whether and how in the various
methods of obtaining accounts in our banks the structures
may be abused.

Policy point I: take the leading role and develop relationships
with those who have interests similar to our own. By taking
the lead in establishing an International Off-shore Financial
Committee, we show professionalism, and maturity; more-
over, Luxembourg, Israel, Liechtenstein, Switzerland and Hong
Kong are not bad company to keep on such a committee.

Policy point II: If already the DEA are boarding Bahamian boats
do we want them along with the Secret Service and the US Treasury
investigating even ordinary Bahamian accounts; even recommeding
seizure of funds ?.We must always form our policies in ways
that protect our sovereignty and prestige.

c We should classify all of our accounts by the process
of their establishment in the Bahamas, demonstrating
the controls and checks we employ to show how we
prevent money laundering on the basis of our own
regulations - we should than publish the processes as
an example of an industry standard.

Policy point: There are dozens of financial products in a
sophistocated banking sector such as our own. We cannot
accept a blanket review of our financial institutions by
foreigners. The preliminary three steps above will force
our inquirers to stipulate what sort of accounts they
think are out of compliance. It means that instead of
negotiating our entire banking system at once, we
break it into many phases, and discuss each phase
separately.

d. We must negotiate to have FATF accept a standard for
account holders - such as that the person does not
appear on the lists of Interpol or the DEA or the FBI,
nor is currently under investigation which implicates
him in money laundering.

Policy point: since this will not be the last time the powerful
nations will make demands of us, we develop a mature strategy
not merely for survival, but success. We must never capituale,
never react in panic, and never engage in complaining. We think
our way out.

It should be clear that I take the position that under NO circumstances
should we give up our secrecy or bargain parts of it away. (Though I am
told that this has already occurred, I refuse to believe it). We must
determine what the sanctions are. Perhaps we can survive the initial
stages while we seek a resolution to them. (Why should we react when the
penalties are still unclear ?) Also, we have natural allies in among the
G-7. We must begin to put together a coalition to protect our
interests. For instance, we give life to the economy in Florida, with
hundreds of millions of dollars in business, it is time to pressure the
public officials and economic interests in Florida who benefit from our
business to defend our vital interests - since it protects their business
also.

You may ask why should FATF accept our assurances of self-regulation that
we are doing all we can to stem the flow of laundered money in the
Bahamas. I remind that reader of the admonishment in the Vancouver Letter
to be diligent and thorough. That is why we must pursue our domestic
issues with our eyes open to our position in the world. The reason that
Austria capitulated so swiftly undermining its banking secrecy is of
course the Haider Affair. We have no such affairs to worry about. The
question is do we have the clout and prestige to insist upon
self-regulation ? If not why not ? If we do not get to the bottom of such
questions, our sovereignty may carry a series of costs which we are unable
to pay.



-------------------------
Dr. Gilbert NMO Morris
Fellow-Wellcome Insitute, Oxford
Visiting Professor
George Mason University
703-993-1186
gmorris@gmu.edu
royalmorris1@hotmail.com
-------------------------