The government is boosting Seychelles’ future as an offshore financial centre, although its domestic oversight is weak, and headwinds are developing.
[This is an excerpt from an article appearing in the latest edition of The Round Table: The Commonwealth Journal of International Affairs].
Offshore Finance and Business
Any fresh challenge to the country’s position as an OFC [offshore financial centre] is a priority for the Seychelles Government. The OFC is great Seychelles’ hope, unashamedly modelled on the Cayman Islands, a jurisdiction of immensely greater strength and complexity. The OFC sector contributes 5% to Seychelles’ GDP (compared to 55 per cent of Cayman Islands GDP. But Seychelles strategists such as Larose see a global financial market and system in which ‘money can be anywhere’ and others that OFCs are an accepted and necessary part of global financial mobilisation.
Nonetheless, the Caribbean OFC model is not quickly replicable. Proximate to the United States, Cayman Islands especially functions as a branch of Wall Street. Seychelles lacks the strong presence of major Western banks and Wall Street institutions Cayman enjoys and so lacks the major private due diligence that can assist financial governance. To a lesser extent, the Caymanian advantage applies to the OFC configuration of BVI, Bermuda and Bahamas. US and UK financial institutions do not see themselves under pressure to maintain a presence in Seychelles.
Instead, a target of the OFC strategy remains regional African and Arab money, a Seychelles’ calculation being that African growth will outstrip the capacity of the continent’s financial industry to service it. Investment from the Arabian peninsula, in particular, is strong. Arab investment dominates the high-end tourism sector. Major resorts in Seychelles such as those of Savoy of London, Four Seasons and Kempinski, as well as the Eden Island canal complex are all Arab-owned and some of this is passed through banks domiciled in Seychelles. But African and Arab investment does not bring the same degree of private institutional due diligence cover Caribbean OFCs enjoy nor does it extend the same sensitivity to Western financial governance that gives the Caribbeans their better engagement with Western regulators.
Seychelles planners are well aware of where overseas models have failed: Finance Minister Larose cites Vanuatu. Crude undertakings when nations function as blatant tax havens can damage broader international connections including access to development assistance. Seychelles’ planners see their OFC model operating at a more sophisticated international business level.
Most OFCs attract controversy around transparency, governance and suspicion about the potential for tax evasion, money laundering and transnational financial crime. Seychelles historically was no exception. Its return to constitutional government in 1994 was followed promptly by the passage of the Economic Development Act in 1995. This Act, among other things, offered a mechanism whereby foreign investors furnishing at least US$10m would be granted immunity from extradition for a range of overseas offenses. Other laws to remove behaviours encouraged by the 1995 Act were introduced including the Anti-Money Laundering Act in 2006 and Proceeds of Crime Act in 2008.
The 1995 foray into offshore finance may have reflected President René’s youthful London experience when he worked as a lawyer on Midland Bank’s development of Channel Islands tax shelters. That experience, and a fascination with dodgy money shown in his dealings with US crime groups in the 1980s, may have influenced the buccaneering tone of the 1995 legislation. The Act’s repeal serendipitously eased the way for Seychelles after 2001 to align with the post-9/11 US-led effort, notably though FATF, to close OFCs to terrorist finance and the associated crack-down on transnational criminal finance.
Seychelles’ role in global financial markets exposes it to established financial centres’ governance standards. Seychelles is struggling with these pressures. Seychelles underwent a FATF mutual review in 2018 of its performance against the FATF ‘40 Recommendations’ on anti-money laundering and countering terrorist financing. Seychelles was found compliant with only 10 of the 40 and was low or non-compliant with 14. Non-compliance included inability to apply sanctions against proliferators, a poor grip on international financial operations of non-profit bodies, weak adoption of new technology and inadequate mutual legal assistance on confiscations.
Several themes were apparent in the ESAAMLG critique. One went to a need for further refinement of legislation including the definition of criminal assets and restitution abroad. A second was a poor alignment with international moves against proliferation, where Seychelles was found to have no ‘measures in place’. Most shortcomings had some roots in poor human resource capacity. There is no evidence, for example, that the Foreign Ministry prioritises coordination across government on transnational crime. Coordination across government was found to be lacking or sensitises financial colleagues to the growth of sanctions as a policy instrument in Washington and elsewhere.
At this point, Seychelles encounters a broader Western concern with OFCs and their transparency. Scholars such as Nesvetailova have pointed for some time to the scale of financial holdings and operations in OFCs as carrying a financial risk for the global economy. Therefore quite apart from FATF and other international agency interest in Seychelles’ capacity in anti-money-laundering and countering terrorism financing (AML/CTF) measures, there is likely over time to be steadily more intense engagement between Seychelles and the West on OFC activity from strategic and global financial stability perspectives. This will be progressively more demanding for Seychelles’ governance.
Seychelles in common with much of Africa suffers from stripping out of its civil service, for higher wages in the private sector. It has sought to address a thinning of its regulatory ranks by reaching abroad. Seychelles still receives foreign development assistance (‘foreign aid’) with Western donor countries prioritising developing Seychelles governance. Ireland has provided the specialists to build the Seychelles Financial Intelligence Unit (FIU) and some Seychelles financial legislation is closely copied from an Irish original. The Seychelles Proceeds of Crime (Civil Confiscation) Act is a close copy, apart from some numbering, of the Irish statute of the same name. Australia is involved in a twenty-year tax and customs revenue governance program.
Such aid comes with providers’ objectives of increasing efficiency, transparency and reducing fraud.
Ashton Robinson is an Honorary Fellow, School of Social and Political Sciences, University of Melbourne, Melbourne, Australia
