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AmericasFebruary 3 2004

Offshore era ends abruptly

Hugh O’Shaughnessy talks to Grenada’s Prime Minister, Dr Keith Mitchell, about why the island’s time as an offshore financial services centre was so shortlived.
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Grenada, the eastern Caribbean island of 100,000 inhabitants, is no longer in the offshore banking business – that is the verdict of Dr Keith Mitchell, the island’s prime minister, which he delivered in an interview with The Banker. Its rise as an offshore centre was swift and its demise has been equally rapid, leaving it with a search for other sources of livelihood.

Offshore business rises

Following the passing of the Overseas Banking Act in the boom months of 1996, the year after Dr Mitchell was elected to office, money from the US and many other countries went there. It was attracted by the loose rein of government and by some financiers’ realisation that Grenada probably did not have the skills to enforce the regulations that were on the statute books.

The weakness was not only in the public sector; the local staffs of the international accountancy firms that operated in Grenada were regarded as unable to cope with the complex audits of the most advanced financial businesses. Yet their audits were vital to the government, which had no alternative but to rely on them in the absence of its own supervisors. According to the Grenada International Financial Services Authority (GIFSA), by 2000, at the height of Grenada’s pitch for financial business, there were 48 offshore banks established in Grenada.

Local financial experts now confess that many of the newcomers were not from the top drawer – they perhaps would not have been welcomed in the Cayman Islands, for example. International financial supervisors lodged complaints, as did many who did business with Grenadian institutions. Eventually the Financial Action Task Force (FATF), the international body that is charged with hunting dirty money, blacklisted the country as “non-compliant”.

Grenada had previously caught the world’s attention in 1983, when it was the scene of an attempted revolution and a US military invasion. As the new century began, the cries from abroad had an almost immediate effect on the tiny and vulnerable island country. Of the original 48 offshore players, 27 were struck off in 2001, five in 2002 and nine more in the first three quarters of last year. The charges often involved under-capitalisation and failure to observe government regulations.

By the end of September 2003, there were only seven offshore banks left, of which five were facing government petitions for their wind up. Similar thinning out is taking place in the offshore insurance business and trust businesses.

Government role

This rise and fall of offshore finance took place on Dr Mitchell’s watch: he has secured three successive terms in office. He is an admirer of free enterprise and is committed to reducing the government’s role in the lives of the citizens to a minimum.

Seated at his desk in the sixth-floor office of the modern ministerial complex, he has a fantastic view over St George’s, the island’s tiny capital.

“Banks came here to make profits and do serious business, attracted by our low taxation regime,” he says. In his opinion, three factors ended the offshore era for Grenada. “There was certainly pressure from the developed countries to stem the flow of funds to us – although these countries long benefited from capital flows from us underdeveloped countries. Then there was the new international attitude to terrorism and the new controls that it brought in.” And there was the question of the power of local regulators. “There were weaknesses at our end,” he admits. “Things managed to fall down cracks that should not have been there.”

Grenada received some financial assistance from Britain, the former colonial power, and the FATF lifted its blacklisting in February 2003. The strengthening of control continues and new legislation is being prepared to replace GIFSA with a new body that will have control over the whole financial area

Dr Mitchell called general elections in late November and the offshore centre business was one of the factors that voters considered when they cast their ballots. He won an unprecedented third term as prime minister.

In 1999, he and his party won by a landslide. This time, though, the voters cut his majority to a minimum: he won eight out of the 15 seats in parliament. Did voters think he had done badly by closing down the dodgy banks? Or did they feel he should not have encouraged them to come in the first place? Whatever the answer, Dr Mitchell is not as popular as he once was.

New opportunities

Other sources of livelihood for the island include the tourism industry, which is doing well. But Dr Mitchell is excited by the fact that neighbouring Trinidad and Tobago is swimming in a sea of oil and natural gas. Evidence of offshore oil exploration by the Trinidadians is visible from the air on the flight between the two countries. Not surprisingly, Dr Mitchell is keen to settle the exact maritime boundary between the two. It may mean the difference between a hard life and a more comfortable one.

One offshore business might take the place of the other.

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