Martha Myron

Island needs comprehensive contingency plan

  • Convergence of concerns: Bermuda is facing multiple challenges, including proposed changes to the US tax code, and the prospect of a new EU blacklist of “tax havens”

On November 5, Bermuda residents became stunningly aware of the radical vulnerability of our island’s economic success.

For more than 30 years, international business has poured billions into the local money supply, infrastructure (buildings), government tax coffers, businesses, households, events, education, and charities. As a result, Bermuda has had an enormously enviable standard of living — for most of us, but not all. We’ve grown used to having what we want when we want it.

We’ve touted our monoline-focused business model smugly, some would say. We relied complacently on our sterling reputation as a premier international financial centre.

Then it happened.

While not a single “black swan event” — the outlier that everyone hopes never happens, such that no one plans for such an outcome, as described in Nassim Nicholas Taleb’s black swan theory — the cumulative effect of a series of events facing Bermuda have the potential for major consequences.

Each of the five events below can singularly deliver a significant economic body blow to our reputation, but taken together, no one wants to contemplate the outcome.

1. Paradise Papers. The International Consortium of Investigative Journalists uploaded 25,000 documents to their Offshore Data Leaks Database yesterday. Bermuda will be for ever linked to this hack. https://goo.gl/r8v3aB

2. The US House of Representatives released HR 1, The Tax Cuts and Jobs Act, which included permanently cutting the corporate rate to 20 per cent from 35 per cent, thereby in effect, closing the so-called “Bermuda tax loophole”.

Some form of this tax Bill is predicted to pass into law, bringing with it possible disruptive changes in international business models, on-island presences, jobs, ancillary work flows, and foreign cash investment infusions into the Bermuda money multiplier equation, estimated at $1 billion annually. Consider the reduction of that number by 10, 20, 30, or 40 per cent?

3. The European Union finance ministers, in reaction to the Paradise Papers, called for a tax haven blacklist approval release in December 2017, along with possible sanctions. Read more about this in this Reuters story: https://goo.gl/WJRP6D

For an interesting comparison, the FATF placed the island of Vanuatu on the “grey list” of offshore financial centres after the Panama Papers 2015. It is facing “grave economic consequences,” according to Charlot Salwai, the prime minister, amid a fierce debate about the island’s economic destiny. Vanuatu, a poor nation of more than 250,000 residents, declared independence from Britain and France in 1980. Bloomberg Markets, “The Final Days of a Tax Haven,” by Brian Bremner. https://goo.gl/eVB4QY

4. Questions about AML/ATF legislation regarding local betting shops. Bermuda has a biennial pending CFATF inspection next year, because the island is a member of the CFATF that have collectively agreed to implement counter measures against money laundering and terrorism financing, as well as mutually conducted evaluations of each CFATF member’s policies, procedures, and protections for the same. Further reading on CFATF Bermuda 2014 at https://goo.gl/AgDPJq https://goo.gl/vHNYVA

5. The reputational risk in online and physical gaming. This is an industry that always garners microscopic scrutiny and negative publicity due to the lure of winning, the copious cash involved, as well as unremitting criminal attention for scamming profits, money laundering, political corruption, business complicity, tax evasion, drugs and arms trafficking, and terrorism funding.

The first three outlier events on the list are random, but related. They are outside of our control.

The last two on the list are internally controlled, but can and will attract reputational risk.

They are preventable. We can do and must do better.

We must have fully enforceable, highly transparent regulations as well as completely independent boards of oversight for all vulnerable-to-illicit-persuasions industries — free from political influence, monetary inducements, illicit bargaining pressures and conflicts of interest.

Image is everything

Perception is reality. In our fragile state we cannot afford even a hint of corruption, because it will torpedo every positive effort to rigorously defend our image.

Bermuda is a civilised society. We elect and charge our leaders, politicians and ministers with a constitutional duty, which is to do the right thing and protect and defend our country’s reputation; to strengthen our regulations and uphold the law, and to represent the best interests of their constituents, first and foremost before their own interests, conducted to the best of their ability with personal integrity, honour, and dignity.

What will all these outliers mean for Bermuda? Who can predict?

The far bigger question is what is our Bermuda Government contingency plan for a black swan event — bringing disruptive change with it?

Defensive statements about transparency aren’t enough. Bermuda needs an explicit financial contingency plan in place to meet these challenges face on.

Do we have one?

Never forget, we’ve still got that unrelenting massive debt liability. Foreign investors want their interest payments (and the principal back one of these days — remember that $2 billion plus)?

Debtor interest payments alone are $500,000 per day, close to $200 million a year, which is more than 20 per cent of our total annual government operating budget transferred right out of our economy.

That huge sum could be spent on new buses, ferries, infrastructure repairs, senior social services, job training, education, and financial assistance.

Quo fata ferunt. Fine words, but a Bermuda Government contingency plan for the economy is far better than letting “the fates lead us!”

Journalism. Just the facts and only the facts.

Next week will focus on why everyone should have a contingency plan in place. When you know the worst can happen, you can survive and focus positively on the best.

Sources:

• The black swan theory, developed by Nassim Nicholas Taleb, refers only to unexpected events of large magnitude and consequences. Considered extreme outliers, these events collectively play vastly dominant roles in history than regular occurrences. https://goo.gl/yZzV5f

• Your guide to the US tax cut debate, Bloomberg. https://goo.gl/ACsvUr

• Tax reform takes on Bermuda tax loophole, Rob Lenihan, Business Insurance. https://goo.gl/rhXj6h

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com