As a political issue in U.S. party politics, offshore investing has almost always been seen as an issue supported by Republicans and opposed by Democrats. That’s probably due to the fact that since 1975 the Republican party in the U.S. has supported the deregulation of markets and the integration of the world economy in order to weaken labor unions worldwide, create greater efficiency and lessen inflation in the U.S. by moving production offshore, and to spread free market capitalism around the world. Democrats resisted deregulated markets and global integration, until Bill Clinton, because they saw that both would weaken labor unions and the lower and middles classes in the U.S., the traditional backbone of the party. Democrats also argued that offshore investing was a way for rich people and corporations in the U.S. to avoid U.S. taxes. In the end both parties supported offshore investing in the name of economic growth.
How will offshore investing change under the Obama administration? Most offshore investors that I’ve talked to in Panama, Costa Rica and the Caribbean say the same thing: “things are going to get much slower and more regulated.” If the new administration wants to regulate markets, then that will make it more difficult for investors to move money offshore. The other point offshore investors have made is that as financial institutions become larger it becomes easier to regulate offshore investing.
After the U.S. housing and credit problems there has grown in the U.S. a consensus among policy-makers and the public about the need for more regulation of the economy. And when there is a strong domestic demand for change in the U.S. that demand often takes on an international dimension. For example, the U.S. has successfully created a worldwide ban on drugs like cocaine and marijuana; the initial demand to outlaw both drugs came from U.S. domestic politics. That demand for domestic change on drug policy was then translated into international laws and regimes which forced countries in Latin America and Asia to change their legal systems so as to be in line with the U.S. on drug policy. And not only did countries have to change their legal systems, but also enlarge their police forces and military in order to meet enforcement demands. So there is a tendency in American politics and American foreign policy to say that what is bad for American citizens is bad for the world. And if deregulated markets are bad for the American economy, then deregulated markets might be bad for the global economy and if that is true offshore investors might find it harder and harder to move money to offshore financial centers. We might be entering the era of regulated offshore investing.
History Of Offshore Financial Regulations
The first steps by the U.S. government in the direction of regulating offshore financial transactions started with the so called “war on drugs” in the early 1970s. The U.S. government not only wanted to stop drug trafficking, it also wanted to stop the laundering of drug profits in offshore banks in places like the Bahamas, Panama, and Liechtenstein. To that end, the U.S. government passed in 1970 the Bank Secrecy Act which required U.S. banks to report transactions larger than $10,000 or more and that individuals carrying more than $5,000 in cash across U.S. borders needed to fill out currency reports. The Bank Secrecy Act was not seriously enforced until the explosion of cocaine in the United States during the 1980s.
In 1986 the U.S. Congress specifically criminalized the laundering of drug-connected profits and in 1988 U.S. Senator John Kerry added an amendment to the Anti-Drug Abuse Act – called the Kerry Amendment – which gave the U.S. government new leverage in forcing countries to change their banking systems to meet new U.S. anti-money laundering laws. Most importantly the Kerry Amendment stated that countries who did not waive bank secrecy laws would be cut off from transferring money through U.S. banks; at the time, 95% of all wire transfers went through U.S. banks. In order to maintain a good imagine in the U.S., offshore banks were encouraged to open their books to U.S. led investigations of money-laundering.
Also in 1988, the UN, with strong U.S. involvement, supported tougher anti-money laundering laws in what became known as the Vienna Convention (Also known as the Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances). The parts of the Vienna Convention dealing with anti-money laundering laws were taken pretty much verbatim from the anti-money laundering law the U.S. Congress passed in 1986.
Following on from the Vienna Convention the G 7 countries in 1988 and 1989 addressed the question of money laundering and asset seizure and forfeiture with the creation of a task force known as the Financial Action Task Force (FATF). FATF created a list of “40 Recommendations” that countries were expected to implement if they wanted to maintain a positive standing in financial markets. If countries did not implement the “40 recommendations”, then countries would be blacklisted and subjected to “name and shame” campaigns in international financial markets. As of 2000 FATF was broadening its message against money laundering with a 2000 report titled “Spreading the Anti-Money Laundering Message Around The World”. What the FATF would like to create is a uniform system of anti-money laundering laws around the world.
The September 11th terrorist attacks added yet another level of anti-money laundering laws to the books in the form of the USA Patriot Act which gave U.S. authorities the right to track money and seize assets connected to terrorism.
The importance of the above history to offshore investing today is that the U.S. government has been tracking offshore money since 1970 and seriously since the late 1980s. And the U.S. government through its power in the financial markets has been able to get its domestic agenda pushed onto the global arena: the U.S. has been successful in internationalizing its domestic criminal justice system in the financial markets. The state lives on, not because of a communist threat or nuclear war, but because of criminality. Any offshore investor today is asking themselves whether or not this very complex U.S. led international financial regulation of money laundering could be used as a way of regulating other kinds of offshore investing.
To see what might happen to offshore investing under an Obama Administration we need to look at some of the important policy-makers in Obama’s cabinet.
Tim Geithner
Geithner will be the Treasury Secretary under Obama and his role in the administration’s policy on offshore transactions will be very important. Geithner is a protégée of Larry Summers who was the last Treasury Secretary under Bill Clinton. It was Summers who picked Geithner out and elevated him to undersecretary of the Treasury. Geithner played a central role in forming U.S. government policy during both the Mexican and Asian Financial crisis, so he understands the darker sides of economic integration and financial markets. Geithner will probably want a more regulated system of international finance. He is a policy expert and will want policy to be at least, if not more, powerful than money.
Geithner was an important figure in the Clinton administration and his old boss was former Treasury Secretary Robert Rubin. Rubin in his biography In An Uncertain World tells how when he retired as Treasury Secretary, Geithner presented him with a framed copy of what Geithner called “The Rubin Doctrine of International Finance.” The “doctrine” was made up of ten principals; the number two principle on the list was: “Markets are good, but they are not a solution to all problems.” Look for lots of policy from the Treasury Secretary.
Larry Summers
Another important player in the Obama Administration will be former Treasury Secretary Larry Summers; he will be director of the White House National Economic Council (NEC). Summers will be Obama’s most important economic advisor in the White House. He is known to be a strong supporter of regulating offshore financial centers. In Richard Clarke’s book Against All Enemies, Clarke writes that the only economic advisor in either the Clinton or Bush presidencies interested in trying to regulate offshore financial centers was Larry Summers. Robert Rubin, Paul O’Neil and Larry Lindsey didn’t want to enforce existing legislation or push for new laws restricting offshore financial centers.
Obama’s administration is facing all kinds of economic problems that have nothing to do with people moving their money outside the United States. What will probably happen is that offshore investing will slow as people have less money and as states begin to tax and tax offshore services conducted in their jurisdictions. In Panama you can already see changes occurring: prices for corporations and foundations have risen. The bureaucratic red tape has gotten thicker. Banks are restricting the opening of accounts to foreigners. Banks in Panama are not lending money to foreigners. Under an Obama administration offshore investing will certainly continue, but probably at a much slower, coordinated and regulated pace.
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