states free trade agreement (cafta-dr) crs report for ......in various stages of consideration....
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Order Code RL31870
CRS Report for Congress
The Dominican Republic-Central America-UnitedStates Free Trade Agreement (CAFTA-DR)
Updated January 16, 2008
J. F. HornbeckSpecialist in International Trade and FinanceForeign Affairs, Defense, and Trade Division
Prepared for Members andCommittees of Congress
Congressional
Service
The Dominican Republic-Central America-United States
Free Trade Agreement (CAFTA-DR)
Summary
The United States Trade Representative (USTR) and trade ministers from Costa
Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic
signed the Dominican Republic-Central America-United States Free Trade
Agreement (CAFTA-DR) on August 5, 2004. Nearly one year later, it faced a
contentious debate and close vote in both houses of the U.S. Congress. The Senate
passed implementing legislation 54 to 45 on June 30, 2005, with the House following
in kind 217 to 215 on July 28, 2005. President Bush signed the legislation into law
on August 2, 2005 (P.L. 109-53, 119 Stat. 462). The United States has implemented
the agreement for El Salvador, Honduras, Nicaragua, Guatemala, and the Dominican
Republic. In Costa Rica, legislative consideration of CAFTA-DR has been a
prolonged process, culminating in the decision to hold a national referendum. On
October 7, 2007, the people of Costa Rica voted in favor of CAFTA-DR 51.6% to
48.4% (subject to official recount), setting the stage for final consideration by the
National Assembly.
The CAFTA-DR is a regional agreement with all parties subject to “the same
set of obligations and commitments,” but with each country defining its own market
access schedule. It is a reciprocal trade agreement, basically replacing U.S. unilateral
preferential trade treatment extended to these countries under the Caribbean Basin
Economic Recovery Act (CBERA), the Caribbean Basin Trade Partnership Act
(CBTPA), and the Generalized System of Preferences (GSP). It liberalizes trade in
goods, services, government procurement, intellectual property, and investment, and
addresses labor and environment issues. Most commercial and farm goods attain
duty-free status immediately. Remaining trade will have tariffs phased out
incrementally over five to twenty years. Duty-free treatment will be delayed longest
for the most sensitive agricultural products. To address asymmetrical development
and transition issues, the CAFTA-DR specifies rules for transitional safeguards, tariff
rate quotas, and trade capacity building.
The CAFTA-DR is not expected to have a large effect on the U.S. economy as
a whole given the relatively small size of the Central American economies and the
fact that most U.S. imports from the region had already been entering duty free under
normal trade relations or CBI and GSP preferential arrangements. Adjustments will
be slightly more difficult for some sectors, but none are expected to be severe.
Supporters see it as part of a policy foundation supportive of both improved
intraregional trade, as well as, long-term social, political, and economic development
in an area of strategic importance to the United States. Opponents wanted better
trade adjustment and capacity building policies to address the potentially negative
effects on certain import-competing sectors and their workers. They also argued that
the labor, intellectual property rights, and investment provisions in the CAFTA-DR
needed strengthening. This report discusses issues and evolution of the CAFTA-DR
debate and will be updated.
The Dominican Republic-Central America-United States Free Trade Agreement
On August 5, 2004, the United States Trade Representative (USTR) and tradeministers from Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and theDominican Republic signed the Dominican Republic-Central America-United StatesFree Trade Agreement (the CAFTA-DR; see Appendix 1, Chronology ofNegotiations). The CAFTA-DR is a regional trade agreement with all parties subjectto “the same set of obligations and commitments,” but with each country defming itsown market access schedule. It is a comprehensive and reciprocal trade agreement,replacing U.S. unilateral preferential trade treatment extended to these countriesunder the Caribbean Basin Economic Recovery Act (CBERA), the Caribbean BasinTrade Partnership Act (CBTPA), and the Generalized System ofPreferences (GSP).
The U.S. Congress did not consider implementing legislation for over a yearafter the CAFTA-DR was signed because it was so controversial. On June 30, 2005,the Senate passed S. 1307 by a vote of 54 to 45. The House followed on July 28,2005, passing H.R. 3045 by a vote of217 to 215. President Bush signed the bill intolaw on August 2, 2005 (P.L. 109-53, 119 Stat. 462). El Salvador, Honduras,Guatemala, the Dominican Republic, and Nicaragua also ratified the agreement, inthat order. The CAFTA-DR was expected to enter into force on January 1, 2006, butnone of the ratifying countries had completed the legal and regulatory measuresneeded to comply with the agreement. The USTR announced that the CAFTA-DRwould take effect on a rolling basis when countries fulfilled these obligations. Itentered into force on March 1, 2006 and has been implemented for El Salvador,Honduras, Nicaragua, Guatemala, and the Dominican Republic.
In Costa Rica, CAFTA-DR has been highly controversial because it wouldrequire major restructuring of public sector monopolies over electricity, insurance,and telecommunications. Public sector unions were at the center of this concern, butsmall farmers and other workers also voiced opposition. Oscar Arias won a slimpresidential victory in 2006 on a pro-CAFTA platform, but opposition in the NationalAssembly was able to delay consideration ofthe agreement. In the end, the ElectoralTribunal ruled in favor of a petition to hold a national referendum on the CAFTADR. On October 7, 2007, with a 60% participation rate, the people of Costa Ricavoted 5 1.6% to 48.4% in favor of CAFTA-DR. To be implemented for Costa Rica,the National Assembly must pass 13 implementing bills, which face continuingopposition in the legislature. To date, two have become law and the remainder arein various stages of consideration. Unless otherwise agreed to by all Parties to theCAFTA-DR, the agreement requires that it be implemented within two years of thedate when first entered into force (March 1, 2006), so Costa Rica is running a raceagainst the March 1, 2008 deadline and may yet decide to request an extension.
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U.S. Congressional Action
The CAFTA-DR was the most controversial free trade agreement (FTA) vote
since the North American Free Trade Agreement (NAFTA) implementing legislation
was passed in 1993. Many lawmakers were uncomfortable with the agreement as
written, particularly with respect to the labor provisions, treatment ofcertain sensitive
industries (sugar and textiles), investor-state, pharmaceutical data protection, and
basic sovereignty issues. It was also caught up in an overarching congressional
controversy over how trade negotiation objectives are defined in FTAs based on the
Trade Promotion Authority (TPA) framework, as well as, concern by some Members
over the perceived ineffectiveness ofthe executive-legislative consultation process.’
These issues were raised repeatedly in “mock markups” of draft implementing
bills held by the Senate Finance and House Ways and Means Committees on June 14
and 15, 2005, respectively. The Senate Finance Committee voted 11-9 to approve
the draft legislation, with one non-binding amendment that would have extended the
trade adjustment assistance program to cover workers in services industries. The
House Ways and Means Committee voted 25-16 for approval of the draft legislation,
also adding a non-binding amendment with “a requirement that the Administration
report on activities conducted by the CAFTA-DR countries and the United States to
build capacity on labor issues,” and a provision requiring monitoring of CAFTA
DR’s effects on U.S. services industries. A “mock conference” was not held, to the
expressed consternation of some Members.
The Bush Administration sent the final implementing bill to Congress on June
23, 2005. It included a new Section 403, the House amendment requiring that the
Administration transmit biennial reports on progress made in implementing the labor
provisions, including the Labor Cooperation and Capacity Building Mechanism. It
also called for monitoring progress in meeting the challenges outlined in the so-called
White Paper on labor produced by the vice ministers of trade and labor of the
CAFTA-DR countries. Under TPA procedures, identical bills were introduced
jointly as H.R. 3045 and 5. 1307 and referred to the House Ways and Means and
Senate Finance Committees.
The Senate Finance Committee acted first, favorably reporting out S. 1307 by
voice vote on June 29, 2005. The House Ways and Means Committee followed suit,
reporting favorably by a vote of25 to 16 on June 30, 2005. The measure came before
the full Senate on June 30, 2005, where, following 20 hours of floor debate, 5. 1307
passed 54 to 45. H.R. 3045 did not come before the House until July 28, 2005,
where, following two hours of debate, it narrowly passed 217 to 215. On the same
day, the Senate voted 56 to 44 to substitute H.R. 3045 for S. 1307, a necessary
procedural vote to comply with the constitutional requirement that revenue bills
originate in the House. President Bush signed H.R. 3045 into law on August 2, 2005
(P.L. 109-53, 119 Stat. 462).
On TPA, see CRS Report RL743, Trade Promotion Authority: Issues, Options, and
Prospects, by J. F. Hombeck and William H. Cooper.
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Passage in the Senate was by a slinuner margin than with earlier tradeagreements and required accommodation outside the implementing legislation tolabor, textile, and sugar interests. In a letter from USTR Rob Portrnan to Senator JeffBingaman, the Administration promised to allocate $40 million offiscal 2006 foreignoperations appropriations for “labor and environmental enforcement capacitybuilding assistance,” and to continue to request this level of funding in budgets forfiscal years 2007 through 2009. Some $3 million is to be used for fundingInternational Labor Organization (ILO) reporting on progress in labor lawenforcement and working conditions in these countries. An additional $10 millionannual commitment for five years was made for transitional rural assistance for ElSalvador, Guatemala, and the Dominican Republic, or until these countries canqualify for anticipated assistance from the U.S. Millennium Challenge Corporation.
In another letter, Secretary of Agriculture Mike Johanns assured Senator SaxbyChambliss and Representative Bob Goodlatte, the respective agriculture committeechairs, that the Administration would not allow the CAFTA-DR to interfere with theoperation of the sugar program as defined in the Farm Security and Rural InvestmentAct of 2002 (the Farm Bill) through FY2007, when it expires. In particular, hepromised to take steps should additional sugar imports due to the CAFTA-DR,NAFTA, and other trade agreements cause the import trigger threshold of 1.532million short tons per year be exceeded and jeopardize the sugar program operations.Should this occur, the U.S. Secretary of Agriculture agreed to preclude entry ofadditional sugar imports into the domestic sweetener market by either making directpayments to exporters or using agricultural commodities to purchase sugar to be usedfor nonfood use (ethanol production).
Separately, for the textile and apparel issues, promises were made to: (1) changethe rules of origin to require that all pocketings and linings come from the CAFTADR countries (rather than third party countries like China); (2) negotiate a newstricter customs enforcement agreement with Mexico before the CAFTA-DRcumulation rules take effect allowing Mexican inputs to be used in CAFTA-DRtextile and apparel products; and (3) require Nicaragua to increase use ofU.S. fabricto qualify as duty-free under their tariff preference levels.
Other accommodations were made to win House support of H.R. 3045,including passage in the House on July 27, 2005, of the U.S. Trade RightsEnforcement Act (H.R. 3283). This bill would allow greater recourse to pursue tradecomplaints against China and other non-market economies. Not all interest groups,however, could be appeased. Despite efforts to win over all groups, the sugarindustry and some textile groups chose not to support the bill and strong Democraticopposition remained over a number of other issues that may prove to be enduringchallenges to future trade agreements, if crafted from the CAFTA-DR framework.,
Why Trade More Freely?
Countries trade because it is in their national economic interest to do so, aproposition long supported by theory and practice. Comparative advantage has beenrecognized for nearly 200 years as a core principle explaining the efficiency gains
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that can come from trade among countries by virtue oftheir fundamental differences.
It states that countries can improve their overall economic welfare by producing those
goods at which they are relatively more efficient, while trading for the rest. Intra
industry trade is the other major insight that explains trade patterns, in which the
benefits from exchange among countries occur based on specialized production,
product differentiation, and economies of scale. Many Latin American countries
have liberalized trade policies recognizing the contribution that trade (and related
investment) can make to economic growth and development. As an important
caveat, trade is at best only part of a broad development agenda, and is no substitute
for the promotion ofpolitical freedom, macroeconomic stability, sound institutions,
and the need for complementary social and economic policies.2
Comparative advantage provides the rationale for U.S.-Central American (and
Dominican Republic) trade in agriculture, textiles, apparel, and capital goods. Intra
industry trade (e.g., goods within the same harmonized tariff system (HTS) code
number) is based on specialized production, but in this case relies in large part on
differences in wages, skills, and productivity.3 Certain specialized jobs have
developed in Central America (and other developing countries), where they
frequently reside in production sharing (maquiladora) facilities. Economists have
come to refer to such specialized production as “breaking up the value added chain”
and it accounts for why products (and particularly parts thereof) as diverse as
automobiles, computers, and apparel are often made or assembled in Central America
and other countries in partnership with U.S. firms.4 This relationship, discussed in
more detail later, provides the basis for much of the labor policy debate on the
CAFTA-DR, and FTAs more generally.5
2 The role of trade is summarized well in: Rodrik, Dani. The New Global Economy and
Developing Countries: Making Openness Work. The Overseas Development Council,
Washington, D.C. 1999. p. 137 and Bouzas, Roberto and Saul Keifman. Making Trade
Liberalization Work. Afler the Washington Consensus: Restarting Growth and Reform in
Latin America. Kuczynski, Pedro-Pablo and John Williamson, eds. Institution for
International Economics. Washington, D.C. March, 2003. pp. 158, 165-67.
This differs from the standard intra-industTy case between two developed countries in
which goods, such as automobiles, are exchanged based on product differentiation and
economies of scale and where differences in wage levels are not a central factor.
For the theoretical foundation, see Krugrnan, Paul. Growing World Trade: Causes and
Consequences, in Brookings Papers on Economic Activity (1), William C. Brainard and
George L Perry, eds. 1995. pp. 327-76 and for the case in Central America, see Hufbauer,
Gary, Barbara Kotschwar, and John Wilson. Trade and Standards: A Look at Central
America. Institute for International Economics and the World Bank. 2002. PP. 992-96.
5Note that this trend has not been a driving force in the aggregate unemployment rate of the
United States, but does affect the distribution ofemployment among sectors ofthe economy.
It is also important to emphasize here that wage levels are only part of the issue. Lower
wages correlate closely with lower productivity, hence an abundance of low-skilled (low
productivity) workers attracts these types ofjobs. For a overview of the methodology of
measuring the effects of changes in trade policy, see Rivera, Sandra A. Key Methods for
Quantifying the Effects of Trade Liberalization. International Economic Review. United
States International Trade Commission. January/February 2003.
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Measuring the benefits of freer trade is another difficult issue. There is atendency to count exports, imports, and the oft-misrepresented importance of thetrade balance as indicators of the fruits of trade. This approach often gives undueweight to exports at the expense of understanding benefits from imports, where thegains from trade are better understood by their contribution to increased consumerselection, lower priced goods, and improved productivity. For example, high-techintermediate goods imported from developed countries are the basis for future, moresophisticated, production in developing countries. In developed countries, importsfrom developing countries, whether final goods for consumers or inputs formanufacturing enterprises, reduce costs and contribute to productivity and economicwelfare. For all countries, exports are the means for paying for these imports andtheir attendant benefits.
Three caveats related to negotiating FTAs are important. First, the discussionof costs and benefits generally assumes that FTAs are implemented in a multilateralsetting. In fact, given the slow pace of World Trade Organization (WTO)negotiations, many countries are pursuing preferential arrangements, that is, regionaland bilateral agreements like the CAFTA-DR. Latin America is full of them anddepending on how they are defined, they may actually be trade distorting if theypromote trade diversion. This occurs when trade is redirected to countries within alimited agreement that does not take into account countries outside the agreement,some of which may be more efficient producers. Preferential trade agreements arealso cumbersome to manage, requiring extensive rules of origin, and economistsdisagree as to whether FTAs help or hinder the movement toward multilateral tradeliberalization.6
Second, trade, much like technology, is a force that changes economies. Itincreases opportunities for internationally competitive sectors and challenges importcompeting firms to become more efficient or do something else. This fact gives riseto the policy debate over adjustment strategies, because while consumers and exportsector workers benefit, some industries, workers, and communities are hurt.Economists generally argue that it is far less costly for society to rely on various typesof trade adjustment assistance than opt for selective protectionism, the frequent andforcefully argued choice oftrade-affected industries.7 The public policy difficulty isthat both options have costs and benefits, but result in different distributionaloutcomes.8 Because trade agreements raise difficult political choices for legislators
6U5 businesses operating in Latin America have had to interpret a difficult road map whendealing with multiple arrangements defined in the Caribbean Basin Trade Partnership Act,the Andean Trade Preference Act, and the North American Free Trade Agreement. Eachdistorts investment decisions in the region and can have a countervailing influence on theothers. Adding the many Latin American FTAs only makes the situation more confusing.‘ For a recent and accessible treatment of this subject, see Kletzer, Lori G. and HowardRosen. Easing the Adjustment Burden on US Workers. In: Bergsten, C. Fred., ed. TheUnited Stales and the World Economy. Washington, D.C.: Institute for InternationalEconomics, 2005. pp. 313-41.
8Jmpontly, when a staple, such as underwear, is produced abroad and sold in the UnitedStates as a lower-priced import compared to a domestically produced good, it is equivalent
(continued...)
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in all countries, many of whom represent both potential winners and losers, FTA
provisions are typically limited in scope (so continue to protect partially or
completely certain products, industries, or sectors) and are phased in over time
(typically up to 15-20 years for very sensitive products).
Third, there are implications in the trade negotiation process for smaller
countries’ bargaining leverage when they choose to negotiate with a large country in
a bilateral rather than multilateral setting. Both Chile and the Central American
countries realized early in the process that there were negotiating issues over which
they would be able to exert little or no leverage. Both agreements, for example, do
not address antidumping and subsidies, reflecting an ongoing congressional concern,
and negotiations on certain agriculture issues were also limited, given the politically
sensitive nature of this issue.
The Impetus for a CAFTA-DR
The United States was motivated by both commercial and broader foreign
economic policy interests in deciding to negotiate preferential trade agreements with
Central America and the Dominican Republic. Geopolitical and strategic concerns
also sparked interest by all parties in pursuing the CAFTA-DR. Proponents expected
the CAFTA-DR to reinforce regional stability by providing institutional structures
that can undergird gains made in democracy, the rule of law, and efforts to fight
terrorism, organized crime, and drug trafficking. The CAFTA-DR may also be a way
to expand support for U.S. positions in the Free Trade Area ofthe Americas (FTAA),
and given that the January 2005 completion date has slipped, may also help
rationalize the system ofdisparate preferential trade agreements that currently define
Western Hemisphere trade relations.
Critics of the CAFTA-DR pointed to equally broad themes, such as the
pervasive social and economic inequality in much of the region, and so supported
strong labor and environment provisions as important negotiating objectives. There
was concern, for example, over the adequacy ofworking conditions and enforcement
of labor laws in the CAFTA-DR countries. The CAFTA-DR countries argued that
the agreement is one of many forces that can have a positive effect in raising labor
standards, although it is not sufficient to accomplish this goal on its own.
With the proliferation of regional agreements around the world, trade
negotiations have also become a tactical issue of picking off gains where they are
perceived relative to what other countries are doing. It was repeatedly argued by the
U.S. business community, for example, that the U.S.-Chile agreement, the first FTA
8 (...continued)to an increase in real income for the U.S. consumer. This can be significant for low-wage
workers in the United States. The same idea holds true for industrial products and business
consumers. So, there is a “trade off’ in the trade policy decision between keeping certain
jobs through protection and losing the income gains, or keeping the income gains and losing
certain jobs. One public policy response has been to pass trade adjustment assistance
legislation to help firms and workers transition more quickly to new opportunities.
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after NAFTA, was necessary to equalize treatment ofU.S. businesses competing withCanadian finns that already enjoyed preferential treatment with Chile. The case wasmade for Central America as well, which has trade agreements with Canada andMexico, each with firms that compete with U.S. businesses in the region. Delayswith WTO and Free Trade Area of the Americas (FTAA) negotiations onlyreinforced this attitude.
In the context of regional trade agreements, history, geographic proximity, andeconomic complementarities also made the CAFTA-DR an apparently logical step.9Economic fundamentals shaped a trade relationship based on exports of traditionalagricultural products, and later apparel. From the early days of independence,agricultural exports were the centerpiece ofCentral American economic growth. TheBritish controlled primary export production (coffee, bananas, sugar, and beef) untilabout 1850, when U.S. interests won over. This trend continued until the 1 980s andpassage of the Caribbean Basin Economic Recovery Act (CBERA — P.L. 98-67),as part of the Caribbean Basin Initiative (CB1). By becoming eligible for unilateralpreferential tarifftreatment, U.S. investment increased in the region, fostering growthin Central American export sectors.
A major change to the CBI relationship occurred with passage of the CaribbeanBasin Trade Partnership Act of 2000 (P.L. 106-200). Tn response to repeatedconcerns over trade benefits negotiated with Mexico underNAFTA, Congress passedessentially NAFTA-equivalent treatment for the CBI countries. CBTPA targetedpreferences on textile, apparel, and other high-volume export goods not coveredunder the original CBI legislation. The benefits were extended temporarily for aperiod ending September 30, 2008, or until a beneficiary country enters into an FTAwith the United States.
The U.S.-Central American/Dominican Republic economic relationship changedimportantly under the CBTPA, creating an environment in which businesses forgedstrategic partnerships in the increasingly complex world of textile and garmentmanufacturing. From 1974 until 1995, global rules restricting trade in apparelbetween developed and developing countries (mostly quotas) were set out in theMultifiber Arrangement (MFA) and its successor, the WTO-sponsored Agreementon Textiles and Clothing (ATC), which served as a transitional arrangement to aquota-free system begun on January 1,2005. In this context, the CBTPA preferencesprovided an import benefit for the region’s export sectors.1°
The United States created the CBIJCBTPA to foster Caribbean economicdevelopment and to assist U.S. industry in responding to competition from similarproduction-sharing arrangements in Asia that were taking a toll on U.S. productionand employment in the textile and apparel industries. Still, U.S. textile andparticularly apparel industries have been hit hard by foreign competition, resulting
For an excellent economic history of the region, see Woodward, Ralph Lee Jr. CentralAmerica: A Nation Divided New York: Oxford University Press, third edition, 1999.10 For more on the evolution of these trade preference arrangements, see CRS ReportRL3395 1, US. Trade Policy and the Caribbean: From Trade Preferences to Free TradeAgreements, by J. F. Hombeck.
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in a total job loss ofover 540,000 employees from 1998-2002.” The textile industry
(e.g., fiber, yams, fabric) has remained marginally competitive through use of
sophisticated production technologies. The apparel manufacturing industry (e.g.,
shirts, pants, undergarments) by contrast, is highly labor intensive, and in striving to
reduce costs, has moved production offshore to lower-wage countries.
As defined in the CBTPA, U.S. firms, through subsidiary or contractual
anangernents, are required to use mostly U.S. textiles as inputs to products that are
assembled and exported back to the United States — a mutually beneficial strategy.
In 2002, some 56% of U.S. apparel and textile imports from Central America was
assembled from U.S. materials, compared to less than 1% for apparel imports from
China.’2 Although this was a controversial move because of the reliance on foreign
low-wage workers to the detriment of some U.S. employment, many economists
argued that the alternative would have been an even greater loss of textile and
garment jobs to Asian competitors that use no U.S. inputs.’3
With the removal oftextile and apparel quotas in January 2005, the trade picture
changed again. The CAFTA-DR countries were already losing U.S. market share,
which from 1997 to 2002 declined from 11.7% to 9.4%. Over the same time period,
China’s market share increased from 9.1% to 13.0%. Given that U.S. textile and
apparel imports from CAFTA-DR countries are heavily concentrated in products
previously covered by quotas, the dominance of China and other low-cost Asian
producers is likely to continue. CAFTA-DR producers are less competitive on a pure
cost basis because of their higher labor costs relative to Asia, the CBTPA
requirement to use more expensive U.S. inputs, and the additional administrative
costs associated with U.S. preferential trade requirements.’4
Low-cost labor, however, is not the only or even the most important factor
driving competitiveness.’5 Studies suggest that the economic and social networks
that developed between U.S. and Central American firms effectively created a niche
“ United States International Trade Commission (USITC). The Economic Effects of
SignfIcant US. Import Restraints. Publication 3701. Washington, DC, June 2004. p. 60.
12 USITC. Production-Sharing Update: Developments in 2001. Industiy Trade and
Technology Review. November 2003. PP. 22 and B-l-4.
13 Chacón, Francisco. International Trade in Textile and Garments: Global Restructuring
of Sources of Supply in the United States in the I 990s. Integration and Trade, Vol. 4, No.
11, May-August 2000. Inter-American Development Bank, Washington, D.C. and United
States International Trade Commission. Production-Sharing Update: Developments in 2002.
Industry Trade and Technology Review. November 2003. p. 12.
‘‘ United States International Trade Commission. Textiles and Apparel: Assessment ofthe
Competitiveness ofCertain Foreign Suppliers to the US. Market. USITC Publication 3671.
Washington, D.C. January 2004. pp. 1-12, 3-22, and 3-33-35.
more subtle distinction made by one economist notes that, “How comparative advantage
is created matters. Low-wage foreign competition arising from an abundance of workers
is different from competition that is created by foreign labor practices that violate norms at
home. Low wages that result from demography or history are very different from low wages
that result from government repression ofunions.” See Rodrik, Dani. “Sense and Nonsense
in the Globalization Debate.” Foreign Policy. Summer 1997. p. 28.
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market in the region for certain apparel that has held up even with the growingpresence of China in the market. This relationship was made possible by theproximity of production, operational efficiencies, and quick turn around times formeeting increasingly shortened deadlines demanded by large retailers. In a post-quota trading world, these advantages may allow a certain portion of textile andapparel production to remain in the CAFTA-DR countries. Although CAFTA-DRcountry representatives have emphasized that the passage ofthe free trade agreementis a critical component for maintaining this strategy, it is not certain that it cancounter the long-tenri trend in market share loss to Asia.’6
Strategic considerations were important, but ultimately it is fair to ask what eachcountry expects to gain commercially from the detailed agreement that has emerged.The dollar value of U.S. trade with Central America makes the region the UnitedStates’ third largest Latin American trading partner, right behind Brazil, but a fardistant third from Mexico. Still, these are small economies (see Appendix 2 foreconomic data) and although firms engaged in this trade may fmd its effectssignificant, total CAFTA-DR trade in 2004 represented only 1.5% of U.S. foreigncommerce, and so can be expected to have only a small macroeconomic effect.
For the United States, an FTA is a more balanced trade arrangement than theunilateral preferences provided in the CBIICBTPA. Market access issues (e.g., tariffrates, quotas, rules of origin) were core negotiating areas. Although CentralAmerican and Dominican tariffs were already relatively low, they were reducedfurther. In particular, U.S. business interests wanted equal or better treatment thanthat afforded to exports from Canada and Mexico based on their FTAs with CentralAmerican countries. Permanent and clarified trade rules also supported the jointproduction arrangements already in place between U.S. firms and those in the region.Finally, a bilateral agreement offered the United States a chance to deepen other tradecommitments that affect some of its most competitive industries, including rulescovering the treatment of intellectual property, foreign investment, governmentprocurement, e-commerce, and services.
From the Central American and Dominican perspectives, reducing barriers tothe U.S. market (especially for textile and agricultural products) was cause enoughto proceed. The CAFTA-DR also made permanent and expanded U.S. benefits givenunder the CBTPA legislation, but which require reauthorization by Congress.Permanence in trade rules is an enticement for U.S. foreign direct investment (FDI),which in turn can support the region’s export driven development strategy.
The CAFTA-DR countries also faced important vulnerabilities, such as thepossibility that U.S. agricultural exports of key staples, such as corn and rice, mightoverwhelm their small markets. Sensitivity to these and other key industry sectorswere addressed in the extended tariff phase-out and safeguard schedules, and as a
‘6USITC, Textiles andApparel, pp. 3-33, 4-2-4. Gereffi, Gary. The Transformation of theNorth American Apparel Industry: Is NAFTA a Curse or a Blessing? Integration andTrade. Vol. 4, No. 11. May-August 2000. Inter-American Development Bank. pp. 56-57.
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matter of development policy, by CAFTA-DR country efforts to diversify the
agricultural sector into non-traditional exports and non-farm employment.’7
Finally, there were two significant negotiation challenges. The first was the
need for better Central American integration as part of CAFTA-DR, which
historically has been hampered. Having multiple trade rules and rules of origin in a
small sub-region would complicate the trade picture. For the CAFTA-DR to work
well, the United States needed some assurance that goods would flow efficiently
within the region, which will be a significant benefit of the agreement, particularly
with Costa Rica heading toward ratification of CAFTA-DR. Second, there was a
difference in negotiating capacity between Central America and the United States.
U.S. and multilateral offers to assist these countries in developing such capacity were
viewed as generous, but also a little self-serving, which required sensitivity in the
negotiation process.
U.S. Trade Relations with Central Americaand the Dominican Republic
“Docking” the Dominican Republic FTA to CAFTA added the largest of six
trading partners covered by the CAFTA-DR agreement. Total U.S. trade with the
Dominican Republic in 2004 was one-third greater than with either Costa Rica or
Honduras, which tie as the next largest U.S. trading partner in Central America.
What made the process feasible was the Dominican Republic’s willingness to accept
the basic framework and rules ofCAFTA, while negotiating market access and some
other issues bilaterally, as was done with each ofthe five Central American republics.
In addition, the Dominican Republic’s economy and export regime are, in many
ways, similar to those of Central America. U.S.-Dominican Republic trade was
added to an earlier version of this report and is discussed in more detail separately.
U.S.-Central America Trade
Because ofits huge size and geographical proximity, the U.S. market is a natural
destination for Central American exports. Merchandise trade with the United States
has dominated Central America’s foreign commerce for 1 50 years, and as seen in
Figure 1, remains in that role today.
17 The CAFTA-DR countries have begun new exports projects in areas such as miniature
vegetables, cut flowers, cable manufacturing, among others, in expectation that moving
beyond subsistence agriculture and textile manufacturing is critical to achieve economic
diversification and development. What distinguishes this effort from the earlier agricultural
export model is the emphasis on integrating small producers into the export system. The
idea is not only to tap into naturally small production capabilities, but to help bring social
development to areas that previously were not integrated into the agricultural export
development model. It is still a relatively small effort and its widespread application has yet
to be fully realized, but the CAFTA-DR countries see the FTA as supporting this strategy.
CRS-ll
Figure 1. Central America’s Direction of Merchandise Trade, 2003
Data Source: IMF, Direction ofTrade StaIisIics 2004 Yearbook.
The United States is by far the largest of Central America’s trading partners,accounting for some 56% of its exports and 44% of its imports. The rest of LatinAmerica collectively is the next largest trading partner, accounting for 25% ofCentral America’s exports and 31% of its imports. The European Union and Asiatogether account for about 14% of Central American exports and 21% of imports.
This distribution is not uniform throughout the region. Honduras, for example,exports 67% of its merchandise goods to the United States, compared to 44% forCosta Rica. Honduras also has the highest import percentage from the United Statesat 53% compared to Nicaragua’s 25%, which is the lowest. Total trade (exports plusimports) with the United States is also somewhat uneven country by country. CostaRica accounts for 30% of total Central American trade with the United States,whereas Nicaragua amounts to only 5% of the total. Guatemala, Honduras, and ElSalvador account for 25%, 22%, and 18% respectively.
Trade volume with the United States varies among countries, but in most casesthe trend has been one of growth at a rate higher than the average for U.S. trade withthe world. Over the past five years, U.S. exports to Central America grew by 34.7%(25.3% including the Dominican Republic), compared to 17.6% with the world and21.2% with Latin America as a whole (see Appendix 3 for the data). U.S. importsfrom Central America increased by 19.3% (15.4% including the DominicanRepublic) over the same time period, compared to 43.4% from the world and 51.4%from Latin America. Importantly, in 2003 some 80% of imports from CentralAmerica and the Dominican Republic entered the United States duty free under eithernormal trade relations (NTR) status or the CBI or GSP programs.18
Central American Exports Central American Imports
United States International Trade Commission. US.-Central America-DominicanRepublic Free Trade Agreement: Potential Econoniywide and Selected Sectoral Effects.
(continued...)
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For 2004, although trade growth varied among the five countries, U.S. export
growth to Central America doubled average export growth to the world, with all five
countries experiencing solid growth. U.S. imports from Central America, by
contrast, grew by less than half that of average import growth from the world. As
these trends suggest, the United States tends to run small merchandise trade deficits
with all the Central American countries and the Dominican Republic. In part, this
is the nature ofa production-sharing trade relationship, where parts and materials are
sent abroad for value-added processing and then returned to the United States.
Importantly, when services trade is added to the trade balance, the United States
tends to run trade surpluses with all these countries. This trend, too, is indicative of
the basic relationship between the United States, a service-based economy, and
developing countries.’9
U.S. Imports. Nearly three-quarters ofU.S. imports from Central America fall
into three main categories: fruit (mostly bananas) and coffee; apparel; and integrated
circuits. These three distinct categories, for various reasons, are not traded uniformly
by the five countries (see Table 1).
First, Central America has traditionally exported bananas and coffee, which is
dominated by Costa Rica and Guatemala. Coffee has actually declined for all
countries except Costa Rica and constitutes only 3.8% of U.S. imports from the
region. This reflects the competitive nature oftrade in coffee, which is grown in vast
quantities by Brazil, Colombia, and countries in Africa as well. Banana trade has
also declined in importance and accounts for only 5.0% ofU.S. imports from Central
America.
Second, knit and woven apparel has become the primary export goods for all
countries except Costa Rica and accounts for nearly 57% of total U.S. imports from
Central America. Because ofthe CBTPA benefits, some 56% oftextiles and apparel
imported from the six CAFTA-DR countries in 2002 was assembled from U.S. fabric
(from U.S. yarns). Of that amount, the Dominican Republic had 33% of the total
followed by Honduras with 30%, El Salvador with 18%, Costa Rica with 9%,
Guatemala with 8%, and Nicaragua with 2%. Under the CBTPA, these countries
may engage in greater value-added operations such as cutting and dyeing, which has
allowed them to remain selectively competitive with low-cost Asian exports. These
restrictions are further relaxed under the CAFTA-DR.2°The USITC points out that
‘ (...continued)USITC Publication 3717. August 2004. p. 7.
‘ This trend is not disputed, but the U.S. Department of Commerce does not disaggregate
U.S. bilateral services trade data with the Central American countries. Estimates are
provided in some of the Country Commercial Guides produced by the U.S. Department of
Commerce based on foreign country reporting.
20 United States International Trade Commission. Production-Sharing Update:
Developments in 2001. Industi-v Trade and Technology Review. November 2003. pp. 13,
22, Bl-4.
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the CAFTA-DR countries have been losing market share to Asia since at least 1997,‘1and the CAFTA-DR is seen as a way to help abate this trend:
Table 1. Top Eight U.S. Merchandise Imports from CentralAmerica, 2004
($ millions): -
4pduct and HTSa4Total C R. .- Hon Guat El Sal Nic
-.-..
Total U.S. liriports 13,172 3,333 3,641 3,155 2,033 991
KnitApparel(61) 5,108 253 2,013 1,261 1,364 216
WovenApparel(62) 2,415 265 729 686 357 379
Edible Fruit & Nuts (08) 1,037 490 172 359 0 14-Bananas (0803) (657) (245) (129) (273) (0) (11)
Electrical Mach. (85) 983 719 172 1 18 73-Integrated circuits 8542 (489) (489) (0) (0) (0) (0)
Optical/Med. Equip. (90) 492 480 0 12 0 0
Spices, Coffee, Tea (09) 512 150 45 216 49 52-Coffee (0901) (504) (148) (43) (213) (49) (52)
FishandSeafood(03) 293 60 133 22 6 74
Mineral Fuel, Oil (27) 186 0 0 180 6 0
Other 2,146 916 377 418 233 183
Top 8 as % of Total 83.7% 72.5% 89.6% 86.8% 88.5% 8 1.5%Data Source: U.S. Department of Commerce.#HTS = Harmonized Tariff Schedule
Third, Costa Rica attracted $500 million in foreign direct investment for acomputer chip assembly and testing plant, which has become its major exportgenerator. This investment was augmented by an additional $110 million in October2003 for the production line of “chipsets” for personal computers. In 2004, U.S.imports of integrated circuits constituted 18% of total imports from Costa Rica.Similar importance may be seen in the imports of Costa Rica’s medical equipment,another indicator of its relatively sophisticated production capabilities. Costa Ricais the fastest growing and most diversified trader in Central America, which explains,in part, why it has outpaced its neighbors on the development path.22
The CAFTA-DR is intended to build on these trends, support exportdiversification, and provide a long-term stable trade environment that will increaseU.S. foreign investment in the region. Evidence is already seen in alternativeagricultural exports such as cut flowers and miniature vegetables (in multipleCAFTA-DR countries), as well as, developing maquiladora operations to suppiy coilwrapped cables for the automotive sector (Honduras) and adapting apparel cuttingtechnology to supply insulation for aircraft engines (Costa Rica). Many non-apparel
21 USITC, Textiles and Apparel, p. 1-12.22 Hufbauer, Kotschwar, and Wilson, op. cit., p. 1003.
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items that the United States imports from Central America face minimal or no tariffs.
Bananas, coffee, oil, most fish products, and Costa Rica’s integrated circuits and
medical equipment enter duty free. Some enter the United States under preferential
arrangements, but the majority is free of duty under normal (most favored nation —
MFN) tariff rates. Rules on U.S. apparel imports were enhanced and made
permanent under CAFTA-DR.
U.S. Exports. As seen in Table 2, the major U.S. exports to Central America
include electrical and office machinery (computers), apparel, yarn, fabric, and plastic.
Many of these goods are processed in some form and re-exported back to the United
States under production-sharing arrangements. For example, nearly 60% ofelectrical
machinery exports to Central America is integrated circuits going to Costa Rica for
processing and re-export. The same may be said for fabric and yams that are
exported to all countries, sewn and otherwise assembled, and re-exported back to the
United States. Some ofthese goods are consumed in the CAFTA-DR countries along
with capital goods (machinery and parts) and agricultural products.
Table 2. Top Eight U.S. Merchandise Exports to CentralAmerica, 2004
$ millions)
Product and HTS Costa PTotal . Hon Gnat El Sal Nic
Numbea. Thca
Total U.S. Exports 11,388 3,304 3,077 2,548 1,868 592
ElecMachinery(85) 1,698 1,092 175 206 157 68
-Integrated circuits 8542 (828) (822) (0) (5) (1) (0)
Machinery (84) 1,031 301 205 256 205 69
-Office Mach. Pts (8473) (207) (68) (26) (62) (32) (19)
-Computer Parts (8471) (136) (43) (20) (32) (26) (10)
Cotton Yam, Fabric (52) 780 18 412 241 84 23
Mineral Fuel (27) 712 93 239 313 57 10
Knit/Crocheted Fabric 60 688 38 351 24 272 3
Plastic (39) 657 253 123 181 87 13
KnitApparel(61) 624 101 312 33 176 2
Cereals (10) 559 156 92 118 125 68
-Corn (1005) (242) (71) (31) (65) (64) (10)
-Wheat and Meslin 1001 (167) (38) (28) (34) (46) (21)
-Rice (1006) (149) (46) (33) (18) (16) (37)
Other 4,639 1,252 1,168 1,176 705 336
Top 8 as % of Total 59.3% 62.1% 62.0% 53.8% 62.3% 43.2%
Data Source: U.S. Department of Commerce. HTS Harmonized Tariff Schedule
Similar trends for U.S. import trade are evident in U.S. exports. In 2004, 78%
of knit apparel and 76% of knit, cotton, and yarn fabric went to Honduras and El
Salvador. Although the United States exports machinery and parts to all five
countries, electrical machinery and particularly integrated circuits, are sent to Costa
Rica. All five countries import U.S. cereals and some, such as corn and rice, are
CRS-15
among the more import sensitive products for the CAFTA-DR countries because theyare staple crops and grown by small, often subsistence fanners.23
The significant aspects of this trade structure are that it reflects: 1) the continuedhistorical trend of (largely duty-free) regional dependence on the large U.S. marketas an important aspect of trade and development policy; 2) a deepening economicintegration; and 3) growing U.S. direct investment over the long run.
U.S.-Dominican Republic Trade
The Dominican Republic is the 28t largest U.S. export market (6th in LatinAmerica) and ranks as the 41st largest import country (8th in Latin America). Moreso than any of the Central American countries, Dominican trade is dominated by theUnited States (see Table 3 for bilateral trade data.)
Table 3. U.S.-Dominican Republic Merchandise Trade, 2004U S Exports (by product
$ minions U S Imports (by product$ millionsand HTS Number*) and fiTS Number*) -
Electrical Machinery (85) 529 Woven Apparel (62) 1,147
Knit Apparel (27) 379 Knit Apparel (61) 889
Cotton Yar, Fabric (52) 301 Medical listruments (90) 417
Oil (not crude) (27) 291 Electrical Machinery (85) 393
Plastic (39) 235 Precious Stones/Jewelry(71) 341
Machinery (84) 230 Tobacco (24) 227
Precious Stones/Jewelry(71) 219 fron and Steal (73) 161
Cereals (10) 185 Footwear (64) 137
Other 1,974 Other 816
Total 4,343 Total 4,528
Top 8 Exports as % of Total 54.5% Top 8 Imports as % of Total 82.0%Data Source: U.S. Department of Commerce. #HTS = Harmonized Tariff Schedule
The United States absorbs 80% of its exports, with 12% going to otherdeveloped countries and only 8% entering developing countries. The DominicanRepublic imports 50% of its merchandise goods from the United States, 13% fromother developed economies, and 37% from various developing countries. Althoughthe largest of the CAFTA-DR trading partners, U.S. exports grew by only 1.6% in2004 as the Dominican Republic continued to recover from a severe recession.
The joint-production arrangements are evident in apparel and jewelry-makingindustries. Apparel and textiles constitute 16% of U.S. exports and 48% of U.S.imports. Other significant U.S. exports include various types of machinery, refinedoil products, and plastic. Other important U.S. imports include medical instruments,
USITC, Production-Sharing Update: Developments in 2001. Industry Trade andTechnology Review. July 2002. pp. 39-42, Bl-4
-o9CRS-16
electrical machinery, tobacco, and plastic. In many ways, the structure of the U.S.-
Dominican trade is similar to that of U.S.-CAFTA trade, and hence the economic
logic of “docking” it to the Central American agreement.
U.S. Foreign Direct Investment
The CAFTA-DR countries also benefit from foreign direct investment (FDI) as
part of the trade relationship with the United States, which is the largest foreign
investor in all six countries. To the extent that an FTA can be considered a
stabilizing factor in economic relationships, it is expected to encourage more FDI and
thereby promote longer term economic growth and development. U.S. FDI in the
CAFTA countries is presented in Table 4.
The trends suggest that U.S. direct investment in the area is relatively small and
has stagnated or grown erratically in recent years. Some countries have fared better
than others and net foreign investment may increase or decrease because of both
economic and political trends, as well as opportunities in other parts of the world that
can affect business decisions. Investment patterns have been skewed toward Costa
Rica, which has over half of U.S. FDI in Central America.
Table 4. U.S. Foreign Direct Investment (FDI)in CAFTA-DR Countries
(S millions)
Country 1999 2000
Costa Rica 1,493 1,716 1,835 1,802 1,831
El Salvador 621 540 464 684 779
Guatemala 478 835 311 303 294
Honduras 347 399 227 181 270
Nicaragua 119 140 157 250 261
Total Central America 3,058 3,630 2,994 3,220 3,435
Dominican Republic 968 1,143 1,116 983 860
Total CAFTA-DR 4,026 4,773 4,1 10 4,203 4,295
Data Source: U.S. Department of Commerce. Bureau of Economic Analysis. Available at
[http://www.bea.doc.gov/bealdilusdlongcty.htmj. Data are stock of FDI on a historical-cost basis.
Review of the CAFTA-DR
One aspect of the congressional debate over trade agreements focused on their
potential economic effects on the United States. Congress mandated that the United
States International Trade Commission (USITC) assess these effects and it released
its final report in August 2004. This report provides quantitative and qualitative
estimates of the CAFTA-DR effects on the U.S. economy as a whole and for selected
sectors. Overall, it found that the “welfare value” or aggregate effect on U.S.
consumers and households of trade liberalization under the CAFTA-DR would be
lD
CRS-17
approximately $166 million (less than 0.0 1% of GDP) for each year the agreementis in effect.24
With respect to trade flows, the reduction ofrelatively higher tariffrates on U.S.goods is expected to increase U.S. exports more than imports with the region. TheUSITC model estimates that when the CAFTA-DR is fully implemented, U.S.exports to the CAFTA-DR countries will increase by $2.7 billion or 15%, whileimports will increase by $2.8 billion, or 12%. The effect of this trade growth onaggregate U.S. output and employment is estimated to be minimal. The largest sectorincreases were estimated to occur for U.S. grains (0.29% for output and 0.3 1% foremployment) and the greatest decrease to occur for sugar manufacturing (-2.0% forboth output and employment).25 These estimates are in line with expectations madeprior to the negotiations that the marginal effects of the CAFTA-DR will be small,but positive for the U.S. economy as a whole, given the CAFTA-DR countries hadsmall and already largely open economies.
The rest of this section briefly summarizes the major negotiation issues andreferences the ITC’s conclusions with respect to each major issue area, whereapplicable. Emphasis is given to those sectors and issues expected to be mostaffected by the agreement, or that generated the most contentious policy debate.
Market Access
Market access refers to provisions that govern barriers to trade such as tariffs,quotas, safeguards, and rules of origin, which define goods eligible for tariffpreferences based on their regional content. CAFTA-DR replaces and enhances ina permanent agreement U.S. preferential market access extended unilaterally underthe Caribbean Basin Economic Recover Act (CBERA), the Caribbean Basin TradePartnership Act (CBTPA), and the Generalized System ofPreferences (GSP), whichrequire periodic congressional reauthorization (except CBERA). Agriculture andtextile/apparel goods, Central America’s major exports, were the most important anddifficult market access issues to resolve.
Each traded good falls into one of eight tariff elimination “staging categories,”which defme the time period over which customs duties will be eliminated. Eachcountry negotiated a list of its most sensitive products for which duty-free treatmentis delayed. For manufactured goods, duties on 80% ofU.S. exports were eliminatedimmediately, with the rest phased out over a period of up to 10 years.26 Foragricultural goods, duties on over 50% ofU.S. exports were eliminated immediately,with the rest phased out over a period of up to 20 years. In some cases, duty-freetreatment is “back loaded” and will not begin for 7 or 12 years after the agreement
24 USITC, US.-C’entral America-Dominican Republic Free Trade Agreement, p. 64. Thestudy reviews literature on the CAFTA-DR and makes estimates of the economywide andsectoral effects of trade liberalization under CAFTA-DR based on a computable generalequilibrium (CGE) model. For details, see pages xiv, 2, and Appendix D.25 Ibid., pp. xxii and 64-70.26 Ibid., p. 25.
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takes effect. For the CAFTA-DR countries, 100% ofnon-textile and non-agricultural
goods enter the United States duty free immediately.27 Safeguards are retained for
many products over the period ofduty phase out, but antidumping and countervailing
duties were not addressed in the CAFTA-DR, leaving all U.S. and other country trade
remedy laws fully enforceable, as required under Trade Promotion Authority (TPA).
Textiles and Apparel. The CAFTA-DR has less restrictive provisions
governing textile and apparel imports than those in the CBTPA. It removes all duties
on textile and apparel imports that qualify under the agreement’s rules of origin,
retroactive to January 1, 2004, and allows for special safeguard measures during the
duty phase-out period. The penrianence of the provisions and the more
accommodating rules of origin and administrative guidelines may generate a
marginal increase in apparel imports from the region. These provisions are intended
to address the decline in U.S. market share of textile and apparel imports from the
region over the past five years, most ofwhich have been displaced by Asian products,
despite the enhanced preferential treatment that Congress afforded to Central
American and Dominican imports under the CBTPA.28
Central American and Dominican apparel has been entering the United States
duty free for years, if it is assembled from U.S. yam and fabric under the so-called
“yarn forward” rule. The difference from the CBTPA is that duty-free access applies
to textiles and garments assembled from components made in either the CAFTA-DR
countries or the United States, rather thanjust the United States.29 Exceptions to this
rule include an enhanced “cumulation rule,” which allows duty-free treatment for a
limited quantity ofwoven apparel assembled from components made in Canada and
Mexico, to help U.S. textile firms invested in these countries. In addition, there are
exceptions for specified products (affecting less than 10% of trade), goods with
limited amounts of material from third countries, and for tariff preference levels
(TPLs) given to a few imports from Nicaragua and Costa Rica.
Although these rules were widely supported, some textile producers registered
concern that they are overly restrictive and therefore limited in their intended effect
of helping the region compete (by lowering costs) in the U.S. market against Asian
imports. U.S. and CAFTA-DR firms that produce for the U.S. market wanted as
much flexibility as possible to use fabrics from third countries. Others feared,
however, that they are too generous and that if customs procedures are not well
implemented, they could harm U.S. producers by increasing opportunities for the
illegal transshipment of fabrics or goods originating from outside the region, such as
China. There was also considerable debate over the expansion from the CBTPA of
the “short-supply” list. This is the list of goods given duty-free access if made from
materials that are determined to be commercially in “short supply” in the United
States. The CAFTA-DR may also increase U.S. exports of textiles, which have risen
27 Office of United States Trade Representative. Free Trade with Central America:
Summary ofthe US. -central America Free Trade Agreement. p. 1. Hereafter cited as the
CAFTA Suminaty. It may be found at [http://www.ustr.govj.
28 USITC, U.S. -Central American-Dominican Free Trade Agreement, pp. 28-29.
29 See CRS Report RS22 150, CAFTA-DR: Textiles andApparel, by Bernard A. Geib. p. 4.
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significantly under CBTPA. On balance, however, the USITC study estimated thatit “will likely have a negligible impact on U.S. production or employment.”30
Concerns raised by certain sectors of the textile and apparel industry requiredassurances from the Bush Administration before support would be given to theCAFTA-DR. Promises were made to: (1) change the rules of origin for textiles andapparel to require that all pocketings and linings come from the CAFTA-DRcountries (rather than third party countries like China); (2) negotiate a new strictercustoms enforcement agreement with Mexico before the CAFTA-DR cumulationrules take effect allowing Mexican inputs to be used in CAFTA-DR textile andapparel products; and (3) require Nicaragua to increase use of U.S. fabric to qualifyas duty-free under their tariff preference levels. These assurances are not part of theformal CAFTA-DR, but have been implemented nonetheless.3’
Agriculture. Domestic support programs were not addressed in the CAFTADR, which focused on reducing tariffs and increasing quota levels, the most costlytrade-distorting policies. Average applied tariffs on agricultural goods by mostCAFTA-DR countries are relatively low, ranging from 7% to 23%. Most agriculturalimports face no tariff in the United States. For all countries, the pressing challengewas negotiating tariff rate quotas (TRQs — see below) for their most sensitiveproducts.32 Agricultural products have the most generous tariffphase-out schedules,with up to 20 years for some products (e.g., rice and dairy). This approachacknowledges that the agricultural sectors bear most ofthe trade adjustment costs andthat they will require time to make the transition to freer trade.33
All agricultural trade eventually becomes duty-free except for sugar importedby the United States, fresh potatoes and onions imported by Costa Rica, and whitecorn imported by the other Central American countries. These goods will continueto be subject to quotas that will increase, after a certain period, by approximately 2%each year in perpetuity, with no decrease in the size of the above-quota tariff.34 Overhalf of current U.S. farm exports to Central America became duty free upon
30CRS Report P.132895, Textile Exports to Trade Preference Regions, p. 2, by Bernard A.Geib. Inside U.S. Trade. CAFTA Textile Rules Pave Wayfor Increase in Foreign FabricUse. December 19, 2003 and Press Release. NTA Denounces CAFTA as Threat to US.Textile Industry. December 18, 2003 and USTR, CAFTA Summary, p. 2 and USITC, US.-Central American-Dominican Republic FTA, p. 30-32. Nicaragua received specialpreferential treatment for certain “non-originating apparel goods”(Annex 3.27) and CostaRica received limited special treatment for certain wool apparel goods (Annex 3.28).31 Washington Trade Daily, Tide Risingfor CAFTA Portman, July 26, 2005.32 For more details, including sanitary and phytosantiary (SPS) provisions, see CRS ReportRL32 110, Agricultural Trade in the US. -Dominican Republic-Central American FreeTrade Agreement (CAFTA-DR), by Remy Jurenas.‘ Salazar-Xirinachs, Jose M. and Jaime Granados. The US-Central America Free TradeAgreement: Opportunities and Challenges. In: Schott, Jeffrey J. ed. Free TradeAgreements: US Strategies and Priorities. Washington, D.C. Institute for InternationalEconomics. 2004. pp. 245-46.“ CRS Report RL321 10, Agriculture in the US.-Dominican Republic-CentralAmericanFree Trade Agreement (CAFTA-DR,), by Remy Jurenas.
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implementation, including high quality cuts ofbeef, cotton, wheat, soybeans, certain
fruits and vegetables, processed food products, and wine.
Many other transitional provisions exist. Agricultural products are subject to
tariff-rate quotas, or limits on the quantity of imports that can enter the United States
before a very high tariff is applied. The phased reduction in agriculture protection
also includes the transitional use of volume-triggered safeguards, or applying an
additional duty temporarily on products that are being imported in quantities deemed
a threat to the domestic industry.35 Export subsidies are eliminated except when
responding to third party export subsidies.
Sugar was the most controversial agricultural issue to resolve and U.S. sugar
growers and processors were vehement opponents of the agreement to the end. The
U.S. agreed to slight numerical increases in sugar quotas for all six countries. Sugar
and sugar-containing products imported under the U.S. quota system enter the United
States duty-free, but exports above the quota face prohibitive tariffs. Raw sugar
receives the largest quota by volume, 28% of the total U.S. sugar quota for the world
was filled by the CAFTA-DR countries in 2003, and was a major issue for this
agreement. The U.S. market accounts for only 14% of the region’s sugar exports,
representing less than 10% of the region’s sugar production.36
The CAFTA-DR raises the U.S. quota by an amount equal to 35% ofthe current
quota in year one, rising to 50% by year 15, after which the quota increases each year
slightly in perpetuity. This may seem large, but the USITC notes that the initial
increase amounts to only 1% of U.S. production and consumption of raw sugar in
2003, and that the overall effects of the sugar provisions may be small. Two studies
done by the USITC and Louisiana State University estimated that the sugar
provisions could result in a decline in sugar prices of 1% (USITC) and 4.6% (LSU),
with perhaps largely offsetting employment effects in the sugar producing and sugar-
containing product industries.37 The United States may impose a sugar price
mechanism to compensate Central American sugar exporters in lieu of according
them duty-free treatment, but a key issue for some Members of Congress was
defining precisely how this mechanism will work.
Nonetheless, the sugar producing industry remained unsatisfied with these
provisions. The Bush Administration responded in a letter from Secretary of
Agriculture Mike Johanns to Senator Saxby Chambliss and Representative Bob
Goodlatte, the respective agriculture committee chairs, assuring the industry that the
CAFTA-DR would not be allowed to interfere with the operation of the sugar
program as defmed in the Farm Security and Rural Investment Act of2002 (the Farm
Bill) through FY2007, when it expires. In particular, he agreed to act should
u For example, in the case of beef the Central American countries have agreed to the
immediate elimination of tariffs on U.S. prime and choice cuts, but have a 15-year tariff
phase-out on other products, with a backloaded schedule (no tariff reductions in the early
years) and a safeguard. The United States has a 26% out-of-quota tariff on beef that will be
phased out over 15 years, with the quota schedule defined for each country.
36 USITC, U.S.-CentralArnerican-Dorninican Free Trade Agreement, p. 35.
Ibid., pp. 38-40.
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additional sugar imports due to the CAFTA-DR, NAFTA, and other trade agreementscause the import trigger threshold of 1.532 million short tons per year to be exceededand threaten the sugar program operations. The U.S. Secretary ofAgriculture agreedthat in such a case, he would preclude entry of additional sugar imports into thedomestic sweetener market by either making direct payments to exporters or usingagricultural commodities to purchase sugar to be used for nonfood use (ethanolproduction). This offer also proved inadequate to bring about sugar industry supportfor the CAFTA-DR.
Increasing grain exports was another important goal for the United States.Wheat is not grown in the CAFTA-DR countries and there is already largely freetrade in this commodity. Staples for the CAFTA-DR countries, such as rice andwhite corn, however, remain protected and there is a complicated system for phasingout TRQs on U.S. exports over a 15-20 year period. As with sugar imports to theUnited States, U.S. exports of corn and rice will increase slowly due to the highlyrestrictive TRQs and special safeguard measures. The USITC estimates that changesin the quantity of exports from the United States will be small at first and rise byperhaps 20% by the end of the TRQ phase-out period. The USITC suggests that thelong-run effect may be small (1.2% of total U.S. grain exports), but notes that the“potential increase in grains exports offers significant market opportunities for U.S.white and yellow corn growers and U.S. rice growers.”38
Despite the lengthy transition period toward freer trade under the CAFTA-DR,concerns remain over the potentially harmful effects to Central America, particularlyto the small commercial and subsistence farmers, of further opening its markets toU.S. agriculture.39 Three recent studies, however, agree that overall, increasedagricultural trade can also be one source of Central American rural development. Inaddition to increasing Central American agricultural exports, the majority ofhouseholds are net consumers of agricultural goods, and so stand to gain from lowerprices, the equivalent to an increase in family income. Because subsistence farmers’produce generally does not reach the market, they are unlikely to be affected greatlyby changes in market prices.40
Still, for the minority of rural net producers of agricultural goods, economistsalso agree that adjustment policies are essential, beginning with targeted incomeassistance. For rural areas to benefit fully from the CAFTA-DR, there is also acritical need for increased investment in transportation and communications
38 Ibid., pp. 43-47.
39Oxfam International. A Raw DealforRice Under CAFTA-DR. Briefing Paper #68. 2004.40 Todd, Jessica, Paul Winters, and Diego Arias. CAFTA and the Rural Economies ofCentral America: A Conceptual Franeworkfor Policy and Program Recommendation.Inter-American Development Bank. Washington, D.C. December 2004. pp. 43-50, Mason,Andrew D. Ensuring that the Poor Benefitfrom CAFTA: Policy Approaches to Managingthe Economic Transition. Draft of Chapter 5 in forthcoming book. The World Bank.Washington, D.C. March 25, 2005. pp. 25-26, 35, and Arce, Carlos and Carlos FelipeJaramillo. El CAFTA y la Agriclutura Centroamericana. Paper presented at the WorldBank Regional Conference on International Trade and Rural Economic Development,Guatemala. February 21-22, 2005. p. 17.
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infrastructure, education, and more fully developed financial services. This will
improve agricultural productivity, help transition workers toward alternative crops
or non-farm employment, and integrate the rural economy more fully with the
national and international economy. Without concerted effort in adjustment
assistance, the poorest segments of rural Central America may remain vulnerable to
the negative effects of freer trade.4
Investment
In 2003, the United States’ stock of foreign direct investment (FD1) in the
CAFTA-DR countries was $4.3 billion, which represents only 1.4% of U.S. FDI in
Latin America and the Caribbean. Some 43% of the FDI in CAFTA-DR countries
went to Costa Rica, followed by the Dominican Republic with 20%. The United
States has advocated clear and enforceable rules for foreign investment in all trade
agreements, which is largely accomplished by “standard” language requiring national
and most-favored-nation (nondiscriminatory) treatment. The CAFTA-DR clarifies
rules on expropriation and compensation, investor-state dispute settlement, and the
expeditious free flow ofpayments and transfers related to investments, with certain
exceptions in cases subject to legal proceedings (e.g., bankruptcy, insolvency,
criminal activity). Transparent and impartial dispute settlement procedures provide
recourse to investors.
Two investment issues stood out. First, an investor-state provision, common in
U.S. bilateral investment treaties (BITs) and used in earlier FTAs, was included. It
allows investors alleging a breach in investment obligations to seek binding
arbitration against the state through the dispute settlement mechanism defined in the
Investment Chapter. U.S. investors have long supported the inclusion of investor-
state rules to ensure that they have recourse in countries that do not adequately
protect the rights of foreign investors. Since bilateral investment treaties are usually
made with developing countries that have little foreign investment in the United
States, such a provision was not thought to be applied to the United States.
Circumstances changed, however, under NAFTA when Canada used investor-state
provisions to raise “indirect expropriation” claims against U.S. state environmental
regulations.42
Although none of the claims filed against the United States has prevailed,
Congress instructed in TPA legislation that future trade agreements ensure “that
foreign investors in the United States are not accorded greater substantive rights with
respect to investment protections than United States investors.” In response, Annex
10-C ofthe CAFTA-DR states that “except in rare circumstances, nondiscriminatory
regulatory actions by a Party that are designed and applied to protect legitimate
welfare objectives, such as public health, safety, and the environment, do not
constitute indirect expropriations.” This provision and one that allows for early
‘ ibid.42 Indirect expropriation refers to regulatory and other actions that can adversely affect a
business or property owner in a way that is “tantamount to expropriation.” This issue and
many cases are discussed in CRS Report RL3 1638, Foreign Investor Protection Under
NAFTA Chapter 11, by Robert Meltz.
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elimination of“frivolous” suits were intended to address congressional concerns, butthere is uncertainty about how well the changes will operate.
Second, the CAFTA-DR countries requested greater flexibility in the treatmentof certain sovereign debt. Annex 10-A allows sovereign debt owed to the UnitedStates that has been suspended and rescheduled not to be held subject to the disputesettlement provisions in investment chapter, with the exception that it be givennational and MFN treatment. Annex 10-E extends from six months to one year theamount of time required before a U.S. investor may seek arbitration related tosovereign debt with a maturity of less than one year. Both provisions are intended,in the event of a financial crisis, to keep the CAFTA-DR from interfering in anysovereign debt restructuring process, and are viewed by the U.S. Treasury as anaccommodation to Central American interests.
Services
The United States is the largest services exporter in the world and services tradepresented a number of hurdles given that the Central American countries haveadopted few commitments of the WTO ‘s General Agreement on Trade in Services(GATS). There were also many industry-specific barriers that existed, such as:barriers to foreign insurance companies in Guatemala; “heavy” regulation licensingof foreign professionals in Honduras; local partner requirements in some financialservices in Nicaragua; and numerous services monopolies in Costa Rica (insuranceand telecommunications).43 The CAFTA-DR provides broader market access andgreater regulatory transparency for most industries including telecommunications,insurance, financial services, distribution services, computer and business technologyservices, tourism, and others. Banks and insurance firms have full rights to establishsubsidiaries, joint ventures, and branches. Regulation of service industries isrequired to be transparent and applied on an equal basis and e-commerce rules areclearly defined, a critical component of delivering services.’
The USITC suggests that the CAFTA-DR will have little effect on U.S. servicesimports because the market is already open. It does anticipate opportunities for U.S.firms to expand into Central America. In particular, Costa Rica agreed to theeventual opening ofits state-run telecommunications and insurance industries, wherethere has been strong political resistence to privatization and deregulation.45 Unlikethe other countries, doing so will constitute a major structural adjustment for theCosta Rican economy, will have implications for Costa Rican social policy, and willrequire amending domestic laws, all ofwhich, the Costa Ricans argued, was difficultfor their legislature to support if they did not receive concrete tradeoffs in other areas,such as agriculture and textiles. Negotiators resolved these issues in two week-longdiscussions held in January2004 and their detailed conunitments are presented in therelevant chapters ofthe CAFTA-DR. Because ofthis continued sensitivity, however,
USTR. 2004 National Trade Estimate Report on Foreign Trade Barriers. Washington,D.C. 2004.
44USTR, CAFTA Summary, p. 2-3.‘ Salazar-Xirinachs and Granados, op. cit., p. 260.
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a vote on ratifying the CAFTA-DR is highly controversial in the Costa Rican
Congress.
Government Procurement
None of the CAFTA-DR countries is a signatory to the WTO Agreement on
Government Procurement and complaints against purchasing processes vary from
dissatisfaction with opaque and cumbersome procedures in Costa Rica to outright
corruption in Guatemala. El Salvador, Nicaragua, and Honduras passed new
government procurement laws in 2000/01, and in general, there have been
improvements in all countries in dealing with project bidding, although transparency
issues remain.46 Some analysts believe this is due in part to a lack of incentives given
that many of these countries will not be able to compete in the U.S. government
procurement market.47
The CAFTA-DR grants non-discriminatory rights to bid on contracts from
Central American ministries, agencies, and departments, with the exception of“low
value contracts” and other exceptions. It also calls for procurement procedures to be
transparent and fair, including clear advance notices of purchases and effective
review. Specific schedules detailing exceptions and limitations were written by each
country, covering such diverse issues as the sale of firearms to supplying school
lunch programs. In addition, each country provided a list ofsubnational governments
(e.g., states and municipalities) that agree to adhere to the government procurement
provisions. The CAFTA-DR also makes clear that bribery is a criminal offense
under the laws of all countries. In general, the provisions are supported by U.S.
businesses interested in doing or expanding opportunities in the region.48
InteiJectual Property Rights
All Central American countries are revising, or have revised, their intellectual
property rights (IPR) laws and are closing in on complying with the WTO Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS). That said, all
countries are subject to criticism for falling short of either clarifying or enforcing
penalties for noncompliance and in some cases have simply not adopted reforms that
many U.S. industries (e.g., sound and video recordings, pharmaceuticals, book
publishing, computer software) consider necessary to protect their intellectual
property. Piracy, incomplete or inadequate legal protection, and enforcement
capacity remain problems and ongoing concerns exist across the range of IPR issues
ofpatents, trademarks, and copyrights, covering print, electronic, and other media.49
The IPR provisions in the CAFTA-DR go beyond those in the WTO. They
provide that all businesses receive equal treatment and that the CAFTA-DR countries
ratify or accede to various international P agreements. Trademarks benefit from a
46 USTR, 2004 National Trade Estimate Report on Foreign Trade Barriers.
Salazar-Xirinachs and Granados, op. cit., p. 253.
48USTR, AFTA Summaty, p.5.‘ Ibid and 2004 National Trade Estimate Report on Foreign Trade Barriers.
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transparent online registration process and special system to resolve disputes overinternet domain issues, among other benefits. Copyright provisions clarify use ofdigital materials (exceeding TRIPS standards) including rights over temporary copiesof works on computers (music, videos, software, text), sole author rights for makingtheir work available online, extended terms of protection for copyrighted materials,strong anti-circumvention provisions to prohibit tampering with technologies, therequirement that governments use only legitimate computer software, the prohibitionof unauthorized receipt or distribution of encrypted satellite signals, and rules forliability of internet service providers for copyright infringement. Patents and tradesecrets rules confonu more closely with U.S. norms. End-user piracy is criminalizedand all parties are required to authorize the seizure, forfeiture, and destruction ofcounterfeit and pirated goods. The CAFTA-DR also mandates statutory damages forabuse of copyrighted material.50
The CAFTA-DR goes a long way toward meeting U.S. business IPR protectionneeds and the USITC suggests that many industries will benefit from higher revenueif the new standards can be enforced. Even if laws are changed to conform to theCAFTA-DR commitments, however, enforcement issues will likely remain andtechnical assistance may be needed to help develop the necessary capabilities.51
Pharmaceutical Data Protection. To bring a patented drug to market, adrug company must demonstrate through clinical trials that the drug is safe andeffective. Under U. S. patent law, the data used to establish these claims are protectedfrom use by generic manufacturers for five years from the time the drug is introducedin a country’s market. Similar language was adopted in the JPR chapter of theCAFTA-DR. This provision became controversial in November 2004 when theGuatemala legislature changed its laws, adopting World Trade Organization (WTO)language that would have limited data protection to five years from the time a drugis brought to market in the first country (e.g., the United States), rather than from thepresumably later time that it might be introduced in a second country (e.g.,Guatemala).
The USTR argued that this change was a breach of the CAFTA-DRcommitments and threatened to delay implementing legislation until the law waschanged. Guatemala reversed the data protection law, to the disappointment ofmanywho argued that the CAFTA-DR provisions could delay access to future genericdrugs. Given that data protection and patent protection often run concurrently,however, it is debatable whether the introduction of future generic drugs will befurther inhibited by this provision. An August 5, 2004 side agreement among allsignatories further clarifies that “obligations” under Chapter 15 of the CAFTA-DRdo not affect a country’s ability “to take necessary measures [e.g., compulsorylicensing for generic drugs] to protect public health by promoting access to medicinesfor all,” in particular those needed to combat epidemics such as H1V/AIDS,tuberculosis, and malaria, among others. Critics, however, would have preferred that
° Ibid., p. 4-5.51 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, p. 101.
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the side agreement include an explicit exception to the data protection requirement
for cases where compulsory licencing under the WTO rules might be invoked.52
Labor and Environment
Perhaps the greatest challenge to the CAFTA-DR arose over concerns about the
labor and environment chapters. It has become widely accepted that labor and
enviromuent provisions should be part of modern trade agreements. There is
considerable disagreement, however, over how aggressive language in trade
agreements should be in addressing these issues.
From an economic perspective, labor and environment advocates in the United
States argue that developing countries may have an “unfair” competitive advantage
because their lower standards are the basis for their lower costs, which in turn are
reflected in lower prices for goods that compete with those produced in developed
countries.53 It follows from this argument that the difference in costs is an enticement
to move U.S. investment and jobs abroad. On the other hand, economists have
argued that developing countries have a comparative advantage in labor costs
consistent with the free trade model and studies suggest that these cost differentials
are usually not high enough to determine business location alone productivity
remains the primary decision factor.54 Further, many economists view trade
liberalization as part of the overall development process that, in and off itself, can
promote social change.55 Developing countries are also concerned with sovereignty
52 U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican
Republic-Central America-United States Free Trade Agreement Implementation Act.
H.Rept. 109-182. PP. 50-51. The side agreement is available at [http://www.ustr.govj and
for a summary of the debate, see Brevetti, Rosella. CAFTA Opponents Blast U.S. Stance
on Guatemalan Data Protection Law. International Trade Reporter. BNA, Inc. March 10,
2005. See also: CRS Report RS2 1609, The WTO, Intellectual Property Rights, and the
Access to Medicines Controversy, by Ian F. Fergusson.
The difference is that in most developing countries, the social costs associated with
environmental degradation, pollution, and poor working conditions may not be captured in,
or are extemal to, the market price (so-called external costs). Through legal, regulatory, and
tax measures, developed countries require that businesses correct, or pay for, many ofthese
social problems, thereby internalizing these costs to the business, where they are then
reflected in the final (relatively higher) price of the good or service in the market place.
See Stem, Robert M. Labor Standards and Trade. In: Bronckers, Marco and Reirihard
Quick, eds. New Directions in International Economic Law: Essays in Honor ofJohn H.
Jackson. The Hague: Kiuwer Law International. 2000. pp. 427-28 and 436 and CRS
Report 98-742, Trade with Developing Countries: Effects on US. Workers, by J.F.
Hornbeck. Productivity and wage levels are, however, highly correlated. See Rodrik, Sense
and Nonsense in the Globalization Debate, pp. 30-33.
In addition to the external costs addressed in this section, it is interesting to note that there
is some broader evidence that FTAs have not “forced a race to the bottom of regulatory
standards,” but to the contrary, that policy convergence is affected more by countries
agreeing to “norms of governance” via cooperation through international agreements. See
Drezner, Daniel XV. Globalization and Policy Convergence. International Studies Review.
Vol. 3, Issue 1, Spring 2001. pp. 75 and 78.
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issues related to specifying standards in trade agreements and the possibility that theycan be misused as a disguised form of protectionism.
Labor Issues. The labor chapter proved to be the biggest point of contentionin the CAFTA-DR debate, divided largely along party lines. The opening paragraphof the chapter states that all parties reaffirm their commitments under the UnitedNations International Labor Organization (ILO). These are defined in the ILO ‘5 1998Declaration on Fundamental Princzples and Rights at Work as: (1) the freedom ofassociation and the effective recognition of the right to collective bargaining; (2) theelimination of all fonris of forced or compulsory labor; (3) the effective abolition ofchild labor; and (4) the elimination of discrimination in respect of employment andoccupation.56 Disagreement revolved around three issues. First, whether theCAFTADR countries had laws that complied with ItO basic principles. Second, theability of these countries’ to enforce their laws. Third, and most importantly,capacity of the CAFTA-DR Labor Chapter to compel legal compliance andenforcement of ILO fundamental principles.
CAFTA-DR Labor Laws and Enforcement. The Central Americancountries entered the debate early when they requested the ILO to conduct a study oftheir labor laws. The final 2003 report is subject to interpretation and has been usedto bolster both sides of the argument as to whether the CAFTA-DR countriesguarantee core ILO principles.57 Some interpreted the report to affirm that theCAFTA-DR countries’ laws comply with internationally recognized labor standards.In response, Democratic Members ofthe House Ways and Means Committee pointedout deficiencies in many of their laws in a letter sent to the USTR’s office. Itidentified 20 Central American laws that fail to meet core ILO principles, all casesrelated to freedom of association or collective bargaining, as opposed todiscrimination, compulsory labor, or child labor.58
In April2005, with the assistance ofthe litter-American Development Bank, theCAFTA-DR country ministers of trade and labor released a study of their countries’shortfalls in meeting and enforcing core labor principles. Although it documentedthat all countries had made recent changes to their labor laws, there was clearrecognition for the need to hannonize some laws better with ILO principles, as wellas, address enforcement of key infractions such as employment discrimination
56Article 16.8 of the Labor Chapter also has a list of internationally recognized labor rightsthat includes all ofthese rights plus “acceptable conditions ofwork with respect to minimumwages, hours of work, and occupational safety and health.”
United Nations. International Labor Organization. Fundamental Principles and Rightsat Work: A Labour Law Study: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua.Geneva, 2003.58 Letter to the Honorable Peter Allgeier. April 4, 2005. If Honduras and Guatemala areeliminated, concerns in this letter would focus on the use of solidarity associations, onerousstrike requirements, and inadequate protection against anti-union discrimination.
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(pregnancy testing), abuses in free trade zones (application of labor laws), and the
need to dedicate more resources to enforcement.59
The debate over the adequacy of labor laws was not resolved to the satisfaction
of any party, but there was little disagreement that labor law enforcement is an
ongoing problem and that unionization is not widespread. The CAFTA-DR countries
have admitted in their own report that many lack the financial resources and technical
expertise to enforce adequately good labor practices, a problem that will also take
time and resources to overcome.
Labor Provisions in TPA and the CAFTA-DR. The Labor Chapter in the
CAFTA-DR defines certain labor standards for all member countries and the dispute
settlement mechanism for arbitrating formal complaints against noncompliance. It
closely follows language set out in Trade Promotion Authority (TPA) legislation on
the principal negotiating objectives of the United States with respect to labor.6° The
USTR made note of this fact and further argued that the chapter goes beyond earlier
FTAs through a Labor Cooperation and Capacity Building Mechanism that will
support a mutual approach to improve working conditions in CAFTA-DR countries
by: (1) ensuring effective enforcement of existing labor laws; (2) working with the
ILO to improve existing labor laws and enforcement; and (3) building local capacity
to improve workers rights.
Critics charged, however, that the CAFTA-DR labor provisions were too weak
because they give different weight to the following three provisions: (1) the effective
enforcement of domestic labor laws; (2) the reaffirmation of commitments to ILO
basic principles; and (3) “non-derogation” from domestic standards (not weakening
or reducing protections to encourage trade and investment).6’The first provision,
failure to enforce domestic labor laws, can be formally challenged in the dispute
resolution process as defined in the CAFTA-DR. Dispute resolution is not available
for the other two provisions, although they are supported in principle (Articles 16.2
and 16.6).
There was also concern over the differences between labor and other dispute
settlement provisions. If a commercial dispute remains unsettled, the country faces
the possibility of a suspension of benefits “of equivalent effect” (Article 20.16),
resulting in the raising of tariffs, or payment of a monetary assessment (fine) equal
to 50% ofwhat a dispute panel determines is “of equivalent effect.” This article does
not apply to the disputable labor provision. The difference is that the option for
Ministers of Trade and Labor. The Labor Dimension in Central America and the
Dominican Republic. Building on Progress: Strengthening Compliance and Enhancing
Capacity. April 2005.
60 The TPA vote, however, was highly contentious in part because of the disagreement over
how the principal negotiating objectives with respect to labor were defined.
61 Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC). The U.S.
CentralAn2erica Free Trade Agreement. March 19,2004. p. 6, and Lee, Thea M. Assistant
Director for International Economics, AFL-CIO. Comments on the Proposed US-Central
American Free TradeAgreement, before the USTR Trade Policy Committee, November 19,
2002.
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failing to resolve a labor dispute is a monetary assessment paid by the country, whichis capped at $15 million per year, per violation, with recourse to an equivalent dollarvalue of suspended benefits (higher tariffs) if the fine is not paid. The fine is paidinto a fund and expended for “appropriate labor initiatives.”
An Enforceable Labor Chapter. U.S. labor advocates have charged that“the labor provisions of the CAFTA-DR will not protect the core rights of workersin any of the six countries participating in the agreement.”62 Many Members ofCongress concurred, believing that the “enforce your own laws” standard, as well asthe limited dispute settlement provisions, will be ineffective at compelling countriesto meet basic ItO standards. It was also argued that they are a step backward fromthe provisions allowing for the suspension of trade benefits found in U.S. unilateralpreferential trade arrangements, such as the Caribbean Basin Initiative (CBI) and theGeneralized System ofPreferences (GSP). In these, the United States has the optionto suspend trade benefits (reimpose tariffs) if a country does not comply withprovisions of the agreement, including the labor section. Democrats cited a numberof examples, including CAFTA-DR countries, where sanctions, or threats thereof,compelled changes in labor laws 63 Further, capping the assessment in a labor disputeat $15 million and having the assessment paid into a fund in the offending countrywas seen as a largely ineffective mechanism for compliance.
Supporters ofthe Labor Chapter argued that the agreement encourages countriesto improve their laws, making the “enforce your own laws” a meaningful standard,that the CBI option for trade sanctions is less appealing in a reciprocal free tradeagreement where the United States is also subject to the discipline, and further, thattrade sanctions are a “blunt” instrument, punishing all export workers whose productswould come under the sanctions, potentially worsening their situation rather thanimproving it. It was also argued that sanctions have not been a widely used tool overthe lives of the CBI and GSP programs, and to the contrary, that an annual $15million fine per violation is a potentially significant deterrent for the CAFTA-DRcountries. Finally, technical assistance, cooperation, and transparency were presentedas more effective tools in the long run to bring about change in Central America.64
Only time will tell if the CAFTA-DR labor provisions provide support andpossibly effective punitive responses to encourage deeper labor rights reforms inCentral America. These provisions are similar to those found in other FTAs forwhich Congress passed implementing legislation, including Chile, Singapore,Morocco, and Australia (Jordan’s labor provisions were different in some places).Many Members may have accepted that those countries had adequate labor laws,even if there were enforcement or other concerns. This perception was clearlylacking for the CAFTA-DR countries, despite efforts to make transparent theirdeficiencies and to correct some laws and enforcement problems. Hence, broader
62 LAC, ibid., p. 1.63 See U.S. Congress. House of Representatives. Committee on Ways and Means.Dominican Republic-CentralAinerica- Un itedStates Free Trade AgreementlmplementationAct. H.Rept. 109-182. pp. 47-50.
64Ibid., pp. 4-6. See also: Gresser, Edward. The Progressive Casefor CAFTA. ProgressivePolicy Institute. Policy Brief. July 2005. pp. 4-6.
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support was never reached in Congress over the adequacy of these provisions in the
CAFTA-DR.65
Environmental Issues. Maj or goals included protecting and assuring strong
enforcement ofexisting domestic environmental standards, ensuring that multilateral
enviromnental agreements are not undermined by trade rules, promoting strong
enviromnental initiatives to evaluate and raise enviromnental performance,
developing a systematic program of capacity-building assistance, and assuring that
environmental provisions in FTAs are subject to the same dispute resolution and
enforcement mechanisms as are other aspects of the agreement.66
The USTR argued that congressional objectives on environmental issues have
been met in the proposed CA.FTA-DR agreement. It includes language requiring all
countries to enforce their laws and regulations and also creates an environmental
cooperation agreement with a framework for establishing a cooperation commission
and a process to conduct capacity building. All parties agree to commit to establish
high levels ofenvironmental protection and to open proceedings in the administration
and enforcement of laws and regulations.67
Advocates raised the issue of the environmental effects of trade, particularly in
developing countries that may have weak laws and lax enforcement mechanisms, but
the environmental provisions were not the most contentious issues in the CAFTA
DR. Many of these same advocates have conceded that trade agreements have not
led to catastrophic pollution problems nor encouraged a “regulatory race to the
bottom.” In fact, there has also been a certain acknowledged degree of success, by
having environmental issues addressed in the body of FTAs, in side agreements on
environmental cooperation, and through technical assistance programs, the latter of
which developing countries can use to respond to specific problems. Advocates still
noted that much can be improved, such as tightening enforcement language and
ensuring that the United States allocates financial resources to back up promises of
technical assistance, particularly in the case of Central America, where commitment
to “public accountability” is questioned in some cases.68
The Trade and Environment Policy Advisory Committee supported most of the
environment provisions in the CAFTA-DR and particularly the enhanced public
participation process negotiated by the State Department in a side agreement. The
65 Indeed, incorporating mandatory adherence to the ILO basic principles would later
become standard language for the Peru, Panama, and Colombia bilateral FTAs.
66 [http://www.sierraclub.org/trade/fasttrack/letter.asp], Principlesfor Environmentally
Responsible Trade. Another important issue for the United States is ensuring that its higher
environmental standards defined in law and regulation not be compromised by challenges
of protectionism. See CRS Report RL3 1638, Foreign Investor Protection Under NAFTA
Chapter 11, by Robert Meltz.
67 For more details on congressional interest in environmental provisions in trade
agreements, see CRS Report RS2 1326, Trade Promotion Authority: Environment Related
Provisions in P.L. 107-210, by Mary Tiemann.
68 See Audley, John. Environment and Trade: The Linchpin to Successful C’AFTA
Negotiations? Carnegie Endowment for International Peace. Washington, D.C. July2003.
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dispute settlement provisions, effectively the same rules governing labor disputes,were accepted as striking the “proper balance.” The advisory committee still raiseda number of specific environmental concerns, and questioned whether the CAFTADR would be able to meet congressional objectives on capacity building withoutconcrete funding for the program.69 In response, the seven countries signed asupplemental Environmental Cooperation Agreement (ECA) on February 18, 2005.It calls for a new unit to be established in the Secretariat for Central AmericanIntegration to administer public submissions or complaints made on enforcementissues. The ECA is intended to address both short- and long-term environmentalgoals, including providing for a monitoring process, but does not address concernsover funding for the implementation of environmental initiatives.
Dispute Resolution and Institutional Issues
The dispute resolution chapter was modeled on previous FTAs, in whichdisagreements are intended to be resolved cooperatively via a consultative process.If this approach is not successful, the process moves to the establishment of the FreeTrade Commission of cabinet-level representatives, and finally an arbitral panel.Arbitral panels are intended to broker mutually acceptable resolutions, includingproviding for compensation, if appropriate. If a mutually-agreed solution is notfound, the complaining party may resort to a suspension of benefits of equivalenteffect. This result may also be challenged, and final resolution, as well as how thesuspension of benefits are to be administered are set out in guidelines. Resolvinglabor and environmental disputes will be handled slightly differently (see previoussection). All dispute resolution procedures are defined in Chapter 20.Administrative and other technical matters (e.g., transparency issues) of tradeagreement implementation were also addressed by this working group.
Trade Capacity Building
Even before detailed discussions began on the CAFTA-DR, the CentralAmerican countries were apprehensive over the possibility ofbeing overwhelmed bythe resource and experience advantage that the United States had to negotiate andcomply with liberalized trade rules. Hence, the need for trade capacity building,which may be classified into three distinct areas beyond trade negotiationcapabilities. First, the ability to identify priorities, including where the majoradjustment costs (losers) are expected to be and how to respond to them. Second, theability to develop resources to implement the agreement, including institutional,financial, and analytical resources. Third, the capacity to benefit from the CAFTADR.7° The agreement created a permanent Committee on Trade Capacity Buildingto continue work begun in the negotiation process, and recommendations in theagreement call for one of its first priorities to be customs administration.
69 Trade and Environment Policy Advisory Committee on the Central American Free TradeAgreement. The US. -Central American Free Trade Agreement. March 12, 2004.
70This typology of capacity issues was developed by Bernard Hoekman ofthe World Bank.Earlier versions of this report mentioned a fourth area, trade negotiation capacity.
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The third category, however, is arguably the most challenging. It refers to the
ability of a business to: compete in a larger market; learn how to export and use
imports (as inputs) more to its advantage; tap into global finance; navigate customs
and trade logistics problems; and in other ways make the transition from local
producer to international player.71 This will be a difficult challenge for many Central
American firms, particularly if barriers to world trade are reduced outside the U.S.-
Central American relationship (WTOIFTAA) putting increasing pressure on
marginally productive businesses. The joint-production relationship already
established in textiles and garments suggests that certain finns have already
developed some expertise in meeting these challenges.
From the outset of negotiations, the United States advocated assisting the
Central American countries. Each Central American country prepared a National
Action Plan based on a review of its “trade-related” needs. Assistance is being
provided by the United States government through the U.S. Trade and Development
Agency, Agency for International Development, and the Department of State, among
others; private groups (corporate and non-government organizations NGO5); and
five international organizations (the Inter-American Development Bank — 1DB,
Central American Bank for Economic Integration — CABEI, United Nations
Economic Commission on Latin America and the Caribbean — ECLAC,
Organization of American States — OAS, and the World Bank).
The CAFTA-DR includes a Committee on Trade Capacity Building to
coordinate these types ofactivities. U.S. inter-agency flmding in support ofCAFTA
DR trade capacity building peaked as the agreement came to completion, including
$20 million for labor and enviromnental technical assistance in the FY2005 budget.
Maintaining formal support for these programs, including ongoing financial
commitments, is one challenge supporters of these programs emphasize. This is also
true for the trade capacity building efforts in specific non-commercial areas, such as
enforcing labor and environmental commitments.
71 Ibid.
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Appendix 1. Chronology of CAFTA-DR Negotiations
DateJanuary 16, 2002
August 6, 2002
October 1, 2002
November 19, 2002
January 27, 2003
August 4, 2003
December 17, 2003
January 5-9, 2004
January 12-16, 2004
January 19-24, 2004
January 25, 2004
January 28, 2004
February 20, 2004
March 15, 2004
March 24, 2004
April 9, 2004
May 28, 2004
August 5, 2004
December 17, 2004
March 3, 2005
March 10, 2005
April 13, 2005
MilestonePresident George W. Bush announces his intention to explorea free trade agreement (FTA) with Central America.
President Bush signs the Trade Act of 2002 (P1.107-210),which includes Trade Promotion Authority (TPA).
President Bush, as required under TPA, fonnally notifiesCongress of his intention to negotiate a U.S.-Central AmericaFree Trade Agreement (CAFTA) with Guatemala, El Salvador,Honduras, Costa Rica, and Nicaragua.
USTR holds public hearings on CAFTA.
The first of nine rounds begins in San Jose, Costa Rica.
USTR Zoellick formally notifies Congress of intent tonegotiate an FTA with the Dominican Republic.
CAFTA negotiations conclude in Washington, DC. CostaRica requests further negotiation on telecommunications,insurance, agriculture, and textile market access issues.
Costa Rica and the United States hold first round of bilateraldiscussions on CAFTA.
First round of negotiations with Dominican Republic held.
Costa Rica and United States hold second round of bilateraldiscussions on CAFTA.
Costa Rica and United States agree to CAFTA provisions.
USTR releases draft version of CAFTA to public.
President Bush formally notifies Congress of his intention tosign CAFTA.
The United States and the Dominican Republic conclude abilateral FTA and the USTR announces it will be “docked” toCAFTA.
President Bush formally notifies Congress of his intention tosign the U.S.-Dominican Republic FTA.
USTR releases draft text of the FTA with the DominicanRepublic.
The USTR and trade ministers from the Central Americancountries sign CAFTA in Washington, D.C.
The USTR and trade ministers from the Dominican Republicand Central America sign the CAFTA-DR agreement inWashington, D.C.
Salvadoran legislature ratifies the CAFTA-DR 49 to 35.
Honduran legislature ratifies the CAFTA-DR 100 to 28.
Guatemalan legislature ratifies the CAFTA-DR 126-12.
Senate Finance Committee holds hearing on CAFTA-DR.
CRS-34
Date Milestone
April 21, 2005 House Ways and Means Committee holds hearing on CAFTA
DR.
June 14, 2005 Senate Finance Committee holds “mock markup” on draft
implementing legislation and informally approves it 11 to 9,with one non-binding amendment.
June 15, 2005 House Ways and Means Committee holds “mock markup” on
draft implementing legislation, informally approving it 25 to
16 with one non-binding amendment.
June 23, 2005 President Bush sends final text and required supporting
documents of the CAFTA-DR implementing bill to Congress.
June 23, 2005 Identical legislation is introduced in the House and Senate as
H.R. 3045 and S. 1307.
June 29, 2005 Senate Finance Committee orders S. 1307 favorably reported
by voice vote, with no written report.
June 30, 2005 House Ways and Means Committee orders H.R. 3045
favorably reported by a roll call vote, 25 to 16.
June 30, 2005 S. 1307 agreed to in the Senate, 54 to 45.
July 25, 2005 H.R. 3045 reported by the House Committee on Ways and
Means (H.Rept. 109-182).
July 26, 2005 House Committee on Rules provides a closed rule for
consideration of H.R. 3045 under which debate is limited to
two hours and all points oforder against consideration of H.R.
3045 are waived (H.Rept. 109-186).
July 28, 2005 H.R. 3045 agreed to in the House, 217 to 215.
July 28, 2005 Senate agrees to substitute H.R. 3045 for S. 1307, 56 to 44.
August 2, 2005 President Bush signs H.R. 3045 into law (P.L. 109-53; 119
Stat. 462)
September 6, 2005 Dominican Republic ratifies CAFTA-DR. Chamber of
Deputies passes bill 118 to 4, Senate passed bill 27 to 3 on
August 26.
October 9, 2005 Nicaraguan General Assembly ratifies CAFTA-DR by a vote
of49 to 37.
March 1, 2006 The United States implements CAFTA-DR for El Salvador.
April 1, 2006 The United States implements CAFTA-DR for Honduras and
Nicaragua.
July 1, 2006 The United States implements CAFTA-DR for Guatemala.
March 1, 2007 The United States implements CAFTA-DR for the Dominican
Republic.
October 7, 2007 Costa Rica referendum supports CAFTA-DR 51.6% to 48.4%.
CRS-35
Appendix 2. Selected Economic Indicators(year 2003 data, except where otherwise indicated)
..- .‘. ‘4r 1 . . ..
. Costa El Guat. ion- ‘Jicar- Dom. Rica Salvador einala duras agua Rep.
GDP ($ billions) 17.5 14.7 24.0 6.8 2.7 20.5
GDP Growth (%) 5.0 2.2 2.4 1.5 2.3 -1.3
GDP Growth 1980- 3.0 0.2 0.8 2.7 -1.9 3.11990(%)*
GDP Growth 1990- 4.9 4.3 4.0 3.1 4.3 6.02002 (%)*
PPP Per Capita Gross 8,560 4,190 4,030 2,540 2,350 6,270National Income* *
Inflation (%) 9.3 2.8 5.5 9.8 6.1 28.0
Current Account -5.9 -4.5 -4.3 -7.6 -17.6 4.5Balance (% of GDP)
Pop. Below $1 per 2.0 31.1 16.0 23.8 45.1 <2.0day (%)***
HumanDevelopment 42 105 119 115 121 94Index (HDI) Rank#
Sources: World Bank, World Development Indicators 2004, pp. 14-15, 54-55, and 178-83, UnitedNations, Human Development Report 2003, and IMF website.* Average annual percent growth.* * Gross national income (GNI) converted to international dollars using purchasing power parity rates.An international dollar has the same purchasing power over the GNI as a U.S. dollar has in the UnitedStates. GNI, formerly represented as GNP by the World Bank, is a different, but similar measure asGDP. Data are for year 2002.
Percentage of population living on $1 per day or less, most recent survey year.# HDI is a composite measure (education, income, and life expectancy) of average achievement inhuman development. A lower ranking is better: e.g., United States (7), Italy (21), and South Korea(30). The 2003 report reflects data for year 2001.
CRS-36
Appendix 3. U.S. Merchandise Trade with CAFTA-DRCountries
(S mi11ions
. .
Country 1999 2000 2001 2002 2003 2004 Y,çiange bange4 1 2O03-200 l99-2004
U.S. Exports
CostaRica 2,381 2,460 2,502 3,117 3,414 3,304 -3.2% 38.8%
Honduras 2,370 2,584 2,416 2,571 2,826 3,077 8.9% 29.8%
Guatemala 1,812 1,901 1,870 2,044 2,263 2,548 12.6% 40.6%
El Salvador 1,519 1,780 1,760 1,664 1,821 1,868 2.6% 23.0%
Nicaragua 374 379 443 437 502 592 17.9% 58.3%
Dominican Rep 4,100 4,473 4,398 4,250 4,205 4,343 3.3% 5.9%
Total CAFTA 12.556 13,577 13,389 14,083 15,031 15,732 4.7% 25.3%
Mexico 86,909 111,349 101,2967 97,470 F 97,412 110,775 13.7% 27.5%
LAC* 55,153 59,283 58,1577 51,551 F 51,946 61,426 18.3% 11.4%
Latin America 142,062 170,632 159,453 L149,021L149,358 172,201 15.3% 21.2%
World 695,797 781,918 729,1001 693,103 724,771 817,936 12.9% 17.6%
U.S. Imports
Costa Rica 3,968 3,539 2,886 3,142 3,364 3,333 -0.9% -16.0%
Honduras 2,713 3,090 3,127 3,261 3,313 3,641 9.9% 34.2%
Guatemala 2,265 2,607 2,589 2,796 2,947 3,155 7.1% 39.3%
El Salvador 1,605 1,933 1,880 1,982 2,020 2,053 1.6% 27.9%
Nicaragua 495 589 604 679 770 991 28.7% 100.2%
Dominican Rep 4,287 4,383 4,183 4,169 4,455 4,528 1.6% 5.6%
Total CAFTA 15,333 16,141 15,269 16,029 16,869 17,701 4.9% 15.4%
Mexico 109,721 135,926 131,338 134,616 138,060 155,843 l2.9%L 42.0%
LAC* 58,464 73,348 67,370 69,503 78,829 98,749 25.3% 68.9%
LatinAmerica 168,185 209,274 198,708 204,119 216,889 254,592 17.4% 51.4%
World 1,024,618 1,218,022 1,140,999 1,161,366 1,257,121 1,469,671 16.9% 43.4%
U.S. Balance of Trade
Costa Rica -1,587 -1,079 -384 -25 50 -29
Honduras -343 -506 -711 -690 -487 -564
Guatemala -453 -706 -719 -752 -684 -607
El Salvador -86 -153 -120 -318 -199 -185
Nicaragua -121 -210 -161 -243 -268 -399
Dominican Rep -187 90 215 81 -250 -185
Total CAFTA -2,777 -2,564 -1,880 -1.947 -1,838 -1,969
Mexico 7 -22,812 [ -24,577 -30,042 7 -37,146 -40,648 -45.068
LAC* 7 -3,311 [ -14,065 -9,213 f -17,952 -26,883 -37,323
Latin America -26,124 [ -38,642 -39,2567 -55,098 -67,531 -82,391
World f •328,8T[ -436,104 - -41 l,8f -468,263 -532,350 -651,735
Source: Table created by CRS from U.S. Department of Commerce data.* Latin America and the Caribbean, except Mexico.
CAFTA-DR State Fact Sheets - Florida — Page 1 of 3
USDA United States Department of Agriculture Linkini VS. .\iLuf:uzForeign Agricultural Service
r
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STATE FACT SHEETS:Dominican Republic-Central America-United States Free Trade Agreement
El Search All USDA (CAFTA-DR)o Advanced Searcho Database-specific Searches Florida Farmers Will Benefit
May2005
Information for...
Exports of farm products help boost Florida’s farm prices and income. Such exports help supportMarket Development about 20,540 jobs both on and off the farm in food processing, storage, and transportation. InPrograms2003, Florida’s farm cash receipts were $6.5 billion, and agricultural exports were estimated at
Export U.S. Products $1.3 billion, putting its reliance on agricultural exports at 20 percent. Implementation of theDominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) willImport U.S. Productsincrease Florida’s exports of agricultural products.
Florida Benefits From the U.S.- CAFTA-DR Free Trade Agreement (FTA)
Despite over $1.6 billion in U.S. farm exports in 2003, CAFTA-DR countries continue to imposehigh tariffs and other barriers on most agricultural products, including Florida’s key exports. Aprimary U.S. objective was to change the “one-way-street” of duty-free access currently enjoyedby most CAFTA-DR exports into a “two-way-street” that provides U.S. suppliers with access tothese markets and levels the playing field with other competitors. This objective was achieved.Over 50 agricultural industry and farm groups, including the American Farm Bureau, support theFTA.
Fruits and Preparations. As the nation’s 2 largest exporter of fruit and fruit products, Florida fruitproducers and processors benefit from the FTA.
• Florida’s citrus growers, the source of nearly 30 percent of farm cash receipts, will benefitfrom the immediate elimination of duties on concentrated grapefruit juice by all CAFTA-DRcountries and on frozen concentrated orange juice by all Central American countries.Current duties on citrus can reach 20 percent in CAFTA-DR countries, and under WTO rules,could rise to as high as 60 percent. All duties in this sector will be eliminated within 15years, and earlier in many cases.
Vegetables and Preparations. Ranking in the nation in value of sales and 7th in exports, Floridavegetable producers and processors benefit from the FTA.
• Providing the 4th largest source of state farm cash receipts, Florida tomato growers benefitfrom elimination of duties affecting the nearly $500,000 in U.S. exports of fresh tomatoesin recent years. Current duties on tomatoes can reach 15 percent in CAFTA-DR countries,and under WTO rules, could rise to as high as 60 percent. All duties in this sector will beeliminated within 15 years, and earlier in many cases. As the hotel, restaurant, and foodservice sectors in the region continue to expand, along with increasing consumer incomesand seasonal production considerations, the United States will be well-positioned underCAFTA-DR to service the rising demand for fresh tomatoes.
Beef. As the state’s 5th largest source of farm cash receipts and 4th largest agricultural exportsector, Florida cattle and calve operators benefit from the FFA.
• Current import duties on U.S. beef exports are as high as 30 percent, and the WTO permitsduties as high as 79 percent.
• Duties on the products most important to the U.S. beef industry — Prime and Choice cuts —
will be eliminated immediately in Central American countries, while the Dominican Republicwill establish a zero duty TRQ of 1,100 metric tons which expands annually as duties are
htto ://www.fas.usda. gov/info/factsheets/CAFTAIfla. asn 11/10/2010
CAFTA-DR State Fact Sheets - Florida —
Page 2 of 3
eliminated.
• Some immediate duty-free access will be provided by certain countries on other beef cuts
through an initial TRQ totaling 1,165 metric tons, expanding annually until duties are fully
phased-out.
• Duties currently applied to other beef products and beef offals will be phased-out in S to 10
years.
• CAFTA-DR countries are working toward the recognition of the U.S. meat inspection and
certification systems in order to facilitate U.S. exports.
• The American Meat Institute, the National Cattlemen’s Beef Association, the National
Renderers Association, and the U.S. Meat Export Federation have expressed support
publicly for the CAFTA-DR PTA.
Dairy. As the state’s 6th largest source of farm cash receipts, Florida dairy operators benefit from
the FTA.
• U.S. dairy exporters currently face duties as high as 60 percent, and the WTO permits
duties as high as 100 percent.
• Each country will establish duty-free TRQs for certain dairy products totaling over 10,000
metric tons across the six countries — and each will receive the same level of TRQ access
for dairy products entering the United States.
• TRQs will grow by 5 percent per year for the Central American countries and 10 percent per
year for the Dominican Republic, with certain dairy products subject to safeguards during
the phase-out period.
• All Central American and Dominican duties will be eliminated within 20 years, with duties
on some dairy products eliminated earlier.
• The National Milk Producers Federation, the U.S. Dairy Export Council, the Grocery
Manufacturers of America, and the National Food Processors Association have expressed
support publicly for the CA PTA-DR FTA.
Sugar. The 0.3 percent of Florida farms engaged in sugar production will face no cuts in the over
100 percent out-of-quota duty on U.S. sugar that currently protects domestic producers.
• The United States will establish TRQ5 for CAFTA-DR countries, starting at 107,000 metric
tons. In the first year of implementation, increased market access in sugar will amount to
about 1.2 percent of annual U.S. sugar consumption. This amount grows very slowly by 2
percent a year into perpetuity, so that by year 15 of FTA implementation the increased
access on sugar (about 151,000 metric tons) amounts to about 1.7 percent of
consumption. The United States will also establish a quota for specialty sugar goods of
Costa Rica in the amount of 2,000 metric tons annually.
• Provisions will ensure only net surplus exporting countries in the region have access to the
new access, and provisions have been agreed to allow alternative forms of compensation to
be established to facilitate sugar stock management by the United States.
• The Sweetener Users Association, the National Confectioners Association, the Grocery
Manufacturers of America, and the National Food Processors Association have expressed
support publicly for the CA PTA-DR FrA.
Poultry. With nearly $200 million in farm cash receipts, Florida poultry producers benefit from the
FTA.
• U.S. poultry exporters currently face duties as high as 164 percent on both fresh and frozen
products, and the WTO permits duties as high as 250 percent.
• Each CAFTA-DR country will provide immediate duty-free access on chicken leg quarters, a
product where the United States is the world’s most competitive exporter, through country-
specific TRQ5 that expand annually as duties are eliminated in 17 to 20 years.
• Costa Rica and the Dominican Republic will establish duty-free TRQ5 for chicken leg
J,f,... i/w, £q c Quj nv/jnfn/factsheets/CAFTA/fla. asp 11 / 10/2010
CAFTA-DR State Fact Sheets - Florida— Page 3 of 3
quarters totaling 850 metric tons, each expanding by 10 percent annually. The other fourCentral American countries will establish a total regional duty-free TRQ of 21,810 metrictons (with individual country minimum quota levels). After year 12, the TRQ quantity will beno less than 5 percent of regional chicken production.
• Duties on poultry products such as wings, breast meat and mechanically de-boned poultrymeat will be reduced more quickly, with many eliminated within 10 years.
• CAFTA-DR countries are working toward the recognition of the U.S. meat inspection andcertification systems in order to facilitate U.S. exports.
• The National Chicken Council, the USA Poultry and Egg Export Council, and the NationalTurkey Federation have expressed support publicly for the CAFTA-DR FTA.
Sugar Production in Florida - Map (.pdf)
Return to CAFTA-DR State Fact SheetsPage Last Updated: September 27, 2007
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CARIBBEAN TAX
HAVENS, MONEY
LAUNDERING
AND THE PUSH BACK
FROM THE US
2
Paradise
Lost?
Offshore
Financial
Havens
andM
oneyL
aundering
INT
RO
DU
CT
ION
Sincetheir
inception,offshore
centreshave
beenused
bylegitim
atefinancial
institutionsseeking
tom
inimise
theirtax
liability,m
aximise
profits,and
avoidonerous
regulatorycontrols.
They
havealso
beeninvoked
byw
ealthyindividuals,
residingin
highlytaxed
orpolitically
unstableenvironm
ents,w
how
ishto
enhancetheir
wealth
legitimately
anddiscreetly.
Indeedstability,
bothpolitical
andfinancial,
andeasy
removal
offunds,
arecharacteristics
which
attractbusiness
toan
offshorecentre,
asthe
absenceof
thesefacilities
might
bethe
veryreason
thatthe
money
isdeposited
offshore.F
orexam
ple,flight
capitaloften
representsm
oneyfleeing
oppressivefiscal
laws
orundem
ocraticregim
es,by
personsstockpiling
theirassets
farfrom
thereach
oftheir
governments.
How
ever,there
isanother
categoryof
userw
hichhas
undermined
theintegrity
ofoffshore
financialinterm
ediation—
thosew
hoexploit
thebenefits
ofthe
offshorew
orldto
promote
theirunscrupulous
activities.In
thisrespect,
theillegitim
atefunds
inoffshore
centreshave
aneclectic
origin,ranging
fromdrug
traffickingand
corruptionto
taxevasion.
Whatever
theirprovenance,
allof
thesefunds
sharea
comm
onbond
ofseeking
sanctuaryin
thefinancial
servicesand
confidentialityoffered
bythe
offshorehavens.
Itis
thisrole
asdepository
ofillegitim
atew
ealth.that
hasled
tothe
lossof
‘paradise’,a
labelcom
monly
associatedw
iththese
tropicalislands.
Fornow
,the
conceptof
offshorefinancial
centreshas
become
synonymous
with
‘money
launderingcentres’.
The
objectiveof
thischapter
isto
explorethe
infrastructureof
theregion’s
offshorefinancial
servicesindustry
(focusingon
thelaw
sof
theB
ahamas
andthe
Caym
anIslands)
andspecifically,
toexam
inethose
aspectsof
theindustry
thathave
beenused
tofacilitate
money
laundering.
DEFIN
ING
THE
Om
sHoan
FIN
AN
c1IN
ousTRY
Afinancial
entitysuch
asa
bankis
designatedas
“offshore”w
herethe
hostcountry
inw
hichit
ischartered
permits
itto
carryon
itsoperations
anywhere
outsidethat
country’sborders.
The
servicesof
suchbusinesses
areconducted
inforeign
currencyand
areprovided
exclusivelyto
non-residentsof
thehost
State.A
countryis
classifiedas
anO
ffshoreF
inancial/Banking
Centre
ifits
bankingbusiness
is“totally
disp
rop
or
tionateto
theneeds
ofthe
domestic
market”
andw
herea
deliberateattem
ptis
made
toattract
offshorefinancial
businessthrough
theim
positionof
minim
altaxation
and
29
Money
Laundering
Control
inthe
Caribbean
acertain
amount
ofbanking
secrecy.tIt
isfor
theform
erreason
thatit
hasbeen
said
thattax
havensare
the“nucleus
ofthe
offshorew
orld”,a
taxhaven
beinga
country
with
azero
orlow
rateof
tax.
2A
partfrom
offshorebanking,
adeveloped
offshore
financialcentre
may
alsoprovide
facilitiesfor
theestablishm
entof
offshorecom
panies
andtrusts.
The
abovedescriptions
ofoffshore
financialinterm
ediationw
ouldcharacterise
severalof
thejurisdictions
examined
inthis
book.C
omm
onwealth
Caribbean
territo
riesassociated
with
thisindustry
includeA
nguilla,A
ntigua&
Barbuda,
theB
ahamas,
Barbados,
Belize,
theB
ritishV
irginIslands,
theC
ayman
Islands,D
ominica,
Grenada,
Montserrat,
Turks
&C
aicosIslands,
St.K
itts&
Nevis,
St.L
uciaand
St.V
incen
t.3
The
conceptof
offshorefinance,
althoughtraditionally
associatedw
ithparticular
geographiclocations,
suchas
theC
aribbeanor
theS
outhP
acific,is
alsoequally
applicableto
largerfinancial
centres,including
London,
which
providefinancial
servicesto
non-residents.In
addition,as
seenin
thepreceding
chapter,w
iththe
dev
el
opment
ofInternet
banksand
banking,the
conventionalnotion
ofoffshore
isassum
ing
newdim
ensions,w
ithoutregard
toterritorial
constraints.
ENrnRG
ENcE
OF
TH
ER
EO
tON
’SO
lwsH
oRE
FtN
AN
ctAL
IND
UST
RY
Inorder
toappreciate
thenature
ofthe
region’soffshore
financialsector
today,a
brief
lookat
itsorigin
isrequired.
The
offshorefinancial
industrybegan
toem
ergein
the
Com
monw
ealthC
aribbeanin
the1960s.
This
was
primarily
dueto
thestringent
restrictionsand
heavytaxation
affectingfinancial
institutionsin
theindustrialised
countries.A
tthe
same
time,
advancesin
telecomm
unicationsand
fundtransfer
mech
a
nisms
permitted
speedierconnections
between
financialentities
aroundthe
world,
while
decreasingthe
expenseof
operatingfrom
distantcen
tres.4
These
factors
prompted
banks,particularly
inN
orthA
merica,
torelocate
some
oftheir
financial
activitiesto
more
liberaljurisdictions
which
affordedthem
fiscaladvantages
through
lowor
notaxes.
Specifically,
thegrow
thof
theoffshore
sectorin
theC
aribbeanm
aybe
attributedto
theim
positionof
capitalcontrols
bythe
US
government
inthe
formof
theInterest
Equalisation
Act
in1963,
theV
oluntaryF
oreignC
reditR
estraintP
rogramand
the
Foreign
Direct
Investment
Program
,both
in1965.
These
measures
were
aimed
at
stabilisingthe
US
balanceof
payments
problem,
byw
ayof
restrainingcapital
outflows.
This
was
inresponse
tothe
increaseddem
andfor
US
currency,outside
of
thatcountry,
byindividuals
andbusinesses
wishing
toinsure
againstdom
estic
currencyinstability
throughsaving
inU
Sdollars.
The
US
financialm
arketbecam
e
segmented,
byrestricting
thenum
berof
loansfrom
localbanks
toforeigners
while
requiringA
mericans
investingabroad
toborrow
abroad.T
hatis,
asystem
ofdom
estic
borrowing
fordom
esticpurposes,
andforeign
borrowing
forforeign
purposes.In
addi
tionto
theabove,
in1966
a‘credit
crunch’w
ascaused
when
theU
Sm
oneym
arket
interestrates
exceededthose
imposed
asa
ceilingon
bankinterest
rateson
US
dollar
dep
osits.
5
M.
Cook,
Offshore
Fina,,cial
Centres
(t98t).
tt.L.
Barber,
nixH
apens,H
owto
Basic
tnvestand
Do
Easiness
—O
f’)horeand
TaxFree
(t993).
Althosgh
notphysically
tocatedis
theC
aribbeas,B
ermsda
isasother
Com
monw
ealthterritory
inthe
Western
Hem
ispherew
hichis
consideredto
beas
offshorefinancial
centre.
M.
Csssard,
“The
Role
ofO
ffshoreC
entresis
tnternationatFinancial
Enterm
ediatios”Ilta’F
Worki,ig
Paper
(1994).Ibid.
30
Offshore
Financial
Havens
andM
oneyL
aundering
In1969
theU
SF
ederalR
eserveB
oardagreed
toperm
itthe
establishment
ofbank
branchesoffshore.
This
was
intendedto
increasethe
effectivenessof
thebanks
by
allowing
themto
avoidregulations
thatm
ightim
pedethem
intheir
bidfor
loansand
deposits,and
was
alsoaim
edat
preventingdepositors
fromm
ovingtheir
money
to
non-bankfinancial
institutionsin
searchof
higherreturns.
The
absenceof
reserve
requirements
anddeposit
insuranceschem
esfor
banksoffshore
renderedit
cheaper
overallfor
themto
obtainfunds,
therebyincreasing
theam
ountof
capitalavailable.
These
conditionsinduced
Am
ericanbanks
toestablish
branchesoffshore
inthe
growing
‘Eurom
arket’5
where
depositscould
bem
adeor
loansbooked
abroadin
US
currency,but
freefrom
therestrictions
imposed
inthe
US.
Ineffect,
thenew
offshorejurisdictions
became
havens,or
sanctuaries,w
herethe
banksand
them
oneyflow
ingthrough
themcould
operateindependent
of,and
unreg
u
latedby,
thelaw
sand
practicesin
theirhom
ejurisdiction.
This
worked
tothe
banks’
own
advantage.T
heem
ergenceof
thesenew
internationalfinancial
centresalso
corre
spondedto
“thenew
articulationof
world
capitaloperating
ona
globalm
arketscale
underthe
hegemony
offinance
capital”and
facilitatedthe
generationof
globalprofit
bytransnational
ban
ks.
7It
isfor
theabove
reasonsthat
them
ajorityof
theoffshore
banksregistered
inthe
Caribbean
areof
US
origin.T
hehistory
ofthese
institutionsalso
explainsw
hyju
ris
dictionssuch
asthe
Baham
asand
theC
ayman
Islandsbecam
eknow
nas
“offshore
bookingcentres”.
That
is,even
thoughthe
financialtransactions
areregistered
there,
some
trsnsactions,particularly
loansor
deposits,are
normally
arrangedand
managed
inanother
jurisd
iction.
8R
egistrationoffshore
was
primarily
forthe
purposeof
taxa
tion,to
benefitfrom
theabsence
ofhigh
taxes.For
banksthis
spellsgreater
profits
sinceneither
theinterest
onloans
bookedthrough
them,
northe
intereston
deposits
made
with
them,
aresubject
tohigh
ratesof
taxation.T
hisenables
thebanks
toborrow
andlend
money
more
competitively
inthe
internationalm
arket.T
heabove
may
bedescribed
asthe
“push”factors
andsince
forevery
actionthere
is
anequal
andopposite
reaction;w
hat,then,
were
the“poll”
factorsinvolved?
That
is,
what
luredthese
entitiesto
theC
aribbeanand
notanother
partof
thew
orld?T
he
strategicposition
ofthe
Caribbean
isone
factor,situated
practicallyin
the‘front
garden’of
theU
S.P
eoplelike
tobe
closeto
theirm
oneyand
theproxim
ityof
the
regionto
theU
Sgave
theA
merican
banksthe
assuranceof
havingtheir
fundsin
placesw
hichare
easilyaccessible.
The
Caribbean
havensalso
hadthe
benefitof
being
inthe
same
time
zoneas
theE
asternseaboard
andfinancial
seatof
theU
S.A
tthis
time
too,the
US
government
was
keento
advocatethe
promotion
ofcapitalism
within
theC
aribbean,in
lightof
Castro’s
successin
implem
entingcom
munism
inC
uba.O
f
course,the
Caribbean
offshoreterritories
were
attractiveto
US
banksprim
arily
becausethey
offereda
combination
ofthe
following:
ano/low
taxregim
e,relief
from
reserveratios,
no-depositinsurance
premium
sand
thesecurity
offinancial
secrecy.
Before
examining
thesecharacteristics,
thestill-unasked
questionof
why
the
Caribbean
was
interestedin
divinginto
“theshark-infested
offshorefinancial
waters”9
must
nowbe
answered.
At
thesam
etim
ethat
theU
Sbanks
were
seekingto
go
‘Eurom
srket’or
‘Eurocarrency
markets’
referto
depositssnd
loansbooked
outsidecountry
inw
hose
carrescythey
aredenom
inated.T
hispractice
originatedin
Europe,
hencethe
term
X.
Gorostisga,
TheR
oleofintern
ationalF
inancialC
e,ttresin
Underdeveloped
Countries
(1984)
tnthe
Baham
asand
theC
aymsn
Islandsthere
areno
taxeson
income
orcspitst
gains.T
hisincludes
the
sbnenceof
directtaxation
onthe
netprofits
sndm
oreim
portantlythe
lackof
anyw
ithltoldiagtases
on
paymesis
arisingfrom
assetsheld
there,Is
bothjurisdictions,
thereare
noestate
orinheritance
taxes
1st.G
illard,“A
ngailiaC
rarksD
own
onF
inancialPiracy”
TheO
bserver,M
ay27,
t990
31
Money
IjiunderingC
ontrolin
theC
aribbeanO
ffshoreF
inancialH
avensand
Money
Laundering
offshore,several
territoriesof
theC
omm
onwealth
Caribbean
were
emerging
intothe
eraof
politicalautonom
y.’0
The
achievement
ofeconom
icindependence
fromthe
UK
was
thusof
paramount
importance.
Em
barkinginto
theoffshore
world
gavesom
eof
thesecountries
thechance
todiversify
theireconom
yfrom
apurely
tourism-dependent
one.T
heycould
nowestablish
themselves
asa
seriousfinancial
centre,w
hileshaking
offtheir
carefreeim
ageof
simply
beingplaces
of‘sand,
seaand
funin
thesun’.
Sow
henthe
Am
ericanbanks
came
knocking,m
anyterritories
foresawa
goldeneconom
icopportunity
andflung
theirfinancial
doorsopen
toem
bracethese
intermediaries,
onearm
bearingm
inimal
taxationand
theother
financialsecrecy.
Indeed,the
regioncontinued
toplay
therole
ashost
totourists,
butfrom
thistim
eonw
ardstheir
guestlist
includednot
onlytravelling
peoplebut
alsom
oneyon
them
ove.B
ythe
early1980s,
theU
SF
ederalR
eserveallow
edA
merican
banksto
establishInternational
Banking
Facilities
(lBF)
athom
e.T
hisenabled
themto
dealw
ithforeign
customers
freeof
reserverequirem
ents,interest
rateceilings
anddeposit
insurance,w
ithoutresort
toan
offshorefacility.’1
Thus,
thevery
factorsw
hichforced
severalbanks
offshorew
ereno
longeran
obstacle.O
ffshorecentres
beganto
losesom
eof
theirappeal
andby
1982nearly
400banks
hadestablished
IBFs
andshifted
theirassets
andliabilities
home
fromexisting
entitiesin
theC
aribb
ean)
2T
oday,as
thefro
ntiers
between
onshoreand
offshoreactivity
become
blurredby
financialliberalisation
andderegulation,
ithas
beensuggested
thatthe
needfor
theoffshore
financialsector
will
diminish.’3
Nevertheless,
asthe
infrastructurefor
offshorefinance
hasalready
beenput
inplace,
thew
iderange
ofservices
availablecontinues
toentice
bothleg
itim
ateand
illegitimate
users.O
neof
thecore
featuresof
offshorecentres
isthe
absenceof
hightaxation.
This
has
always
beenparticularly
attractivefor
thoseresident
tnhigh
taxjurisdictions,
asit
isperfectly
legitimate
fora
taxpayerto
decreasethe
amount
ofw
hatw
ouldotherw
isebe
histaxes,
oraltogether
avoidthem
,by
means
which
thelaw
perm
its.’4
Indeed,tax
havensby
definitioncapitalise
ona
taxpayer’sdesire
tom
inimise
liabilityto
taxat
home.
Am
uch-publicisedexam
pleof
sucha
planw
asthe
taxavoidance
effortsof
Geoffrey
Robinson,
former
UK
Paym
aster-General.’
5T
hissituation
highlightedthe
useof
offshoretrusts
inth
etax
havensof
Berm
udaand
Guernsey
toreduce
liabilityfor
taxin
theU
K.
Whilst
thetransactions
may
havecalled
intoplay
moral
andethical
issues,they
didnot
crossthe
nebulousline
intothe
sphereof
unlawful
taxevasion.
Incases
suchas
this,the
useof
offshorejurisdictions
isfrow
nedupon
becauseit
facilitates
thediversion
ofcapital
generatedin
anotherjurisdiction.
How
ever,as
longas
draconianlevels
oftaxation
andexchange
controlspersist
inother
jurisdictions,the
offshoreindustry
will
continueto
flourish,by
drivingoffshore
thosefunds
thatw
ouldotherw
isebe
on
sho
re.’6
The
dangerarises
where
thetransactions
involvedhave
thedesign
andeffect
ofconcealing
thevery
existenceof
thefunds
fromthe
relevantauthorities.
The
resultis
0T
hisw
asespecially
truefor
theB
ahamas
which
gainedits
politicalindependence
in1973.
The
Caym
anIslands
bysum
time
hadbees
grantedself.governing
statusalthough
itrem
aineda
dependentterntary
of
theU
nitedK
ingdom.
1U
SD
epartment
ofT
reasury,Tax
Havens
inthe
Caribbean
(1985).M
anybanks
stiltretained
ashett
entityoffshore.
Cassard
opcit.
Gregory
itH
eis’ering293 u.s.
465(1935).
5D
Leppard
and3.
Burke,
“Robinson’s
Berm
udaTax
Haven”
SundayTim
es.D
ecember
7,1997.
10L
ambert,
“IviarketingT
rustServices
inthe
90’s”puper
presenteda,
theC
uyman
Islands5th
Oie,iniel
Conference,
Jannaryt997.
acoincidence
oftax
evasionand
money
laundering,and
may
arisew
herethe
wealth
isplaced
ina
secretoffshore
bankaccount,
orin
thenam
eof
anoffshore
company,
andnot
declaredto
therevenue
authorities.Indeed,
inthe
1980s,a
US
Senate
investigationconsrnittee
foundthat
therew
erea
largenum
berof
transactionsinvolving
legallyand
illegallyearned
income,
which
was
divertedto
orpassed
throughhavens
forthe
purposeof
taxev
asion.’
7T
heestablishm
entof
offshorefinancial
centresin
theC
aribbeanw
asa
responseto
soundfinancial
needs,but
thedem
andfor
theirservices
remained
elasticto
changesin
theirtaxes
andregulations.
As
theoffshore
world
became
more
crowded,
competition
increasedand
Caribbean
offshorecentres
were
forcedto
offerhighly
attractiveleg
islation
foroffshore
activities,often
without
installingthe
necessaryuafeguards.
Inretrospect,
onecould
saythat
thefollow
ingstatem
entcaptures
theunofficial
butunderlying
approachtaken
bym
anyC
aribbeancentres
indeveloping
theiroffshore
industry:
[T]he
Baham
asm
ustdo
thingsw
hichare
notallow
edin
theU
Sbecause
todo
thingsw
hichare
allowed
inthe
US
isnon-com
petitivesince
inevery
instancethe
US
doesit
betterthan
theB
ahamas
do.T
heB
ahamas
aretherefore
compelled
inbanking
andtrust
operationsto
appealto
unallowable
activitiesand
byinference
toappeal
toactivities
disallowed
inthe
US.us
This
statement
isequally
applicableto
theattitude
ofsom
eof
theother
Caribbean
offshorecentres
when
enticingthe
offshorem
arketto
theirshores.
Indeed,it
was
theeagem
eusof
theregion
tofind
aniche
inthe
offshorew
orldthat
ledit
toventure
hastilyinto
theuncharted
waters
ofthe
offshorew
orld.In
many
cases,the
supportinginfrastructure
would
notbe
inplace,
furtherexposing
thejurisdiction
tothe
dangersof
offnhorefinancial
intermediation.
Forinstance,
untilthe
rnid-1960sthere
was
nospecific
legislationgoverning
theoffshore
financialsector
inthe
Baham
asand
theC
ayman
Islands.O
necould
simply
setup
acom
panyand
giveit
fullbanking
powers
and,w
ithoutm
ore,have
anoffshore
bank)
9B
yw
ayof
contrast,B
arbadoscam
eon
boardthe
offshorefinancial
scenelater
inthe
day,and
havinglearned
fromthe
bittersweet
lessonsof
theirneighbours,
tooka
more
cautiousapproach.
Itw
asindeed
theobjective
ofthe
architectsof
thatcountry’s
offshoreindustry
toprom
otethe
islandas
a“responsible
offshorefinancial
centre”.2°
Thus,
in1977
when
theB
arbadiangovernm
entdeclared
itsintention
todevelop
theisland
asa
taxhaven
andoffshore
financialcentre,
thethen
Attorney-G
eneraladam
antlyexpressed
thegovernm
ent’srefusal
tocreate
conditionsthat
would
facilitatethe
launderingof
illegalfunds
andem
phasisedits
determination
“toexercise
theutm
ostvigilance
soas
toexclude
dishonestand
criminal
transactionsw
hichcould
impugn
Barbados’
reputatio
n”.
2t
By
thistim
etoo,
theU
Khad
begunto
takea
keeninterest
inthe
Caribbean
offshorefinancial
centresand
assistedthe
Barbados
government
US
Departm
entuf
Treasury,
TaxH
avensin
theC
aribbean(1985).
An
unnamed
Baham
isnexecutive
quotedin
R.
Btum
,O
ffshoreB
unks,T
rustsand
Com
panies—
TheB
usinessof
Crim
ein
theE
uromarket
(1984).T
heB
unkand
Trust
Com
panyR
egutatiousA
ctt965
(Baham
as)and
theB
ankand
Trust
Com
panyR
ngnlationnL
awt966
(Caym
an)sought
toim
poseu
licensingprocedure
forthe
formation
ofnew
banksand
trustcom
paniesin
therespective
jurisdictions.3
()()O
ffshoreB
unkingA
ct(1979).
SiQ
uotedin
B.
Rider,
“Burbados
Governm
entto
Devetop
Istandus
aT
axH
aven”(1981)
2C
ompany
Law
yer42.
3233
Money
Laundering
controlin
theC
aribbeanO
ffshoreF
inancialH
avensand
Money
Laundering
inensuring
thatits
offshoreindustry
was
properlym
onitored,including
aidingin
thecreation
andstaffing
ofthe
postof
Inspectorfor
Securities.
This
conservative
approachto
offshorefinance
hasenabled
Barbados
torem
aina
relativelyclean
centre
,22
while
stillbecom
inga
“genuine,unique
‘one-stopshopping’
offshorebusiness
centre”.
23
THE
FAC
ILIT
AT
OR
SO
FM
ON
EY
LA
uN
oE
ruIo
Any
kindof
internationalcrim
inalw
hosegoals
areto
continueoperations,
increase
profitand
avoiddetection
will
runa
criticalphase
ofhis
businessthrough
theoffshore
havenbank,
trustand
company
syste
m.
24
As
will
beshow
n,it
isbecause
oftheir
easy
formation,
minim
alcontrols
andconfidentiality
thatthe
offshorebank,
company
and
trusthave
them
ostappeal
topotential
money
launderers.E
achof
thesefinancial
veh
i
clesand
thesecrecy
attachedto
themw
illnow
beexam
inedin
greaterdetail.
Offshore
Banks
SeveralC
omm
onwealth
Caribbean
jurisdictionsrem
ainvibrant
offshorebanking
centres,com
prisingboth
fullservice
branchesof
intemational
banksw
hichoffer
offshorebanking
facilities,as
well
aslim
itedservice
offshorebanks
thatcater
exclu
sivelyto
non-residents.T
helatler
may
berestricted
tospecified
customers
oru
nre
strictedto
anynon-residents.
Abank
isdesignated
as“offshore”
where
itis
charteredor
licensedto
operalew
ith
customers
outsidethe
bordersof
thehost
country.S
inceit
isnot
allowed
todo
bu
si
nessw
ithlocal
residentsall
itsfunds
must
besolicited
fromthose
residentoutside
that
countryor
fromanother
offshoreen
tity.
25
As
describedabove,
many
Caribbean
offshorecentres
areessentially
“financial
entrepots”or
bookingcentres.
Thus,
inm
ostcases,
theoffshore
banksact
asa
mere
conduit,w
herebynon-resident
foreigncurrency
fundsare
depositedinto
andthen
channelledthrough
theseinterm
ediariesto
othernon-resident
borrowers.
Often,
these
transactionsare
merely
enteredin
thebank’s
recordsbut
nophysical
movem
entof
fundsis
involved.A
ssuch,
them
ajorityof
theseoffshore
banksdo
notoccupy
abuilding
oftheir
own,
nordo
theyhave
vaultsor
employ
localstaff
toservice
their
operations.S
incethey
neverhandle
cashbut
merely
recorddeposits
andloans,
nothing
more
thanpaperw
orkchanges
hands.T
heyare
essentially“shell”
banks,their
physical
presenceon
theislands
limited
toa
name-bearing
brassplate
andtheir
representative
alocal
lawyer
orother
residentagent.
This
deficiencyof
realentities
andthe
multitude
ofpaper
onesw
hosestock-in-trade
is“fictitious”
orunseen
capital,have
beensaid
to
addan
airof
illusionand
make-believe
tothese
offshorecen
tres.
26
Barbados
isclassified
asa
Jurisdictionof
Concern
bythe
US
Departm
entof
State,
lnserssatiosnl
Narcotics
ControlS
trategyR
eport2001
(2002).It
isnot
considered,by
theFA
TF,to
bea
uos-cooperattve
jurisdictionin
thefight
againstm
oneysundering
(seeC
hapter10).
Ernst
&Y
oung,B
arbados:a
Unique
Offshore
Business
Centre
(1990)B
arbadosoffers
offshorebank,
trustand
insuranceservices
asw
ellas
offshoretrading
companies.
R.
Bistro
op.cit.
These
may
includeoffshore
companies.
Forexam
ple,a.
6(6)(a)B
anksand
Trust
Com
paniesL
aw(2001
Rev.)
(CI.).
26S
M.
Roberts,
TheL
ocaland
tileG
lobal:T
heC
aynsanIslands
a,sdthe
lvternotiosialFissancial
Systesn,
unpublishedPhD
thesisS
yracuseU
niversity(1992).
Nevertheless,
theseshell
banksare
entitledto
maintain
acorrespondent
relationship
with
aforeign
bank.T
hisw
ouldusually
involvethe
offshorebank
aligningitself
with
am
ajorbank
which
isa
mem
berof
oneof
theinternational
electronicclearing
systems,
suchas
CH
JPSor
SW
IFT
.27
The
correspondentbank
isthen
ableto
provide
essentialm
oneytransm
issionservices
forthe
shellbank,
includingw
iretransfers.
AU
SS
enatereport
foundthat
largebanks
inthe
US
manage
thousandsof
correspon
dentrelationships
with
banksat
home
andab
road.
28
Som
eof
thesecorrespondent
banksprocess
asm
uchas
US$1
trillionin
wire
transfersd
aily
.29
Fora
laundererw
ith
anoffshore
bank,the
abilityto
havea
correspondent bankingrelationship
would
there
forenot
onlyprovide
hisbank
with
apatina
ofrespectability,
itw
ouldalso
facilitate
thepassage
offunds
aroundthe
world.
How
ever,not
alloffshore
banksare
shells,as
thereexist
branchesof
major
foreign
banksw
hichm
aintaina
physicalpresence
inthe
region.In
additionto
providingfu
ll
servicebanking
todom
esticcustom
ers,they
haveInternational
Private
Banking
facilitiesw
hichallow
themto
conductoffshore
businessw
ithnon-residents.
The
development
ofthis
practicew
asintended
toallow
thebanks
totap
theresources
of
highnet
worth
foreigners.T
heoriginal
ideaw
asthat
theinvestm
entneeds
ofaffluent
foreignerscould
besatisfied
byselling
thempersonalised
bankingand
trustproducts,
asw
ellas
advisoryservices.A
lthoughaim
edat
individualsw
ithvast
sums
ofinherited
wealth
andnew
highearners
suchas
entertainers,this
servicehas
aluocaptured
the
fundsof
richcrim
inalsseeking
tolaunder
criminal
money,
orthoae
wishing
tosecrete
privatew
ealthfrom
theirhom
egovernm
ents,in
theform
offlight
capita
l.3°
Now
adays,anyone
wishing
toconduct
thebusiness
ofoffshore
bankingis
required
toobtain
abanking
licence.T
hisis
usuallygranted
onapplication
supporledby
the
requisiteinform
ationand
particu
lars.3’
Aprospective
licenseem
ustdesignate
alocal
addressas
itsplace
ofbusiness
andnam
eits
residentagents.
32
Alicence
will
usually
begranted,
oncethe
carryingon
ofsuch
bankingbusiness
isnot
deemed
tobe
against
thepublic
interesL33
Opportunities
form
oneylaunderers
couldarise
where
thelicensing
proceduredoes
notinvolve
therigorous
screeningof
theprospective
licensee,such
as
obtainingdata
onthe
applicant’sfinancial
statusand
history,the
characterand
exp
eri
enceof
thedirectors,
detailsof
non-residentshareholders,
andcapital
adequacy.
Ow
ninga
bankw
ouldbe
evensim
plerw
herethere
isno
requirement
foroffshore
banks
controlledby
non-residentsto
havean
authorisedcapital
thathas
beensubscribed
and
paidup.
Indeed,the
relativesim
plicityw
ithw
hichoffshore
bankinglicences
couldbe
obtained,in
some
offshorejurisdictiono,
ledto
thedevelopm
entof
anindustry
of
brokeringor
retailingoffshore
banksin
the1980s.
34
By
this,an
entrepreneurial
investorw
ouldacquire
anum
berof
bankinglicences
andresell
themto
otherforeigners,
asC
learingH
ouselaterbank
Payment
System(C
HIPS)
andthe
Societyfor
Worldw
ideInserhauk
Financial
Telecom
munications
(SWIFT
)(see
alsodiscussion
inC
hapter7
relatingto
theuse
ofw
iretranslers
for
mosey
laundering).U
SSenate,
Minority
Staffof
theP
en-sanestSub-C
omm
itteeon
Investigations.R
eporton
Correspondent
Bankissg:
AG
atess’ayfo
rM
oneyL
aundering,F
ebruary5,2001.
26Ibid.
°S
M.
Roberts
op.cit.
asFor
example,
Banks
andT
rustC
ompanies
Law
(2001R
ev.)(“B
TC
L”)
(Cl.);
Bank
andT
russC
ompanies
Regulation
Act
2000(“B
TC
A”)
(Bah).
s.4
BT
CA
(Bah.);
s.6
BT
CL
(CI.).
a.6
BT
CL
(C.!.);
s.4
BT
CA
(Bah.).
asSom
eof
them
ostnotorious
ofthese
estrepreneursw
erein
thebusiness
ofpurchasing,
marketing
and
resellingoffshore
bankinglicences.
mostly
tofraudsters.
3435
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
oftento
thoseseeking
adevice
forlaundering
wealth
orfor
defraudingunsuspecting
investors.C
onsequently,the
offshorefinancial
centresof
theregion
gainednotoriety
as
a“spaw
ningground
forsm
all,shadow
yprivate
banksw
hosem
ainactivity”
was
‘turningout
phoneyfinancial
documents
thatare
used..(for)
illegalp
urp
oses”.
35
Suchpractices
prompted
theB
ritishgovernm
entto
intervenein
thefinancial
affairs
ofM
on
tserrat3
tin
1991,and
pressureits
cabinetinto
revokingthe
licencesof
nearly
200offshore
banksw
hichw
ereallegedly
engagedin
unlawful
activities.
37
Inthat
yeartoo,
theshady
dealsand
operationsof
theO
wens
Bank
andT
rust
Com
panyin
St.V
incentw
ereexposed.
This
followed
theconviction
ofthe
bank’s
chairman
andm
anager,by
anItalian
court,in
connectionw
itha
£150m
illionin
terna
tionalfraud
andm
oneylaundering
schem
e.38
The
bankhad
beenunder
observationby
theC
omm
onwealth
Secretariat
andthe
UK
government,
sincethe
mid-1980s,
during
which
time
aB
ankof
England
reportexpressed
concernthat
theSt.
Vincent
bankw
as
engagingin
illicitactiv
ity.
39
Am
orerecent
example
ofthe
abuseof
offshorebanks
isthat
ofA
ntiguaand
the
infamous
European
Union
Bank.
The
misleadingly
titledand
self-proclaimed
“world’s
firstInternet
bank”
4°w
asallegedly
afront
forthe
Russian
mafia,
Setup
forthe
purposesof
launderingtheir
money
andcom
mitting
fraud,(including
misappropri
stingits
depositors’m
oney
).4t
When
theA
ntiguanauthorities
revokedthe
bank’s
licencein
1997,they
alsoshut
down
fiveother
Russian-O
wned
offshorebanks
whose
operationsw
ereequally
suspect.
To
date,the
most
spectacularabuse
ofthe
offshorebanking
sectoris
thatof
the
internationalfinancial
conglomerate,
theB
ankof
Credit
andC
omm
erceInternational.
The
bankw
asregistered
inC
ayman
asthe
principalbanking
subsidiaryof
BC
CI
Holdings
SA,
which
was
establishedin
Luxem
bourgas
aholding
company
and,
consequently,not
regulatedas
abank
inthat jurisdiction.
This
structureenabled
BC
CI
tobe
“offshoreeveryw
here”thereby
avoidingany
centralregulator
orcom
prehensive
supervisionof
itso
peratio
ns.
42
At
thetim
eof
itsdem
ise,the
BC
CI
(which
had
branchesin
overseventy
countries)w
asfound
tobe
involvedin
illicitactivities
on
aw
orldwide
scaleranging
frombanking
fraudto
drugm
oneylaundering.
This
was
possiblebecause
nosingle
regulatorknew
what
thebank
was
doingbeyond
its
jurisdiction.A
nothersim
ilarlystructured
institutionw
asthe
Caym
anxbank
which
operatedin
theIsle
ofM
anas
asubsidiary
ofan
institutionin
theC
ayrnanIslan
ds.
43
Since
itw
as
effectivelyoffshore
toboth
jurisdictions,it
operatedfree
ofregulation.
Indeedit
boastedon
theIntem
etthat
itsclients’
recordsw
erefree
fromoversight
bythe
authorities
ofany
jurisdiction.
°S
Drinkall,
“Con
Meo
areR
akingin
Miilions
byS
ettingU
pO
wn
Caribbean
Banks”
tOut
Street
Journal,M
arch23,
1981.ss
One
ofits
dependentterritories.
“B
Rider,
“The
Cost
ofL
aundry”(1995)
16C
ompany
Louvyer
34.T
hisaction
alsoresatted
inthe
arrest
of2
Ministers
forcorruption.
Si
,Stailon
Sunday.“Storm
hitsoffshore
bank,”A
ugnst4,
199i.
Ibid.T
hebank’s
servicesw
ereconducted
viathe
Internet.4t
The
casealso
highlightsthe
potentialfor
abuseof
bankingover
theInternet
where
totalanonym
itycan
beachieved
andalso
theabsence
ofcontrols
onthe
Internet.42
J. Adam
sand
D.
Frantz,A
Full
ServiceB
ank—
How
BC
CI
StoleB
illionsA
roundthe
World
(1992).
Referred
toin
US
Departm
entof
Stote,International
Narcotics
Control
StrategyR
eport1998
(1999).
Offshore
Com
panies
With
thehelp
ofa
locallaw
yerand
forthe
appropriatelicensing
fee,a
wealthy
foreignercan
hidehis
identitybehind
anew
lycreated
butfictitious
corporation,the
activitiesof
which
would
becouched
invague
andobscure
terms
beneaththe
veneerof
ageneric
corporatenam
e.
44
The
launderer’snam
eneed
notappear
onthe
registra
tionpapers
asnom
inees,including
theincorporating
lawyer,
may
beused
toprovide
himw
ithan
additionallayer
ofprotection.
These
offshorecom
paniesare
recognisedlegal
personsand,
apartfrom
aprohibition
againstpurchasing
realproperty
inthe
offshorejurisdiction,
theym
ayacquire
assetsand
operatebank
accounts.C
omm
onm
oneylaundering
schemes
would
involvethe
useof
offshorebank
accountsheld
inthe
names
ofshell
companies,
andthe
transferof
suchfunds
toa
bankaccount
heldby
anoffahore
company
inanother
offshoreju
risdiction,
The
FAT
Fhas
reiteratedthat
shellcorporations
continueto
figuresignificantly
inm
oneylaundering
activitiesand,
indeed,rem
ainone
ofthe
primary
toolsem
ployedby
professionalm
oneylaunderers.
They
notethat
sincethere
hasbeen
arise
inthe
useof
bankaccounts
inthe
names
ofshell
companies
toshelter
profits,countries
shouldtake
noticeof
thepotential
forabuse
ofshell
corporationsby
money
launderersand
shouldconsider
whether
additionalm
easuresare
requiredto
preventunlaw
fuluse
ofthese
entities,
45
Inm
anyC
aribbeanjurisdictions
thereare
facilitiesfor
theform
ationof
offshorecom
panies.T
heseare
essentiallycom
paniesthat
areset
upto
dobusiness
exclusivelyw
ithpersons
residentoutside
thejurisdiction,
They
areusually
precludedfrom
carryingon
banking,trust
orinsurance
businessand
areintended
toengage
inforeign
trade.In
some
jurisdictionsthere
existsthe
creatureknow
nas
theInternational
Business
Com
pany(IB
C),
The
IBC
may
beprohibited
fromow
ningan
interestin
realproperty
locally,save
fora
leaseof
anoffice.
Itis
usuallycharacterised
byits
easeof
incorporation,
exemption
fromtaxation
andconfidentiality
forits
mem
bers.For
instance,in
theB
ahamas
thereused
tobe
a24-hour
servicefor
incorporationof
anew
entity,w
ith“off-the-shelf”
com
pan
ies4
6available
forpurchase.
This
processallow
edfor
theform
ationof
acom
panyw
ithoutthe
owners
everhaving
toappear
inperson.
Moreover,
oncethe
Mem
orandumof
Incorporationand
othersupporting
documents
were
submitted
theyw
ereinspected
andapproved
within
oneday
ofbeing
lodged.T
hisfast
trackservice,
popularlyknow
nas
“theinstant
registrationpackage”,
was
manifestly
inadequatefor
aproper
verificationof
thebona
fidesof
theow
nersand,
consequently,w
assubject
toabuse
.47
The
parallelin
theC
ayman
Islandsis
theexem
ptedcom
panyw
hoseoperations
must
takeplace
mainly
outsidethe
jurindiction,O
therpotentially
appealingfeatures
arethat
itm
aybe
registeredas
acom
panyof
limited
durationand
soautom
aticallycease
toexist
ona
dateless
than30
yearsfrom
thedate
ofincorporation
oron
thehappening
ofa
specifiedevent.
48
Capital
may
bedivided
intoshares
without
nominal
orpar
valu
e49
andthere
arealso
nom
inimum
capitalrequirem
entsfor
suchcom
panies.
R.
Ehrenfeld,
Evil
Money
—E
ncountersA
longthe
Money
Trail
(1992).a
FAT
FR
ecomm
endation25
(t996).46
These
arepre-incorporaled
companies.
tBC
sare
nowgoverned
bythe
InternationalB
nninensC
ompanies
Act
2000(“IB
CA
ct”)w
hichcontains
some
stricterprovisions
thanits
predecessor.us.
197to
201C
ompanies
Law
(2001).A
tthis
time
theexem
ptcom
panyw
illbe
takento
basev
olu
ntarily
wound-np
anda
liquidatorappointed.
s.8
(i)C
omponies
Law
.
3637
Offshore
Financial
Havens
andM
onrryL
aundering
Money
Laundering
Control
inthe
Caribbean
Insom
ejurisdictions,
bearershares
areperm
ittedfor
companies
conductingsolely
offshorebusiness,
sothe
identityof
thebeneficial
owner
may
notbe
ascertainable.
Bearer
sharesenable
ownership
tobe
vestedin
theperson
who
isin
possessionof
the
sharecertificate.
The
name
ofthe
shareholderis
noton
thecertificate
noris
aregister
ofthe
names
ofsuch
shareholderspossible,
sincetransfer
ofow
nershipis
effected
merely
ondelivery
ofthe
sharecertificate.
This
devicehas
thereforeafforded
the
shareholderscom
pleteanonym
ity,as
thetrail
ofow
nershipw
ouldbe
impossible
to
establish.In
a1990
reportto
theH
ouseof
Co
mm
on
s,5°
thepotential
dangerof
bearer
sharesw
asacknow
ledgedand,
becausethey
allowtotal
anonymity
forow
ners,ii
was
recomm
endedthat
theiruse
inthe
Caym
anIslands
andother
UK
Dependent
Territories
shouldbe
abo
lished
.5’
Itm
ayalso
bepossible
touse
nominee
shareholdersto
shieldthe
trueidentity
ofthe
beneficialow
nersof
theshares.
By
this,a
laundererw
ouldnom
inateanother
person,
suchas
anoffshore
lawyer,
bankor
trustcom
panyto
holdhis
sharesin
thatnom
inee’s
name.
This
addsa
furtherlayer
ofprivacy,
sincein
additionto
thelaunderer
notbeing
named
onthe
officialcom
panydocum
ents,the
nominee
would
alsobe
boundby
con
fi
dentialityobligations
notto
disclosethe
identityof
thebeneficial
owner.
Inreality,
them
ajorityof
offshorecom
paniesare
mere
shells,w
ithno
realfu
nc
tions.T
heyexist
asfigureheads
ofthe
owners
and,for
money
launderers,act
as
aperfect
funnelthrough
which
topass
illicitw
ealth.T
helaw
reportsare
replete
with
examples
ofshell
companies
beingused
asinstrum
entsfor
wrongdoing.
For
instance,in
Agip
(Africa)
Ltd.
v.Jack
son
,52
money
defraudedfrom
theplaintiffs
was
paidinto
theaccounts
ofseveral
papercom
paniesw
hichw
ereset
upfor
thesole
purposeof
actingas
recipientsfor
theproceeds
offraud.
Ineach
casethe
company
had
anom
inalshare
capital,no
assets,and
carriedon
nobusiness
activity,and
was
infact
putinto
liquidationby
theow
neras
soonas
itfulfilled
itsrole
asrecipient
ofthe
payments.
Similarly,
ina
BC
CI-related
case,the
accusedw
ascharged
with
falseaccounting
andconspiracy
todefraud,
where
heerected
acom
plexstructure
ofoffshore
com
pa
niesto
mislead
theB
CC
I’sauditors
intofalsely
believingthat
realbusiness
was
being
conductedw
ithunconnected
com
pan
ies.55
Infact
thecom
paniesw
erem
ereshells
and
theirtransactions
wholly
fictitious.
54
As
illustrated,m
anyof
theseoffshore
companies
arem
erenom
inees,nothing
more
thana
name
ona
bankaccount,
usedpurely
asvehicles
forthe
transferof
money
.55
Above
all,it
isthe
easeof
incorporation,the
lackof
supervisionover
theiractivities
andsecrecy
surroundingthe
operationof
theseoffshore
companies
thatrender
them
aperfect
money
launderingvehicle.
50R
odneyG
allagher,C
oopers&
Lybrand
Report
onthe
Surveyof
Offshore
Financial
Sectors
inthe
Caribbean
Dependent
TerritorieS
(1990).
a.185
Com
paniesL
aw(C
l.)perm
itsbearer
sharesas
longas
company
doessot
holdland.
Inthin
Juris
diction.in
orderW
imm
obilinebearer
sharesand
limit
theirpotential
forabuse,
thebearer
sharesm
ust
beissued
toan
authorisedcustodian,
suchas
abank
ortrust
company.
The
latteris
requiredto
keepa
recordof
theshares,
includingthe
identityof
thecom
panyissuing
theshares
(s.I 87
Com
paniesL
aw).
Rearer
shareshave
beenabolished
inthe
Baham
asunder
s.10(a)
IBC
Act
(2000).
52[1990]
Ch.
265.R
toG
okal(1997)
2C
r.A
pp.R
.266.
Ibid.p
erM
illettI.
Agip
s.Jackson
op.cit.
Offshore
Insurance
Many
ofthe
offshoreC
aribbeanhavens
havean
activecaptive
insuranceindustry,
that
inan
insurancebusiness
whereby
allrisks
andprem
iumu
originateoutside
theju
risdic
tion,and
where
thatcom
panyis
owned
mostly
byn
on
-residen
ts.56
Inm
anycases,
the
captivecom
panyis
aw
hollyow
nedsubsidiary
ofa
foreigncom
panyand
thestru
c
tureis
invokedas
atax
avoidanceschem
e.T
hus,in
theonshore
countrythe
parentcom
panyin
ableto
deductthe
payment
ofthe
premium
s,and
sincethe
insu
r
ancecom
panyis
ina
taxhaven,
thereceipt
ofthe
premium
sdoes
notattract
anytaxeo
offsh
ore.
57
There
issparse
dataon
theuse
ofoffshore
insurancecom
paniesfor
thepurpose
of
money
launderingbut,
giventhe
easeof
formation
ofthese
entitiesand
associated
secrecy,
58
thereis
noreason
why
theycould
notbe
usedas
anotherm
oneylaundering
vehicle.Indeed,
theFA
TF
hasidentified
thegrow
inguse
ofthe
insurancesector
for
money
laun
derin
g.
59
This
usuallyoccurs
throughthe
purchaseof
insuranceproducts,
redeeming
themfor
a‘clean’
chequefrom
theinsurance
com
pan
y.
6°
An
example
ofthe
abuseof
theoffshore
sectorinvolving
theinsurance
industryw
as
revealedduring
aninvestigation
intothe
allegeduse
ofre-insurance
companies
regis
teredin
theC
aribbeanby
theA
merican
mafia.
This
formed
partof
ahuge
fraudand
money
launderingsc
am
.6t
Apparently
thecom
paniesw
erebogus,
inthat
theyhad
no
realassets,
buttheir
balancesheets
were
bolsteredthrough
asset-rental,and
borrowing
propertyfrom
legitimate
firms.
The
scheme
involvedcustom
ersbeing
trickedinto
payingcut-price
premium
sto
thecom
panies,but
oncea
largeclaim
was
made
the
offshoreinsurance
company
would
beput
intoliquidation,
andthe
criminals
would
escapew
iththe
money,
which
hadalready
beensiphoned
tooffshore
bankacco
unts.
62
Offshore
Trusts
Another
devicethat
may
beused
forlaundering
wealth
inthese
havensis
theoffshore
trusL
Inthe
typicalsituation,
theoffshore
trustis
usedfor
placingthe
ownership
of
assetslocated
abroadin
thehands
ofindividuals
orcorporations
basedin
thehaven
country
.63
The
latterw
ouldhold
theassets
ontrust
forthe
benefitof
beneficiaries
residingelsew
here,To
addanother
strandto
thelaundering
web,
offshorecom
panies
may
beused
asthe
settloror
beneficiaryof
theoffshore
trust.For
instance,the
Caym
anianlaw
allows
anexem
ptcom
panyto
beregarded
asnon-resident
inthe
Caym
anIslands,
forthe
purposeof
beinga
beneficiaryof
anoffshore
trust.
64
Atrust
involvesthe
separationof
thelegal
andbeneficial
ownership
ofproperty
between
thetrustee,
inw
homlegal
titleresides,
andthe
beneficiariesw
hopossess
56See
forexam
ple.R
xempt
InsuranceA
rt(1983)
(Bah.).
ntn
some
jurisdictions,off-the-shelf
entitiesare
available.
Insom
ejurisdictions,
thereisa
requirement
tofile
financialstatem
entsbut
theseare
natopen
topublic
scrutinyand
thereis
nopublic
recordof
thecom
pany’sshareholders.
nFA
TF,R
eporton
Money
Laandering
l)pologies(1996).
Crim
inalsoperating
onshorecould
arrangeto
havean
insurancecom
panyset
upin
anoffshore
jurisd
ic
tion.It
would
then‘sell’
theman
insurancepolicy,
andafter
payinga
lump
samprem
ium,
thepolicy
couldbe
terminated
andthe
moneys
returned.
M.
Sheehanand
13.L
eppard,‘P
oliceP
robe£100m
City
Sw
indle”The
limes,
March
14,1999.
The
scheme
alsoallegedly
involvedthe
infiltrationof
theL
loyd’sinsurance
market.
62Ibid.M
.G
rundy,Tax
Havens-O
ffshoreB
ankingC
enters:A
World
Survey(1993).
ss.74(1)
ned86(1)
Trusts
Law
(2001R
ev.).
38
39
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
anequitable
interestin
thetrust
property.It
may
becreated
bythe
settlordeclaring
himself
astrustee
ofthe
propertyfor
thebenefit
ofanother
orit
may
arisew
herethe
seniorm
akesan
intervivos
ortestam
entarytransfer
ofproperty
tothe
trusteefor
the
benefitof
otherpersons
(orfor
theadvancem
entof
certainpurposes).
The
classicfu
nc
tionof
anoffshore
trusthas
beento
make
financialprovision
forrelatives
confronted
byvolatile
events,including
war
orsom
eform
ofpersecution.
Ithas
alsobeen
invoked
bym
ultinationaltrading
companies
concernedabout
therisk
ofexpropriation
of
corporateassets
locatedin
politicallyunstable
jurisdictions.
Ithas
beensuggested
thatthe
recentgrow
thin
offshoretrusts
canbe
attributedto
theexplosion
ofthe
litigationindustry
inthe
US,
asthis
representsan
increasedthreat
toindividual
andcorporate
wealth
fromthe
fullrange
ofcontract
andtort
law
.65
Inthis
regard,there
isan
addedperception
thatthe
courtsare
more
plaintiff-orientedand
willing
togrant
unlimited
damage
awards.
As
such,those
fearinglitigation
against
themhave
soughtto
protecttheir
wealth
byusing
offshoretrusts.
How
ever,in
addition
tothese
motivating
factors,the
offshoretrust
hasbeen
usedadvantageously
bythose
wishing
tosecrete
wealth
forother
lesshonourable
purposes.
Since
thebeneficial
ownership
intrust
propertypasses
tothe
beneficiaries,it
falls
outsidethe
ambit
ofthe
settlor’sor
trustee’sassets
inthe
eventof
aclaim
againstsuch
assets.For
asettior
with
criminally
derivedw
ealth,the
trustw
ouldseem
tobe
auseful
weapon
forshielding
propertyfrom
seizure,since
itis
placedoutside
hisow
nership
andco
ntro
l.66
Also,
adebtor
may
seekto
placehis
wealth
safelyaw
ayfrom
creditors
bythe
useof
anoffshore
trust.T
hisis
becausethe
beneficialow
nershipin
trustp
rop
ertyresides
inthe
beneficiariesand
notin
thesettlor/debtor.
Offshore
trustsw
hichare
designedfor
thesole
purposeof
preservingassets
againstclaim
sunder
foreignin
sol
vency,m
atrimonial,
orsuccession
laws
arecom
monly
referredto
asA
ssetP
rotection
Trusts
(AP
Ts).
An
AP
Tm
aybe
usedby
asettlor
who
wishes
toprotect
hisw
ealth
againstclaim
sby
creditorsfor
satisfactionof
adebt,
includinga
judgment
deb
t.67
Also,
itm
aybe
adoptedby
thesettlor
seekingto
excludehis
wealth
fromclaim
sby
aform
erspouse
orchildren
form
aintenanceor
property,or
who
simply
wants
his
propertyto
bedevised
ina
manner
inconsistentw
ithdom
esticsuccession
laws.
Provisions
existin
thetrust
lawof
some
Com
monw
ealthC
aribbeanjurisdictions
which
havethe
effectof
insulatingassets
placedin
offshoretrusts
fromforeign
claimants,
therebyencouraging
theform
ationof
suchA
PTs.
These
provisionshave
the
effectof
making
claims
againstan
AP
Tdifficult,
ifnot
impossible,
tosucceed.
Creditors
seekingto
havethe
trustset
asidein
orderto
establishthat
thebeneficial
ownership
ofthe
propertystill
residesin
thesettlor/debtor,
andthat
theproperty
isthus
availablefor
satisfactionof
thedebt,
will
encounterthe
following
hurdles.
First,the
burdenof
proofis
placedsolely
oncreditors
toestablish
thatthe
disp
osi
tionof
property,w
hereversituated,
was
made
atan
un
derv
alue
65
andw
iththe
intentof
0.
Osborne,
“Asset
Protection
forU
nitedStates
Clients”
(1995)4
Journalof
Ioternatio,tolT
rustand
Corporate
Planning
12.°
Hosvever,
legislationperm
itlingthe
seizureof
theproceeds
ofcrim
eusually
providefor
thetracing
of
suchassets
intothe
handsof
thirdparties,
includingtrustees.
How
ever,it
shouldbe
notedthat
inthe
flahamas
where
atestator
busoutstanding
debtsand
liabilities
anypurported
disp
ositio
uof
hisassets
byw
illw
ouldbe
deemed
voidas
againsthis
creditors.T
heprop.
ertyof
thedeceased
lestatorw
ouldhe
consideredassets
forpaym
entof
thedebts
andthe
courtw
ould
administer
theproperty
forthat
purpose(s.2
lA
dministration
ofE
statesA
ct2002).
68“U
ndervalue”m
eansthe
provisionof
noconsideration
orthot
which
issignificantly
lessthan
thevalue
ofthe
property,for
esample,
s,2
Fraadutent
Dispositions
Law
(1996R
ev.)(“FD
L”)
(Cl.);
s.2
Fraudulent
Conveyances
Act
1991(“FC
A”)
(flab.).T
hisw
ouldinclude
adisposition
forming
thesubject-m
atterof
atrust.
defraudingthat
credito
r.69
Inestablishing
thisclaim
,the
creditorw
ouldhave
toprove
thatin
establishingthe
trust,the
settlorhad
an“intent
todefraud”
him
,7°
thatis,
anintention
to“w
ilfullydefeat
anobligation”
owed
toh
im.
7tB
ycom
?arison,in
theU
Kthere
isno
needto
establisha
specificintent
todeceive
credito
rs,7
Furtherm
ore,the
claimant
must
showthat
suchan
obligationexisted
onor
priorto
thedate
ofthe
disposition,and
thatthe
sen
ior
hadnotice
ofthis
obligationat
thetim
eof
thetran
sfer,73
Therefore,
inorder
tosucceed
theclaim
antm
ustprove
thathe
was
acred
itorat
thetim
eof
thedisposition,
sinceany
transfersexecuted
priorto
thedebt,
evenif
inanticipation
ofit
would
notbe
voidable,A
neven
more
radicalposition
was
adoptedin
theT
urks&
Caicos
Islandsw
herethe
legislationprovided
thata
trustis
notvoidable
atthe
instanceof
acreditor
unlessit
isproved
thatat
thetim
eof
thetrust
thesettlor
was
insolventor
thatthe
dispositionrendered
himinsolvent.
That
is,m
erein
deb
tedness
orfuture
insolvencyw
ouldnot
Vitiate
thed
ispo
sition
.74
This
effectivelysupersedes
theestablished
comm
onlaw
rulein
Re
Butterw
orth
,75
which
allowed
thesetting
asideof
atrust
onthe
groundsof
beingfraudulent,
bycred
itors
whose
debtdid
notexist
atthe
time
ofthe
disposition,but
whose
existencecould
havebeen
anticipatedby
thesettlor.
By
restrictingrights
ofavoidance
tocreditors
existingat
thedate
ofthe
disposition,the
offshoresettior’s
positionis
thusgreatly
improved,
sinceit
allows
himto
createtrusts
which
cannotbe
avoidedby
futurecred
itors.
76
There
alsoexist
relativelyshort
limitation
periodsfor
creditorclaim
s.For
example,
inthe
Baham
as,any
actionsto
setaside
thetrust
must
bebrought
within
two
yearsfrom
thedate
ofthe
transferof
wealth
intothe
trust.
77
By
contrast,in
theU
Kthere
hastraditionally
beenno
time
limit
forsetting
asidea
trustif
theinsolvent
settlor’sd
om
islant
purposein
creatingthe
trust,w
asto
prejudicecred
itors,
78
The
aboveprovisions
arebolstered
bythe
choiceof
lawprovisions
which
enablethe
settiorto
expresslydeclare
inthe
trustthat
thelaw
ofthat
offshorejurisdiction
shallgovern
thetru
st.79
Accordingly,
thelaw
ofthe
placew
herethe
trustin
netup
deter
mines
thevaltdity
andeffect
ofthe
trust,w
hetherthe
trustproperty
involvesm
oveableor
imm
ovablepro
perty
.85
Moreover,
thetransfer
ofassets
toa
trustunder
suchlaw
would
beconsidered
valideven
where
thesenior
isin
ajurisdiction
thatdoes
notrecognise
thetrust
concept.A
ssuch,
anythird
partyclaim
sagainst
thetrust
propertyw
ouldbe
subjectto
thetrust
andfraudulent
dispositionlaw
sof
thehaven
state.A
significantcharacteristic
ofAP
Ts
isthat
theym
ayalso
containflee
clauses.T
heseare
clausesw
hichperm
itthe
changeof
theriots
ofthe
trust,either
automatically
onthe
occurrenceof
aspecified
event,or
atthe
discretionof
thetrustee
ora
thirdparty
Protector.In
suchsituations,
theexisting
trusteew
ouldretire,
newones
would
beappointed,
andthe
assetstransferred
toanother
trustin
adifferentjurisdiction.
Inrelation
For
esample
so.4(1)
and(2)
FDL
(Cl.).
n.2
FCA
(flab.);a.
2FD
L(C
I).‘
Forexam
ples.2
FDL
(CI.).
72T
hatis
becausethe
words
“intentto
defruad”do
notappear
inthe
relevantsection
ofthe
InsolvencyA
ct1986;
seeC
hohane
Sagger
119921B
.C.C
.306.
ss.2
and6
FDL
(Cl.);
so.2
and4
FCA
(Bah
j.s.6
lT
rustO
rdinance(1990).
(1882)19
Ch.
D.
588.G
.K
od
tliny
e,C
aribbeanL
awof
Trusts:
Text,C
ases‘8
MateriaL
s(1996).
a.4(3)
FDA
(Bob);
theC
ayman
Islandsboa
alonger
limitation
periodof
6years
s.4
FDL
(Cl.).
s.423
InsolvencyA
ct1986
(emphasis
mine).
ns.4
(1)
Trusts
(Choice
ofG
overningL
aw)
Act
1989(B
ob.);s.
89T
rustsL
uw(2001
Revision)
(CI.).
87A
tcom
mon
lawthe
rulefor
moveables
isthe
same,
butim
moveables
oregoverned
bythe
lexsitar.
4041
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
totrigger
clauses,ft
may
beexpressly
providedthat
thetrust
isto
betransferred
to
anotherjurisdiction
where
acourt
orderthreatens
thefree
disposalby
thetrustees
of
thetrust
property.T
histype
of‘creditor
resistant’clause
isdesigned
toallow
the
beneficiaries(w
hichm
ayinclude
thesettlor),
always
tobe
onestep
aheadof
potential
creditors,thereby
allowing
thetrust
propertyto
remain
elusive.
InP
rivateT
rustC
orporationv.
Grupo
Torras
SA8’
thetrust
deedprovided
forthe
automatic
termination
ofthe
tenureof
thetrustee
uponany
judicialaction,
thepurpose
oreffect
ofw
hichw
asto
restrictthe
freeand
imm
ediatetransfer
oftrust
propertyinto
andout
ofthe
Baham
as.U
ponsuch
cessation,it
was
providedthat
thetrustees
would
bedivested
ofthe
trustproperty,
andthe
trusteeshipsucceeded
toby
anam
edtrustee
incorporatedin
theT
urksand
Caicos
Islands.T
heresult
would
bethe
ousterof
the
jurisdictionof
theB
ahamian
courts.H
erethe
assetsrepresented
theproceeds
ofan
allegedfraud
comm
ittedby
Sheikh
Fahad
ofK
uwait.
The
Court
ofA
ppealof
the
Baham
asrecognised
thatthe
terms
ofthe
trustw
ouldeffectively
renderthe
trustp
rop
ertyjudgm
ent-proofonce
inflight
toan
alienjurisdiction.
Inthese
circumstances
it
was
heldthat
theprovisions
createthe
verykind
ofsituation
which
theM
arevain
junc
tionw
asdeveloped
tocounteract;
thatis,
theflight
offunds
tofrustrate
theexecution
ofa
possibleju
dgm
ent.
82
As
such,it
was
heldthat
apre-em
ptiveM
arevainjunction
was
necessaryto
imm
obilisethe
assetsbeneficially
owned
bythe
Sheikh
andsafe
guardthem
fromflight
underthe
terms
ofthe
trust.T
hisaction
was
deemed
necessary
to‘shut
thestable
doorbefore
thehorse
bolts’83
Nevertheless,
thecase
demonstrates
howA
PTs
canbe
structuredto
trump’
allchallengers,
bykeeping
thetrust
property
outof
theirre
ach
.84
What
ism
oresinister
isthat
theseclauses
may
resultin
them
igra
tionof
trustsw
hichare
potentiallysubject
toseizure
underthe
confiscationlaw
s
beforean
ordercan
beenforced.
Interm
sof
estateplanning,
thegeneral
ruleis
thaton
thedeath
ofa
settlor,trust
propertydoes
notform
partof
hisassets
forprobate
purposes.H
owever,
conflictsm
ay
ariseinvolving
claimants
fromjurisdictions
with
forcedheirship
rules.Such
claims
may
bepursuant
tothe
civillaw
orthe
Shari‘a
(Islamic
law)
which
impose
mandatory
rulesrelating
tothe
testamentary
dispositionof
property.U
nderthe
lexsuccesslonis
of
thesesystem
s,close
family
mem
bersare
statutorilyentitled
toa
specifiedportion
of
thetestator’s
estate.If
theydo
notreceive
theirshare
byw
ill,they
may
applyto
the
courtfor
anorder
settingaside
anyprior
dispositionby
giftso
thatthat
property
retums
tothe
testator’spool
ofassets
fordistrib
utio
n.
85
Since
thecom
mon
lawrecognises
theconcept
offreedom
oftestam
entaryd
ispo
si
tion,there
areno
parallelforced
heirshiprules.
How
ever,som
ejurisdictions
intro
duceddiscretionary
provisionsinto
theirsuccession
laws
which
would
allowthe
unsatisfieddependant
toapply
tothe
courtfor
anorder
forreasonable
provisionout
of
thedeceased’s
esta
te.
86
These
laws
would
enablethe
courtto
quantifythe
valueof
the
estateto
includeany
proprietarydispositions
bythe
deceased(other
thanfor
full
value)if
thecourt
concludesthat
suchdisposition
was
made
with
theintention
of
defeatingany
suchclaim
s.
[1997—981
1O
.F.L.R
.443.
‘Ibid.per
Gonsulves-S
abotaP.
P.M
atthews,
“The
Asset
Protection
Trust:
Holy
Grail
orW
hollyU
seless?’(t995—
6)6
Ktngs
College
Law
Journal62,
D.
Hayton,
“Trusts
andForced
Heirship
Problem
s”(1993—
4)4
Kings
College
Law
Journal12.
96For
insta
nce,
thisw
asachieved
bythe
Inheritance(Provision
for. Family
andD
epnndants)A
ct1975
(England)
andthe
Succession
Act
1980(B
arbados).
Inany
ofthe
abovesituations,
ifthe
assetsare
locatedin
anA
PT
governedby
the
lawof
anoffshore
jurisdiction,it
may
bevirtually
impossible
fora
dependant’sclaim
tosucceed.
Indeed,w
ithrespect
toclaim
antsfrom
aforced
heirshipjurisdiction,
Caym
anianlaw
specificallyexcludes
anysuch
claims
throughits
non-recognitionof
forcedheirship
rights.
87
Thus,
notrust
will
beset
asideon
thebasis
thatit
defeats
interestsconferred
byforeign
successionlaw
s.D
ishonestsettlors,
with
theaid
ofequally
unscrupuloustrustees,
may
engagein
anarrangem
entby
which
thetrustees
recognisethat
theassets
remain
thesettlor’s
in
allbut
name,
sadthat
theirtask
isto
doexactly
asthe
settlorsa
ys.
88
That
is,there
isno
realtrust,
sincethe
settiorw
ouldalw
aysbe
infull
controlof
thetrust
property.In
such
asituation,
aclaim
antseeking
toset
asidethe
trustw
ouldhave
totry
toestablish
that
thetrust
isa
sham.
InR
ahman
v.C
haseB
ank(C
I)T
rustC
o.L
td.
89
thew
idowof
the
settlorbrought
anaction
againstthe
offshoretrustee
seekingto
setaside
thepurported
settlement,
sinceit
was
inviolation
ofheirship
laws.
Itw
asheld
thatthe
trustw
as
asham
,since
itappeared
tobe
what
itw
asnot.
Here
thesettlor
breachedthe
cardinal
ruleof
avalid
trustby
continuingto
treatthe
trust’sassets
ashis
own,
andthe
trustee
ashis
nominee
oragent.
The
factsin
thatcase
were
peculiarin
that,from
them
oment
ofthe
disposition,the
settlorexercised
complete
controland
authorityover
thetrustee
inthe
managem
entand
administration
ofthe
pretendedsettlem
ent,including
distrib
u
tionsof
capitalto
himself.
Aprovision
inthe
Caym
anIslands
trustlegislation
would
make
iteven
more
diffi
cultto
provethat
thetrust
isa
sham.
This
isbecause
thesettlor
isallow
edto
reserve
sayor
allof
thefollow
ingpow
ers:to
revoke,vary
oram
endthe
trustinstrum
ent;
appointincom
eor
capital;act
asa
directorof
acom
panyow
nedby
thetrust;
instruct
thetrustee
inrelation
tothe
investment
ofthe
trustproperty;
appointor
remove
any
trustee,protector
orbeneficiary;
andchange
thegoverning
lawor
forumfor
thetrust’s
adm
inistratio
n.
95
Inaddition,
thesettlor
isallow
edto
reserveany
limited
beneficial
interestin
thetrust
property.In
most
casesw
herethe
settior’saim
ism
erelyto
facilitatethe
transferof
illicit
wealth,
hew
illretain
asignificant
amount
ofcontrol
throughnon-binding
lettersof
wishes
orby
theappointm
entof
aP
rotectorto
guidethe
trustee.In
anextrem
eform
,
alaunderer
may
exercisecontrol
byestablishing
hisow
noffshore
trustcom
panyto
act
astru
stee.9’
Whilst
thelegal
technicalityfor
separationof
ownership
andcontrol
from
thesettlor
would
besatisfied,
insubstance
thetrustee
will
merely
beacting
underthe
authorityof
thesettlor/Jaunderer.
Alternatively,
theshares
ofthe
offshorecom
pany
may
beheld
bythe
offshoretrust,
with
thesettlor/launderer
beingm
adechief
op
er
atingofficer
ofthe
company
with
theauthority
todraw
fundsand
payhim
self,thereby
allowing
himcontrol
overthe
trustasse
ts.92
Inthe
contextof
money
laundering,one
might
askw
hereon
thelegal
spectrum
avalidly
createdA
PT
lies.To
theextent
thatthe
propertyw
asacquired
throughleg
iti
mate
means,
onem
aysay
thateveryone
hasthe
rightto
enhanceand
preservepersonal
wealth
throughlaw
fulactivities.
Nevertheless,
where
thesetrusts
havethe
effectof
undermining
oreven
defeatingthe
insolvency,m
atrimonial
orsuccession
laws
of
as.90
to92
Trusts
Law
(2001R
ev.).A
.E
dwards,
Review
of Financial
Regulation
inrIte
Crow
nD
ependencies(1998).
9°[19911
J.L.R
.103.
9°a.
14T
rustsL
aw(2001
Rev.).
9IA
trustcom
panycan
beset
uppursuant
tothe
laws
regulatingthe
licensingof
offshorebanks
for
example,
BT
CL
(CI.);
BT
CA
(flub.).92
UNLICP,F
inancialH
avens,B
ankingS
errecyand
Money
Laundering
(1998).
4243
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
anotherjurisdiction
anddenying
thosew
itha
‘legitimate
expectation’of
claiming
againstsuch
property,the
secretionof
wealth
intoan
offshoretrust
sitsuneasily
on
thebenchm
arkbetw
eenthat
which
islaw
fuland
thatw
hichis
unlawful.
Of
course,the
greatercause
forconcern
isthe
potentialuse
ofA
PT
sfor
thepurpose
oflaundering
the
proceedsof
seriouscrim
es.A
spointed
outby
astudy
onfinancial
regulationin
theoffshore
dependencies,the
scopefor
theabuse
ofoffshore
trustsis
con
siderab
le.93
This
stems
fromtheir
abilityto
concealcrim
inalproceeds
byhiding
theidentity
ofthe
settlorand
beneficiaries.E
venif
discovered,the
trustassets
canstill
bekept
outof
the
reachof
foreignauthorities,
with
theaid
ofshort
limitation
periodsand
fleeclauses.
Overall,
theeffect
ofA
PT5
isindeed
worrying,
bym
akingit
“impossible
forforeign
lawenforcem
entauthorities
toquestion
whether
thetrust
hasbeen
establishedw
iththe
proceedsof
crime
andim
possibleto
recoverthe
fundsif
infact
ith
as”
.94
SEC
RE
CY
OF
OPE
RA
TIO
NS
One
ofthe
most
attractivebenefits
ofconducting
financialbusiness
inthe
offshore
world
isthe
protectionof
financialprivacy
rights.It
hasbeen
saidthat
“regardlessof
why
legitimate
andillegitim
atebusinesses
gooffshore,
thecom
mon
denominator
is
thatboth
want
secrecy,discretion
andco
nfid
entiality
”.95
The
confidentialitylaw
sin
theoffshore
jurisdictionsvary
indegree
ofstrictness
andapply
notonly
inthe
co
nte
xt
ofbank
secrecy,but
alsoinclude
corporateand
trustlaw
sw
hichprotect
theidentity
of
thetrue
owners.
Confidentiality
hasalw
aysbeen
particularlyattractive
tothose
who
considerthat
theirdom
esticrights
toconfidentiality
havebeen
undermined,
orthat
theirproperty
is
threatenedby
ahostile
confiscatorygovernm
ent.In
thisrespect,
them
odemprototype
ofbanking
confidentialityem
ergedin
the1
93
0s,
96
when
theSw
issgovernm
entco
di
fiedan
existingpractice
ofbanking
secrecyand
renderedviolations
ofthe
secrecy
provisionsa
crim
e.
97
This
measure
was
aimed
atpreventing
Nazi
agentsfrom
pursuing
andseizing
assetsbelonging
toG
erman
Jews.
Inthe
Caribbean,
financialsecrecy
has
beenone
ofthe
main
featuresof
theoffshore
sector.Indeed,
thesecrecy
attachedto
relationsand
transactionsbetw
eenfinancial
institutionsand
theirclients
hasbeen
consideredessential
forthe
attractionof
financialbusiness,
Ithas
beenfelt
that“any
lesseningof
thisguarantee
would
harmthe
interestsof
the[region]
andany
streng
th
eningof
itw
ouldbolster
them
”.
98
How
ever,the
secrecyhaven
hasalso
beenone
ofdirty
money’s
“most
cherished
privilegesan
d..,
ardentso
licitors”.
99
Crim
inalsrely
onsecrecy
laws
tocom
mit
crimes
because,quite
simply,
evenafter
thosecrim
eshave
beendiscovered,
secrecylaw
s
substantiallyinterfere
with
legitimate
lawenforcem
entand
bankregulators
tod
eter
mine
who
perpetratedthe
illicitactivity
andw
herethe
money
went.
AR
eportof
the
A.
Edw
ardsop.
cit.ibid.H
LB
arber,T
arH
avens,H
owto
Bank,
investand
Do
,Business.O
ffshoreand
TaxFree
(1993).
The
model
adoptedin
most
Caribbean
offshorejnrisdtctlons.
JH
orowitz,
“Piercing
Offshore
Bank
SecrecyL
aws
Used
toL
aunderIllegal
Narcotics
Prolits:
The
Cayrnan
islandsE
nample”
(1985)20
Texas
inrernatiol,alL
ao’Journal
133.
Donald
Fleming,
former
President
ofthe
Bask
ofN
ovaS
cotiaT
reatC
o.(B
ahamas)
isa
speechto
the
Baham
ianC
hamber
ofC
omm
ercein
1977,quoted
inH
.E
rbstein,“B
askS
ecrecyL
owand
its
Implications
forA
mericnn
SecnritieaR
egulation”(1995)
16C
ompany
Law
yer133.
AM
aingot,“B
uckingthe
Trend
—O
ffshoreSecrecy
Centres
andthe
Role
ofG
overnment”
(Jane1996)
Cariconi
Perspective
32.
US
Departm
entof
Treasury
concludedthat
oneof
them
ajorbarriers
todealint
effectivelyw
ithabuses
inoffshore
financialjurisdictions
isthe
inabilityof
investiga.m
rsto
obtainusable
information
with
respectto
transactionsconducted
inor
througithose
havens.
t5
0T
hisis
becauseeven
when
casesof
abuseare
identified,prosecutior
isdifficult,
ifnot
impossible,
asa
resultof
thetransactions
takingplace
througha
offshorebank,
trustor
corporation,C
onfidentialitym
aybe
achievedin
many
ways
andthe
specificdevices
utilisedin
many
ofthe
jurisdictionsw
illbe
examined
intht
following
subsections.
Public
Records
First,confidentiality
may
beprotected
byrestrictions
onthe
typeof
information
available
inpublic
registries.T
helatter
areusually
thefirst
stopin
aninvestigator’s
questsince
theygenerally
revealdata
onthe
ownership
andfinancial
activitiesof
legalenti
tiesregistered
inthat jurisdiction,
Fora
money
launderinginvestigation,
detailson
thiregistration
ofcorporate
entities,their
beneficialow
nershipand
financialactivitie:
would
providea
usefulstarting
point.H
owever,
accessto
suchinform
ationis
limitet
bythe
provisionsin
theoffshore
trustand
company
legislationw
hichperm
itthi
disclosureof
minim
alinform
ationO
ntopublic
records,For
example,
inthe
Baham
as,although
thereis
arequirem
entfor
anIB
Cto
keela
shareregister
atits
registeredoffice,
thereis
norequirem
entto
lodgeit
with
thR
egistrarof
Com
pan
ies.t5t
Records
ofthe
company’s
business,including
minutes
om
eetingsand
resolutions,as
well
asregisters
ofdirectors,
may
bekept
bythe
compan’
atits
office,but
thereis
norequirem
entfor
themto
belodged
with
thepubli
reg
istry.
t02
Mem
bersof
theIB
Cm
ayrequest
inspectionof
booksif
itis
fora
purposrelated
tothat
mem
ber’sinterest
inthe
company,
butit
isin
thecom
pany’sdiscretioi
torefuse
suchrequest
ifit
deems
itnot
inthe
bestinterest
ofthe
com
pany.
t03
ItC
ayman,
anexem
ptcom
panyis
notrequired
tofile
anannual
returnof
itsfinancia
dealingsor
ofits
mem
bersw
iththe
Registrar
ofC
om
panie
s,T
hus,the
financiaactivities
ofthe
company,
includingdetails
aboutthe
assetsand
sharecapital,
may
bkept
hidden,A
lso,although
requiredto
keepa
registerof
shareholders,’°5
exemp
companies
areperm
ittedto
keepsuch
registeranyw
herein
thew
orld.106
Further,
thnam
esof
officersand
shareholdersin
thecom
panym
ayrem
ainSecret
asthe
exemp
company
isnot
obligedto
permit
publicinspection
ofits
record
s.t5
7In
UJB
Financial
Corporation
v.C
’hilntarkO
ffshoreC
apitalF
undL
td,
t55
thC
ayman
IslandsG
randC
ourthad
todeterm
inew
hetherthe
defendantcom
pany’register
ofshareholders
was
confidentialinform
ationw
ithinthe
meaning
ofth
Confidential
Relationships
(Preservation)
Law
(“CR
PL
”))°9
That
lawapplies
to“a)
confidentialinform
ationw
ithrespect
tobusiness
ofa
professionalnature
which
arise
tOU
SD
epartment
ofT
reasury,R
eporton
TaxH
avensin
riteC
aribbean(1985).
s.29
IBC
Act,
t2a.
66tB
CA
cLa.
67IB
CA
ct.n.
41C
ompanies
Law
(20012nd
Rev.).
as.40(1)
and41(1)
ibid.s.4
45?
‘°[1992—
3]C
.I.L.R
.53.
09If
itw
ereconstrued
ussuch,
thenin
theabsence
ofconsent
fordisclosure
bythe
defendant,the
coaw
onldbe
requiredto
considerw
hetherdisclosure
coaldbe
orderedon
thebasis
ofone
ofthe
statutotenem
ptions.
5393569999I
4445
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
inor
isbrought
intothe
Islandsand
toall
personscom
inginto
possessionof
such
information
atany
time
thereafterw
hetherthey
bew
ithinthe
jurisdictionor
thereo
ut”.°
5H
erethe
defendantcom
panyw
asfounded
inthe
BV
I,but
itspnncipal
placeof
businessw
asthe
Caym
anIslands.
Itw
asadm
inisteredby
aC
aymanian
company
which
maintained
aregister
ofthe
defendant’sshareholders.
The
courtheld
thatthe
registerof
thedefendant’s
shareholdersw
asconfidential
information
within
thescope
ofthe
Law
,and
sodisclosure
ofthe
shareholders’nam
escould
onlybe
made
ifthe
plaintiff’sapplication
fellw
ithinone
ofthe
statutoryg
ateway
s)”
Insom
ejurisdictions,
evenif
accessto
theshare
registeris
achievedthe
sharesare
likelyto
bein
thenam
esof
nominees,
therebyconcealing
theidentity
ofthe
real
owners.
Furtherm
ore,if
bearershares
were
issued,there
couldbe
norecord
ofthe
presentshareholders
ofthe
company.
As
isthe
situationin
many
jurisdictions,the
absenceof
arequirem
entto
fileregular
financialstatem
entsor
theregular
monitoring
ofa
company’s
businessallow
ssom
eoffshore
companies
toexist
asa
mere
shell.
Conversely,
acom
panyregistered
foronshore
business,w
hichis
notfunctional,
could
bestruck
offfor
inactivity.
There
isoften
norequirem
entto
registera
trustor
filea
copyw
itha
government
authority.F
urther,unless
authorisedby
thetrust
instrument
orordered
bythe
courtto
doso,
thetrustee
may
bespecifically
precludedfrom
disclosingto
anyperson
info
r
mation
relatingto
thesettior,
beneficiaryor
thetrust
accou
nts.’
t2
InC
ayman,
although
theinstrum
entof
anexem
ptedtrust
islodged
with
theR
egistrarof
Trusts,
itis
not
opento
publicinspection
orexam
inationby
anyoneother
thanthe
trusteesand
those
expresslyauthorised
bythe
trustin
strum
ent.
tt3
Inany
event,by
virtueof
theco
nfid
en
tialitylaw
sin
theC
ayman
Islands,any
information
givento
theR
egistrarof
Trusts
is
confidentialand
may
notbe
disclosedby
thatoffice
unlessunder
oneof
theestab
lishedcriteria
fordisclo
sure.”
4
Banking/F
inancialC
onfidentiality
Inthe
Caribbean
offshorew
orld,banking
secrecyhas
beenview
edas
aprerequisite
for
thesurvival
ofthe
financialindustry
andindeed
theeconom
ythat
itupholds.
AB
ahamian
Chief
Justicevoiced
thisbelief
when
hestated
that“...
thesecrecy
pro
vi
sionis
oneof
thepillars
ofthis
partof
oureconom
icstructure,
thedestruction
of
which
would
leadto
thecollapse
ofthe
whole
structureit
supports.hiS
Through
itsrole
aspayer
andreceiver
ofa
customer’s
money,
abank
hasaccess
to
intimate
detailsregarding
itscustom
ers’financial
transactions.B
anksecrecy
laws
thereforeexist
toprotect
theconfidentiality
ofinform
ationheld
byfinancial
institu
tions.E
ssentiallythey
prohibitthe
disclosureby
banksof
acustom
er’sidentity,
bu
si
nessrecords
andother
detailsrelating
10the
bankaccount
exceptin
clearlydefined
circumstances.
o5.3
(l)C
RI’L
.T
hesestatutory
gateways
will
bediscussed
below.
Inihe
insisntcsse
disclosurew
asdenied
asthe
opplicationappeared
tobe
afishing
expeditionfor
thepurpose
ofascestalning
whether
therew
asa
busixfor
theforeign
proceedingsto
which
itrelated.
2See
forexam
ples.
83(5)T
rusteeA
nt1998
(Bah.);
s.3
CR
PL
(Ct.).
113v.
77
Trusts
Low
(2001R
ev.).T
insm
oyinclude
aProtector.
These
will
bediscussed
laterin
thechapter.
ss.2
and5
CR
PL
resdrr
ita
crime
fora
publicor
go
vern
ment
officisi,such
asthe
Registrar
ofC
ompanies
orT
rusts,to
discloseany
information
obtainedin
thatcapncity
unlessauthorised
sodo
soby
virtueof
thesectiod
3exem
ptionsor
pursuantto
anorder
of
the
con
rt.
perK
nowles
Ci
Re
Nassau
Dank
andT
rustC
ompany
11977—8)
1L
.R.B
.I.
Incivil
lawjurisdictions,
theconcept
offinancial
privacyis
consideredto
be
acentral
tenetof
individualrights
andfreedom
s.C
omm
onlaw
countriesrecognise
anim
pliedterm
inthe
banker/customer
contractw
hichprecludes
disclosureof
the
customer’s
financialdetails.
The
comm
onlaw
dutyof
confidentialitybetw
eenbanker
andcustom
eras
laiddow
nin
Tournier
v.N
ationalP
rovincialand
Union
Bank
of
Engla
nd
116
isa
partof
thelaw
ofthe
Com
monw
ealthC
aribbean.In
accordancew
ith
theT
ournierprinciples,
acustom
erhas
theright
tosue
hisbanker
fordam
agesfor
breachof
contractw
herethe
bankerdiscloses
information
relatingto
thecustom
erin
circumstances
outsidespecific
permitted
parameters.
Afinancial
institutionm
ayonly
revealinforrnalion
relatingto
itscustom
erw
here:(i)
thebank
isacting
underco
mpu
l
sionof
law;
(ii)the
bankis
actingunder
aduty
tothe
publicto
disclose;(iii)
thein
ter
estsof
thebank
requiredisclosure;
or(iv)
thecustom
erhas
expresslyor
impliedly
consentedto
disclosure.T
heseexisting
rightsto
financialprivacy
havebeen
buttressed
bythe
criminal
lawin
some
offshorehavens.
By
criminalising
breachesof
theco
nfi
dentialityprovisions,
thesejurisdictions
havegiven
statutoryeffect
tothe
strongpublic
interestinherent
inm
aintainingone
ofthe
pillarsof
theireconom
y.In
doingso,
they
havealso
made
themselves
more
attractiveto
criminals
who
craveanonym
ity.
Inthe
Baham
as,it
isa
criminal
offencefor
anyperson
who
hasacquired
info
rma
tionin
hiscapacity
asa
director,officer,
employee,
agentor
former
licenseeof
abank
ortrust
company
todisclose
toany
otherperson
anyinform
ationrelating
to
acustom
er’sidentity,
assets,liabilities,
transactionsor
accounts.
t17
Likew
ise,in
the
Caym
anIslands,
theconfidentiality
laws
renderit
acrim
inaloffence
fora
personin
possessionof
confidentialinform
ation,how
everobtained,
todivulge
itor
toattem
pt,
offeror
threatento
divulgeit
orfor
aperson
tow
ilfullyobtain
orattem
ptto
obtain
confidentialin
form
ation.”t
Suchconfidential
information
refersto
information
which
therecipient
isnot
authorisedby
theprincipal
todisclose,
otherthan
incarrying
out
theinstructions
ofthat
principal,and
includesinform
ationgiven
toa
publicofficial,
abanker,
trusteeor
attorney-at-law.
Itis
suchstrict
banksecrecy
laws
which
allowed
fornum
beredbank
accounts,w
hereonly
seniorm
anagement
knewthe
identityof
theaccount
holder,and
gavethe
Caym
anIslands
thenicknam
e‘G
enevaof
the
Carib
bean
’.1’9
Since
lawyers
areresponsible
forsetting
upoffshore
financialentities
onbehalf
of
clients,and
areofle
nchosen
asthe
nominee
directorsfor
suchoffshore
companies
or
asthe
residentagents
foroffshore
banks,the
issueof
legalprofessional
privilege
arises,it
may
presentan
impedim
entw
herelaw
enforcement
seeksto
gainaccess
to
information
aboutthese
entitiesfrom
thelaw
yer.L
egalprofessional
privilegeattaches
toall
comm
unicationsbetw
eena
lawyer
andclient
forthe
purposeof
givingor
obtaininglegal
advice,even
where
litigationis
notco
ntem
plated
.12°
Breach
ofthis
duty
couldexpose
theattorney
toliability
tohis
clientfor
dam
ages.’
2’A
sin
theB
ahamas,
[192411
KB
.46t.
s.15
ET
CA
Contravention
ofthis
sectionsvoutd
resultis
afine
ofup
toB
ah.$25000
orim
prisonment
fora
periodnot
exceeding2
yesrs,or
both.
s.5C
RP
L.
‘‘
J.R
obinson,T
heL
.aundryrnen—
Insidethe
World’s
Third
Largest
Business
(1994).
20per
Miiiett
3.P
riceW
aterhousev
BC
CI
Holdings
(Luxem
bourg)SA
[19921B
.C.L
.C.
583.
InInterna,ional
Credit
andinvesi,nent
Co.
(Orersens)
Ltd
s’. Adham
TheT
imes,
February
10,1997
it
was
heldIhut
thecourt’s
inherentpow
erto
orderu
solicitorto
discloseIhe
name
nndaddress
ofhis
clientshould
beexercised
onlyin
exceptionsleases.
Here
itw
ouldbe
asedto
preventdefendants
inan
inlernationslfrond
fromdefeating
thejurisdiction
ofthe
courtthrough
“shadowy
offshoreIrusis
sad
companies
which
were
designedio
make
theirassets
‘judgment.proof’
46
47
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
theconfidentiality
laws
may
alsoim
posecrim
inalliability
onthe
attorneyw
hodivulges
confidentialinform
ationabout
hisclient’s
propertytran
sactions.’
22
Aduty
ofconfidence
alsoarises
where
therein
atrust
orfiduciary
relationshipin
existence,so
thatthe
oneto
whom
theduty
isow
edm
ayseek
injunctiveor
remedial
relieffrom
thetrustee/fiduciary
where
thelatter
purportsto
breachthat
confidence.
Additionally,
thetrustee
may
fallw
ithinthe
ambit
ofthe
confidentialitylaw
s.In
Re
H’
23
itw
asheld
thatsince
theapplicant
trusteew
asin
theposition
ofa
personto
whom
confidentialinform
ationw
asim
partedduring
thetransaction
of“business
of
aprofessional
natu
re”,’2
4that
is,the
successionto
trusteeship,he
fellsquarely
within
theprovisions
ofthe
confidentialitylaw
sof
theC
ayman
Islands.C
onsequently,he
had
toseek
thedirections
ofthe
courtbefore
divulginginform
ationpertaining
tothe
trusts.
PEN
ET
RA
TIN
GT
HE
WA
LL
OP
SECRECY
The
internationalcom
munity
haslong
condemned
theuse
offinancial
secrecyto
impede
theefficient
investigationof
am
oneylaundering
offence.T
he1988
United
Nations
Convention
Against
IllicitT
rafficin
Narcotic
Drugs
andP
sychotropic
Substances
(the“V
iennaC
onvention”)has
establishedthat
inthe
specificcontext
of
drug-relatedm
oneylaundering,
noparty
shoulddecline
torender
mutual
legalassis
tanceon
theground
ofbanking
secrecy.’
25
Furtherm
ore,the
FAT
Fhas
recomm
ended
thatfinancial
secrecylaw
sshould
beconceived
soas
notto
inhibitthe
implem
entation
ofits
recomm
endationsfor
counteringm
oneylau
nd
ering
.’26
Itis
generallyaccepted
thatpersons
transactingbusiness
with
banksand
otherfin
an
cialinterm
ediariesare
entitledto
areasonable
degreeof
privacyin
connectionw
ith
suchtransactions.
How
ever,the
criticalquestion
isnot
whether
acountry
hasfinancial
secrecylaw
s,but
“whether
thecountry
hasbuilt
intoits
laws
effecttveand
efficient
means
ofpiercing
banksecrecy
where
thereis
areasonable
suspicionthat
abank
accounthas
beenused
inconnection
with
crime
oras
thedepository
ofthe
proceedsof
acrim
e”’
27
Inresponding
tothis
question,one
must
firstconcede
thatthere
isno
such
thingas
absolutebanking
secrecy.’
28
Itis
am
ythand
thereality
isthat
thereexist
built-instatutory
gateways
throughw
hichinform
ationm
ayflow
,as
well
asother
investigativem
eansfor
penetratingthe
perceivedw
allof
secrecy.It
isthe
adequacyof
suchchannels
thatrem
ainsa
moot
point.
Inthe
Baham
as,w
herethe
customer
doesnot
expresslyor
impliedly
consentto
disclosure,the
legislationperm
itsdisclosure
ofconfidential
information
onthe
following
gro
unds.’
29
First,confidential
information
may
berevealed
forthe
purposeof
theperform
ance
ofone’s
dutiesor
exerciseof
functionsunder
thebanking
legislatio
n.’
30
Secondly,
disclosurem
aybe
made
when
lawfully
requiredto
doso
bya
Court
ofcom
petentjurisdiction
within
theB
aham
as.’3’
How
ever,in
thisregard,
aB
ahamian
courtw
illnot
permit
fishingexpeditions,
andin
practicew
illonly
grantan
orderperm
ittingd
isclosure
ofconfidential
information
where
therequest
isspecific.
InN
issanM
otorC
orp.to.
Ad
esco’
32
theS
upreme
Court
refusedto
entertainan
applicationfor
theproduction
ofdocum
entsand
sworn
testimony
foruse
ina
foreigncivil
suit,w
hereit
was
allegedthat
theproceeds
offraud
were
depositedin
aB
ahamian
offshorebank
account.In
thatcase
itw
asheld
thatalthough
thecourt
would
notallow
Baham
iansecrecy
laws
tobe
usedas
ascreen
forfraud,
itw
ouldnot
granta
requestw
hichm
erely“leads
toa
trailof
enquiryto
uncoverprobative
material”.
That
is,som
ethingm
orethan
mere
inferencespointing
inthe
directionof
fraudis
neededto
justifya
courtorder
fordisclosure
ofconfidential
info
rmatio
n’
33
Thirdly,
disclosureis
permitted
ifrequired
underthe
provisionsof
anyother
Baham
ianla
w.t
34
The
latterexception
would
embrace
theprovisions
ofthe
Proceeds
ofC
rime
Act
2000w
hichm
andatesthe
revelationof
otherwise
confidentialbank
information.
As
will
beshow
nin
subsequentchapters,
thisA
ctrequires
thereporting
ofknow
ledgeor
suspicionof
money
laundering,in
certaincircum
stances,w
hilstspecifically
exempting
thediscloser
fromcivil
orcrim
inalliability
forbreach
ofany
non-disclosurerestrictio
ns.’
35
Fourthly,disclosure
may
bem
adeto
aperson
with
aview
tothe
institutionof,
orfor
thepurpose
of,crim
inalor
disciplinarypro
ceedin
gs)
36
Inrelation
tothe
latter,these
may
bein
relationto
proceedingsinvolving
theexercise
ofprofessional
dutiesby
anauditor,
accountantor
attorn
ey,’
37
orthe
dischargeof
dutiesby
apublic
officeror
mem
berof
theC
entralB
ank.’
38
The
confidentialityprovisions
donot
precludethe
Inspectorof
banksand
trustcom
paniesfrom
sharing,w
iththe
Financial
IntelligenceU
nit,inform
ationrelating
toaccounts
andcustom
ersof
alicensee,
where
hebelieves
thata
suspicioustransaction
reportw
asnot
filed.t
39
Additionally,
disclosureis
allowed
where
sucha
rightexists
atcom
mon
law
.’4°
This
would
incorporatethe
basesfor
disclosureset
outin
theT
ourniercase,
andw
ouldcover
theright
todisclose
ifit
isin
thepublic
interestto
doso.
InD
ouglasv.
Pin
dlin
g’
4’it
was
heldthat
ifthe
publicinterest
appearedon
goodgrounds
torequire
disclosureof
acustom
er’sbanking
records,the
customer’s
rightto
non-disclosurew
ithoutconsent
must
yieldto
thepublic
interest.In
thatcase,
theP
rivyC
ouncilconcluded
thatit
was
justifiablefor
acom
mission
ofinquiry
todecide
toinvestigate
therespondent’s
bankingrecords,
where
thisw
asnecessary
toprom
otethe
inquiryinto
whether
ornot
therespondent
hadreceived
anybenefits
orfavours
inconnection
with
thetransactions
inquestion.
Inthis
respect,disclosure
would
alsobe
permitted
where
thebank
isacting
undercom
pulsionof
law.
How
ever,w
heresuch
compulsion
emanates
froma
foreigncourt
or
s.t5(t)(f)(iii)
ET
CA
.132
11989—901
1L
.R.B
.4t2
.133
perG
onsatves-Sabola
AcIg
CJ.
s.t5(t )(f)(iii)
BT
CA
.F
orexam
ple.s.
43.
136S.
t5(t)(v
)B
TC
A.
Suchproceedings
may
bew
ithinor
outsideof
theB
ahamas.
us.t5(t)(v)(A
)and
(B)
BT
CA
.39
I40t5(7)(c).
141s.
t5(7)(a).[1996]
48W
.t.R.
2627
12520
22s.
15(c)B
TC
A.
27[1996)
C.I.L
R.
238.s.3
(I)C
RPL
.‘°
Article
7(5).R
ecomm
endation2
(t996).U
SS
enneR
eport,C
rime
andSecrecy:
The
Use
ofO
ffshoreB
anksand
Com
panies(1985).
PM
aynard‘O
ffshoreB
ankingSecrecy:
Myth
orR
ealily?”(1998)
1Jo,its,a!
ofM
oneyL
auodertng
Control
316.Such
consentis
notrequired
where
ioformalion
isbeing
sharedbetw
eena
licenseeand
Saperntsory
Authorities
forpurpose
ofconsolidated
supervisionor
facilitatingco.opecation
between
domestic
regalaloryauthorities
(ss.15(5)
and(6)
BT
CA
).
As
well
asfor
theperform
anceof
on
esduties
within
thescope
ofone’s
employm
entss.
15(1)(fi)
and
(ii)B
TC
A.
4849
Money
Laundering
Control
inthe
Caribbean
Offshore
Financial
Havens
andM
oneyL
aundering
administrative
order,the
domestic
courtm
aychoose
todeny
disclosure.In
Re
Bank
of
Am
eric
at42
theapplicant’s
headoffice
inthe
US
was
servedw
ithan
IRS
surnntonsto
producebank
recordsof
customers
atthe
Nassau
branch.T
hebank
soughtthe
perm
is
sionof
theB
ahamian
courtto
comply
with
theorder.
Inrejecting
theapplication,
Gonsalves-S
abolafound
“now
arrantfor
regardingcom
pulsionof
lawin
thealien
jurisdictionof
theH
eadO
fficeas
beingcom
prehendedin
thecom
pulsionof
laww
hich
Thurnier
recognisedas
constitutingan
exceptionto
theduty
ofconfidence
owed
bya
localbank
toits
customer”.
Although
atcom
mon
lawthe
bankis
allowed
todisclose
customer
information
insofaras
itis
necessaryto
protectthe
bank’sinterests,
inR
eB
ankof A
merica’
43
it
was
heldthat
thisexem
ptionw
ouldnot
availthe
Baham
ianbank
actingin
responseto
foreignprocess.
Generally,
disclosurew
ouldreasonably
benecessary
toprotect
the
bank’sinterests
asagainst
theircustom
eror
thirdparties
inrespect
oftransactions
of
thebank
foror
with
theircustom
er,or
forprotecting
thebank
orpersons
interested
againstfraud
orcrim
e,In
thiscase,
itw
asthe
court’sopinion
thatif
thebank
made
disclosure,it
would
beunilaterally
relievingitself
ofthat
most
sensitiveof
itsco
ntrac
tualobligations,
non-disclosurew
ithoutthe
customer’s
consent.
Inthe
Caym
anIslands,
confidentialinform
ationm
ayonly
bedisclosed
ifauthorised
todo
soby
theperson
who
hadim
partedthe
info
rmatio
n,’
44
bya
professionalperson
actingin
thenorm
alcourse
ofbusiness,
orby
orto
theF
inancialSecretary,
Inspector
ofF
inancialS
ervicesor
theG
overnorof
thete
rritory
.t45
Otherw
ise,the
seeking,
divulgingor
obtainingof
confidentialinform
ationby
orto
aninvestigator
intom
oney
laundering,m
aybe
achievedin
thefollow
ingspecified
circumstances.
First,pursuant
toa
policeinvestigation
ofa
crime
comm
ittedw
ithinthe
jurisdictionor
ifnot,
ifsuch
actsw
ouldhave
constituteda
crime
within
thete
rritory
.t46
Strictiyspeaking,
thelatter
provisionw
ouldexclude
theobtaining
ofinform
ationin
matters
involvingtax-
relatedm
oneylaundering,
sincetax
evasionis
nota
crime
inthe
Caym
anIslands.
Secondly,w
herea
bankuses
theinform
ationin
anyproceedings
tothe
extentthat
it
isreasonably
necessaryfor
theprotection
ofits
interests,either
asagainst
its
customers
oras
againstthird
partiesin
respectof
transactionsof
thebank
for,or
with,
itscu
stom
er.’47
InR
eB
ankAnserica
Trust
andB
ankingC
orporation(C
ayman)
Ltd
.”58
theG
randC
ourtof
Caym
anheld
thatthis
exceptiondid
notoperate
soas
toenforce
processem
anatingfrom
anotherjurisdiction,
which
soughtto
compel
theproduction
oftransaction
recordsm
aintainedby
thebank
atits
Caym
aniansubsidiary.
This
was
so
eventhough
failureto
comply
couldexpose
thebank
tocontem
ptsanctions
inthe
US
.’49
Therefore,
abank
cannotrely
onthis
exceptionm
erely‘to
saveits
own
skin’
142U
nreportedN
ovember
24.1993,
ibid.a
s.3(2)(b)(i)
CR
PL.
5.3(2)(b)(iv)
CR
PL.
146ss.
3(2)(b)(ii)and
(iii)C
RPL
.
s.3(2)(b)(v)
CR
PL.
146(1992—
3]C
.J.L.R
.574
This
was
atax
relatedm
atterand
inexercising
itsdiscretion
toperm
itor
refase
disclosurethe
Caym
aniancourt
heldthat
thepreservation
ofconfidentiality
outweighed
theinterests
of
theU
SInternal
Revenne
Service
inesforcing
itssum
mons.
‘T
hisapproach
may
becontrasted
with
thattoken
bythe
US
jadiciaryin
theB
ankof
Nova
Scotiacases,
where
itw
asconclsded
thatthe
bank’sfailure
tocom
plyw
ithsubpoenae
toissue
bankrecords
would
amount
toa
contempt
ofcourt,
eventhough
todo
sow
ouldam
onxtto
aviolation
ofoffshore
confiden
tialitylaw
s.T
heirreasoning
was
thatthe
United
States’interest
incollecting
revenuesand
ensuringan
unimpeded
andeflicacioss
investigationoutw
eighedthe
Caym
antslsnds’
interestin
protectingprivacy
rightsunder
itsconfidentiality
laws.
t/Sv.
Ba,,k
of Nova
Scotia740
P.24817
(1984).
sinceit
would
hardlybe
assertinga
legalright
vis-à-visits
customer.
InR
eB
CC
I
(Overseas)
Ltd
)3°
itw
asheld
thatafo
rtiori
thisexem
ptiondid
notapply
where
there
waa
am
ererequest
bya
foreigncourt
notbacked
bylegal
Sanction.M
oreover,in
that
caseit
was
heldthat
theexception
doesnot
coverthe
situationw
herea
bankw
ishes
todisclose
confidentialinform
ationto
thirdparties
foruse
inforeign
proceedingsin
which
thatbank
isnot
aparty.
How
ever,In
tineM
atterof
BC
CI
(Overseas)
Ltd.
inL
iquid
atio
nt5t
where
theapplicant
bankw
asactually
aparty
toproceedings
inE
ngland,it
was
permitted
(throughits
liquidator)to
discloseinform
ationpursuant
toth
isex
ceptio
n.
Thirdly,
disclosurem
aybe
made
where
tinerelevant
professionalperson
doesso
with
theapproval
ofthe
Financtal
Secretary
andit
isnecessary
forthe
protectionof
himself
orany
otherperson
againstcrim
e.Finally,
disclosureis
allowed
where
this
isdone
inaccordance
with
anyother
law
.’33
This
important
gateway
would
includethe
provisionsin
theanti-m
oneylaundering
laws,
forreporting
suspicionsof
money
laun
dertng,and
byvirtue
ofw
hichthe
personm
akingthe
disclosureis
specifically
exempted
fromliability
forviolating
theconfidentiality
prohibitions, t54A
sa
general
rule,a
personw
hois
requiredto
giveevidence
beforeany
proceedings(either
within
oroutside
Caym
an)in
connectionw
ithconfidential
information
must
firstobtain
the
directionsof
thecourt
fora
determination
ofw
hetherit
isperm
issiblefor
himto
do
so.
t35
Essentially
thecourt
will
make
adeterm
inationas
tow
hetherthe
purported
disclosurefalls
within
oneof
thestatutory
excep
tions.’
36
litR
eHt5
7the
applicant
trusteesought
directionsas
tow
hetherhe
shouldcom
plyw
itha
subpoenaserved
in
Pennsylvania
requiringhtm
totestifi
beforea
grandjury
there.It
was
deemed
tobe
aproper
andnecessary
application,since
underC
ayman
law,
without
theproper
consentof
theappropriate
principal,the
applicantis
obligedto
seekthe
court’sdirec
tionsand
abideby
theoutcom
e.
Ingeneral,
wherever
confidentialityobligations
exist,they
may
bew
aivedby
the
consentof
thebeneficiary
ofthe
confidence,as
longas
suchw
aiveris
voluntaryand
notcom
pelled.in
theM
atterofA
BC
Ltd.lSt
itw
asheld
thata
consentform
signedin
compliance
with
theorder
ofa
foreigncourt
isnot
trueconsent
atall,
sinceit
isnot
givenfreely
andin
theexercise
ofan
independentand
uncoercedjudgm
ent.T
hatis,
it
amounts
merely
tosubm
issionto
forc
e)
9T
hisw
asreaffirm
edin
Re
Hw
herethe
courtw
astold
thatthe
beneficiaryof
theconfidence
didnot
objectto
thedivulging
of
theinform
ationby
thesubpoenaed
applicant.N
evertheless,the
courtfound
thatthat
is
notto
betaken
anauthorisation
within
them
eaningof
theC
RP
L,
sincethat
person
isalso
anA
merican
cttizenand
isthe
subjectof
thegrand
jury’sinvestigations.
t1992’-31C
.LL
.R.
131.‘,
tt994—3l
C.5.L
.R.
56.152
n.3(2)(b)(vi)
CR
PL.
s.3(2)(c)
CR
PL.
154F
oreaam
ple,o.
23(5).P
roceedsof
Crim
tnalC
ondactL
aw1(2001
Rev.)
providesa
defenceto
acharge
ofacquiring
anotherperson’s
proceedsof
criminal
coudsct,fo
raperson
who
made
priordisclosure
ot
hisknow
ledgeor
snspscion.T
hatperson
would
notbe
deemed
tohave
violatedany
restrictionon
the
disclosureof
information.
55S.4
CR
PL.
56per
t4nrre3
Re
BC
CI
(Overseas)
Ltd.op.
cit.IS?
[1996JC
.J.L.R
.238.
[1984]C
.1.L.R
.130.
159T
heIssne
ofcom
pelledw
aiverof
consentw
iltbe
examined
inC
hapter9.
5051
Money
Laundering
Control
inthe
fJaribbeanO
ffshoreF
inancialH
avensand
Money
Laundering
Consequently,
itw
asregarded
assettled
lawthat
evenan
expressedC
onsent,let
alone
acquiescenceor
non-objection,if
givenunder
painof
penalty,m
aynot
beaccepted
by
theC
ayman
courtsas
validconsent
orauthorisation.
Where
theperson
requiredto
make
disclosurein
theforeign
proceedingshas
not
obtainedthe
requisiteperm
ission,he
may
seekto
refusedisclosure
onthe
basisthat
histestim
onyw
ouldexpose
himto
criminal
liabilityin
theoffshore
jurisdiction.In
Drannigan
v.D
aviso
nt6°
theplaintiffs
refusedto
testifyin
aninquiry
inN
ewZ
ealand
onthe
groundthat
todo
sow
ouldresult
intheir
comm
ittingcrim
inaloffences,
contrary
toC
ookIslands
secrecylegislation,
andthat
theyshould
besllow
edto
raisethe
privilegeagainst
self-incrimination.
How
ever,it
was
heldby
thePrivy
Council
thatthe
privilegeagainst
self-incrimination
doesnot
obtainw
herethe
criminal
orpenal
sanc
tionsarise
undera
foreignlaw
.T
hereasoning
oftheir
Lordships
isthat
ifthe
privilegew
ereapplicable
itw
ouldhave
theeffect
ofaccording
primacy
toforeign
law,
sinceit
would
overridethe
domestic
court’sability
toconduct
itsproceedings
in
accordancew
ithits
own
lawand
procedures.A
sthe
PrivyC
ounciladvised,
different
countrieshave
theirow
ninterests
topursue.
Acontrary
conclusionw
ouldgive
the
witness
anabsolute
responseto
refuseto
answer
thequestion
whatever
thenature
of
theactivity
proscribedby
theforeign
law,
andhow
everim
portantthat
answer
might
be
forthe
purposesof
thedom
esticcourt’s
pro
ceedin
gs)
6t
CoN
cLusio
N
moved.
Inthese
cases,it
isclear
thatoffshore
havensrem
aina
formidable
hurdlein
controllingm
oneylaundering.
The
challengefor
offshorejurisdictions
isto
findthe
delicatebalance
between
remaining
competitive
asan
offshorecentre
andpreventing
theirfinancial
servicesfrom
beingexploited
forillicit
purposes.W
ithless
confidentialityand
more
controlof
theplayers
inthe
offshoresector,
aw
orkableequilibrium
couldbe
achieved.O
therwise,
anyw
rong-footingcould
leadto
acentre
gainingnotoriety,
andperpetuate
itsstatus
asa
safehaven
forthe
proceedsof
criminal
activities.For
fartoo
longC
aribbeanoffshore
centreshave
fallenprey
tothe
misdeeds
ofcrim
inalsfrom
aroundthe
world,
andalthough
some
attempt
isnow
beingm
adeto
reversethis
downw
ardspiral,
itw
illtake
more
time
anda
greatdeal
more
regulationbefore
theycan
shedthis
iniquitousim
age.P
erhapsthen,
theprophesy
will
befulfilled
andparadise
regained.
Offshore
havenshave
beenlabelled
ascentres
forgiving
explicitlycrim
inalactivity
aprotective
shield“by
thoseintent
ondefending
them
achineryof
peekaboofinance
fromthe
probingeyes
anditchy
fingersof
thejudicial,
fiscaland
monetary
auth
ori
ties”of
othercountrie
s.162
The
offshorefinancial
industryin
theC
aribbeanw
as
conceivedto
improve
theeconom
iesof
thoseterritories
andnot
intendedto
entice
criminals
orencourage
money
laundering.It
was
designedand,
toa
largeextent,
has
succeededin
producingbenefits
forthe
localeconom
y,including
generatingrevenue
fromlicense
fees,increasing
capitalinflow
sand
developingthe
financialand
legal
servicesse
cto
rs.t63
How
ever,inadequate
controlshave
ledto
thesehavens
being
blamed
forserving
asthe
‘cleansingagent’
fordirty
morley,
andfor
permitting
the
proliferationof
taxevasion
andother
white
collarcrim
es.
High-profile
incidentssuch
asthose
discussedin
thischapter
will
continueto
keep
thespotlight
shiningbrightly
onoffshore
financialcentres,
andreinforce
thestigm
aof
delinquency.A
sw
illbe
discussedlater,
effortsare
beingm
adeto
controlthe
abuseof
theoffshore
financialsector,
includingthe
dilutionof
them
uch-maligned
confiden
tialitylaw
s.H
owever,
much
remains
tobe
done,as
thedegree
ofsuccess
incracking
am
oneylaundering
caseis
stillvery
dependenton
beingable
tobreak
down
eachlevel
ofsecrecy
attainedby
thelaunderer.
The
money
laundererw
ishingto
spinan
ever
more
tangledw
ebcould
invokea
combination
ofthe
offshorebank,
trustand
company
regimes.
Foran
investigatorto
destroythe
confidentialitybarriers
ateach
layerw
ould
requirem
onthsor
years,w
hena
fewhours
isall
hem
ayhave
beforethe
fundsare
601)9971
AC
.238
This
approachw
asalso
takenin
Austraha
inB
ankof
Valena
plcn
National
Crim
e
Asshority
[1999]F.C
.A.
1099.61
Brannigan
eD
avisonat
245—9.
62R
.T.N
aylor,H
ot Money
andthe
Politics
ofD
ebt(1994).
63s•
Young
Chang,
The
Econom
icIm
pactof
Offshore
Banking
Centers
onthe
Host
Countries”
in
Y.S.
Parkand
1sTE
ssayyad(edt.),
InlernaiionalB
ankingand
Financial
Centers
(1959).
5253
University of Miami Inter-American Law Review
Fall 2008
THUNDER IN PARADISE: THE INTERPLAY OF BROADENING UNITED STATES ANTI-MONEY LAUNDERING
LEGISLATION AND JURISPRUDENCE WITH THE CARIBBEAN LAW GOVERNING OFFSHORE ASSET
PRESERVATION TRUSTS
Evan Metaxatos [FNa11
*170 I. Introduction
Traditional notions of ‘offshore accounts’ bring to mind images of large sums of money gained through
illegitimate means and purposefully concealed from the view of United States authorities, or earned
legitimately but shielded from otherwise applicable taxes by means of its location in an offshore
account. While there may be some historical basis for this assumption, the modern offshore asset
preservation trust is far removed from such preconceived notions and much more nuanced.
Over $5 trillion dollars is invested in banks, mutual funds and trusts located across the world’s 35
international offshore financial centers FN11 and many law-abiding customers are increasingly placing
their money in what have simultaneously been called offshore asset preservation trusts, asset
protection trusts, or self-settled trusts. [FN2] In reality, asset preservation trusts offer few tax
advantages; [FN31 their primary benefit is instead derived from the privacy they provide their
beneficiaries and settlors, their flexibility, and their ability to withstand the jurisdictional furor of foreign
judgments. IFN41
Offshore asset preservation trusts have come under attack in recent years, however, by both U.S.
legislators and courts frustrated in their attempts to enforce judgments in foreign jurisdictions. Much of
this pressure is the result of the frequent use of asset preservation trusts in concealing and shielding
assets derived from fraudulent schemes and money laundering associated with the illegal drug trade.
[FN5] An increasing amount of pressure, however, is being directed towards these trusts due to their
use in more legally ambiguous activities such as protection of assets from foreign civil judgments. [FN61
Attacks on asset preservation trusts have come in the form of an increasingly broadening view of the
reach of American jurisdiction, the enactment of new legislation for the purpose of combating the
money laundering, and *171 international cooperation with offshore jurisdictions. LFN7I
This article will first discuss the general benefits to be derived from the management of both legitimate
and illegitimate offshore asset preservation trusts, and whether some of the more ambiguous features
of such trusts lead to the conclusion that they are fraudulent on a de facto basis. It will then address the
steps the United States has taken recently, both legislatively and judicially, to reach the assets in these
trusts, and some of the international cooperative efforts undertaken to combat the illegitimate ways in
which people have used offshore asset preservation trusts. This article will next focus on the myriad of
responses to U.S. pressure by various offshore Caribbean jurisdictions, with special focus on the
7
Bahamas and the Cayman Islands. Lastly, the article will address whether American laws have overreached in their attempt to combat money laundering, the sufficiency of the Caribbean response toAmerican pressure, and what the drafter of an asset preservation trust should keep in mind whenforming and managing a ‘legitimate’ offshore asset preservation trust.
II. The Benefits of Establishing an Offshore Asset Preservation Trust
It is no coincidence that the rising popularity of offshore asset preservation trusts in recent years hasparalleled the sharp rise of litigation in the United States. [FN81 As an increasingly large segment of thepopulation has found themselves subject to liability by U.S. courts, they have sought to protectthemselves from potential creditors by placing their assets beyond the reach of a court’s jurisdiction.Once reserved for the ultra-wealthy, asset preservation trusts can now be opened over the internet inorder to shield doctors from malpractice suits or insulate assets in dispute during a divorce proceeding.[FN9] While both domestic and foreign asset protection trusts may be able to provide a base level ofprotection against U.S. creditors, foreign trusts provide additional benefits because of their geographicallocation, divergence from certain *172 common law forced heirship laws, the ability for a trust to be“self-settled,” and immunity from foreign judgments.
Both the role asset preservations trusts play in avoiding foreign judgments and the legally tenuousmeans by which they accomplish their role have lead some critics to conclude that such trusts arefraudulent devices by their very nature. [FN1O] Others argue, however, that as punitive damage awardsin the United States continue to increase, people are justified in moving their assets to offshorejurisdictions where such unreasonable awards are less likely to be awarded, and that U.S. courts shouldrespect the laws and sovereignty of these foreign jurisdictions. FN111
A. Tax Benefits
Contrary to popular belief, harboring money in an asset preservation trust does not immunize either thesettlor or the beneficiary of the funds from tax liability in their home country. Although the settlor ofsuch trusts typically does not have to pay taxes in the offshore jurisdiction where the trust is located, thesettlor is still liable for any taxes in their home jurisdiction where the assets were initially procured.[FN12] Avoidance of taxes is therefore not an important factor contributing to the decision of a settlorto go offshore. [FN13} The benefits of such trusts have instead been characterized by the degree ofcontrol they afford their settlors, their protection by strict banking confidentiality laws, and theimmunity they enjoy from foreign judgments.
B. Self-Settled Trusts
The defining characteristic of an offshore asset preservation trust is its allowance of the settlor to retain
control over both the management of the trust and its ultimate retention. [FN141 The very *173 idea of
a self-settled trust [FN151 seems paradoxical to people who view a trust as an instrument in which the
settlor relinquishes control of his assets. [FN161 Typically a settlor must still show caution in the amount
of control he exerts over trusts. [FN171 As offshore legislation expands such power, however, a settlor
increasingly has more latitude to govern the disposition of his assets. For instance, under Cayman Island
trust legislation, a settlor can revoke, vary, or amend the trust instrument; instruct a trustee regarding
how the funds should be invested; change the forum law by which the trust is governed; and reserve for
himself a beneficial interest in the trust. [FN181 Engaging in such activities with an ordinary trust would
typically lead to the trust being considered a sham, [FN191 but this is much more difficult when these
powers are statutorily authorized. As a result of such power, it can be nearly impossible for a Caribbean
court to conclude that an asset preservation trust is a sham which would render it vulnerable to foreign
judgments. [FN2O1
C. Strict Banking Secrecy Laws
People also flock to offshore asset preservation trusts in order to reap the benefits of their unrivaled
banking secrecy laws. IFN21] While some people may use offshore trusts in order to conceal illicit funds
from the eyes of U.S. investigators, others do it because they fear ‘Big Brother’ or simply wish to keep
their affairs private. [FN221 For instance, an offshore jurisdiction will typically not force production of
confidential information unless the debtor has *174 committed a crime in their home jurisdiction which
is also a crime in the offshore jurisdiction. [FN23] Because many offshore jurisdictions also have no
income or estate taxes, there are no comparable tax crimes by which the debtor can be held liable for
and therefore forced to comply with a subpoena. [FN24]
It should be noted, however, that no jurisdictionsTconfidentiality laws can be said to be absolute and
some offshore jurisdictions do divulge information in limited circumstances. In the Bahamas, for
instance, a court will grant a U.S. court order requiring the disclosure by a bank or trust company of
confidential information in some circumstances, so long as the subpoena duces tecum is limited in scope
and specific. [FN251 In the Cayman Islands, disclosure of confidential information is allowed when done
in accordance with any other law of the Cayman Islands. [FN261 Although the circumstances in which an
offshore jurisdiction will comply with a U.S. court order are still substantially limited, such circumstances
are broadening as a result of U.S. pressure to combat money laundering.
D. Circumventing Forced Heirship Laws
Another benefit derived from offshore asset preservation trusts is their avoidance of common law rules
regarding forced heirship. When the owner of a property in a U.S. jurisdiction typically wishes to convey
his or her interest in a property to another, forced heirship, marital property, and other laws may
interfere with how the owner of the property wishes it to be distributed. fFN27] For instance, many
states still enforce a rule against perpetuities, [FN2S1 which restrains the long-term distribution of
5o
property. If the property is held in an offshore asset preservation trust, however,*175 such laws are of
no consequence. In addition to abolishing the rule against perpetuities, [FN291 most foreign jurisdictions
have also abolished forced heirship laws and spousal right laws. [FN3O1 The flexibility of offshore asset
preservation trusts therefore allows the owner of property to have more control over who ultimately
receives his property and allows a property owner to maintain this control for longer periods of time.
E. Immunity From Foreign Judgments
Perhaps the most important feature of an offshore asset preservation trust in the eyes of a settlor is its
seeming invincibility from judgments rendered in foreign jurisdictions. This invincibility results from
simple obstacles, such as the geographic distance between the United States and these foreign
jurisdictions, as well as very complex jurisdictional issues arising from the independent judicial systems
these countries enjoy that are free to disregard the orders of U.S. courts.
Once a judgment for damages is entered against a criminal or civil defendant by a U.S. court, the
prevailing party will typically wish to have this judgment enforced. If the assets are in the United States,
this is a simple process in which the deciding court simply issues a court order, which all U.S. financial
institutions are required to comply with, to turn over the assets. [FN31] Foreign institutions, however,
are under no obligation to comply with a court order from the United States. Courts must therefore
either have their judgments recognized by the foreign jurisdiction, or exert pressure on the settlor to
comply with their court orders. [FN32]
1. Settlor Under Pressure
When U.S. courts attempt to exert pressure on a settlor, a number of unique issues arise. In an asset
preservation trust the settlor is typically also the beneficiary. fFN331 This might lead one to the
conclusion that when the settlor owes money, withdrawing the needed money from an asset
preservation trust is well within the *176 purpose for which the trust was created. [FN341 The primary
purpose of an asset preservation trust, however, is to protect against foreign judgments. [FN351 Because
withdrawing money in order to pay off a foreign judgment runs afoul of the main purpose for such
trusts, foreign financial institutions have typically argued that actions by the settlor in furtherance of this
goal should not be complied with, and Caribbean courts have agreed. For instance, the Cayman Islands
have refused to recognize a receiver of an offshore trust appointed by a U.S. court, [FN361 and have
likewise refused to recognize consent forms signed in compliance with an order of a foreign court.
[FN371
Several additional features unique to offshore asset preservation trusts also help to alleviate pressure
on the settlor that follows a judgment of liability in a U.S. court. First, their usual inclusion of a ‘flee
clause’ permits the settlbr to change the situs [FN3S1 of the trust to a more favorable jurisdiction if it
seems that the trust may come under legal attack. [FN39] Therefore, while a settlor may initially
maintain a trust in a jurisdiction which affords preferential treatment in the management of the trust, if
litigation is imminent, the settlor can change the situs of a trust to an alternate jurisdiction which will
minimize a creditor’s ability to enforce a judgment against the trust. [FN4O1 By including a ‘flee clause’ in
an offshore asset preservation trust, not only are creditors discouraged from bringing suit, but if they
are prepared to bring suit they may initially over-commit resources in a jurisdiction which will ultimately
not litigate the issue.
Most often, however, the decision to move the situs of a trust pursuant to a ‘flee clause’ is not made by
the trustee, but is *177 instead made by the ‘protector’ [FN411 of the trust, another benefit unique to
offshore asset preservation trusts. If a protector feels that the trustee is acting under the duress of a
foreign jurisdiction, it is typically within his authority to remove the trustee; invoke a ‘flee clause’ in
order to move the trust to another situs; and freeze benefits payable to beneficiaries. [FN421 These
illustrations make it clear that attempts by a U.S. court to exert pressure of a settlor in order to seize
assets are typically met by a number of unique obstacles if the funds are located in an offshore asset
preservation trust.
2. Enforcement of Foreign Judgments
If exerting pressure on a settlor/beneficiary in the United States is unsuccessful, an American court will
typically seek to have its judgment enforced in the jurisdiction where the assets are located. In order for
a court’s judgment to be enforced, however, it must first be recognized. [FN43] In the United States, a
court will typically recognize the judgment of a foreign court as a matter of comity, 1FN441 so long as the
foreign court is able to impartially administer justice. I FN4S] This does not mean, however, that foreign
jurisdictions will reciprocate this comity in recognizing the judgments of U.S. courts. When foreign
countries do not automatically recognize the judgment of a U.S. court as a matter of comity, such
countries may also enter into both bilateral and multilateral treaties with the United States in order to
have their judgments enforced. [FN461 As this article will discuss, U.S. pressure has compelled various
Caribbean jurisdictions to enter into such agreements to enforce foreign judgments, but only in limited
circumstances. In other circumstances, Caribbean courts still fail to recognize the judgments of American
Courts and creditors are typically required to argue the case anew in a foreign jurisdiction.
F. Benefits to Caribbean Countries of Harboring Asset Preservation Trusts
Although the benefits of an offshore asset preservation trust for a settlor are clear, such trusts also
benefit the jurisdictions in which they are harbored. Many of the Caribbean jurisdictions which house
these trusts are still emerging economies, attempting to shift from systems based on agriculture to
economies based on tourism and financial services. [FN5O1 In accomplishing this transformation, the
subtle nuances of their trust legislation can sometimes be a double-edged sword, simultaneously
attracting foreign investors with their lax regulations and jurisdictional independence, and frustrating
foreign governments because of their failure to cooperate with judgments aimed at assets harbored
abroad. Foreign governments such as the United States, however, are not without their means of
persuasion, and it has been the task of Caribbean governments to strike a proper balance regarding
their trust legislation.
*179 III. The United States Response to the Problem of Money Laundering
The ability of offshore asset preservation trusts to withstand the enforcement of foreign judgments has
led to their increasing popularity for both legally ambiguous uses such as shielding assets from divorce
proceedings and the avoidance of what might be considered excessive punitive damages awards, [FN51]
to outright illegal uses such as the laundering of money associated with the illegal drug trade. 1FN521
The United States has therefore sought to lift the veil of secrecy surrounding offshore asset preservation
trusts and attack the protections these trusts provide their settlors. The United States first took aim at
the problem of money laundering.
Money laundering was not even addressed as a problem in the United States until 1970 1FN531 and was
not made a crime until 1986 when Congress enacted the Money Laundering Control Act. [FN54] The
Money Laundering Control Act made it a crime to launder the proceeds of criminal activity by engaging
in financial transactions, with either the intent to promote that criminal activity, to conceal the origins of
the profit, or avoid reporting requirements on the money. [FN55] Although early anti-money laundering
legislation was drafted with the problem of illicit drug trafficking in mind, the scope of what courts are
willing to consider “financial transactions” for purposes of identifying money laundering has expanded in
recent years to include other transgressions as well. [FN561 As financial institutions have come under
increasing pressure to divulge information regarding the origins of money suspected to be gained
through illegal activities, money laundering has moved offshore where such laws are not applicable.
A. The Jurisdictional Reach of U.S. Anti-Money Laundering Laws
The attempts of U.S. investigators to pursue money launderers offshore have been met with a number
of obstacles, however, that have required both bold new legislation and judicial ingenuity* 180 to
overcome. The most obvious problem facing investigators is jurisdictional in nature. How can a U.S.
court enforce a judgment, subpoena, or court order against a person or financial institution located in
another sovereign country? As mentioned earlier, in order to enforce a judgment, a court must either
compel the settlor or financial institution to voluntarily comply with the court order, or persuade the
Caribbean jurisdiction to recognize the judgment of the U.S. court. [FN571
Where either the settlor or the financial institution managing the trust has a presence in the United
States, courts have often relied on exerting pressure. While the protections afforded to the settlor of an
asset preservation trust have been discussed, these protections do not necessarily extend to the
financial institutions which act as trustees. For instance, many courts will hold the U.S. subsidiary of a
financial institution [FN58j liable for the refusal of their branch in a foreign jurisdiction to comply with a
court order. [FN591 The financial institution is therefore faced with the unappealing dilemma of either
complying with a U.S. court order regarding the disposition of a foreign trust, or violating the trust laws
of where the trust is located, If the financial institution has a significant presence in the United States
then the scales may tip in favor of complying with a U.S. court order because the financial institution
may have more to lose.
But what happens when there is no domestic branch of a financial institution to hold responsible and
the structure of an asset preservation trusts nullifies any pressure a court can exert over a settlor? The
U.S. court must then seek to have its judgment enforced by a Caribbean court. As mentioned earlier,
however, in order for a court’s judgment to be enforced, it must first be recognized. Because most
Caribbean jurisdictions do not recognize U.S. judgments as a matter of comity, enforcement of U.S.
judgments takes place under a patchwork of treaties that provide incomplete coverage.
*181 1. Extraterritoriality
It should also be noted that U.S. courts have engaged in an extraterritorial [FN6O] expansion of
prescriptive and enforcement jurisdiction as well. [FN611 American courts have claimed the right to
extraterritoriality when either a significant part of the illegal conduct in question takes place in the
United States or the illegal activity takes place outside U.S. borders but has consequences within the
United States. [FN62] In the first instance, varying U.S. courts have taken differing stances regarding just
how much “conduct” has to take place within the United States in order to subject a foreign person or
entity to the laws of the U.S. . For instance, Judge Friendly, writing for the Second Circuit, has held that
prescriptive jurisdiction can be based on the “perpetration of fraudulent acts themselves but does not
extend to mere preparatory activities or the failure to prevent fraudulent acts where the bulk of the
activity was performed in foreign countries.” [FN63] In other words, Friendly takes a somewhat limited
view regarding the amount of conduct that might expose a foreign entity to U.S. jurisdiction.
Other scholars, however, now express concern that the United States has embarked on a bold expansion
of extraterritoriality and can now assert prescriptive and enforcement jurisdiction against a financial
institution anywhere in the world simply because the institution has executed trades in U.S. currency
which have to be booked in corresponding U.S. banks. [FN64] Most banks around the world trade to
some extent in U.S. currency, however, and such a rule would bring many transactions under the
jurisdiction of U.S. courts which would otherwise be excluded. 1FN651 Such an interpretation of
“conduct” is therefore dangerously broad in its assertion of extraterritorial jurisdiction and runs the
danger of infringing upon the sovereignty of other nations. Nevertheless, Courts are beginning to
expand their rule *182 of what sort of conduct is enough to bring financial activities under the purview
of U.S. courts and this trend is expected to continue. [FN66]
U.S. courts have also been willing to exert prescriptive jurisdiction over foreign entities even when their
illegal conduct takes place outside of the United States, so long as the conduct creates a substantial
adverse effect in the United States. [FN67] Under this doctrine, a company does not even need to have a
presence in the United States or engage in conduct within U.S. borders to fall under U.S. prescriptive
jurisdiction. 1FN681 While the “substantial effect” test is indeed an effective way of targeting the
perpetrators of fraudulent international investment schemes aimed at U.S. investors, it also raises
questions of the limits of U.S. laws and the dangers of asserting extraterritorial jurisdiction.
When the “conduct” and “substantial effect” tests are taken in conjunction with the pressure the United
States already exerts on settlors and financial institutions, the U.S. approach to money laundering
evinces a broad assertion of extraterritoriality. The PATRIOT Act, however, has even further broadened
the reach of U.S. jurisdiction.
2. The USA PATRIOT Act
Although prior to September 11, 2001, attempts to expand the reporting requirements of financialinstitutions were met with widespread opposition and concerns about invasion of privacy, [FN69} theturmoil surrounding the worst terrorist attack in our nations history allowed the PATRIOT Act to passwith sparse opposition. [FN7O1 Under the guise of fighting terrorism, the PATRIOT Act hassignificantly*183 expanded the definition of what constitutes a financial institution for purposes ofcombating money laundering [FN71] and has conferred on district courts ‘long-arm’ jurisdiction [FN721over foreign persons and financial institutions. [FN73j Specifically, this is accomplished through Title Illof the PATRIOT Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act of2001 [FN741 that amends both the 1970 Bank Secrecy Act and the 1986 Anti-Money Laundering Act.[FN75]
For instance, the PATRIOT Act enables the Secretary of the Treasury to issue a summons or subpoena to“any foreign bank that maintains a correspondent account in the United States and request recordsrelated to such correspondent account, including records maintained outside the United States relatingto the deposit of funds into the foreign bank.” {FN761 Although such subpoenas were generally issuedunder 18 U.S.C.A. § 1956(a) before the passage of the PATRIOT Act, when compliance with thesubpoena or summons ran afoul of foreign laws governing confidentiality, the U.S. court, for reasons ofcomity, would typically defer to the foreign court. [FN771 Now, however, U.S. courts will press forwardand financial institutions will be required to submit to the jurisdiction which can exert the most pressureon the financial institution to comply with their laws. [FN781
Financial institutions are also now required to maintain “records of the information used to verify aperson’s identity, including name, address, and other identifying information.” [FN79] While suchinformation may seem trivial in nature, it helps U.S. investigators in tracking the source of funds in orderto combat money laundering. For purposes of asset preservation trusts, this information also becomesproof that a debtor has funds in an offshore account. Financial institutions are now also more willing toprovide this information to investigators because § 351 of the PATRIOT Act amends the Bank Secrecy Act(1970) by providing *184 financial institutions with legal immunity from liability for voluntary disclosuresof suspicious transactions. IFN8O1
B. Broadening Judicial Interpretation of Anti-Money Laundering Laws
The enactment of new legislation combating money laundering has also been accompanied bybroadening judicial interpretation of these statutes. Money laundering was initially outlawed in 1986 tocombat the illicit drug trade. [FN81] Since then, however, courts have interpreted 18 U.S.C.A. § 1956 toencompass concealing the “proceeds” of bankruptcy fraud in offshore accounts as well. [FN821 As aresult of this interpretation, § 1956 is now made applicable to a much broader number of assetpreservation trusts. Other courts have also expanded the definition of “intent” under § 1956 to include“willful blindness.” [FN83} Under such an interpretation, a lawyer who establishes such a trust is nowunder a duty to investigate the origins of money deposited therein in order to ensure that the moneywas gained through legitimate means.
U.S. court decisions have also methodically targeted many of the specific aspects of offshore asset
preservation trusts which make them desirable to customers. For instance, in United States v. Bank of
Nova Scotia, [FN84} a landmark case, the 11th Circuit held that the interest of American citizens in the
privacy of their bank records located offshore was substantially reduced when balanced with the
interest of their own government in a criminal investigation. [FN851 As a result of this decision, banks
can now look at the relative interests of the different states involved in order to come to the conclusion
that America’s interest in pursuing a criminal investigation may outweigh any comparable interest a
foreign state might have in enforcing bank secrecy laws. [FN861
U.S. courts have also turned up the heat on the settlor of the trust in order to collect more information
regarding the trusts or *185 attach the assets. Courts have held that a settlor can be held in contempt of
court and incarcerated for failing to cooperate with a court order to turn over records regarding the
trust. [FN871 While a settlor can typically claim that they have no power to comply with such an order to
produce bank records, [FN88] in an offshore asset preservation trust such a claim is more tenuous
because the settlor retains substantial power over the trust.
In Eulich v. United States, [FN89] for instance, the district court did not buy the argument that the
settlor had no control over his trust when the IRS demanded documents relating to it. The court ordered
Eulich to produce documents concerning the trust by all means possible, including filing a lawsuit in the
Bahamas to facilitate production of the documents. FFN9O] In Eulich, the court found that to the extent
that producing the documents was impossible for Eulich, it was only because of the situation which
Eulich himself created by depositing between $75-$100 million dollars in a Bahamian asset preservation
trust, and that Eulich should not be allowed to benefit from the situation he had created. [FN911
In addition to attacking some of the specific features of offshore asset preservation trusts, U.S. courts
have also expanded the scope of what sort of trusts they are willing to consider illegitimate. In
Breitenstine v. Breitenstine, [FN921 the Wyoming Supreme Court evaluated a Bahamian asset
preservation trust used by a husband to shield assets from his wife before an impending divorce
proceeding. The Court concluded that such a use was “reprehensible” and that the asset preservation
trust was created to hinder, delay, or defraud the husband’s creditors. FFN931
Such legally ambiguous uses raise broad public policy questions concerning offshore asset preservation
trusts and lead some to conclude that such trusts are fraudulent on their face. [FN941 Others argue,
however, that they are merely another form of trust which *186 affords the settlor more control, [FN95]
a feature that is not in itself fraudulent. However one views such accounts, the United States has led the
way in pressuring offshore jurisdictions to adopt more lenient bank secrecy laws, but they have also
employed the help of others along the way.
C. The International Fight Against Money Laundering
Of course, the United States is not alone in its attempt to stem the flow of illicit money into offshore
jurisdictions. With America leading the way, the United Nations has formed the International
Convention for the Suppression of the Financing of Terrorism, which recognizes the need for
cooperation among States in devising and adopting effective measures for the prevention of the
financing of terrorism. [FN96j The Convention calls upon its signatory countries to take steps to prevent
and counteract the financing of terrorism through appropriate domestic measures as well as through
international cooperation. [FN97] While an effective means of fighting money laundering in theory,
certain key offshore jurisdictions, including the Bahamas, have not yet ratified the treaty. [FN981
The G7, led by the United States, has also undertaken the task of combating money laundering. In 1989
the G7 formed the Financial Action Task Force (hereinafter “FATF”) in order to recommend measures to
improve countriesTmoney laundering laws. [FN991 The FATF issued forty recommendations [FN1001 thatprovide a guide to countries in revising their legislation. In 2000, FATF issued a report in which itidentified “serious systematic problems” with the anti-money laundering laws of five Caribbean nationsincluding*187 the Bahamas and Cayman Islands. [FN1O1] Although the FATF’s power to enforce these
recommendations relies on engaging in dialogue with non-compliant nations and the embarrassment
associated with being non-compliant, [FN1O21 the method seems to have worked because Myanmar,
the last country to be listed as non-compliant by the FATF, has been removed from the list. [FN1O3] How
effective these forty recommendations are at curtailing either the legitimate or illegitimate usage of
offshore asset preservation trusts remains to be seen. [FN1O41
IV. The Caribbean Reaction
Various Caribbean jurisdictions have responded to international and unilateral U.S. pressure to fight
money laundering through a number of legislative enactments and judicial opinions. While some
legislative enactments have been viewed as positive steps forward, others have had a limited effect on
the operation of asset preservation trusts. In like manner, various Caribbean judiciaries have issued
decisions both in an attempt to cooperate with efforts to fight money laundering and in defense of their
own sovereignty.
A. Caribbean Legislative Response
The Caribbean legislative response to U.S. pressure to address money laundering has differed from
country to country, but certain trends have become apparent. These trends include the erosion of
banking secrecy laws and the formulation of financial intelligence units to facilitate international
cooperation, but the overall preservation of the asset preservation trust’s immunity from foreign
judgments.
In the Cayman Islands, for instance, the legislative assembly has signed a ‘Statement Regarding Drug
Cooperation’ [FN1O51 in *188 response to Bank of Nova Scotia [FN1O61 and a subsequent ‘exchange of
letters’ among the United States, the Cayman Islands and United Kingdom. [FN1O71 This agreement
allows for Caymanian courts to compel production of bank documents in specified drug cases. [FN1O8]
The agreement, however, is not made applicable to cases of either tax evasion (which is not a crime in
the Cayman Islands because there are no income taxes) or when a debtor is attempting to shield assets
from a creditor. 1FN1091 As a result, many of the uses of the asset preservation trust in the Cayman
Islands remain unaltered and creditors wishing to attack some of these more legally tenuous uses of
asset preservation trusts have been required to try the case anew in the Cayman Islands.
The Cayman Islands has also formed the Cayman Island Monetary Authority, which is charged with
implementing the country’s anti-money laundering laws and providing assistance to overseas regulatory
authorities. FFN11Q1 The primary money laundering legislation the Monetary Authority is charged with
upholding is the Proceeds of Criminal Conduct Law (2007 Revision), [FN1111 which covers all businesses
and individuals. Like the Statement Regarding Drug Cooperation, however, the Proceeds of Criminal
Conduct Law is limited in scope and only made applicable to “criminal conduct,” which is defined as an
indictable offense if it had occurred in the Cayman Islands or conduct committed outside the jurisdiction
that would constitute an offense if it had been committed within the Cayman Islands. [FN112I The scope
of the Monetary Authority therefore does not encompass U.S. laws unless those laws are also laws of
the Cayman Islands.
Similar to the Cayman Islands’ Monetary Authority, the Bahamas created the Financial Intelligence Unit
in 2000 pursuant to the Financial Intelligence Unit Act 2000 [FN1131 in response to *189 being
blacklisted by the Financial Action Task Force. Also like the Cayman Island Monetary Authority, the
Bahamas Financial Intelligence Unit is mandated by law to cooperate with international law
enforcement agencies in order to stem the flow of money laundering [FN114I and as a result has won
removal from the list of countries regarded as noncompliant with the Financial Action Task Force’s list of
forty recommendations. [FN1151 Although the Bahamas have no tax treaties in force, their Financial
Intelligence Unit has also entered into mutual legal assistance treaties with other nations which provide
for the exchange of information and compliance with specific foreign court orders. [FN1161 In the
calendar year 2006, the Financial Intelligence Unit received sixty-six requests for assistance from foreign
financial investigatory units, eleven of which were from the United States, and was able to provide
assistance or is providing assistance ninety-one percent of the time. [FN117] These steps mark a positive
step forward in the fight to combat illegal money laundering without interrupting the operation of
legitimate offshore asset preservation trusts.
Not all recent laws, however, are being adopted for the purpose of making it easier for foreign courts to
enforce judgments against assets in a foreign jurisdiction, It is relatively recently, for instance, that the
Bahamas have enacted a two-year statute of limitations on the commencement of proceedings alleging
a fraudulent conveyance into a trust [FN118I and have placed the burden of establishing the settlor’s
fraudulent intent on the creditor seeking to set aside the transfer. [FN119] Since the ordinary course of
litigation in the United States often takes years to begin with, many creditors*190 may find that by the
time they realize the assets they seek are in a Bahamian asset preservation trust, it is too late to file suit
in the Bahamas.
The laws in St. Christopher and Nevis in like manner have established a very high burden for establishing
a fraudulent conveyance into a trust. The recently enacted ‘Proceeds of Crime Act’ [FN12O1 stipulates
that, “It shall be a defense to a charge under this section if the person satisfies the Court that he did notknow or had no reasonable grounds for knowing that the property referred to in the charge wasderived, directly or indirectly, from some form of serious offence.” [FN121] Nevis therefore takes amuch stricter view of what constitutes a fraudulent conveyance than do most U.S. courts. For instance,the Eighth Circuit in Oberhauser held willful ignorance was enough to establish intent for purposes ofproving a fraudulent conveyance. FFN122I Therefore, while a U.S. court may establish a fraudulentconveyance upon a finding of willful ignorance and exert pressure on the settlor, a court in Nevis mighthold that the burden for establishing a fraudulent conveyance has not been met and decline to enforcea U.S. court order to hand over assets in the trust. 1
B. The Caribbean Judicial Response
Caribbean courts have been as varied as their legislatures in responding to U.S. pressure to fight moneylaundering and the financing of terrorism. For instance, the U.K. Privy Council, which hears appeals fromthe Bahamian Supreme Court, has been *191 generally supportive of new anti-money launderinglegislation. The Privy Council has upheld the constitutionality of newly enacted legislation to combatmoney laundering in the face of opposition by interest related to the trust industry in the Bahamas.[FN125] The Privy Council has also upheld the revocation of a trust company’s license in response tosuspected money laundering. [FN1261 While this may represent only one company, it is alsorepresentative of the overall belief that the era of lax regulation is now over.
Another landmark case in asset preservation trust jurisprudence came in 1995 with the Bahamian caseof Grupo Torras S.A. v. Al Sabah. [FN127] In Grupo Torras, it was alleged that Sheikh Fahad, a member ofthe Kuwaiti royal family, had defrauded investors to the tune of $450 million dollars and then hid theassets in a series of asset preservation trusts in the Bahamas and Cayman Islands. [FN128] Employingthe Fraudulent Dispositions Act of 1991, [FN1291 the Bahamian Supreme Court granted a ‘mareva’injunction which froze the assets of one such trust, preventing the trust from invoking a flee clause inorder to move the assets to another jurisdiction. [FN13O1 In ascertaining the intent of Bahamianlegislators, the court reasoned:
“It seems to me that it is one thing to ascribe to the Parliament of the Bahamas (“Parliament”) anintention to make The Bahamas more attractive as a “tax haven” by encouraging the establishment inthis jurisdiction of what are referred to in some commercial circles as “asset protection trusts” but it isquite a different matter to attribute to Parliament an intention of allowing the Bahamas position as alegitimate tax haven to be used as a cover for fraudulent activity which has little or nothing to do withthe minimisation of taxes or the protection of honestly acquired assets from the sometimes
1 [This footnote is created by the Professor from the primary text: Nevertheless, St. Christopher and Nevis havealso created a Financial Intelligence Unit in order to enforce their anti-money laundering laws through cooperationwith foreign financial intelligence units [FN1231 and like their Caribbean compatriots, are no longer listed asnoncompliant regarding FATF’s forty recommendations because of their significant progress in strengthening theiranti-money laundering capabilities. [FN1241
unreasonable demands placed on those assets e.g., as a result of an award of damages against a
professional person.” [FN131I
It is worth noting that the court reasserted in Grupo Torras its belief that avoiding taxes and protecting
against some forms of liability were legitimate uses of such trusts and that is such circumstances* 192
the court would not comply with a foreign court order. Crucial to the court’s granting of an injunction in
Grupo Torras, however, was the finding that the trust was a ‘sham’ in that Sheik Fahad, as both settlor
and primary beneficiary of the trust, exerted control over the trust in a manner inconsistent with even a
self-settled trust. [FN1321 While a settlor of a self-settled trust will typically be allowed to make
investment decisions regarding the trust, Sheik Fahad withdrew money from the trust in order to pay for
membership in a country club so that he could play golf, and also used trust funds to invest in property
in the Bahamas which he ended up using as a residence. [FN133]
Grupo Torras is significant not only because of the amount of money involved in the trust, but also
because it draws a line in the sand, defining how much control a settlor can exercise over offshore asset
preservation trusts. It also clearly illustrates that offshore jurisdictions such as the Bahamas are willing
to identify fraudulent conveyances into an asset preservation trust going forward. While many of the
more legitimate uses of asset preservation trusts remain unaffected, it is now much more difficult for a
money launderer to take advantage of some of the unique features of an asset preservation trust in
order to obscure the origins of funds and evade creditors.
C. Inter-Regional Cooperation
While Caribbean legislators and judiciaries have worked independently in response to U.S. and
international pressure to combat money laundering, they have produced a collaborative effort as well.
This effort is in part, due to the recognition that if uniform standards are not maintained throughout the
region, some countries may seek to achieve an unfair advantage in their trust legislation, which would
work to the detriment of the overall goal of fighting the illegitimate use of these offshore financial
centers. [FN1341
At the forefront of this inter-regional effort is the Caribbean Financial Action Task Force (hereinafter
‘CFATF’), created as a result of a 1990 meeting held in Aruba among member-states and *193 the
Kingston Declaration on Money Laundering. [FN135] The CFATF has facilitated the signing of a
memorandum of understanding among their member states and they issue a yearly report in which they
track each other’s progress in addressing money laundering. Nations requesting to become “cooperating
and supporting nations” must express their commitment to the support of the CFATF and undergo a
positive mutual evaluation by the FATF or a FATF-approved regional body. [FN136]
***
[All] member states are now compliant with FATF’s forty recommendations and the CFATF has trained
seventy-one examiners during the past year on more stringent AML/CFT [FN138] standards for
combating money laundering and the financing of terrorism. [FN1391
Such collaboration between the Financial Intelligence Units (hereinafter ‘F.l.U.s’) of different countrieshas also been formalized by the formulation of the Egmont Group. The Egmont group...fight(s) bothmoney laundering and the financing of terrorism. [FN1421 Caribbean members of the Egmont groupinclude: Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Bermuda, British Virgin Islands,Cayman Islands, Dominican Republic, Netherland Antilles, St. Kitts and Nevis and St. Vincent & theGrenadines. [FN1431
Cooperative endeavors such as the Egmont group and CFATF facilitate not only the exchange ofinformation, but also of standards governing asset preservation trust. Going forward, it is likely that thecontinuation of such cooperation, coupled with U.S. pressure, is likely to result in more uniformstandards governing offshore asset preservation trusts throughout the Caribbean.
V. A Look Into the Future
The Caribbean as a collective unit has clearly come a long way since the United States first sought tofight money laundering beyond its own shores. In the process, the offshore financial industry has seenboth the rise of the asset preservation trust in order to meet the needs of debtors, and its modification
as a means of preventing fraudulent conveyances and other forms of money laundering.
Although asset preservation trusts are still an effective means of protecting legitimately earned assetsfrom foreign creditors, IJS. pressure has clearly led to an erosion of banking secrecy laws and anysensible lawyer should keep several things in mind before establishing and operating such trusts. First, alawyer should be at least partially aware of the source of funds which enter an asset preservation trust.While willful ignorance is still insufficient to establish a fraudulent conveyance in most offshore
jurisdictions, a lawyer in the U.S. can be held liable as facilitating the fraudulent conveyance and bedeemed a co-conspirator of the fraud. [FN144] One proposed solution to this danger is to require aclient who wishes to open an asset preservation trust to sign a solvency *195 affidavit, pledging that theclient has no outstanding judgments against him. [FN1451 By requiring such an affidavit, a lawyer maybe able to absolve himself of liability if a U.S. court later alleges that he facilitated a fraudulent
conveyance into an offshore trust.
Second, although a trust that allows the settlor a greater degree of control can in many situations bebeneficial, as a result of cases such as Grupo Torras [EN 1461 there is still a real danger that such trustscan nevertheless be held shams and set aside. It is therefore essential that in drafting the trustagreement, the powers of the settlor are clearly defined and that the settlor does not exceed thesepowers in reality.
Lastly, although determining the situs of the asset preservation trust is still an important decision, asinter-regional cooperation leads to more uniform standards, the finance industry is approaching a morestandardized version of the asset preservation trust, regardless of where the trust is located. While such
a trend obviously makes the job of a lawyer easier in determining the situs of a trust, it is still too early
to determine whether this trend will also lead to a loss of some of the features which make asset
preservation trusts so desirable in the first place.
For the time being, however, asset preservation trusts are now less likely to be used as a means of illegal
money laundering because of U.S. pressure, yet they still provide both the flexibility and the protection
needed in today’s increasingly litigious society for assets earned through legitimate means.
[Footnotes Omitted]
40 UM1AIALR 169
H.R. 1265 - Summary: Stop Tax Haven Abuse Act (GovTrack.us) Page 1 of 2
G ovTrack.us
GovTrack Insider is :rnn ne iduo .jnrss o HIs in Co:igress. Check it t.
HR. 1265: Stop Tax Haven Abuse Actiii Congress
20 OCt—20 IC)
S LI mm a ri Cs
Congressional Research Service Summary
The following summary was written by the Congressional Research Service, a well-respected nonpartisan armof the Library of Congress. GovTrack did not write and has no control over these summaries.
3/3/2009--Introduced.
Stop Tax Haven Abuse Act - Amends Internal Revenue Code provisions relating to tax shelter activities to: (1)establish legal presumptions against the validity of transactions involving offshore secrecy jurisdictions (i.e., foreigntax havens identified in this Act and by the Secretary of the Treasury); (2) impose restrictions on foreignjurisdictions, financial institutions, or international transactions that are of primary money laundering concern or thatimpede U.S. tax enforcement; (3) treat certain foreign corporations managed and controlled primarily in the UnitedStates as domestic corporations; (4) increase the period for Internal Revenue Service (IRS) review of tax returnsinvolving offshore secrecy jurisdictions; (5) require tax withholding agents and financial institutions to report certaininformation about beneficial owners of foreign-owned financial accounts and accounts established in offshoresecrecy jurisdictions; (6) disallow tax advisor opinions validating transactions in offshore secrecy jurisdictions; (7)subject dividend equivalents and substitute dividends to the 30% tax on foreign income; and (8) impose reportingrequirements for transactions involving a passive foreign investment company.Amends the Securities Exchange Act of 1934 and other federal enactments to impose a penalty for failure to discloseholdings or transactions involving a foreign entity.
Requires the Secretary of the Treasury to publish a final rule requiring unregistered investment companies, includinghedge funds or private equity funds, to establish anti-money laundering programs, and to submit suspicious activityreports.
Modifies requirements for certain third party summonses used to obtain information in tax investigations that do notidentify the person with respect to whose liability the summons is issued (John Doe summons).Increases penalties for promoting abusive tax shelters and for aiding and abetting the understatement of tax liability.Prohibits the patenting of tax planning inventions.
Prohibits tax advisor contingent fee agreements for obtaining tax savings or benefits.Allows increased disclosure of tax information for enforcement purposes.
Directs the Secretary to impose standards for written tax opinions by tax practitioners.Denies tax deductions for certain fines and penalties for violations of law and for interest paid on certainunderstatements of tax.
Sets forth rules for the application of the economic substance doctrine and imposes penalties for underpayments oftax due to transactions lacking economic substance.
Becs’se the LS. ( noss ooas roost egisaCive intbuaion 00000 one ksIative drt oLer enors oeerr, GovIiack is usunIv onethistrtio ds Hhiod. For more in! rmatoo bnut where this da:a romes !‘om, son About GovTrack.us.To the this inthnuation, eiu! a eitutIoo Iorrrr tbr a suggestion: I Wikipedia TemDlate.
httn:/Iwww. ovtrack.us/congress/bi11.xpd?bi11h 111-1265 &tab=sunimary 11/7/2010
Excerpt from:
The Stop Tax Haven
Abuse Act: A Unilateral
Solution to a
Multilateral ProblemAnthony D. Todero, 19 Minn. J. Int’l L 241
(2010)
2010] TilE STOP TISHAvENMUSEACT 269
what lure international financial investors.157 The BostonConsulting Group predicted offshore assets will reach $8.8trillion by 2012, giving foreign banks a strong financialincentive not to cooperate with U.S. tax autborities.155
IV. ALTERNATIVES THAT CONSIDER OTHERCOflITREES’ m’rEEESTS
The problem is not that the Act puts U.S. interests first.’ssRather, the problem is that although the United States isdependent on other countries for tax information in order for theHIS to enforce U.S. tax po]icies,lsO the Act does not considerother countries’ interests in promoting bank secrecy.IsI TheU.S. motivation is obvious. When other countries holdthemselves out as tax shelters and guarantee bank secrecy, U.S.taxpayers cheat on their tax returns.152 This decreases the U.S.tax base by depleting financial resources that the governmentcan use to support its initiatives.’sa
Motivation for a country like Naurn is relatively simple aswell. Because Nauru’s resources are declining, one source ofeconomic security is the foreign investment attracted by thecountry’s bank secrecy laws.is4 Alternatives that considerothers’ economic interests—while not necessarily requiring thesubordination of 115. interests—are a policy that trades cash fortax information and an intsrncthrnal tcz erg Lzati;r. -:ci:domeetic enforccmcnt pcwcra.
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270 MINNESOTA JOURNAL OFINT’L LAW [Vol. 19:1
A. CASH oa TAS INFORMAPrON
If the United States were to purchase tax information, the
goal would not be to collect as much information as possible, but
to collect only the smallest amount of information necessary to
enforce tax laws.I65 Once the United States identified a
jurisdiction from which it needed tax information, that
jurisdiction’s willingness and ability to prowide the necessary
tax information would become an issue of price negotiation.iS6
The final price might include compensation necessary to repay
private parties and “to offset the burdens lmpose&’ on foreign
governmental actora.1s7 This market system of tax information
acuisifion takes into account another country’s nan-reciprocal
need for tax information or its inability to gather such
information. If the U.S. paid less for such information than the
amount of tax revenue that information would produce, the
system would account for all parties’ interests. By doing so, a
net importer of tax information, such as the United States, could
acquire extraterritorial tax information from a country with
relatively small amounts of collected tax information, such as
the Bahamas.’asThe current method of bilateral exchange—trading tax
information for tax information-—remains fundamentally
unchanged since before World War IL and is outdated.’ss Rather
than using sanctions to force countries into compliance as the
Stop Tax Haven Abuse Act would do, the United States might
allow the use of cash as consideration for specific tax
information.ow This would allow an importer of tax information
165. The IRS has previously limited the amount of tax information mfletted.
See Dorothy A. Brawn. Race and Class Maltera in Tax Policy, 107 COLUM. L. REV.
790, 807 (2007) (noting the end of IRS “goneral audita” according to the Taapaycr
Complianse Hoasuressant Program).165. See Dean, supro note 9, at 659 (TIThe United States mmlii regotiato with
the govornmente of these jurisdictions the speciSc nature of the information. . . as
well as regarding the price at which it woulitbe willing and able to provide 1L).
167. See Id, at 959—69.169. See id. at 611 (mating that a more complete market would allow a country to
‘nsasimize ito utility and to minimize its impact on privacy’ even if they collected
little or no information’); see also Gibson, oopra rote 54 (stating that the Bahamas
does not levy taxes on capitai game, corporate earninga, personal income, ealea,
inheritance, or dividends.’).169. See fleso, supm nate 9, at 611 (highlighting far example, that net tax
information iniportere, ouch as the United States, could acquire spectOr tax
information, rather than import homogenized information an masse, which is lees
useful tad more invasive).110. See Deass, eupra onto 5, at 511.
20101 TIlE STOP T4SHAvEivABusEAcT 271
to acquire tax information ox post, thereby decreasing theprivacy concerns associated with the shipment of tax data.rii
However, the possibility of market failure still exists in thiscash-for-information system. For example, the fair price forinformation might exceed the revenues generated by theacquisition of information or a bilateral monopoly might preventa more complete market.17l Even though a purchaser of taxinformation would acquire tailored information making privacyless of a concern, a nonmarket solution might provide morerobust privacy protections than a market alternative.’ii Agovernmental alternative might avoid market failures.
B. A Nw MuLnsntnaL TlJSTITUTION
Because leaders have political and financial incentives toact in nationally eelf-interested ways, a tranenational body withdomestic tax authority could overcome the problem ofextraterritorial tax information acquisition.’74 Such atrananational actor would need to have powers on par with thedomestic capabilities of national tax authorities, which wouldimpinge on traditional notions of national sovereignty.ne
171, With the increasing advent of identity theft and hackers, the case farlimiting the infermation sent to the illS is strong. See Rosaat F. DAolry,Govzateogeorr Accoubrosantry Omcs, RErowr tO tan Sueooseoaivrzz ONTzcsaownv, ltwossas!noa Poxacy, lsry,soovssnoezsta Rsistlows, nm taxCissus: INFoaMAnON Sscuxn’Y: Psoosnas MAnE, BUT WEAKNESsES Ar tagIterglnoAl, Rxvxosug Snavica CONUNUE to Foss Risxs (2005), reprinted in TAXAsayers, Qoea Tsx Nocss TODAY 106.12 at 6—7 (2081); see generally Peter P.Swire, Financial Privacy and the Theazy of High-Tech Government Surveillance, 77Wa Ti. LQ. 461, 497 (1999) (“The possibility of intrusions. . .is a pewerfelargument against allowing anlimitad varnment access to sensitive personalinformation of any bn&”). There is Mao the risk that sn IRS employee mightconduct an unauthorized eearch of an individuaTh tax iukxmatloa See AndreaCeembea, IRS Employee Sentenced for Snocpinw Tax Maze Eyet Thx Rerorde ofAlmost 201) Celebritiee, Including Kevin Bacon, MAXK5TWATCII. Aug. 20, 2008,httpalwww.marketwatckcom/eews/etooyliee’werker.onooped-tax-ncerdslatorax?guld=473sBACan-C5sF4siB-AF11.asC21o1E7CPs)&diat=niar1.
172, See RlcaAie S poaans, EcoNoMic ANatsis OF LAW § 8.8, at 62(8th ect2003) (noting that a bilateral monepaly occurs and muses high transaction malewhen neither party has a beneficial alternative to “dealing with the ether”).
178. See generally Peter P. Swire, Traaleerap: The Importance of Legal Rules IsElerlronec Commerce and Intencel Privacy, 54 HAS7nIO5 L,J. 847, 860-73 (2008)(discuaaing the importance ef privacy protection in the Internet era).
174. See, zeg., Vito Taxi, Globalization and the Work of Fiscal Termitea, ss Fm.&Dav. 1, Mar. 1, 2008, httpllcrww.iderg/externaligubelWfaaddr200lloa/tanzihta(acting the distant, and mere utopias, peeelhllity of a world tax ergenizatiec thatwould facilitate the international cetactian and distribution of tax revenues).
175. See Ronen Palan, Tax Haversi aad the CommercializatIon of Slate
272 MI1’1NESOl’A JOURNAL OF INT’L LAW rVoL l9l
Recently, two existing international organizations, the United
Nations and the OECD, have vied for leadership of a new global
tax authority.178 Both the United Nations and the OECD axe
capitalizing on their history of work aimed at increasing
international tax cooperation.177 In theory, either organization
could fill the gaps generated by the current patchwork system of
bilateral t5x treaties and avoid the inequity of the multilateral
conventions on tax information acquisition. Iii practice,
however, the reality is much different.The OECD’s exclusive membership fuels non-members’
perceptions of discrimination in the• development of
international tax rules.1ls This generates a perception of
illegitimacy whereby large powerful countries dominate smaller,
weaker ones in the realni of tax policy and enforcement.175
Although the OECD might have more power then the United
Nations to enforce an international tax regime, it lacks the
necessary international legitimacy because of its membership
makeup, which includes historically powerful nations, such as
the United States, France, Germany, Portugal, Spain, Italy,
Japan, and the United Kingdcm.18o While the United Nations
might have greater international credibility as a fair arbiter of
Sovereignty, 56 INra Oea. 151, 178 (2502) (nathig that such an organization might
spell the n4 of the traditional Westphalian ytm of sovereignty).
176. Dean. eupra note 9, at 661—62.177 Sea, ag, U.N. Dep’t of Int’l Scan. & Soc. Affaira, U.N Model Double
Taxation Convention Between Developed and Developing Countries, U.N. Dec. No.
ST/ESW1O2 (1960), rep,-iavted ire S7ANIZY S. SURREY, United No4one Model
Convention for Thx Treatiee Between Developed and Developing Countries: A
Description and Analysis, inS HAxV. L.ScH. tN7’L nI PROGRAM & 1N1L BUREAu 0?
FiscAL DocuMRorrA’rIoN, Sal,EoranMOeaoGRel’Rs ONTAYATION 67-113 (1980),
178. See Arthur J. Cotkfiald. The Rise of the OECL) as informal ‘World Ta
Orgonizatiaro” Thea ugh National Reoporoseo to E.Ccmmerce Tax Challenges, 8 Yiz
JL & TzcH. 136, 185-86 (2006) (arguing that extending OSCO membership to,
dirent countries will help to allay cencerns that the OEOD has been ‘captured’ by
multinational firms booed in OECD countries” and noting that “the perceived
influence of these firms nay be reclucengtlw legitimacy and effectiveness of OECD
refoesn efforts.”); tAtt.]ewood, supra note 09, at 480-85 (deeea’lbing pitfalls to ChOP
reform efforts, including the fact that tue membership is not viewed us
representative of the entire world).179. See Alexander Townsend. Jr.. Conunent, The Global Schoolyard Bully: The
Organisatiorv for Economic Co-Operation and Deuelopmenls Coercive Efforts to
Control Tax Competition, 25 PoRDaM,i INt’l U. 215, 261-68 (2001) (arguing that
the 1968 and 2000 OSCI) reports ‘mark a coercive and intrusive solution that
deviates from traditional 8cal remedies.”).120. Dean, aupra note 9, at n.570: tee ales Littlewood, aupro note 69. at 480-25.
Pot a list of OBCD member nations, sos Org. for Scan. Co.operatin & Dcv.,
RaliScatton of the Convention on the OECD. http:/lwww.ab05.eomIOECDJ.htoil (last
visited Nov. 2, 2009).
2010] THE STOP TAX HAvENABuSEACT 273
international tax controveraies,18l it lacks sufficient power to bea la-ananational tax enforcer.i82 Countries, especially the UnitedStates, might resist the necessary curtailment of sovereignty forinternational tax enforcement.18a Realizing its incentives toresist U.N. enforcement authority, the United States mightrecognize other countries’ similar incentives to work against thesuccessful enforcement of a U.S. dominated multilateral taxregime such as the OECD. Thus, tax evasion is a globalproblem requiring a global solution. 154
V. CONCLUSION
Globalization, the September 11th attacks, and two recentscandals have put tax havens in the legislative crosshairs, TheObarna Administration fully supports the Stop Tax HavenAbuse Act.155 Because of President Obama’a unqualifiedsupport, the political popularity of cracking down on tax evadersin tough economic times, and banks’ decreasing ability to fightagainst such measures, the Act is likely to pass. Thecenterpiece of the Act is a list of offaliore secrecy jurisdictions.Although some of the motives behind enacting such legislationare laudable and some of the Act’s provisions are commendable,the Act is unlikely to garner cooperation from countries vital toits success. The Act fails to account for other countries’economic interests. Although alternatives are not perfect, theyare preferable. A market solution, such as allowing the United
181. See U.N. Aol Hoc Group of Experts on lnL’l Cooperation in Tax Matters,Ixetilstfonol Franewark for I vncotioncl 7bx Cooperation, 1 5-10, at 4-5, U.N.Dec. STISGIAC.8!20001L.0 (iosg 19. 2093), available aS btterildaceesedds,unorg/dod
DCC N03145] 851PDF1N0348139.pdflOpenElemont (‘The United Nationsbee recognized for some time the need to give the developing and transitionalcountries a voice in the dinnulation of international tel norms.’).
192. See OenaAo Hothaway Between Poser and Principle’ An Integrated Theoryof lntornutioni Law, 72 U. CIII. L REv. 469, 606 (2005) (noting the weabness of theUnited Notions ability to enfosee compliance).
183. See e.g Daniel Mitc.befl, UJ Tao Police PotenEo.l, Wean Tacos. Feb. 7,2002, at AIR (expressing concern that a U.N.-led international tax organicationwould be costly to the United States).
184. See Plan, eupra note 178, at 173 (‘fAJny aerious attempt to combat the taxhavens phenomenon would have to be condacted on a multilateral level,”); see alsoMiemaL VAN Dr.nc & FRANCIS Wgyzio, Toes GLoEAL PRLISLEM OF TA HAVENS: ThECASE 00’ TSE NEmERLANDS S (Sticlsting Ondewek Multintioiiale Onolernamingen(Centre for Research on Multinational Corporations) 2008) (2007) (arguing that theNetherlands must end harmful lox poiieiee but that the tax haven problem requiresa global solution).
189. Drawbaugh & Daly, sispro note a.
274 MiNNESOTA JoURNAL OFIN7L LAW IVoL 19:1
States to purchase tax information from other countries, or anintergovermnental solution, such as a World Tax Organization,would facffitate a greater exchange of extraterritorial taxinformation and bolster the enforcement of U.S tax laws.
COUNTERTRADE
AND
THE CARIBBEAN
58 MONEY, CURRENCY AND FINANCE cil.i
dollars a day is settled through the U.S., most of it through CHIPS.
[9] Countertrade
In a count,ertrade transaction, one party accepts goods or services as
payment for its products instead of currency. Typically, a countertrade
transaction involves commercial parties from two different countries.
Countertrade is often used in transactions where credit or convertible currency
is unavailable. It may be a resourceful way to arrange the sale of a product into
a country that cannot provide payment in hard currency. The lack of foreign
exchange may be specific to the buyer or may stem from the country’s limited
reserves.
Countertrade transactions are often facilitated by trading through an
intermediary, such as an international broker, international bank, or export
management company. These facffitators, however, can increase the transaction
costs. A countertrade transaction also may involve additional risks regarding
delivery and performance because of the time difference between each party’s
obligation to perform. It may be wise to draft separate contracts for each part of
the contract, rather than have one contract that makes the two parts
interdependent. The separate contracts can be linked by a separate
countertrade document.
The U.S. Department of Commerce (DOC) maintains that “the U.S.
Government views countertrade as generally contrary to an open, free trading
system but will not oppose participation by U.S. businesses in countertrade
transactions unless such activity could have a negative impact on national
security. All normal import and export regulations must be observed, as there
are no special exemptions for countertrade. transactions.” Despite this negative
opinion of countertrade, the DOG’s export support program offers assistance to
parties involved in or seeking countertrade transactions.
UNCITRAL has published a Legal Guide on International Countertrade
Transactions.
[a] Barter
An ancient form of countertrade is barter, in which no money is used but the
parties simply exchange merchandise directly for other merchandise or
services. This may occur through a swap of one product for another or by
switching products through a chain of merchants in different markets. Barter is
infrequently used in contemporary trade because of the difficulties in matching
the goods each party needs and in determining the values of the goods.
[N Counterpurchase
A more common form of contemporary conntertrade is referred to as
counterpurchase. In this transaction, an exporter purchases goods from a
country in exchange for that country’s purchase of an equivalent valued amount
of the exporter’s product. Counterpurchase also may be conducted through
separate parallel trade transactions that are contractually linked. For example,
§ 1.02 REGULATION OF INTL FINANCIAL TRANSACTIONS 59
a contract may agree to pay the U.S. exporter in a convertible currency if theexporter (or another designated party) agrees to subsequently purchase anequivalent value of goods from the importing country using that currency.
A counterpurchase contract separates the timing of each party’s contractperformance so that one transaction can be completed even though the secondtransaction requires additional time. The participating parties sign two separatecontracts that specify the goods and services to be exchanged. Thus,counterpurchases can be useful if performance depends on a future event, suchas a harvest.
As an example of a counterpurchase, assume that Country X has abundantrice but needs computers from the U.S. It is unlikely that a computermanufacturer will need rice, so a barter transaction is not feasible. However, ifa U.S. cereal producer can be involved, the transaction may be structured tohave the computer manufacturer ship the computers to Country X which in turnships the rice to the cereal producer. The cereal producer then pays thecomputer manufacturer.
[ci Buyback, Offset and Swap TransactionsIn a buy-back arrangement, a seller of capital equipment or technology may
accept partial payment in products manufactured with their equipment.Typically, the seller receives some currency in addition to the products. Forexample, a steelmaker may sell steel to a foreign auto parts maker and then buythe parts at a reduced price. The effect is to partially pay for the auto parts withsteel. A production shari’ng arrangement is similar to a buyback, but used inmining and energy projects in which a developer will be paid a share of the mineor well output.
An offset transaction is often used between countries that are involved in highvalue industrial contracts, such as aerospace or military industries. It is quitecommon in civilian and military aircraft contracts. The contract involvesreciprocal trade agreements in which the seller of a product made in onecountry agrees to purchase a specified amount of goods from the other country.For example, Country X agrees to pay $1 billion for airplanes made by acompany in Country Y if that company buys an equivalent amount oftelecommunications equipment from Country X. These contracts are designedto offset the adverse effects of large foreign purchases on a country’s balance oftrade. The arrangements often require certain portions of the product to bemanufactured or assembled in the purchasing country.
The contract may be an indirect offset, meaning that the goods and servicespurchased are unrelated to the products being sold. In a direct offset contract,the goods on both sides are related, usually involving a form of co-production,license or joint venture. Developing countries often use offset contracts tofacilitate technology transfers, providing goods or services in exchange forresearch and development, technical assistance, or patent agreements.
Swaps are relatively new arrangements that are used in countries that carrylarge debt burdens. The debt may be swapped for other items such as equityinterests in local industry or local products. In some cas the debt may be
FAcEB00K 2 BLACKBERRY AND DATABASE TRADING SYSTEMS: M0RPHING SOCIAL
NETwoRKING TO BUSINESS GROWTH IN A GLOBAL RECESSION
Roger M. Groves’
“While Facebook’s international audience totaled 34 million people at the beginning of
2008, on the first day of 2009 that number had increased to 95 million - nearly 70% of the total
Facebook audience.”2
I. Introduction
Facebook now has applications to the Blackberry Smartphone and iPhone. That
expansion has sparked Facebook’s international explosion.3 If the Facebook social networking
technology has applications to Blackberry, why not business?4 Can the Facebook model of data
sharing be customized to propel U.S. technology firms into new international markets? This
article claims the affirmative, through a multilateral clearing system, with credits and vouchers,
as part of the exchange of a commodity and the creative use of an evolving trade practice termed
“countertrade.” The voucher system envisioned is not dissimilar to the successful use of
environmental tradable credits that provided incentives to major corporations to stop using
Roger M. Groves is an associate professor at Florida Coastal School of Law, former tax judge and equity partner at
Howard & Howard, Attorneys P.C. Emphatic appreciation is extended to Sean M. Murray and Sean M. Murrell for
their valuable contributions as research assistants.2 Justin Smith, The Facebook Global Market Monitor: Tracking Facebook in Global Markets,
http:/Iwww. insidefacebook.com/facebook-global-market-monitor (last visited June 9, 2009).
See Facebook Surpasses 175 Million Users, Continuing to Grow by 600k Users/Day, Feb. 14, 2009,
http://www.insidefacebook.com/2009/02/14/facebook-surpasses- 1 75-rnillion-users-continuina-to-grow-bv-600k-
usersday/ (last visited June 9, 2009). (noting that in February of 2009, if Facebook were a country it would be the
sixth most populous in the world and that Facebook’s monthly growth accelerated by at least 25% in 30 countrEes in
January 2009 vs. December 2008) (emphasis added).
Blackberry is commonly regarded as a businessperson’s phone-plus device of choice. See PRLog, 2 BlackBerry
models try to answer iPhone, http://www.prlog.org! 10155 037-2-blackben-models-t-to-answer-iphone.html (last
visited June 9, 2009).
1
not, Facebook is value added to its members in making available OCP data for its Facebook
users. As the previous example illustrates, all of these social network relationships described in
the Facebook Terms of Use — customers, OCPs and Facebook — have broader business
applications in the international trade transactions.
V. FAcEB00K INTERNATIONAL GROWTH
A. Business Opportunities as a Multilateral clearing System
The insatiable appetite for profitability may lead a U.S. firm to tap into the expertise of
others as business partners in efforts to increase market share. Facebook is no exception. Its
business partners were software developers. Its hope was to increase profitability through new
applications and expand into new international markets.53 Thus far, the plan has legs. Facebook
has recently experienced international growth in ways most business ventures only dream of.54
There are numerous illustrations of the global Facebook explosion. During 2008 alone, Italy
experienced growth of 2900%. Now, approximately 8.5% of the Italian population accesses
Facebook, making Facebook the fourth most trafficked website in Italy.56 The 2008 year also
The term “applications” refers to Facebook applications. A FaceBook application is defmed as a platform fordevelopers which provides a framework to interact with the core Facebook features. Facebook applications havedetailed descriptions, users ratings and reviews, wiki pages, detailed features, and screen shots. See Servepath.com,Glossary of Dedicated Server Hosting Terms, http://www.servepath.cornlsupportldefinitions.php (last visited June16, 2009).
Facebook started 2008 with 5 million monthly active mobile users. By January 2009 over 20 million users wereactively using Facebook through mobile platforms. Additionally, growth continues to spiral upwardsinternationally, particularly in Europe and South America. See Insidefacebook.com, Sandberg: 20 Million UsersNow Accessing Facebook Through Mobile Platforms, http://www.insidefacebook.com/2009!01/09/sandberg-20-million-users-now-accessing-facebook-through-mobile-platforms/ (last visited June 16, 2009).
See Justin Smith, The Facebook Global Monitor: Tracking Facebook in Global Markets,http://www.insidefacebook.cornlfacebook-global-market-monitor (last visited June 16, 2009).56 See Facebook Growth Surges in Italy: Developers Look for Better Italian eCPMs,http:Hwww.insidefacebook.comI2008/12R 8/facebook-growth-surges-in-italy-developers-look-for-better-italian-ecpms (last visited June 16, 2009).
14
7L+
brought Facebook an increased penetration of 600% in Spain, 400% in France, 400% in
Switzerland, 2000% in Argentina, and 600% in Indonesia.57
Facebook applications have been developed for iPhone and Blackberry Smartphone
users.58 At least one million Blackberry users have already downloaded Facebook onto their
respective devices.59 The “application” or connection between Facebook and the Blackberry
device is not developed by Facebook.6°Facebook oniy provides the link and does not claim
responsibility for the application of Facebook to the device.61 Rather, an independent software
developer provides the application connectivity. In the case of the Facebook-Blackberry
arrangement, the software developer is Research In Motion, Ltd. (RIM).62 The Facebook
website provides the following description of RIM’s business activity:
“Research In Motion is a leading designer, manufacturer and marketer of innovative wireless
solutions for the worldwide mobile communications market. Through the development of
integrated hardware, software and services that support multiple wireless network standards,
RIM provides platforms and solutions for seamless access to time-sensitive information
including email, phone, SMS messaging, Internet and intranet-based applications. RIM
technology also enables a broad array of third party developers and manufacturers to enhance
their products and services with wireless connectivity to data.”63
Thus, for international Facebook applications there are intellectual property rights of two major
contributors to be protected, Facebook and its software developer. If members of an
international exchange network of businesses existed, Facebook may need to engage the services
See supra note 46.58 See e.g., Facebook, I tp://www.facebook.comJapps/app1ication.php?id=2254487659&refs (last visited June 16,
2009).See Natasha Lomas, Facebook for Blackberry racks up a million hits,
http://networks.silicon.comlrnobile/0.39024665.39 181 364,00.htm (last visited June 16, 2009).60 http://www. facebook.corn!apps/app1ication.php?id2254487659&reis61 See Facebook, http://www.facebook.comJapps/app1ication.php?id2254487659&vinfo&viewO (last visited
June 17, 2009).62
63
15
,75
1’9
of a software developer and contractually allocate rights between them. Very likely, the software
developer would license the software to Facebook in exchange for royalty payments.
Then, using the same type of provisions from its existing Terms of Use, Facebook would
detail the relationship between the Facebook, OCPs and the business customer. Business users
of the site would not have extraction and tinkering rights to the Facebook/Software Developer’s
site content any more than the individual social networking users unless authorized by Facebook.
B. The Role of the Multilateral Clearing System (MCS)
While barter exchanges are centuries old, they are an evolving and growing part of
international countertrade and have found a place in multilateral trading among information
technology firms.64 The generic formulation of this system involves the following parties:
I. An exporter of goods and/or services (a U.S. firm in this model) who is also willing to
purchase goods or services in exchange.
2. A clearinghouse that takes title and risk of loss of the goods.
3. An international off-shore entity, willing to purchase or sell goods or services with the
U.S. exporter and other exchange members.65
Both the U.S. exporter and international buyer agree to be part of the exchange system where the
clearinghouse processes a cash payment, or a voucher/credit, or a combination of these items as
the return payment for their respective goods and services.66 That clearinghouse entity also finds
the market for the goods supplied to it by the exchange participants.67 An example is a U.S. firm
64 See George Cassidy, Financing Strategies- Barter’s Rebirth, EAST/WEST COMMER5ANT, Dec.1, 1995, available at1995 WLNR 4072109.65 See, e.g., id.66 Id.67 Id
16
with excess inventory, or a firm with a product that is no longer as marketable or available in the
U.S. due to a change in U.S. environmental or food and drug regulations. The U.S. firm does not
have expertise or business affiliations in international markets. Yet, it nonetheless desires to find
a market for those products and thereby generate profits rather than losses.
In the clearinghouse, the U.S. firm finds an entity that has international resources and
expertise as well as a network of potential purchasers of the U.S. firm’s excess or economically
obsolete goods. Since the clearinghouse takes title and assumes the risk of loss for the product,
the U.S. exporter has minimized its risk. All the clearinghouse requires is that the U.S. exporter
store, insure and incur the risk of loss until the goods are delivered.68 The clearinghouse is
termed the multilateral clearing system (“MCS”). The graphic description of this basic system is
below:
CASH ANDVOUCHERS
GOODS /SERVICES
STORE, INSURE AND SHIP (CIF TERMS) TITLE AND RISK OF LOSS
NEW MARKET/
68 These are traditionally accepted tenns in transport, known as C.I.F., for cost, insurance, freight, all at the expense
of the seller until the goods reach an agreed destination. See RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS
TRANSACTIONS 2 (9th ed. 2006 Documents Supp. 2006).
17
The U.S. exporter may use the cash and/or voucher and credits for any number of purposes to
fulfill other business needs. Vouchers or credits may be tradable for office equipment or
construction services if’, for example, the U.S. entity is planning a plant expansion or is starting
up with minimal capital. Some credits and vouchers could even take the form of travel or other
perks to reward employees or clients.69 From such use, an exchange member may find enhanced
firm goodwill, increased retention of existing highly-valued employees or clients, or future
clients who also see value in such voucher arrangements.
Vital to the value of the MCS is its ability to bring entrepreneurs into the same MCS
system in a way that expands each firm’s sales beyond its own preexisting client list. The MCS
model is designed to expand a firm’s sources for future revenues beyond what the firm otherwise
gains on its own. The MCS system transforms a simple barter among two parties into a multi
faceted MCS. As one commentator summarized, “Today, simple barter has blossomed into the
sophisticated system known as countertrade. . . . And that has, in turn, nurtured a new breed of
entrepreneur, the expert who can form a chain of buyers and sellers so that, eventually,
everybody gets what he wants.”70
A simple hypothetical two-party barter may be between a construction contractor that
needs office equipment and a manufacturer of office equipment that needs a small plant
expansion. They could exchange products and no sophisticated MCS model would be necessary.
If, however, party A is a person or small company with a U.S. patent of a pharmaceutical product
that cures a disease found mostly in developing countries, that patent holder may find valuable a
69
° RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS TRANSACTIONS 252 (9th ed. 2006) (quoting excerpt of articleBack to Barter from ICC BUSINEsS WORLD, Summer 1983, p.6).
18
network already versed in the customs and practices of developing countries, assuming those in
developing countries also have something of equivalent value to offer the patent holder.7’
C. FacebookasanMCS
The value added services of the MCS are several and are perhaps best illustrated through
this attempt to customize the MCS to Facebook. Obviously, the system is ultimately designed to
provide the chain of buyers and sellers. So, imagine if Facebook’s owners decided to expand its
international client base beyond socially networking individuals sharing personal photos and
messages via personal mobile phones and computers to businesses sharing and downloading
business E-signed documents, graphics and images. What would prevent the Facebook MCS
from using computer technology and global marketing techniques to allow businesses in
different countries to exchange products and services through the above system of cash and
credits/vouchers? What would prevent Facebook, already expert at overseeing a value-added
social network exchange, from overseeing a value-added business network exchange? Facebook
could indeed establish a chain of buyers and sellers so that credits earned by one seller could be
exchanged for the services of another entity in the exchange network. The vouchers or credits
could be used to swap for anything from raw materials, capital equipment, supplies, and
worldwide services for travel, accommodations and advertising.72
71 An example may be the patent holder’s desire for patients for further studies, paid for and provided by the one or
several developing countries. The developing country could itself be a member of the MCS exchange system. The
patent holder may then earn vouchers as a credit to exchange with several of those countries.72 See George Cassidy, Financing Strategies- Barter y Rebirth, EAST/WEST COMMERSANT, Dec. 1, 1995, available at
1995 WLNR 4072109.
19
The graphic depiction of the exchange network is below:
CASH ANDVOUCHERS
GOODS /SERVCCES
VOUCHER SWAPS
NEW MARKET
One MCS provider devoted 100 persons in a New York office to essentially three tasks:
(1) making deals, (2) re-marketing inventories, and (3) paying companies that are part of the
exchange network.73 Among the million-plus and growing Blackberry owners who have already
downloaded Facebook, isn’t it likely that many are using the Blackberry for business purposes
already? And, if Facebook devised an application for business as seductively attractive as its
social network tools, is there not also vast potential for an MCS through Facebook? Instead of
connecting with college alumni, a firm could connect with exchange members who have been
careftully selected and categorized for their mutually beneficial aspects.
See George Cassidy, Financing Strategies- Barter’s Rebirth, EAsT/WEST COMMERSANT, Dec.l, 1995, availableat 1995 WLNR 4072109.
20
Some firms may argue that they are just as capable of finding business partners from
search engines and websites of those same business clients. This Facebook MCS is not
suggested as ideal for all. Perhaps some large, well- healed firms can afford significant
international networking resources and have the ability to select and arrange information in a
user-friendly maimer that attracts a multitude of entities that connect with each other. But, at
least on the social networking side of transactions, no one has done it like Facebook.
There are various challenges in an international transaction. Facebook’s clearinghouse
function would offer each member the value-added service of being the customs, cultural, and
legal translator to facilitate the international transaction. Unlike the United States, some nations
mandate the designation of a local agent for the distribution of goods into that country.74 Such
provisions are non-waivable by contract between the parties. Even distribution agreements may
be severely restricted.75 Facebook could screen credible from unscrupulous agents by
recommending or certifying agents via its role as an MCS provider. Similarly, U.S. firms may
face anti-Americanism or related cultural issues occasioned by fear of exploitation of another
country’s cultural or natural resources.76 Countries currently struggle with whether to even allow
social networking sites to operate within their borders.77 The similar issue may face a business
variant or division of such sites. Facebook could be the more culturally-friendly face of America
with certain trading partners, and could play a lobbyist role as well. Indeed, the MCS is
essentially a vehicle designed to fulfill the goals articulated by various nations in a recent treaty:
to facilitate international multilateral commercial transactions and affirm the goal of “upholding
RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS TRANsACTIONS 239 n.4 (9t1 ed. 2006).
n See id. at 23 8-243.76Seeid. at 10-11 n.1.
See CNN.com, Iranians Regain Access to Facebook, Twitter, May 26, 2009,
bttpi/www.cnn.comJ2009/WORLD/meast/05/261iran.facebook1index.htm1 (last visited June 20, 2009) (discussing
the recent shutdown of Facebook and Twitter in Iran).
21
and safeguarding an open and non-discriminatory multilateral trading system.”78 Similarly, the
goal of the MCS in countertrade transactions is to increase transactions among firms from
various countries, particularly parties new to technology transfers fiom developing countries.79
And to achieve that goal, the MCS can assist in the effort to solve soft currency or liquidity
issues through voucher credits and carefluly matched exchange partners.8°
And, rather than each member paying each of its respective counsel, would not each firm
contemplating international transactions prefer a specialized legal group that combines the
cultural filter with the required international documents? Bills of lading, letters of credit, and
the above-noted agent rules of particular jurisdictions are but a few of the specialized areas that
would be involved in such transactions.8’If Facebook provided the legal team a small portion of
the transactional fee charged to facilitate the transactions, it could both provide and subsidize
these quality legal services.
The Facebook legal team would, for example, provide value to exchange members if a
foreign nation requires a foreign distributor or agent resident to that country in order to sell
goods in that country.82 The legal team may therefore draft an agreement to parse out the
relative rights, responsibilities, liabilities, and representations arid warranties between that
78 See World Trade Organization, Ministerial Declaration of 20 November 2001, WT/MJN(0 1)/DEC/i ¶ 6, availableat http://ww’.wto.org/english/thewto e/ministe/mino I e/mindecl e.htm.
“Technology Transfer” refers to the sale or licensing of intellectual property, or the field involving the sale andlicensing of intellectual property. See BLACK’S LAW DIcTIoNARY(8th ed. 2004).80 “Soft Currency” refers to currency that is not backed by reserves and therefore subject to sharp fluctuations invalue. See BLACK’S LAW DICTIONARY(8th ed 2004). Soft currencies are not in demand in world markets. Seeh:/!www.anz.com/edndictiona’.asp?actioncontent&contensoft currency (last visited June 20, 2009).81
A bill of lading is the official document prepared by the carrier duly accepting the goods for shipment containinginformation like item quantity, value, vessel details, date, port, consigner, consignee etc. The bill of lading is thecontract to carry the goods to the said destination based on which seller can claim consideration and buyer can takedelivery of the goods. See Legal-Explanations.com, http://www.legal-explanations.com/definitions/bill-oflading.htm (last visited June 20, 2009). Letters of Credit are documents issued by a bank that guarantee the paymentof a customer’s draft. In essence, letters of credit are instruments used to substitute a bank’s credit for that of thecustomer, who, in international transactions, may be unknown to the seller. Seehttp://wordnetweb.princeton.edu1perl/webwn?sletter%20of%20credit (last visited June 20, 2009).82 See FOLSOM, supra note 65, at 239.
22
exchange member and its foreign agent or partner. Within an international agreement, those
rights may obviously include the licensing by the foreign distributor/agent (“partner”) of the U.S.
software developer’s technology. The traditional protections of that technology under U.S. law
are through patents, copyrights and trademarks.83 While there are varying rights among the three
protection types, the trademark licensing is at the core of most international franchise agreements
and Facebook would protect the exchange member’s rights in the foreign agent agreement. 84
What may also separate Facebook from the individual exchange member or other MCS
providers is its seemingly unique connectivity with the younger generations, which translates
into the, say, under fifty-something entrepreneurs, which now includes Twitter.85 That younger
business segment may also be the plasma for innovation in technology. They may be the
business generation most likely to be using the Blackberry Smartphone or iPhone as it evolves
more business applications. That segment may therefore embrace rather than shun the electronic
transmission of important international documents like a letter of credit or bill of lading, and may
accept the related E-signatures on such documents.86The types of goods and services to be
exchanged (apart from the voucher swaps) may increasingly be software or other intangible
property from this creative database generation of entrepreneurs.87 Facebook may have goodwill
with developers and other electronically sophisticated entrepreneurs since Facebook itself is an
entity that was born into and profited from its internet acumen.
83 See id. at 790-99.841d. at 790, 801.85 Facebook does not have a patent on youthful entrepreneurism. Twitter’s three co-founders are all in their 30’s and
incidentally they did not depend on traditional criteria for business success. They were all college dropouts. See Jon
Swartz, A World That’s All a-Twitter,USA TODAY, May 26, 2009, at Bi. But the point is the same. There is a
generational dynamic to information technology modeling. This article attempts to incorporate that dynamic in
modeling future international business transactions in periods of global economic stress.
86 The Electronic Signatures in Global and National Commerce Act of 2000 establishes the legal equivalency of
electronic contracts, electronic signatures, and other electronic records with their paper counterparts. See BLACK’S
LAW DICTIONARY(8th ed. 2004).
87 For further description of these entrepreneurs, see Groves, “Gen GT: Future Business Ventures in Global
Technology and Entrepreneurs of the Data Sharing Generation” at SSRN:
_______
23
D. MCS Benefits
For the MCS exchange member, the benefits of a Facebook MCS can be summarized as
follows: (1) developing a new market! customer base, (2) the ability to sell excess capacity or
domestically obsolete commodities, and (3) converting losses from that excess capacity into
revenue or needed goods or services.88 The exchange is essentially an alternative to cash but
achieves the same purchasing power as a form of currency; thus it conserves cash.89 And,
conserving cash can improve cash flow since there is more cash then available for other business
purposes 90
As stated earlier, the Facebook MCS may not be well-suited for every international
business firm. But if a firm is among the U.S. small and medium sized businesses in
international trade without the resources or expertise to build both a customized network of
purchasers of its product or a qualitative legal team for those transactions, the Facebook MCS
may be advisable.
E. C’apitalization of the Entity
The capital needed to establish and maintain such an MCS is typically generated from the
following primary sources: (1) existing reserves dedicated to expansion, (2) monthly fees from
members in the exchange, (3) website advertising, and perhaps most significantly (4) a
88 See Cassidy, supra note 64.See Michael Joe Medill, Illinois Trade Association Acquiredfor $4 Million, DAILY HERALD (Arlington Heights,
IL), October 5, 2006, available at 2006 WLNR 24575069.90 Id.
24
transactional fee for each commodity exchanged.9’As for the potential for advertising revenue
from the Facebook MCS website, its considerable market penetration from being one of the most
trafficked sites on the planet provides an attractive lure to advertisers. Each exchange member
could also advertise. Each outside entity that desires the exchange members as clients could
advertise. Beyond advertising, each transaction facilitated by Facebook would generate a fee for
the customer’s use of Facebook’s many value-added features described above.
As stated by one executive of an exchange company, “Today, business is conducted in a
borderless world and barter is an effective tool for companies to expand and penetrate global
markets, and grow their bottom line.”92
VI. THE INTELLECTUAL PROPERTY RIGHTS OF FAcEB00K AND MCS MEMBERs AS
DATABASE CREATORS IN INTERNATIONAL TRANSACTIONS: HARMONIZING THE
INTELLECTUAL CREATIONS OF THE MCS PARTIEs
A MCS can only effectively function if there is clarity in the legal relationships among all
participants in the system: i.e. the exchange members and Facebook as facilitator. Only by
knowing the relative rights in their respective property can a member then enter into assignments
of interests and license agreements regarding those rights. Obviously, conflicting claims or
uncertainty over the parties’ respective rights in specific property and the extent of protection of
that property could thwart the buying and selling of goods and services in this transactional
format. The focus in this writing is on the facilitator, Facebook, which lies at the heart of the
transaction and quarterbacks the team of traders.
91 See Michael Joe Medill, Illinois Trade Association Acquiredfor $4 Million, DAILY HERALD (Arlington Heights,
IL), October 5, 2006, available at 2006 WLNR 24575069; Penni Crabtree, About 400,000 Companies Barter Goods
or Services Each Year, THE SAN DIEGO UNION-TRIBUNE, March 26, 2008, available at 2008 WLNR 5816844.
92 Thriving on Barter, BUSINESS TIMES (Singapore), October 30, 2006, available at 2006 WLNR 18781084.
25
The Changing Role Of Countertrade And Other Contract-Based Practices In International Trade *
Extract of paper presented at the International Trade and Finance AssociationSixth International Conference, San Diego, May 22-25, 1996
By: Pompiliu Verariu, US. Department of Commerce,International Trade Administration
(* The views expressed in this text are those of the author and do not necessarily represent those of theInternational Trade Administration, the U.S. Department of Commerce, or the U.S. Government.)
Following the emergence in the mid-1970s of countertrade transactions in trade with the thencommand-economy countries of Eastern Europe and the Soviet Union, the practice proliferated rapidlyand, by the end of the 1980s, had spread geographically to over 100 nations.
Countertrade deals would typically entail two contractually-linked import/export transactions, eachsettled through letter of credit payment.
In the belief that countertrade arrangements could alleviate net outflows of scarce hard currencyresources and help finance critical imports, many developing country governments enacted legislationwhich enabled private sector enterprises--or directed state-owned enterprises--to participate incountertrade deals.
For many hard currency-strapped Third World countries struggling to cope with the rising prices of theirenergy imports, linking imports from industrialized countries to domestic exports seemed like areasonable way to finance the imports and expand exports.
Bilateral trade under government-to-government clearing agreements was, after all, the way much ofintra-developing country trade was conducted in the 1970-80s. Clearing trade--whereby two or morecountries agree to exchange a number of specific products over one or more years and the value of thetraded goods is denominated in accounting units expressed in major currencies such as the U.S. dollar orthe Swiss franc--has now been practically phased out in international commerce. In the 1970s, however,it accounted for an estimated 10% of world trade.
Because the format and use of countertrade transactions have evolved over the years, this paper willuse the term “countertrade” in a generic sense.
The term will denote practices whereby foreign suppliers commit, as a condition of sale, to reciprocateand undertake certain contractually specified commercial initiatives that “compensat&’ the buyersthrough transfers of various agreed upon economic benefits (e.g., payments in kind that minimize oravoid net hard currency outlays by buyers, marketing assistance in third markets, investments and jobcreation in the buyer’s country, or a combination of these.)
I. The 1970s and 19805
Judging by analyses of reported transactions, the number of countertrade transactions apparently
peaked in the mid-1980s or in the later part of that decade in the number of transactions executed and
their dollar value.
The actual volume of such deals, as a percent of total world trade, can only be estimated because of the
spotty information available. Contributing to widely varying figures are assessments that either lump
together or exclude different categories of compensatory arrangements (e.g. government-to-
government clearing agreements, military offsets).
The uneven reporting on countertrade
transactions also leaves unresolved
questions about the unreported volume
ofsuch transactions and about the
extent to which compensatory
obligations are actually fulfilled
according to contracted terms.
Estimates in the mid-1980s placed the annual volume of international deals conducted under the
generic label of countertrade between 5% and 25% of total world trade--that is, somewhere between
about $80 and $240 billion.
Also significant was the rapid geographical spread of the practice during the 1970-SOs. A study based on
a survey of 110 U.S. firms by the National Foreign Trade Council Foundation reported that the number
of countries making countertrade demands increased from 15 in 1972, to 27 in 1979, to 88 in 1983.
An alternate indicator of rising countertrade pressures during the period was the involvement of the
U.S. business community with the practice
• A U.S. International Trade Commission study that surveyed 523 U.S. corporations accounting for $127
billion in export sales in 1984 (about 60% of total U.S. export sales that year), reported that 5.6% of
military and non-military export sales that year involved countertrade obligations.
The study reported that between 1980 and 1984, defense countertrade obligations of U.S. firms
increased from $414 million to $2,182 million, while non-military countertrade obligations increased
from $467 million to $580 million.
Developing Countries: Countertrade with developing countries constituted the bulk of such deals
between suppliers from industrialized countries and developing country importers in the 1970-80s.
The transactions involved traditional Third World exports--mostly agricultural commodities and crude
oil.
By the mid-1980s, supply and demand constraints in volatile commodity markets contributed to a
leveling in the volume of countertrade commodity deals, while countertrade arrangements involving
value-added processing and buy-backs of light industry goods and low-technology components
multiplied, particularly in China and other South-East Asian countries.
The format of countertrade transactions and the nature of the assets exchanged also evolved during thelate 1980s, reflecting increased sophistication in structuring such deals and the inclusion of a broader
asset basis in countertrade arrangements.
In addition to physical goods, such as equipment and commodities, items transferred under reciprocally-linked deals included services such as transportation services and construction engineering, intellectualproperty rights such as licensing, rights to the use of assets such as leasing, and even outstanding
commercial and national debt which was settled through repayments in products(e.g., commercialdebt-for-product swaps in Peru and settlement of Libyan government debt through oil deliveries.)
A major application of countertrade in the 1970s was in buy-back transactions--a contractual agreementwhereby foreign contractors accept as full or partial repayment goods derived from the plant ormachinery they supplied.
Buy-back arrangements financed construction of much of the new production capacity in the SovietUnion.
Countertrade techniques were also used occasionally in freeing blocked soft currency funds.
These funds--held in countries with currency controls, such as India and the former Yugoslavia, andrepresenting local earnings by foreign firms or nationals--were sold at a discount, with officialpermission, to other Western parties who used them to cover local costs for such activities as producingfilms.
Industrialized Countries: Counter-trade practices were not solely restricted to trade with developingcountries, as evidenced by the creation in the 1980s of public units in industrialized countries entrustedwith administering compliance with both defense and non-military offsets.
Offsets--an umbrella term for a broad range of industrial and commercial compensation practicesrequired of foreign suppliers under primarily government agency of state-owned enterpriseacquisitions--were made a common requirement for the procurement of either military (e.g., fighteraircraft) or high-cost civilian hardware (e.g., commercial aircraft).
Both defense and non-military offsets may entail overseas co-production of the procured item, as wellas other economically beneficial transfers to the importing country that are not related to the originalexport.
Industrialized countries that established offset programs tied to both civilian and military procurementsin the 1980s include Australia, Austria, Belgium, Canada, Greece, Turkey, Portugal, Norway, Sweden,Finland, and Spain.
To assist their exporters some industrialized country governments also promoted countertrade under
government agreements.
For example, the French Ministry of Agriculture signed in 1989 an agreement with the USSR Council of
Ministers which provided for exchanges of Soviet commodities for French agricultural and food
processing equipment and technologies.
Other Western governments, such as those of the United States, Canada, Belgium, Holland, the United
Kingdom, and Italy, established special countertrade service units within public agencies to provide
countertrade-related advisory assistance to their exporters.
The French Government has supported instead the formation of a separate countertrade assistance
entity in the private sector. The Swedish Government was until 1990 a major stockholder, through
interests by the Swedish Investment Bank, in a private sector company involved in countertrade, Sukab.
II. The 1990s
In the 1990s, countertrade pressures abated in many parts of the world, notably Latin America as a
result of debt reduction induced by the Brady Plan initiative, lower international interest rates, policies
that liberalized trade regimes, and the emergence of economic blocs such as NAFTA (U.S., Canada,
Mexico), and MERCOSUR (Brazil, Argentina, Uruguay, Paraguay) which integrate regional trade based on
free market principles.
International countertrade practices are now increasingly associated with bidding on major defense and
non-military government procurement contracts and with project financing--a contract-based, off-
balance-sheet finance technique whereby revenues generated from the output of the financed project
are directly allocated to service outstanding debt and principal.
A variation of the countertrade buy-back contract which links foreign contractors’ repayments to the
output products of the production capacity they supplied, project financing relies instead mainly on
contractual recourse to the project’s revenue streams.
Strongest pressures for compensatory arrangements are currently tied to offsets in government
procurements. The end of the geopolitical struggle against communism has shifted the focus of global
rivalry to the commercial arena--mainly commercial competition among industrialized democracies.
Shrinking national defense spending in Western countries (over 35% in the U.S. since 1990) and
declining international orders for weapons are forcing U.S. defense contractors to undergo mergers and
to outbid each other for declining sales in the international marketplace--mostly by increasing the level
of the offset obligations they assume.
On their part, developing country governments are increasingly shifting their focus to civil
procurements--commercial aircraft, industrial plants, and especially infrastructure projects such as
roads, telecommunications, and power projects.
(According to the World Bank, developing countries are now spending around $200 billion a year on newinfrastructure investment, one-fifth of their total investment.)
High procurement costs and tighter budgets have prompted many emerging country governments in the1990s to issue new civilian offset regulations (e.g., United Arab Emirates, Kuwait).
Civil offset requirements, therefore, are increasingly acquiring a financing rationale in these markets.
In a global environment of budgetary constraints, the ability of suppliers to meet offset requirementsand/or to provide their clients with financial packages that can best those of competing bidders is amajor competitive edge.
Countertrade pressures are also on the rise in the former Soviet bloc countries.
Since the advent of “perestroika,” the emerging democracies of Eastern Europe and the successor statesto the former Soviet Union have embarked on a path of gradual economic reform, shifting away fromcentral planning toward individual forms of market-driven economies.
The nations’ requirements for huge amounts of foreign funds are, however, constrained by thecountries’ limited number of investment and/or business opportunities, by low creditworthiness, and bythe need to compete for private capital with more profitable and risk-free markets.
Today, Eastern Europe and the newly independent republics of the former Soviet Union still grapplewith economic dislocations associated with reforming and reconstructing their obsolescent economies.The self-financing aspects of countertrade arrangements appeal to these countries’ governments as onealternative for financing trade and investment linked to privatization and modernization of existingproduction capacity.
Countertrade practices have traditionally played a significant role in the commerce of the formercommand economies of Eastern Europe and the Soviet Union.
In the late 1980s, well over half of the former Soviet Union’s trade was conducted on the basis ofcountertrade, the bulk of it under bilateral clearing agreements with Central Europe and a number ofdeveloping countries.
The concept of payment in goods lent itself well to the region’s centrally-planned system which was notbased on profit-oriented flows of money as a me dium for settling transactions, but on an accountingsystem for uses of domestic resources.
Faced with declining intra-regional trade levels and dislocations in feed-stock sources induced by thedemise of the regional clearing system, the Newly Independent States (NIS) of the former Soviet Unionare restoring former commercial links between themselves and with East European countries byconducting a significant portion of trade on the basis of cashless barter.
According to the Russian State Statistics Committee, barter transactions accounted for 11.5% of allRussian exports in 1993 ($4.9 billion), compared with 8.3% in 1992.
This figure is a lower limit since it does not account for buy-back transactions, unreported non-
government barter deals, and countertrade arrangements financed through offshore escrows. The
Russian Government has also bartered products (including military hardware) to settle outstanding debt
owed to Turkey, Hungary, Finland, and South Korea.
Other former Soviet republics, less versed in bilateral barter agreements than Moscow, have been more
reluctant to enter into such arrangements. All exert strict controls on barter and countertrade deals
involving strategic raw materials.
Barter arrangements are, however, impractical in trade with Western suppliers because such deals
seldom satisfy the trading partners’ coincidence of needs for each other’s products.
Because Western suppliers can no longer rely on commercial credit extensions to finance the export leg
of countertrade transactions, they must now generate in advance, on behalf ofthe NIS importer, the
foreign exchange required to finance the Western export.
The advance generation of foreign exchange is accomplished through the sale of NIS goods whose
proceeds are then escrowed offshore in order to secure timely payments to the Western suppliers.
Hence, the emergence and proliferation of offshore escrow accounts endowed by commodity sale
proceeds which have now substituted for previous countertrade practices involving linked, financially
settled, and offsetting import-export contracts.
Escrow-financed trade that relies on commodity exports has become a significant and common tool in
trade of the Russian Federation. In 1992, the Russian Market Research Institute of the Ministry of
Foreign Economic Relations estimated that about 10% of annual hard currency export revenues--or as
much as $4 billion annually--is escrowed abroad.
About 80% of these funds is then used to finance imports into Russia. In 1994, the Russian Central Bank
raised these estimates. According to the bank, about $22-23 billion was escrowed offshore in 1992 and
1993, out of a total value of $70 billion exported in two years.
Escrow-financed trade appears to enjoy the support of both central and regional governments in the
Russian Federation, as regions and major energy producers are entitled to retain hard currency earnings
derived from exporting a portion of their production for their own development.
In 1992, approximately 10% of the production of Russian regions was exported through such regional
quotas. For production enterprises, countertrade fulfills a role that ranges from financing critical imports
to stashing foreign exchange export-revenues offshore.
III. Conclusions
Worldwide economic liberalization measures are now providing new business opportunities for
industrial country exporters and investors, while global trends for increased reliance on private capital
flows and decreased dependence on sovereign guarantees are pushing contract-based financingtechniques to the fore.
These trends portend that contract-based financing tools such as countertrade--not withstanding anyheightened costs and risks they pose to the trading parties--will likely continue to find use in trade withdebt-ridden countries for transactions lacking cover from multilateral development banks and Westernexport credit agencies.
By relying on multiyear marketing commitments for counter-delivered goods, countertradearrangements ensure continuity in repayment flows.
In the absence of sovereign guarantees, countertrade contracts may also provide a legal mechanismthat could enhance the opportunity for liquidating debt in case of default on the part of one of theparties to the contract.
Thus, financing based on countertrade and other similar contract-based self-liquidating financingarrangements is likely to continue as a way of supplementing traditional export finance business.
Key to the market acceptance and successful outcome of such transactions will, however, be the waycosts and risks will be shared among trading parties, inclusive of government agencies.
WHY COUNTERTRADE IS GETTfl\G HOT - June 29, 1992 Page 1 of 2
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WHY COUNTERTRADE IS GETTING HOTBy Shelley Neumeier
June 29, 1992
(FORTUNE Magazine) — Uganda wanted 18 helicopters to help stamp out elephant and rhino
poaching but didn’t have the $25 million to pay for them. Enter Gary Pacific, head of countertrade for
McDonnell Douglas Helicopter. Pacific helped set up several local projects that generate hard
currency, including a plant that will catch and process Nile perch and a factory to turn pineapples and
passion fruit into concentrate. Pacific says he’s already found buyers in Europe. Delivery of the
helicopters will start in 14 months. Such circuitous deals, long at the fringe of trade, are becoming
more common as U.S. companies hungrily search for opportunity in the developing world. Dan West,
chairman of the American Countertrade Association (ACA) in St. Louis and director of countertrade
for Monsanto, estimates that this type of trade now accounts for 20% of U.S. exports. That’s close to
$110 billion of goods and services. No government figures support this estimate (there are no
reporting requirements); West bases his guess on an informal survey of colleagues in his
association. Most are FORTUNE 500 heavyweights, including 33 of America’s top exporters (See
Trade), but some are companies such as Arcon Manufacturing of Charlotte, North Carolina, which
makes grain silos. What’s incontrovertible is the growth of ACA: About 40% of ts 176 member
companies joined the six-year- old organization during the past 18 months. Says Neil Caplan, who
handles such matters for Continental Grain: “Countertrade is here to stay. It’s a fact of life in certain
markets.” These include countries in Eastern Europe and the former Soviet Union that want Western
goods and technology but lack the hard currency to pay for them, as well as other emerging markets.
The ACA runs semiannual training seminars and offers a network Of countertrade cognoscenti who
are willing to share their experience and knowledge, Its new members include many who had not
previously thought much about countertrade --or even exporting. Richard Frankenheimer, who runs
the trade finance division of Nynex, says his company recently joined because “we need to be
conversant in whatever techniques are in vogue so we can win bids overseas.” Maybe you’ll get an
insert with your phone bill one day offering a few pounds of perch at an irresistible price.
CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE/SOURCE: ACA CAPTION:
TRADE TRICKS The American Countertrade Association’s membership reflects the diverse
companies bargaining for business in cash-poor countries.
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United States Code: Title 15,4712. Barter and countertrade I Eli/Legal Information Instit... Page 1 of 2
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TiTLE 15> cHAPTeR 73> SUBcHAPTER II> § 4712
§ 4712. Barter and counteitrade(a) Interagency group
(1) Establishment
The President shall establish an interagency group on countertrade, to be composed of representatives of such departments andagencies of the United States as the President considers appropriate. The Secretary of Commerce shall be the chairman of theinteragency group.
(2) Functions
It shall be the function of the interagency group to—
(A) review and evaluate—
(i) United States policy on countertrade and offsets, in light of current trends in international countertrade and offsetsand the impact of those trends on the United States economy;
(ii) the use of countertrade and offsets in United States exports and bilateral United States foreign economic assistanceprograms; and
(iii) the need for and the feasibility of negotiating with other countries, through the Organization for EconomicCooperation and Development and other appropriate international organizations, to reach agreements on the use ofcountertrade and offsets; and
(B) make recommendations to the President and the Congress on the basis of the review and evaluation referred to insubparagraph (A).
(3) Sharing of information
Other departments and agencies of the United States shall provide to the interagency group such information available to suchdepartments and agencies as the interagency group may request, except that the requirements, including penalties for violationthereof, for preserving the confidentiality of such information which are applicable to the officials, employees, experts, or consultantsof such departments and agencies shall apply in the same manner to each member of the interagency group and to any other parsonperforming any function under this subsection.
(b) Office of Barter
(1) Establishment
There is established, within the International Trade Administration of the Department of commerce, the Office of Barter (hereafter inthis section referred to as the “Office”).
(2) Director
There shall be at the head of the Office a Director, who shall be appointed by the Secretary of Commerce.
(3) Staff
The Secretary of Commerce shall transfer such staff to the Office as the Secretary determines is necessary to enable the Office tocarry out its functions under this section.
(4) Functions
It shall be the function of the Office to—
(A) monitor information relating to trends in international barter;
(B) organize and disseminate information relating to international barter in a manner useful to business firms, educationalinstitutions, export-related Federal, State, and local government agencies, end other interested persons, including publishingperiodic lists of known commercial opportunities for barter transactions beneficial to United States enterprises;
(C) notify Federal agencies with operations abroad of instances where it would be beneficial to the United States for theFederal Government to barter Govemment-owned surplus commodities for goods and services purchased abroad by the FederalGovernment; and
http://www.law.cornell.eduluscode/htmlluscode15/usc sec 15 0000471 2----000-.html 1 1/1 /7fl1 0
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Africa Argentina Australia
j Austria Belgium Brazil
Canada Chile China
Columbia Czech lepublic Denmark jEgypt ] France Germany
Hong F Hungary Xceland
[ India Italy Jamaica
F Japan Jordan Korea (South)
Kuwait Lebanon Malaysia
Mexico Netherlands New Caledonia
New Zealand Panama Poriiania
Fus.sia Scotland Singapore
Slovak Republic South Africa Spain
Sri Lanka Thailand Turkey
United Kingdom United Arab Emirates
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ENERGY COOPERATION AGREEMENT Page 1 of6
Embassy of the Republic of Guyana, Caracas Venezuela
Consular Information I I Mainpage II Speeches by Ambassador Odeen Ishmael II Información en Español
Quinta Roraima, Prados del Este, Apartado 51051, Caracas 1050, Venezuela
Telephone: (58) 212 977-1158 - (58) 212-975-3687Fax: (58) 212 976-3765
ENERGY COOPERATION AGREEMENT PETROCARIBE
Post July 4th. 2005 - Back to Embassy page - Pictures of PetroCaribe summit
Text of PetroCaribe Agreement signed at Puerto Ia Cruz, Venezuela on 29 June 2005
We, the Heads of State and / or Government, gathered in the City of Puerto Ia Cruz, Venezuela,
within the framework of the Energy Meeting for the creation of PETROCARIBE:
1. WELCOME the initiative of the President of the Bolivarian Republic of Venezuela for the creation
of PETROCARIBE, the fundamental objective of which is to contribute to the energy security, the
social and economic development and the integration of the Countries of the Caribbean through the
sovereign use of energy resources based entirely on the principles for integration referred to as the
Bolivarian Alternative for the Americas (ALBA);
2. RATIFY the commitments assumed at the First Meeting of Energy Ministers of the Caribbean held
in Caracas, Venezuela, on 10 July 2004 and at the Second PETROCARIBE Meeting of Energy
Ministers held in Montego Bay, Jamaica, from 26 to 27 August 2004;
3. AGREE that, for the Latin American and the Caribbean region, integration is an essential
condition for striving to achieve development in the midst of the increasing creation of large
regional blocks occupying major positions in the world economy;
4. CONCLUDE that only integration based on cooperation, solidarity and the common will to
advance to higher levels of development can help fulfil the needs and aspirations of the peoples of
Latin America and the Caribbean while allowing them to preserve their independence, sovereignty
and identity;
5. REITERATE that the objective of PETROCARIBE is to help in the transformation of Latin American
and Caribbean societies by making them fairer, more educated, participatory and harmonious
nations. For this reason, PETROCARIBE has been conceived as an integral process intended to
promote the eradication of social inequalities and to foster improved living standards and more
effective participation by nations in their efforts to shape their own destiny;
6. RECOGNISE the need to adopt measures, within the context of PETROCARIBE, based on a
special and differentiated treatment for the Latin American and the Caribbean countries exhibiting
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ENERGY COOPERATION AGREEMENT Page 2 of 6
less relative development, and on complementarity and cooperation between the countries of theregion;
7. GUARANTEE absolute respect for the principles governing the equality of States, sovereignty,non-interference in internal affairs, free determination and the right of each nation to freelydetermine the social, economic and political systems of its choice
8. CONCERNED about global economic trends and particularly about the policies and practiceswhich now prevail in industrialized countries and which may lead to a greater marginalization of thesmaller countries of the Third World whose economies are heavily dependant on foreign countries;
9. GIVEN the special circumstances of heavily indebted poor countries, all terms and conditions ofthe applicable financing arrangements will be determined through bilateral discussions with suchcountries;
10. RECOGNISE the importance of Trinidad & Tobago as an energy exporting country of theCARICOM as a reliable source of supply;
11. WE HAVE ACKNOWLEDGED that, within the context of an unfair economic order inherited fromcolonialism, and imposed by the wealthy developed and rich countries, the current global energy-related trends marked by the enormous waste of consumer societies, by the reduced availability ofproduction capacities and by speculation leading to the rise in hydrocarbon prices, have allcontinuously exerted a negative impact on both the economic performance of, and the socialconditions in the countries of the Caribbean. In most cases, the exports of these countries havebeen even more seriously affected by the fall in the prices of their products, mainly agriculturalproducts, such as sugar, bananas and others. In view of this situation, the countries of theCaribbean need to possess reliable sources of energy and must be assured that prices will notrepresent an obstacle to their development. For these reasons, we, the Heads of State and / orGovernment, have agreed to sign this:
AGREEMENT
On the basis of this Agreement, it has been decided to immediately create PETROCARIBE as a bodyaimed at facilitating the development of energy policies and plans for the integration of the nationsof the Caribbean through the sovereign use of natural energy resources to directly benefit theirpeoples. In this regard, PETROCARIBE will be responsible for coordinating and managing all issuesassociated with the energy-related links between the signatory countries in accordance with thisAgreement.
In order to guarantee the achievement of these objectives and given the dynamic nature andcomplexity of the energy issue, PETROCARIBE emerges as an organization capable of ensuring thecoordination and harmonization of energy policies, including oil and oil-derivatives, gas, electricityand the efficient use of these resources, technological cooperation, training, development of energyinfrastructure and the harnessing of alternative sources of energy such as wind, solar and otherkinds of energy.
I. INSTITUTIONAL PLATFORM
In order to achieve its objectives, PETROCARIRE shall be furnished with a Ministerial Councilformed by the Ministers of Energy or their equivalents and assigned the following functions:
* Coordinate relevant policies, strategies and plans;
* Delegate functions and responsibilities to the agencies created for the fulfilment of specific tasks,
http://www.guyana.org/spanish/petro agreement.html 11/1/2010
ENERGY COOPERATION AGREEMENT Page 3 of 6
99whenever necessary;
* Agree on and approve issues of absolute priority to the organization, as well as studies,
workshops and work sessions, with a view to providing the necessary technical and legal support
for these issues;
* Exercise its fullest authority with regard to the performance of the Executive Secretariat;
* Agree on the admission or withdrawal of members whenever required.
The Council of Ministers shall appoint a President and a Deputy, who shall call and chair the
meetings. Regular meetings shall be held once per year and special meetings shall be held as often
as needed.
PETROCARIBE shall also posses an Executive Secretariat ascribed to the Ministry of Energy and
Petroleum of the Bolivarian Republic of Venezuela and assigned the following functions:
* Prepare the agendas of the meetings of the Council of Ministers;
* Directly manage and administer PETROCARIBE-related affairs;
* Ensure the implementation and follow-up of the decisions adopted by the Council of Ministers and
submit the relevant reports and recommendations;
* Prioritize the studies and projects defined by the Council of Ministers;
* Propose the allocation of resources for the performance of all necessary studies.
IL ALBA CARIBE FUND FOR SOCIAL AND ECONOMIC DEVELOPMENT
In order to help foster the social and economic development of the countries of the Caribbean,
PETROCARIBE shall have at its disposal a Fund earmarked for the financing of social and economic
programs and consisting of contributions from financial and non-financial instruments. Such
contributions may, upon agreement, be drawn from the financed portion of oil invoicing and the
savings from direct trade.
This fund shall be called the ALBA-CARIBE Fund.
In order to activate the ALBA-CARIBE Fund, the Bolivarian Republic of Venezuela shall contribute
an initial capital of Fifty Million Dollars (US$50 million).
IlL OPERATING ASPECTS
1. With a view to commencing operations, Petroleos de Venezuela (PDVSA) has created a special
purpose affiliate under the business name of PDV CARIBE.
2. Upon beginning its operations, this affiliate shall possess adequate cargo capacity for covering
its various supply-related obligations.
3. Freight expenses arising from these operations shall be charged at cost price, which represents
additional savings for the signatories to this Agreement.
4. PDV CARIBE shall guarantee a direct trade relationship without intermediaries in the supply
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ENERGY COOPERATION AGREEMENT Page 4 of 6
process. This arrangement shall help generate additional savings for the consumer countries.
5. To this end, PDV CARIBE shall also be responsible for organizing a logistics network of ships,storage facilities and terminals. This will include, whenever possible, refining and distributionfacilities for fuels and products. Priority shall be given to countries in greatest need.
6. This affiliate shall adopt training programs designed to strengthen professional capacities and topromote a non-contaminating, more energy-efficient and more rational use of conventional energyand of renewable energy.
IV. FINANCING MECHANISMS AND COMPENSATIONS
Apart from the benefits set forth in the San José Agreement and in the Caracas Energy CooperationAgreement, the Bolivarian Republic of Venezuela shall extend credit facilities to the countries of theCaribbean exhibiting less relative development on the basis of bilaterally fixed quotas.
2. Long-term Financinq
With regard to financing,two years.
the grace period provided for in the CEA shall be extended from one to
3. Short-term Financing
The portion to be paid in the short-term shall be extended from thirty to ninety days.
4. Deferred Payment
The same bases of the Caracas Energy Cooperation Agreement shall apply for 17 years (includingthe 2-year grace period mentioned), provided that the price per barrel remains below 40 dollars.
Should the price per barrel exceed 40 dollars, the payment period shall be extended to 25 years,including the 2-year grace period specified at 1% interest. With regard to deferred payments,Venezuela shall be able to determine the portion that shall be paid with goods and services forwhich it shall offer preferential rates.
>= 20 dollars per barrel 10
>= 22 dollars per barrel 1115>= 24 dollars per barrel
PRICE PER BARREL (%)PERCENTAGETO BE FINANCED
>= l5dollarsperbarrel
I 1120>= 30 dollars per barrel 25
>= 40 dollars per barrel 1 30
> 50 dollars per barrel 1140
>= 100 dollars per barrel 1150 I
http://www.guyana.org/spanishlpetro_agreement.html 11/1/2010
ENERGY COOPERATION AGREEMENT Page 5 of 6
The products that Venezuela may purchase at preferential rates may include certain items such as
sugar, bananas or other goods or services to be determined that are believed to be affected by the
trade policies of rich countries.
V. ENERGY EFFICIENCY
One essential feature of the objective of PETROCARIBE shall be to add energy saving programs to
supply-related agreements. In this regard, PETROCARIBE may arrange credits and exchange
technologies to enable beneficiary countries to develop highly functional energy-efficient programs
and systems, as well as other measures making it possible for them to reduce their oil consumption
and to provide a wider range of services.
VI. THE ACTORS
Within the framework of PETPOCAR1BE, state bodies shall be required to implement energy-related
operations. Venezuela offers technical cooperation to support the creation of state agencies in
countries not possessing qualified state institutions for this purpose.
This Agreement is signed in two original and equally authentic copies drafted in English and
Spanish in the City of Puerto Ia Cruz, on 29 June 2005 by:
Willmoth DanielDeputy Prime Minister of Antigua and Barbuda
Leslie MillerMinister of Trade and Industry of the Bahamas
Vildo MannMinister of Health, Energy and Communications of Belize
Fidel Castro RuzPresident of the State Council and the Government of the Republic of Cuba
Roosevelt SkerritPrime Minister of Commonwealth of Dominica
Leonel FernandezPresident of the Dominican Republic
Keith MitchellPrime Minister of Grenada
Samuel HindsPrime Minister of the Cooperative Republic of Guyana
Percival PattersonPrime Minister of Jamaica
Ralph GonsalvesPrime Minister of St. Vincent and the Grenadines
Petrus ComptonMinister of Foreign Affairs, International Trade and Civil Aviation of St. Lucia
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ENERGY COOPERATION AGREEMENT Page 6 of 6
3o-Earl Asim MartinMinister of Public Affairs and Energy of St. Kitts and Nevis
Jules Rattankoemar AjodhiaVice President of the the Republic of Suriname
Hugo ChavezPresident of the Bolivarian Republic of Venezuela
This page is part of Guyana News and Information.(http://www.guyana.org)
http://www.guyanaorg/spanishIpetro_agreement.htm1 11 / 1/2010
o3
EXCERPT FROM Caribbean Business Growth Potential
During the Global Recession through Countertrade: Exhibit A — The Petrocaribe.
The Petrocaribe as a Multilateral Clearing System.
One Caribbean opportunity for countertrade is through the expanding scope of the Energy
Cooperation Agreement Petrocaribe, (“Petrocaribe”). The system is not based on commercial private
profiteering, but on the need of similarly situated nations to meet regional needs not otherwise
provided from industrialized nations. On June 29, 2005, fourteen Caribbean and Mexican countries,
including Jamaica, the Bahamas, Dominica, the Dominican Republic and Haiti, formed an alliance to
enhance access to energy resources at a more advantageous price than it received from industrialized
nations. Spurred into action from sudden increases of oil prices in 2005, they believed exchanging crude
oil and related products among themselves regionally, with flexible payment terms was superior to the
existing arrangements with industrialized countries. Apparently uncontroverted figures reveal
unprecedented transactional efficiencies and significant economic development have already occurred
from the accord.
The primary beneficiaries are the countries that depend largely on imported oil. The benefactor
has been Venezuela, a major producer of crude oil. Jamaica was an early member and its bilateral
agreement illustrates the terms. Under the original agreement, Venezuela provided 29,000 barrels per
day at lower price that provided from prior sources outside the region.’ Payment terms were
advantageous to Jamaica in that it only had to pay 80% of the total cost from its own resources, with a
20% low interest loan for devel6pment projects over a 15 year period when the price of oil exceeded a
particular price per barrel. As an accountability provision, Jamaica would have to settle the loan on an
accelerated basis (5 years) if the development projects did not come to fruition. The total terms were
reviewed annually, and became more favorable to Venezuela over time. This bilateral agreement allows
Jamaica to access 7.4 barrels of oil annually at a cost of only $15-30 per barrel. 2 Jamaica included the
ability to process its own crude oil under the Petrocaribe agreement (Petrojam) further reducing its long
term costs.3
The success of the Petrocaribe became evident and the accord expanded to 18 members,
representing over 88 million Latin and Caribbean inhabitants.4Petrocaribe sources assert that from
2007-2009, 14 of the 18 members reported increased volume of oil from 59 thousand barrels to 121
thousand barrels daily, comprising a 105% increase over that period.5 Increased oil supply at lower cost,
and refineries for oil and electric power generation also added 59,647 direct and indirect job5 through
1 http://petcomja.com/alliance main.htm last visited 6-19-09.2 http://petcomia.com/alliance main.htm last visited 6-19-09.
http://eetcomla.com/alliance main.htm last visited 6-19-09.
http://www.pdvsa.com/ifldex.PhP?tPlinterfaCe.efl/deSiRn/bibliOteCa/readdOC.tpl.html&new
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eleven new joint ventures in the region.6The same source concludes that the overall decrease in energy
costs and positive economic benefits generated $1.4 billion in tangible savings
Additional Caribbean nation states are seriously considering joining the alliance. Most recently,
St. Lucia publicly stated its intent to “commence, advance and become full member... with
implementation of the crude oil supply agreements”.7In the two years since Guyana participated in
Petrocaribe, it has imported approximately 2.3 million barrels of oil and by-products.8Guyana’s prime
minister opines that the agreement has contributed to an improved standard of living for its citizenry.9
6 Id.Petrocaribe official website, Petrocaribe Energy for Union, 2009,
http://www.petrocaribe.org/index.php?tplinterface.en/desigfl/SalaPrenSa/readmeflu.tQI.html&fleWSid obi id=7
17&newsid temas=1 last visited 6-20-09.
Id.Id.
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