Preetam Kaushik examines the island nation’s history as a tax haven, against the backdrop of its unique status as a sovereign country, yet still constitutionally part of the UK.

Tax havens abound across the globe, Switzerland, Mauritius, Monaco, the British Virgin Islands (BVI), the Cayman Islands, Bermuda, the Bahamas, Jersey, Gibraltar, Anguilla, Guernsey, and Liechtenstein – all share this dubious distinction.

These countries and territories have flourished mainly by selling one core strength – an uncanny ability, supported by idiosyncratic regulations, to conceal secrets.

Their community of clients – business tycoons with shady records, politicians who looted their nations, billionaire celebrities wanting to hide their clandestine financial transactions – has never run short of secrets, especially murky money deals that they would want to keep under wraps. Doing business has been reasonably easy and extremely profitable.

As specialisation has increasingly come into vogue, these territories dangle esoteric offerings to entice their elite clients. BVI allows business entities to be incorporated outside the regulatory glare, Liechtenstein houses foundations whose ownership and purposes cannot be fathomed, Jersey is a fertile land for trusts whose foundation often rests on mistrust.

However, they all share a common motive – to help their secretive partners evade regulations in their respective countries.

How 9/11 galvanised anti-money laundering efforts

While there were existing anti-money laundering regimes in place prior to the terrorist attacks on the US, they were mainly focused on countering drug trafficking. The horrific events of September 11, 2001, dramatically changed this focus and placed many financial havens under the microscope.

The Financial Action Task Force (FATF) – which was set up to counter financing of terrorism and money laundering by G7 countries, created a ‘blacklist’ of countries deemed negligent in their response and attitude to money laundering.

Saint Kitts and Nevis was one of the nations to be placed on this list and was cited with a long list of accusations: money laundering was only a criminal offence in relation to narcotics trafficking; no reporting of suspicious transactions; little supervision of the offshore sector; no relevant procedures in place; non-residents can operate an offshore bank account with no ID being taken; strong bank secrecy laws which hide beneficial owners even in criminal cases; company law frustrates customer identification even more.

The island nation promised to formulate legislation to bring in transparency, and in June 2002 the island nation was taken off the list but was warned it would be closely monitored.

Enter the financial crisis of 2007–2008

The 2007-2008 financial crisis proved to be another watershed. Enraged by the mounting depletion in tax income, wealthy countries heightened their scrutiny and started probing the operations of tax haven-based entities.  

This was followed by the release of the Paradise Papers and Panama Papers that exposed how the rich camouflage their unaccounted-for wealth. In May 2018, the UK passed an amendment to its anti-money-laundering bill in a bid to force offshore territories such as the BVI, the Cayman Islands, and Bermuda, to create public registers of entities secretly operating from those regions.

The collective international glare led to dwindling earnings for many tax havens, including the previously invulnerable business model of the Swiss financial industry.

But while many tax havens were compelled to make adjustments to their secrecy-based business models, Saint Kitts and Nevis, a small sovereign state in the Caribbean with a population of just 50,000 and Queen Elizabeth as the head of state, continued to be an aberration.

A story of impenetrable secrecy

Leveraging the international conventions that require countries to respect each other’s regulations, Saint Kitts and Nevis mastered the art of denying access to the ownership information of entities that are registered with the island nation. Consequently, it has allowed clients to set up businesses with a level of anonymity that no regulator could penetrate.

Not surprisingly, Saint Kitts and Nevis has provided the perfect environment and regulatory framework for some of the biggest tax evasion and money laundering scams ever recorded.

In October 2020, billionaire Robert Brockman, who was previously chief executive of Ohio-based IT services firm Reynolds & Reynolds, was charged in a USD 2 billion tax evasion case. But this was only after a fellow billionaire alerted prosecutors about the tax dodging scheme to escape prosecution himself.

Brockman used a family-owned charitable entity based in Saint Kitts and Nevis to conceal massive earnings from investments in private equity funds. In addition, Brockman was also reportedly part of a fraudulent scheme involving debt investments.

In November 2012, US regulators seized two houses worth USD 2.1 million owned by Taiwan’s jailed former president Chen Shui-bian, who used shell firms based in Saint Kitts and Nevis to secrete hordes of money amassed from bribes received during his presidency.

Shadowboxing

In order to prove the entities registered on the island are engaged in money laundering, evaded tax, or involved in the financing of terrorism, regulators first need to prove that those entities actually exist, and secondly that someone owns them.

The business model is simple – if investigators cannot prove someone owns an entity, then they cannot prove it evaded tax and involved in money laundering or financing of terrorism.

This enables fraudsters, tax evaders, tainted politicians, and money launderers to evade the financial regulations aimed at tracing ownership of assets in their respective countries, and successfully hide their dealings.

In order to prove that a Saint Kitts and Nevis-registered firm actually belongs to someone and was created fraudulently, you have to start legal remedy within a year of the creation of the entity. This is almost impossible, as ascertaining if such an entity exists in the first place is an insurmountable challenge.

A unique status

The usual measures employed by international bodies to counter money laundering and tax evasion, such as legal remedy against lenders and diplomatic coercion do not work against Saint Kitts and Nevis. This is down to its unique status as a sovereign country and yet still constitutionally part of the UK.

While more formidable peer countries and territories begin to sweat under enhanced scrutiny by watchful regulators globally, Saint Kitts and Nevis has continued to thrive.

One example is the citizenship by investment scheme which offers the opportunity to obtain a second passport with Saint Kitts and Nevis. Citizenship offers no personal income tax, no gift tax, no death duties, no estate tax, no inheritance tax and no capital gains tax on worldwide income.

Another major advantage to the holders of a Saint Kitts and Nevis passport is that it guarantees full Schengen travel rights throughout Europe and is rated higher than several European nations for freedom to travel. As a result, a holder can travel to approximately 156 countries worldwide, even though applicants don’t have to travel to the island to apply and there are no annual residency rules to maintain the passport.

Is there change in the Caribbean air?  

In January of this year, Saint Kitts and Nevis together with the FATF released a mutual evaluation report on new measures to combat money laundering and terrorist financing. The report analysed the level of compliance with the FATF 40 Recommendations and the effectiveness of Saint Kitts and Nevis’ AML/CFT system.

It concluded that Saint Kitts and Nevis was compliant with 8 recommendations; largely compliant with 8 more; partially compliant with 25; and non-compliant with 8. Overall, the country was rated compliant or largely compliant with 13 out of the 16 core and key recommendations.

The report also provided further recommendations on how the island’s system could be strengthened in the future in order to bring Saint Kitts and Nevis closer to full compliance with international standards.

Only time will tell if this proves to be another major turning point in its relationship with dirty money or if Saint Kitts and Nevis continues to be a haven for those rich enough to enjoy its clear blue waters and clean Caribbean air.

Share:

More from the Blog

AML asset management

How Asset Managers can harness technology to reduce money laundering risks

The financial industry is unfortunately blemished by dirty money circulating within the system. And while asset managers have traditionally swerved the money laundering impact faced by their banking counterparts, progressive capabilities from financial criminals are forcing the sector to notice glaring flaws in their AML processes.

Any screening technology is only as good as its underlying data. That’s why work to find the best providers, ensuring you get screening matches you can trust.

Resources

The latest news, commentary and events from RiskScreen. For industry insight, visit our AML insight hub, KYC360.

Used by over 30,000 compliance professionals for AML news & analysis. Free CPD wallet.

Company

RiskScreen was founded by experts in financial crime. It’s because of this unrivalled subject matter expertise that companies choose to partner with us.