Nearshore Americas

The Damage Done from “Blacklisting” Caribbean Countries

In late 2017, the European Union (EU) began publishing a list of countries that it claimed did not do enough to curb international tax evasion and profit shifting. The list of “non-cooperative jurisdictions for tax purposes” has been implemented as part of an EU’s bid to fight tax fraud after revelations of widespread avoidance schemes used by corporations and high-net-worth individuals to lower their tax bills.

The EU’s blacklist has mostly featured small economies like Palau and Samoa though territories more known for offshore business including Panama and the Cayman Islands have featured. The list is constantly updated as countries comply with EU standards and recommendations according to three criteria: how close their economies are tied to the EU, how big their financial sectors are, and how well governed they are.

Alicia Nicholls says blacklisting has a “significant impact” on Caribbean economies

“There are actually two lists, the blacklist itself and the Annex II, which includes jurisdictions that do not yet comply with all international tax standards but have committed to reform,” Alicia Nicholls, a Barbados-based international trade specialist told Nearshore Americas. 

Although many countries within the EU itself fail to meet the list criteria, they are excluded from scrutiny by design. The list drew criticism for giving European territories a pass — in spite of several EU member states, including Cyprus, Ireland, Luxembourg, Malta and the Netherlands, presenting economic indicators typical of tax heavens — as well as being arbitrary and overly punitive against small developing economies. 

“The blacklisting has a significant impact across the board. If you’re producing goods, or engaging in the fashion or music industries, this will affect you. The list affects Caribbean economies even as tourist destinations, mainly due to added difficulties to correspondent banking connections,” said Deodat Maharaj, Executive Director of the Caribbean Export Development Agency. 

Impacts of the Blacklist

Multiple financial institutions in various Caribbean jurisdictions have lost significant correspondent banking relationships, defined as bilateral arrangement between banks, as a result of being blacklisted as non-compliant on tax matters. This trend is aggravated by diverse factors, including increasing pressure on banking institutions to raise their capital, streamline their business models and reevaluate their risk exposure. While the Caribbean region relies heavily on international trade, remittances, offshore banking and tourism, correspondent banking relationships are a central component of their economies due to the constant need to secure rapid and cross border transactions. 

Although many countries within the EU itself fail to meet the list criteria, they are excluded from scrutiny by design

“We have some banks that have completely terminated correspondent banking connections. That is not a great situation. It has major implications for investment attraction,” said Nicholls. 

Beyond the risks to a country’s reputation, the direct consequences of blacklisting include various sanctions by EU member countries, from withholding taxes at a higher rate on payments received in blacklisted jurisdictions to limiting the ability of these countries to access funds from international development programs and stricter controls on transactions with the EU. The EU also reinforces the monitoring of transactions and increases the audits to tax payers who benefit from listed regimes. 

“Many jurisdictions become less attractive for investors due to being blacklisted. And then transactions take longer to go through; that has an impact on trade and supply chains. Given the reputational risks coming from inclusion on such a list it might lessen a jurisdiction’s attractiveness to investors who wish to establish or have already established knowledge services-related businesses in that jurisdiction. This is especially so for those businesses established in the financial services sector and professional services firms,” Nicholls said.

Deodat Maharaj says the region’s recent economic decline was driven by the pandemic

Covid-19 Relief Curtailed

Despite the consequences of being blacklisted, recent data does not suggest a significant long-term effect on foreign direct investment in Caribbean economies. “The recent decline in investment toward the region has more to do with the economic effects of the Covid-19 pandemic,” said Maharaj.

However, the EU has also considered prohibiting companies with subsidiaries based in blacklisted jurisdictions from being eligible for Covid-19 economic relief. These measures serve as a disincentive for EU companies to invest in blacklisted countries.

There aren’t conclusive studies about the effects on Caribbean exports, however blacklisting could have significant effects in the long term development projects of Caribbean countries, as many focus on developing and exporting services. “Caribbean countries, with maybe a couple of exemptions, can’t compete in the mass production of commodities. We have to focus on areas such as business outsourcing and knowledge services, as well as leveraging the ingenuity of our people, digitalization and technology.  

The Caribbean offshore banking sector has been hit hard by the implementation of the EU’s blacklist. The Cayman Islands, a British overseas territory, was listed between February-October 2020 due to the presence of investment funds that “did not reflect real economic activity”. The move was based on the assumption that this practice could lead to investment vehicles being created to reduce taxes in other jurisdictions and illustrates the danger to Caribbean economies that rely heavily on offshore banking as a main economic sector.

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“Different governments have been pushing back, however we haven’t seen a change in the EU’s approach” — Deodat Maharaj

“The response from Caribbean countries has been mixed. We need to comply and preserve financial relations, but our governments are trying to engage with the EU politically as well,” Nicholls added.

Many Caribbean governments have been trying to maintain a balancing act. With the support of international organizations such as Oxfam International and the Tax Justice Network (TJN), Caribbean authorities have questioned the accuracy and morality of this list. A TJN report revealed that countries blacklisted by the European Union cause less than 2% of global tax losses while EU member states cause 36%. 

“Different governments have been pushing back, however we haven’t seen a change in the EU’s approach”, said Mr. Maharaj. 

Despite some success around policy and transparency, so far it is difficult to measure the overall effect of this list in combatting international tax fraud. At the same time, the impact on Caribbean economies is yet to be fully studied. For Alicia Nicholls, we “just need empirical evidence to move forward”. 

Bryan Campbell Romero

Bryan Ch. Campbell Romero is an independent analyst and writer. He serves as a freelance contributor to Nearshore Americas and writes for multiple publications on political risk, society and the entrepreneurial ecosystems of Cuba and the Latin American region. Originally from Cuba, Bryan holds a Bachelor’s degree in Philosophy (Licenciatura en Filosofía) from the University of Havana.

1 comment

  • Have always queried OECD and included EU do not have Exchange Control Regulations…..residents are free to transfer any amount of their money to any open jurisdiction.

    If that is a fact then how is it that transfers from EU hitting the banks in Cayman – BVI-Bahamas- Bermuda-Antigua suddenly become dirty money laundering’ ?

    There is a strong case which indicates this pressure from the EU is really a tax collection issue pure and simple.

    Pre-Brexit UK was very well known for alleged money laundering…..6 or so States within the US have ultra Tax regs…..Montana – Utah-Delaware-Nevada is anything ever done to police or sanction them ?