Preetam Kaushik tracks the nation’s journey to shed its reputation as a jurisdiction vulnerable to money laundering risks.

On 7th January, 2022, the European Commission adopted a regulation to remove the Bahamas from its blacklist of jurisdictions with strategic deficiencies in their AML/CFT regulations. The move comes over a year after the FATF removed the Bahamas from its list of jurisdictions under increased monitoring, also known as the FATF grey list. In October 2018, the FATF had placed the Bahamas in its grey list after the Caribbean Financial Action Task Force in its Mutual Evaluation Report in July 2017 identified several deficiencies in the country’s AML framework.

In this blog article, we will trace the journey the nation has made in its attempt to shed its reputation as a jurisdiction vulnerable to money laundering risks.

From tax haven to money laundering hotspot

The Bahamas, an archipelago of 700 islands is a tropical paradise in the Caribbeans. It is also one of the wealthiest countries in the Caribbeans, with an economy largely dependent on tourism coming in from North America. Financial services constitute the second largest sector of the Bahamian economy. The financial services sector in the Bahamas is dominated by the international (offshore) services worth close to US$255.6 billion as of 2018.

The Bahamas also figures among the leading global tax havens. Its climate of political stability, negligible taxation and strict privacy laws, combined with its strong financial services sector make it a viable and attractive destination for investors. As with many other tax havens, this financial climate brings with it a vulnerability to money laundering risks. The Bahamas has always been in the news for being a jurisdiction that is afflicted by money laundering. As early as 2000, the FATF came up with a list of fifteen jurisdictions which included the Bahamas as potential global havens for money laundering.

Between 1994 to 2002, former Chilean dictator Augusto Pinochet used two offshore shell corporations in the Bahamas to launder nearly US$12 million. In 2006, a Bahamas based offshore investment service provider was implicated in allegations of laundering more than $1 billion in funds derived from tax evasion, drug trafficking, securities fraud and bank fraud.

Its reputation as a money laundering hotspot only got stronger with the years. In 2018, the United States authorities published a report naming the Bahamas as a major money laundering destination. It identified the absence of official records of beneficial ownership, and no obligation for resident paying agents to tell domestic tax authorities about payments to non-residents, as major red flags.

In July 2017, the CFATF published its Mutual Evaluation Report (MER) of the Bahamas where it identified several key deficiencies in the AML infrastructure. It observed that as an international financial centre, the Bahamas was vulnerable to a wide range of money laundering risks. It noted that the Bahamas “has yet to develop documented national AML/CFT policies”. One area of concern was the fact that there were no money laundering convictions in the last four years. The report also highlighted the beneficial ownership system as an area of concern. Overall, the Bahamas was found to be partially compliant with 21, largely compliant with 10, non-compliant with 1, and fully compliant with 8 of the 40 FATF recommendations. Predictably, this was followed by the FATF placing the Bahamas in its grey list of jurisdictions with strategic deficiencies in October 2018.

Working its way out of the Grey List

Being placed in the FATF grey list was perhaps the wakeup call the nation needed to get its AML act together. The Bahamas set in motion a wide range of reforms in its AML/CFT set up which also yielded immediate positive results. In its follow up report in December 2018, the CFATF noted the progress made by the Bahamas in improving its AML record. It re-rated the nation as fully compliant with 13, largely compliant with 17, and partially compliant with 10 of the 40 FATF recommendations.

The International Monetary Fund, in its 2019 country report for the Bahamas noted that the Central Bank of the Bahamas along with the Ministry of Finance has either introduced or updated several key pieces of legislation and regulations pertaining to AML/CTF, and broadly enhanced its risk-based supervision regime.

In September 2019, the Attorney General revealed that there had been 40 money laundering convictions in the last 4 years in the Bahamas. This was a huge improvement from what the CFATF noted in its 2017 MER. In September 2020, the Bahamas made crucial amendments to the Register of Beneficial Ownership Act. The amendments brought in non-profit companies and segregated accounts companies within the scope of the legislation.

In December 2020, the FATF removed the Bahamas from its list of jurisdictions under increased monitoring, noting the significant progress it had made in improving its AML/CFT regime. This was a formal recognition of the efforts put in by the Bahamian administration to bring its AML infrastructure up to speed in the last few years.

Concluding Thoughts

The Bahamas’ progress story does not end with the FATF de-listing. The CFATF in its MER published in November 2021 noted that the Bahamas was not fully compliant with 18 and largely compliant with 20 of its 40 recommendations. Its removal from the EU black list of money laundering jurisdictions in January 2022 is further testament to the seriousness with which it is implementing its AML regulations. Along with its reputation for being an attractive offshore investment destination, the Bahamas is also building a name as a jurisdiction safe from money laundering and associated vulnerabilities.

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