CRS Report for Congress

Transcription

1 CRS Report for Congress Service Congressional Prepared for Members and Committees of Congress Specialist in International Trade and Finance J. F. Hornbeck Foreign Affairs, Defense, and Trade Division Updated January 16, 2008 States Free Trade Agreement (CAFTA-DR) The Dominican Republic-Central America-United Order Code RL31870

2 signed the Dominican Republic-Central America-United States Free Trade rate quotas, and trade capacity building. fact that most U.S. imports from the region had already been entering duty free under effects on certain import-competing sectors and their workers. They also argued that debate and will be updated. 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 October 7, 2007, the people of Costa Rica voted in favor of CAFTA-DR 51.6% to National Assembly. preferential trade treatment extended to these countries under the Caribbean Basin incrementally over five to twenty years. Duty-free treatment will be delayed longest needed strengthening. This report discusses issues and evolution of the CAFTA-DR Republic. In Costa Rica, legislative consideration of CAFTA-DR has been a 48.4% (subject to official recount), setting the stage for final consideration by the on August 2, 2005 (P.L , 119 Stat. 462). The United States has implemented the agreement for El Salvador, Honduras, Nicaragua, Guatemala, and the Dominican set of obligations and commitments, but with each country defining its own market the labor, intellectual property rights, and investment provisions in the CAFTA-DR The CAFTA-DR is a regional agreement with all parties subject to the same goods, services, government procurement, intellectual property, and investment, and and transition issues, the CAFTA-DR specifies rules for transitional safeguards, tariff The CAFTA-DR is not expected to have a large effect on the U.S. economy as trade adjustment and capacity building policies to address the potentially negative in an area of strategic importance to the United States. Opponents wanted better (CBTPA), and the Generalized System of Preferences (GSP). It liberalizes trade in addresses labor and environment issues. Most commercial and farm goods attain duty-free status immediately. Remaining trade will have tariffs phased out in kind 217 to 215 on July 28, President Bush signed the legislation into law a whole given the relatively small size of the Central American economies and the Agreement (CAFTA-DR) on August 5, Nearly one year later, it faced a Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic access schedule. It is a reciprocal trade agreement, basically replacing U.S. unilateral for the most sensitive agricultural products. To address asymmetrical development be slightly more difficult for some sectors, but none are expected to be severe. The United States Trade Representative (USTR) and trade ministers from Costa prolonged process, culminating in the decision to hold a national referendum. On Economic Recovery Act (CBERA), the Caribbean Basin Trade Partnership Act normal trade relations or CBI and GSP preferential arrangements. Adjustments will 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 Summary Free Trade Agreement (CAFTA-DR) The Dominican Republic-Central America-United States

3 require major restructuring of public sector monopolies over electricity, insurance, presidential victory in 2006 on a pro-cafta platform, but opposition in the National In Costa Rica, CAFTA-DR has been highly controversial because it would and telecommunications. Public sector unions were at the center of this concern, but Tribunal ruled in favor of a petition to hold a national referendum on the CAFTA voted 5 1.6% to 48.4% in favor of CAFTA-DR. To be implemented for Costa Rica, date when first entered into force (March 1, 2006), so Costa Rica is running a race Assembly was able to delay consideration of the agreement. In the end, the Electoral opposition in the legislature. To date, two have become law and the remainder are CAFTA-DR, the agreement requires that it be implemented within two years of the against the March 1, 2008 deadline and may yet decide to request an extension. in various stages of consideration. Unless otherwise agreed to by all Parties to the DR. On October 7, 2007, with a 60% participation rate, the people of Costa Rica small farmers and other workers also voiced opposition. Oscar Arias won a slim the National Assembly must pass 13 implementing bills, which face continuing the Senate passed S by a vote of 54 to 45. The House followed on July 28, The U.S. Congress did not consider implementing legislation for over a year Guatemala, the Dominican Republic, and Nicaragua also ratified the agreement, in that order. The CAFTA-DR was expected to enter into force on January 1, 2006, but needed to comply with the agreement. The USTR announced that the CAFTA-DR after the CAFTA-DR was signed because it was so controversial. On June 30, 2005, 2005, passing H.R by a vote of217 to 215. President Bush signed the bill into law on August 2, 2005 (P.L , 119 Stat. 462). El Salvador, Honduras, none of the ratifying countries had completed the legal and regulatory measures would take effect on a rolling basis when countries fulfilled these obligations. It entered into force on March 1, 2006 and has been implemented for El Salvador, Honduras, Nicaragua, Guatemala, and the Dominican Republic. to the same set of obligations and commitments, but with each country defming its ministers from Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic signed the Dominican Republic-Central America-United States Negotiations). The CAFTA-DR is a regional trade agreement with all parties subject replacing U.S. unilateral preferential trade treatment extended to these countries under the Caribbean Basin Economic Recovery Act (CBERA), the Caribbean Basin On August 5, 2004, the United States Trade Representative (USTR) and trade Free Trade Agreement (the CAFTA-DR; see Appendix 1, Chronology of own market access schedule. It is a comprehensive and reciprocal trade agreement, Trade Partnership Act (CBTPA), and the Generalized System of Preferences (GSP). United States Free Trade Agreement The Dominican Republic-Central America-

4 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 also called for monitoring progress in meeting the challenges outlined in the so-called Prospects, by J. F. Hombeck and William H. Cooper. On TPA, see CRS Report RL743, Trade Promotion Authority: Issues, Options, and day, the Senate voted 56 to 44 to substitute H.R for S. 1307, a necessary (P.L , 119 Stat. 462). controversy over how trade negotiation objectives are defined in FTAs based on the expressed consternation of some Members. reporting favorably by a vote of25 to 16 on June 30, The measure came before procedural vote to comply with the constitutional requirement that revenue bills originate in the House. President Bush signed H.R into law on August 2, 2005 Administration transmit biennial reports on progress made in implementing the labor provisions, including the Labor Cooperation and Capacity Building Mechanism. It CAFTA-DR countries. Under TPA procedures, identical bills were introduced passed 54 to 45. H.R did not come before the House until July 28, 2005, 23, It included a new Section 403, the House amendment requiring that the also adding a non-binding amendment with a requirement that the Administration basic sovereignty issues. It was also caught up in an overarching congressional Trade Promotion Authority (TPA) framework, as well as, concern by some Members bills held by the Senate Finance and House Ways and Means Committees on June 14 trade adjustment assistance program to cover workers in services industries. The DR s effects on U.S. services industries. A mock conference was not held, to the since the North American Free Trade Agreement (NAFTA) implementing legislation was passed in Many lawmakers were uncomfortable with the agreement as the full Senate on June 30, 2005, where, following 20 hours of floor debate, White Paper on labor produced by the vice ministers of trade and labor of the Senate Finance Committees. jointly as H.R and and referred to the House Ways and Means and The CAFTA-DR was the most controversial free trade agreement (FTA) vote over the perceived ineffectiveness ofthe executive-legislative consultation process. House Ways and Means Committee voted for approval of the draft legislation, The Senate Finance Committee acted first, favorably reporting out S by voice vote on June 29, The House Ways and Means Committee followed suit, U.S. Congressional Action CRS-2 written, particularly with respect to the labor provisions, treatment ofcertain sensitive industries (sugar and textiles), investor-state, pharmaceutical data protection, and These issues were raised repeatedly in mock markups of draft implementing 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 The Bush Administration sent the final implementing bill to Congress on June where, following two hours of debate, it narrowly passed 217 to 215. On the same

5 CRS-3 Passage in the Senate was by a slinuner margin than with earlier trade agreements and required accommodation outside the implementing legislation to labor, textile, and sugar interests. In a letter from USTR Rob Portrnan to Senator Jeff Bingaman, the Administration promised to allocate $40 million of fiscal 2006 foreign operations appropriations for labor and environmental enforcement capacity building assistance, and to continue to request this level of funding in budgets for fiscal years 2007 through Some $3 million is to be used for funding International Labor Organization (ILO) reporting on progress in labor law enforcement and working conditions in these countries. An additional $10 million annual commitment for five years was made for transitional rural assistance for El Salvador, Guatemala, and the Dominican Republic, or until these countries can qualify for anticipated assistance from the U.S. Millennium Challenge Corporation. In another letter, Secretary of Agriculture Mike Johanns assured Senator Saxby Chambliss and Representative Bob Goodlatte, the respective agriculture committee chairs, that the Administration would not allow the CAFTA-DR to interfere with the operation of the sugar program as defined in the Farm Security and Rural Investment Act of 2002 (the Farm Bill) through FY2007, when it expires. In particular, he promised to take steps should additional sugar imports due to the CAFTA-DR, NAFTA, and other trade agreements cause the import trigger threshold of million 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 of additional sugar imports into the domestic sweetener market by either making direct payments to exporters or using agricultural commodities to purchase sugar to be used for nonfood use (ethanol production). Separately, for the textile and apparel issues, promises were made to: (1) change the rules of origin to require that all pocketings and linings come from the CAFTA DR countries (rather than third party countries like China); (2) negotiate a new stricter customs enforcement agreement with Mexico before the CAFTA-DR cumulation rules take effect allowing Mexican inputs to be used in CAFTA-DR textile and apparel products; and (3) require Nicaragua to increase use of U.S. fabric to 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 Rights Enforcement Act (H.R. 3283). This bill would allow greater recourse to pursue trade complaints against China and other non-market economies. Not all interest groups, however, could be appeased. Despite efforts to win over all groups, the sugar industry and some textile groups chose not to support the bill and strong Democratic opposition remained over a number of other issues that may prove to be enduring challenges 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, a proposition long supported by theory and practice. Comparative advantage has been recognized for nearly 200 years as a core principle explaining the efficiency gains

6 Washington, D.C p. 137 and Bouzas, Roberto and Saul Keifman. Making Trade Latin America. Kuczynski, Pedro-Pablo and John Williamson, eds. Institution for Developing Countries: Making Openness Work. The Overseas Development Council, Liberalization Work. Afler the Washington Consensus: Restarting Growth and Reform in International Economics. Washington, D.C. March, pp. 158, which goods, such as automobiles, are exchanged based on product differentiation and 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 investment) can make to economic growth and development. As an important 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 It states that countries can improve their overall economic welfare by producing those This differs from the standard intra-industty case between two developed countries in 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 George L Perry, eds pp and for the case in Central America, see Hufbauer, Consequences, in Brookings Papers on Economic Activity (1), William C. Brainard and America. Institute for International Economics and the World Bank PP United States, but does affect the distribution of employment among sectors ofthe economy. 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 States International Trade Commission. January/February Quantifying the Effects of Trade Liberalization. International Economic Review. United It is also important to emphasize here that wage levels are only part of the issue. Lower 5Note that this trend has not been a driving force in the aggregate unemployment rate of the Gary, Barbara Kotschwar, and John Wilson. Trade and Standards: A Look at Central 2 The role of trade is summarized well in: Rodrik, Dani. The New Global Economy and CRS-4 that can come from trade among countries by virtue oftheir fundamental differences. goods at which they are relatively more efficient, while trading for the rest. Intra have liberalized trade policies recognizing the contribution that trade (and related caveat, trade is at best only part of a broad development agenda, and is no substitute for the promotion of political freedom, macroeconomic stability, sound institutions, and the need for complementary social and economic policies. number) is based on specialized production, but in this case relies in large part on 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 and other countries in partnership with U.S. firms. 4 This relationship, discussed in differences in wages, skills, and productivity. developed in Central America (and other developing countries), where they frequently reside in production sharing (maquiladora) facilities. Economists have more detail later, provides the basis for much of the labor policy debate on the automobiles, computers, and apparel are often made or assembled in Central America CAFTA-DR, and FTAs more generally. 5 3 Certain specialized jobs have 2

7 CRS-5 Measuring the benefits of freer trade is another difficult issue. There is a tendency to count exports, imports, and the oft-misrepresented importance of the trade balance as indicators of the fruits of trade. This approach often gives undue weight to exports at the expense of understanding benefits from imports, where the gains from trade are better understood by their contribution to increased consumer selection, lower priced goods, and improved productivity. For example, high-tech intermediate goods imported from developed countries are the basis for future, more sophisticated, production in developing countries. In developed countries, imports from developing countries, whether final goods for consumers or inputs for manufacturing enterprises, reduce costs and contribute to productivity and economic welfare. For all countries, exports are the means for paying for these imports and their attendant benefits. Three caveats related to negotiating FTAs are important. First, the discussion of costs and benefits generally assumes that FTAs are implemented in a multilateral setting. In fact, given the slow pace of World Trade Organization (WTO) negotiations, many countries are pursuing preferential arrangements, that is, regional and bilateral agreements like the CAFTA-DR. Latin America is full of them and depending on how they are defined, they may actually be trade distorting if they promote trade diversion. This occurs when trade is redirected to countries within a limited agreement that does not take into account countries outside the agreement, some of which may be more efficient producers. Preferential trade agreements are also cumbersome to manage, requiring extensive rules of origin, and economists disagree as to whether FTAs help or hinder the movement toward multilateral trade liberalization. 6 Second, trade, much like technology, is a force that changes economies. It increases opportunities for internationally competitive sectors and challenges import competing firms to become more efficient or do something else. This fact gives rise to the policy debate over adjustment strategies, because while consumers and export sector workers benefit, some industries, workers, and communities are hurt. Economists generally argue that it is far less costly for society to rely on various types of trade adjustment assistance than opt for selective protectionism, the frequent and forcefully argued choice oftrade-affected industries. The public policy difficulty is that both options have costs and benefits, but result in different distributional outcomes. Because trade agreements raise difficult political choices for legislators 8 7 businesses operating in Latin America have had to interpret a difficult road map when dealing with multiple arrangements defined in the Caribbean Basin Trade Partnership Act, the Andean Trade Preference Act, and the North American Free Trade Agreement. Each distorts investment decisions in the region and can have a countervailing influence on the others. Adding the many Latin American FTAs only makes the situation more confusing. 6U5 For a recent and accessible treatment of this subject, see Kletzer, Lori G. and Howard Rosen. Easing the Adjustment Burden on US Workers. In: Bergsten, C. Fred., ed. The United Stales and the World Economy. Washington, D.C.: Institute for International Economics, pp Jmpontly, when a staple, such as underwear, is produced abroad and sold in the United States as a lower-priced import compared to a domestically produced good, it is equivalent (continued...)

8 in all countries, many of whom represent both potential winners and losers, FTA a bilateral rather than multilateral setting. Both Chile and the Central American to expand support for U.S. positions in the Free Trade Area ofthe Americas (FTAA), 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. also sparked interest by all parties in pursuing the CAFTA-DR. Proponents expected U.S. business community, for example, that the U.S.-Chile agreement, the first FTA The Impetus for a CAFTA-DR provisions are typically limited in scope (so continue to protect partially or completely certain products, industries, or sectors) and are phased in over time CRS-6 Third, there are implications in the trade negotiation process for smaller (typically up to years for very sensitive products). countries bargaining leverage when they choose to negotiate with a large country in they would be able to exert little or no leverage. Both agreements, for example, do and negotiations on certain agriculture issues were also limited, given the politically the CAFTA-DR to reinforce regional stability by providing institutional structures countries realized early in the process that there were negotiating issues over which not address antidumping and subsidies, reflecting an ongoing congressional concern, sensitive nature of this issue. Central America and the Dominican Republic. Geopolitical and strategic concerns 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 rationalize the system of disparate preferential trade agreements that currently define Western Hemisphere trade relations. perceived relative to what other countries are doing. It was repeatedly argued by the and given that the January 2005 completion date has slipped, may also help strong labor and environment provisions as important negotiating objectives. There 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. of labor laws in the CAFTA-DR countries. The CAFTA-DR countries argued that was concern, for example, over the adequacy ofworking conditions and enforcement jobs through protection and losing the income gains, or keeping the income gains and losing 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 to an increase in real income for the U.S. consumer. This can be significant for low-wage 8 (...continued) negotiations have also become a tactical issue of picking off gains where they are With the proliferation of regional agreements around the world, trade pervasive social and economic inequality in much of the region, and so supported Critics of the CAFTA-DR pointed to equally broad themes, such as the The United States was motivated by both commercial and broader foreign economic policy interests in deciding to negotiate preferential trade agreements with

9 P.L. CRS-7 after NAFTA, was necessary to equalize treatment ofu.s. businesses competing with Canadian finns that already enjoyed preferential treatment with Chile. The case was made for Central America as well, which has trade agreements with Canada and Mexico, each with firms that compete with U.S. businesses in the region. Delays with WTO and Free Trade Area of the Americas (FTAA) negotiations only reinforced this attitude. In the context of regional trade agreements, history, geographic proximity, and economic complementarities also made the CAFTA-DR an apparently logical step. Economic fundamentals shaped a trade relationship based on exports of traditional agricultural products, and later apparel. From the early days of independence, agricultural exports were the centerpiece ofcentral American economic growth. The British controlled primary export production (coffee, bananas, sugar, and beef) until about 1850, when U.S. interests won over. This trend continued until the 1 980s and passage of the Caribbean Basin Economic Recovery Act (CBERA 98-67), as part of the Caribbean Basin Initiative (CB1). By becoming eligible for unilateral preferential tarifftreatment, U.S. investment increased in the region, fostering growth in Central American export sectors. 9 A major change to the CBI relationship occurred with passage of the Caribbean Basin Trade Partnership Act of 2000 (P.L ). Tn response to repeated concerns over trade benefits negotiated with Mexico undernafta, Congress passed essentially NAFTA-equivalent treatment for the CBI countries. CBTPA targeted preferences on textile, apparel, and other high-volume export goods not covered under the original CBI legislation. The benefits were extended temporarily for a period ending September 30, 2008, or until a beneficiary country enters into an FTA with the United States. The U.S.-Central American/Dominican Republic economic relationship changed importantly under the CBTPA, creating an environment in which businesses forged strategic partnerships in the increasingly complex world of textile and garment manufacturing. From 1974 until 1995, global rules restricting trade in apparel between developed and developing countries (mostly quotas) were set out in the Multifiber Arrangement (MFA) and its successor, the WTO-sponsored Agreement on Textiles and Clothing (ATC), which served as a transitional arrangement to a quota-free system begun on January 1,2005. In this context, the CBTPA preferences provided an import benefit for the region s export 1 sectors. The United States created the CBIJCBTPA to foster Caribbean economic development and to assist U.S. industry in responding to competition from similar production-sharing arrangements in Asia that were taking a toll on U.S. production and employment in the textile and apparel industries. Still, U.S. textile and particularly apparel industries have been hit hard by foreign competition, resulting For an excellent economic history of the region, see Woodward, Ralph Lee Jr. Central America: A Nation Divided New York: Oxford University Press, third edition, For more on the evolution of these trade preference arrangements, see CRS Report RL3395 1, US. Trade Policy and the Caribbean: From Trade Preferences to Free Trade Agreements, by J. F. Hombeck.

10 reduce costs, has moved production offshore to lower-wage countries. low-wage workers to the detriment of some U.S. employment, many economists sophisticated production technologies. The apparel manufacturing industry (e.g., (e.g., fiber, yams, fabric) has remained marginally competitive through use of in a total job loss of over 540,000 employees from The textile industry As defined in the CBTPA, U.S. firms, through subsidiary or contractual CRS-8 shirts, pants, undergarments) by contrast, is highly labor intensive, and in striving to 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 cost basis because of their higher labor costs relative to Asia, the CBTPA SignfIcant US. Import Restraints. Publication Washington, DC, June p. 60. United States International Trade Commission (USITC). The Economic Effects of 2 Although this was a controversial move because of the reliance on foreign China. assembled from U.S. materials, compared to less than 1% for apparel imports from 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, 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 3 a in the Globalization Debate. Foreign Policy. Summer p. 28. that result from government repression ofunions. See Rodrik, Dani. Sense and Nonsense home. Low wages that result from demography or history are very different from low wages 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 more subtle distinction made by one economist notes that, How comparative advantage Competitiveness ofcertain Foreign Suppliers to the US. Market. USITC Publication Washington, D.C. January pp. 1-12, 3-22, and United States International Trade Commission. Textiles and Apparel: Assessment ofthe Industry Trade and Technology Review. November p. 12. States International Trade Commission. Production-Sharing Update: Developments in , May-August Inter-American Development Bank, Washington, D.C. and United of Sources of Supply in the United States in the I 990s. Integration and Trade, Vol. 4, No. 13 Chacón, Francisco. International Trade in Textile and Garments: Global Restructuring Technology Review. November PP. 22 and B-l USITC. Production-Sharing Update: Developments in Industiy Trade and Low-cost labor, however, is not the only or even the most important factor driving competitiveness. that developed between U.S. and Central American firms effectively created a niche 5 Studies suggest that the economic and social networks costs associated with U.S. preferential trade requirements. 4 requirement to use more expensive U.S. inputs, and the additional administrative 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. In 2002, some 56% of U.S. apparel and textile imports from Central America was assembled and exported back to the United States mutually beneficial strategy. anangernents, are required to use mostly U.S. textiles as inputs to products that are

11 CRS-9 market in the region for certain apparel that has held up even with the growing presence of China in the market. This relationship was made possible by the proximity of production, operational efficiencies, and quick turn around times for meeting increasingly shortened deadlines demanded by large retailers. In a postquota trading world, these advantages may allow a certain portion of textile and apparel production to remain in the CAFTA-DR countries. Although CAFTA-DR country representatives have emphasized that the passage ofthe free trade agreement is a critical component for maintaining this strategy, it is not certain that it can counter the long-tenri trend in market share loss to Asia. 6 Strategic considerations were important, but ultimately it is fair to ask what each country 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 United States third largest Latin American trading partner, right behind Brazil, but a far distant third from Mexico. Still, these are small economies (see Appendix 2 for economic data) and although firms engaged in this trade may fmd its effects significant, total CAFTA-DR trade in 2004 represented only 1.5% of U.S. foreign commerce, 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 the unilateral preferences provided in the CBIICBTPA. Market access issues (e.g., tariff rates, quotas, rules of origin) were core negotiating areas. Although Central American and Dominican tariffs were already relatively low, they were reduced further. In particular, U.S. business interests wanted equal or better treatment than that afforded to exports from Canada and Mexico based on their FTAs with Central American countries. Permanent and clarified trade rules also supported the joint production 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 trade commitments that affect some of its most competitive industries, including rules covering the treatment of intellectual property, foreign investment, government procurement, e-commerce, and services. From the Central American and Dominican perspectives, reducing barriers to the U.S. market (especially for textile and agricultural products) was cause enough to proceed. The CAFTA-DR also made permanent and expanded U.S. benefits given under 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 the possibility that U.S. agricultural exports of key staples, such as corn and rice, might overwhelm their small markets. Sensitivity to these and other key industry sectors were addressed in the extended tariff phase-out and safeguard schedules, and as a 6USITC, Textiles andapparel, pp. 3-33, Gereffi, Gary. The Transformation of the North American Apparel Industry: Is NAFTA a Curse or a Blessing? Integration and Trade. Vol. 4, No. 11. May-August Inter-American Development Bank. pp

12 matter of development policy, by CAFTA-DR country efforts to diversify the agricultural sector into non-traditional exports and non-farm employment. 7 to be fully realized, but the CAFTA-DR countries see the FTA as supporting this strategy. Figure 1, remains in that role today. need for better Central American integration as part of CAFTA-DR, which small sub-region would complicate the trade picture. For the CAFTA-DR to work with Costa Rica heading toward ratification of CAFTA-DR. Second, there was a well, the United States needed some assurance that goods would flow efficiently U.S. and multilateral offers to assist these countries in developing such capacity were ways, similar to those of Central America. U.S.-Dominican Republic trade was Finally, there were two significant negotiation challenges. The first was the within the region, which will be a significant benefit of the agreement, particularly historically has been hampered. Having multiple trade rules and rules of origin in a negotiation process. difference in negotiating capacity between Central America and the United States. viewed as generous, but also a little self-serving, which required sensitivity in the CRS-1O the basic framework and rules ofcafta, while negotiating market access and some has dominated Central America s foreign commerce for 1 50 years, and as seen in U.S.-Central America Trade In addition, the Dominican Republic s economy and export regime are, in many 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 other issues bilaterally, as was done with each ofthe five Central American republics. added to an earlier version of this report and is discussed in more detail separately. Dominican Republic in 2004 was one-third greater than with either Costa Rica or 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 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 idea is not only to tap into naturally small production capabilities, but to help bring social 17 The CAFTA-DR countries have begun new exports projects in areas such as miniature 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 trading partners covered by the CAFTA-DR agreement. Total U.S. trade with the Docking the Dominican Republic FTA to CAFTA added the largest of six and the Dominican Republic U.S. Trade Relations with Central America

13 Figure 1. Central America s Direction of Merchandise Trade, 2003 United States International Trade Commission. US.-Central America-Dominican (continued...) Republic Free Trade Agreement: Potential Econoniywide and Selected Sectoral Effects. (25.3% including the Dominican Republic), compared to 17.6% with the world and Trade volume with the United States varies among countries, but in most cases 21.2% with Latin America as a whole (see Appendix 3 for the data). U.S. imports Republic) over the same time period, compared to 43.4% from the world and 51.4% normal trade relations (NTR) status or the CBI or GSP programs. 18 America and the Dominican Republic entered the United States duty free under either from Central America increased by 19.3% (15.4% including the Dominican from Latin America. Importantly, in 2003 some 80% of imports from Central the trend has been one of growth at a rate higher than the average for U.S. trade with the world. Over the past five years, U.S. exports to Central America grew by 34.7% at 53% compared to Nicaragua s 25%, which is the lowest. Total trade (exports plus This distribution is not uniform throughout the region. Honduras, for example, exports 67% of its merchandise goods to the United States, compared to 44% for Costa Rica. Honduras also has the highest import percentage from the United States imports) with the United States is also somewhat uneven country by country. Costa Rica accounts for 30% of total Central American trade with the United States, whereas Nicaragua amounts to only 5% of the total. Guatemala, Honduras, and El Salvador account for 25%, 22%, and 18% respectively. accounting for some 56% of its exports and 44% of its imports. The rest of Latin America collectively is the next largest trading partner, accounting for 25% of together account for about 14% of Central American exports and 21% of imports. The United States is by far the largest of Central America s trading partners, Central America s exports and 31% of its imports. The European Union and Asia Data Source: IMF, Direction oftrade StaIisIics 2004 Yearbook. Central American Exports Central American Imports CRS-ll

14 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 For 2004, although trade growth varied among the five countries, U.S. export CRS-12 sent abroad for value-added processing and then returned to the United States. is the nature of a production-sharing trade relationship, where parts and materials are 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 Importantly, when services trade is added to the trade balance, the United States circuits. These three distinct categories, for various reasons, are not traded uniformly countries except Costa Rica and constitutes only 3.8% of U.S. imports from the quantities by Brazil, Colombia, and countries in Africa as well. Banana trade has America. region. This reflects the competitive nature oftrade in coffee, which is grown in vast (from U.S. yarns). Of that amount, the Dominican Republic had 33% of the total may engage in greater value-added operations such as cutting and dyeing, which has 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 by the five countries (see Table 1). also declined in importance and accounts for only 5.0% of U.S. imports from Central 22, Bl-4. Developments in Industi-v Trade and Technology Review. November pp. 13, 20 United States International Trade Commission. Production-Sharing Update: Commerce based on foreign country reporting. provided in some of the Country Commercial Guides produced by the U.S. Department of U.S. bilateral services trade data with the Central American countries. Estimates are This trend is not disputed, but the U.S. Department of Commerce does not disaggregate USITC Publication August p. 7. (...continued) 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 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% of textiles and apparel imported from the six CAFTA-DR countries in 2002 was assembled from U.S. fabric dominated by Costa Rica and Guatemala. Coffee has actually declined for all First, Central America has traditionally exported bananas and coffee, which is into three main categories: fruit (mostly bananas) and coffee; apparel; and integrated U.S. Imports. Nearly three-quarters ofu.s. imports from Central America fall developing countries. 9 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

15 America, 2004 Table 1. Top Eight U.S. Merchandise Imports from Central and the CAFTA-DR is seen as a way to help abate this trend: 1 the CAFTA-DR countries have been losing market share to Asia since at least 1997, ($ millions) Total U.S. liriports 13,172 3,333 3,641 3,155 2, Edible Fruit & Nuts (08) 1, Bananas (0803) (657) (245) (129) (273) (0) (11) Electrical Mach. (85) Integrated circuits 8542 (489) (489) (0) (0) (0) (0) Optical/Med. Equip. (90) Spices, Coffee, Tea (09) Coffee (0901) (504) (148) (43) (213) (49) (52) Mineral Fuel, Oil (27) Other 2, 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 is the fastest growing and most diversified trader in Central America, which explains, 21 USITC, Textiles and Apparel, p Hufbauer, Kotschwar, and Wilson, op. cit., p diversification, and provide a long-term stable trade environment that will increase agricultural exports such as cut flowers and miniature vegetables (in multiple CAFTA-DR countries), as well as, developing maquiladora operations to suppiy coil wrapped cables for the automotive sector (Honduras) and adapting apparel cutting technology to supply insulation for aircraft engines (Costa Rica). Many non-apparel U.S. foreign investment in the region. Evidence is already seen in alternative The CAFTA-DR is intended to build on these trends, support export 2003 for the production line of chipsets for personal computers. In 2004, U.S. in part, why it has outpaced its neighbors on the development path. 22 Third, Costa Rica attracted $500 million in foreign direct investment for a computer chip assembly and testing plant, which has become its major export Similar importance may be seen in the imports of Costa Rica s medical equipment, another indicator of its relatively sophisticated production capabilities. Costa Rica generator. This investment was augmented by an additional $110 million in October imports of integrated circuits constituted 18% of total imports from Costa Rica. FishandSeafood(03) KnitApparel(61) 5, ,013 1,261 1, WovenApparel(62) 2, pduct and HTSa4 Total C R..- Hon Guat El Sal Nic : - CRS-13

16 Total U.S. Exports 11,388 3,304 3,077 2,548 1, Integrated circuits 8542 (828) (822) (0) (5) (1) (0) -Office Mach. Pts (8473) (207) (68) (26) (62) (32) (19) Machinery (84) 1, Computer Parts (8471) (136) (43) (20) (32) (26) (10) Cotton Yam, Fabric (52) Mineral Fuel (27) Knit/Crocheted Fabric Plastic (39) Numbea. Thca $ millions) America, 2004 Table 2. Top Eight U.S. Merchandise Exports to Central States under production-sharing arrangements. For example, nearly 60% of electrical U.S. Exports. As seen in Table 2, the major U.S. exports to Central America CRS-14 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 MFN) tariff rates. Rules on U.S. apparel imports were enhanced and made Total. Hon Gnat El Sal Nic 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 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 permanent under CAFTA-DR. 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 Product and HTS Costa P 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. ElecMachinery(85) 1,698 1, Salvador. Although the United States exports machinery and parts to all five Rica. All five countries import U.S. cereals and some, such as corn and rice, are of knit apparel and 76% of knit, cotton, and yarn fabric went to Honduras and El Cereals (10) Corn (1005) (242) (71) (31) (65) (64) (10) -Rice (1006) (149) (46) (33) (18) (16) (37) -Wheat and Meslin 1001 (167) (38) (28) (34) (46) (21) Other 4,639 1,252 1,168 1, 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 KnitApparel(61) Similar trends for U.S. import trade are evident in U.S. exports. In 2004, 78% countries, electrical machinery and particularly integrated circuits, are sent to Costa

17 CRS-15 among the more import sensitive products for the CAFTA-DR countries because they are staple crops and grown by small, often subsistence 23 fanners. The significant aspects of this trade structure are that it reflects: 1) the continued historical trend of (largely duty-free) regional dependence on the large U.S. market as an important aspect of trade and development policy; 2) a deepening economic integration; 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 in Latin America) and ranks as the 41st largest import country(8th in Latin America). More so than any of the Central American countries, Dominican trade is dominated by the United States (see Table 3 for bilateral trade data.) (6th Table 3. U S Exports (by product U.S.-Dominican Republic Merchandise Trade, 2004 $ minions U S Imports (by product and HTS Number*) and fits Number*) - $ millions 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 other developed countries and only 8% entering developing countries. The Dominican Republic imports 50% of its merchandise goods from the United States, 13% from other developed economies, and 37% from various developing countries. Although the largest of the CAFTA-DR trading partners, U.S. exports grew by only 1.6% in 2004 as the Dominican Republic continued to recover from a severe recession. The joint-production arrangements are evident in apparel and jewelry-making industries. 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, refined oil products, and plastic. Other important U.S. imports include medical instruments, USITC, Production-Sharing Update: Developments in Technology Review. July pp , Bl-4 Industry Trade and

18 CRS-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 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. part of the trade relationship with the United States, which is the largest foreign The CAFTA-DR countries also benefit from foreign direct investment (FDI) as U.S. Foreign Direct Investment logic of docking it to the Central American agreement. The trends suggest that U.S. direct investment in the area is relatively small and 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 potential economic effects on the United States. Congress mandated that the United estimates of the CAFTA-DR effects on the U.S. economy as a whole and for selected consumers and households of trade liberalization under the CAFTA-DR would be 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 its final report in August This report provides quantitative and qualitative Review of the CAFTA-DR [ Data are stock of FDI on a historical-cost basis. Guatemala Honduras Nicaragua Dominican Republic 968 1,143 1, Costa Rica 1,493 1,716 1,835 1,802 1,831 Total Central America 3,058 3,630 2,994 3,220 3,435 (S millions) El Salvador in CAFTA-DR Countries Country Table 4. U.S. Foreign Direct Investment (FDI) has stagnated or grown erratically in recent years. Some countries have fared better can affect business decisions. Investment patterns have been skewed toward Costa Rica, which has over half of U.S. FDI in Central America. One aspect of the congressional debate over trade agreements focused on their States International Trade Commission (USITC) assess these effects and it released sectors. Overall, it found that the welfare value or aggregate effect on U.S. -o9

19 CRS-17 With respect to trade flows, the reduction ofrelatively higher tariffrates on U.S. is in effect. 24 approximately $166 million (less than 0.0 1% of GDP) for each year the agreement ld a permanent agreement U.S. preferential market access extended unilaterally under is delayed. For manufactured goods, duties on 80% of U.S. exports were eliminated 24 USITC, US.-C entral America-Dominican Republic Free Trade Agreement, p. 64. The study reviews literature on the CAFTA-DR and makes estimates of the economywide and sectoral effects of trade liberalization under CAFTA-DR based on a computable general equilibrium (CGE) model. For details, see pages xiv, 2, and Appendix D. 25 Ibid., pp. xxii and Ibid., p. 25. which defme the time period over which customs duties will be eliminated. Each country negotiated a list of its most sensitive products for which duty-free treatment immediately, with the rest phased out over a period of up to 10 years. agricultural goods, duties on over 50% ofu.s. exports were eliminated immediately, treatment is back loaded and will not begin for 7 or 12 years after the agreement Each traded good falls into one of eight tariff elimination staging categories, with the rest phased out over a period of up to 20 years. In some cases, duty-free 26 For Market access refers to provisions that govern barriers to trade such as tariffs, preferences based on their regional content. CAFTA-DR replaces and enhances in Partnership Act (CBTPA), and the Generalized System of Preferences (GSP), which require periodic congressional reauthorization (except CBERA). Agriculture and difficult market access issues to resolve. textile/apparel goods, Central America s major exports, were the most important and the Caribbean Basin Economic Recover Act (CBERA), the Caribbean Basin Trade quotas, safeguards, and rules of origin, which define goods eligible for tariff Market Access references the ITC s conclusions with respect to each major issue area, where applicable. Emphasis is given to those sectors and issues expected to be most affected by the agreement, or that generated the most contentious policy debate. The rest of this section briefly summarizes the major negotiation issues and prior to the negotiations that the marginal effects of the CAFTA-DR will be small, goods is expected to increase U.S. exports more than imports with the region. The USITC 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%, while imports will increase by $2.8 billion, or 12%. The effect of this trade growth on aggregate U.S. output and employment is estimated to be minimal. The largest sector both output and employment). small and already largely open economies. 25 These estimates are in line with expectations made increases were estimated to occur for U.S. grains (0.29% for output and 0.3 1% for employment) and the greatest decrease to occur for sugar manufacturing (-2.0% for but positive for the U.S. economy as a whole, given the CAFTA-DR countries had

20 takes effect. For the CAFTA-DR countries, 100% ofnon-textile and non-agricultural duty phase-out period. The penrianence of the provisions and the more CRS-18 goods enter the United States duty free immediately. many products over the period of duty phase out, but antidumping and countervailing duties were not addressed in the CAFTA-DR, leaving all U.S. and other country trade yarn forward rule. The difference from the CBTPA is that duty-free access applies (TPLs) given to a few imports from Nicaragua and Costa Rica. to address the decline in U.S. market share of textile and apparel imports from the on textile and apparel imports that qualify under the agreement s rules of origin, Textiles and Apparel. The CAFTA-DR has less restrictive provisions remedy laws fully enforceable, as required under Trade Promotion Authority (TPA). governing textile and apparel imports than those in the CBTPA. It removes all duties retroactive to January 1, 2004, and allows for special safeguard measures during the accommodating rules of origin and administrative guidelines may generate a marginal increase in apparel imports from the region. These provisions are intended region over the past five years, most ofwhich have been displaced by Asian products, limited quantity of woven 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 27 Safeguards are retained for 29 See CRS Report RS22 150, CAFTA-DR: Textiles andapparel, by Bernard A. Geib. p USITC, U.S. -Central American-Dominican Free Trade Agreement, pp CAFTA Suminaty. It may be found at [ Summary ofthe US. -central America Free Trade Agreement. p. 1. Hereafter cited as the 27 Office of United States Trade Representative. Free Trade with Central America: States. The CAFTA-DR may also increase U.S. exports of textiles, which have risen materials that are determined to be commercially in short supply in the United imports. U.S. and CAFTA-DR firms that produce for the U.S. market wanted as 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 of helping the region compete (by lowering costs) in the U.S. market against Asian Although these rules were widely supported, some textile producers registered concern that they are overly restrictive and therefore limited in their intended effect 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 rule include an enhanced cumulation rule, which allows duty-free treatment for a countries or the United States, rather than just the United States. 29 Exceptions to this to textiles and garments assembled from components made in either the CAFTA-DR duty free for years, if it is assembled from U.S. yam and fabric under the so-called Central American and Dominican apparel has been entering the United States American and Dominican imports under the CBTPA. 28 despite the enhanced preferential treatment that Congress afforded to Central

21 it will likely have a negligible impact on U.S. production or employment. 30 significantly under CBTPA. On balance, however, the USITC study estimated that Free Trade Agreement (CAFTA-DR,), by Remy Jurenas. as duty-free under their tariff preference levels. These assurances are not part of the to be subject to quotas that will increase, after a certain period, by approximately 2% Geib. Inside U.S. Trade. CAFTA Textile Rules Pave Way for Increase in Foreign Fabric Use. 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.- preferential treatment for certain non-originating apparel goods (Annex 3.27) and Costa Rica received limited special treatment for certain wool apparel goods (Annex 3.28). 31 Washington Trade Daily, Tide Risingfor CAFTA Portman, July 26, For more details, including sanitary and phytosantiary (SPS) provisions, see CRS Report RL32 110, Agricultural Trade in the US. -Dominican Republic-Central American Free Trade Agreement (CAFTA-DR), by Remy Jurenas. Agreement: Opportunities and Challenges. In: Schott, Jeffrey J. ed. Free Trade Agreements: US Strategies and Priorities. Washington, D.C. Institute for International Economics pp CRS Report RL321 10, Agriculture in the US.-Dominican Republic-CentralAmerican Salazar-Xirinachs, Jose M. and Jaime Granados. The US-Central America Free Trade Central American-Dominican Republic FTA, p Nicaragua received special CRS Report P , Textile Exports to Trade Preference Regions, p. 2, by Bernard A. 30 half of current U.S. farm exports to Central America became duty free upon by the United States, fresh potatoes and onions imported by Costa Rica, and white each year in perpetuity, with no decrease in the size of the above-quota tariff. 34 Over corn imported by the other Central American countries. These goods will continue All agricultural trade eventually becomes duty-free except for sugar imported 32 Agricultural products have the most generous tariff phase-out schedules, trade-distorting policies. Average applied tariffs on agricultural goods by most CAFTA-DR countries are relatively low, ranging from 7% to 23%. Most agricultural with up to 20 years for some products (e.g., rice and dairy). This approach acknowledges that the agricultural sectors bear most ofthe trade adjustment costs and that they will require time to make the transition to freer trade. 33 DR, which focused on reducing tariffs and increasing quota levels, the most costly imports face no tariff in the United States. For all countries, the pressing challenge was negotiating tariff rate quotas (TRQs see below) for their most sensitive Agriculture. Domestic support programs were not addressed in the CAFTA products. formal CAFTA-DR, but have been implemented nonetheless. 3 Concerns raised by certain sectors of the textile and apparel industry required assurances from the Bush Administration before support would be given to the CAFTA-DR. Promises were made to: (1) change the rules of origin for textiles and apparel to require that all pocketings and linings come from the CAFTA-DR countries (rather than third party countries like China); (2) negotiate a new stricter customs enforcement agreement with Mexico before the CAFTA-DR cumulation rules take effect allowing Mexican inputs to be used in CAFTA-DR textile and apparel products; and (3) require Nicaragua to increase use of U.S. fabric to qualify CRS-19

22 fruits and vegetables, processed food products, and wine. 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 was filled by the CAFTA-DR countries in 2003, and was a major issue for this implementation, including high quality cuts ofbeef, cotton, wheat, soybeans, certain Many other transitional provisions exist. Agricultural products are subject to responding to third party export subsidies. a threat to the domestic industry. 35 Export subsidies are eliminated except when tariff-rate quotas, or limits on the quantity of imports that can enter the United States additional duty temporarily on products that are being imported in quantities deemed CRS-20 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 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 2003, and that the overall effects of the sugar provisions may be small. Two studies Bill) through FY2007, when it expires. In particular, he agreed to act should 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 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 provisions could result in a decline in sugar prices of 1% (USITC) and 4.6% (LSU), them duty-free treatment, but a key issue for some Members of Congress was defining precisely how this mechanism will work. 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 of 2002 (the Farm done by the USITC and Louisiana State University estimated that the sugar Ibid., pp USITC, U.S.-CentralArnerican-Dorninican Free Trade Agreement, p. 35. 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 phased out over 15 years, with the quota schedule defined for each country. years) and a safeguard. The United States has a 26% out-of-quota tariff on beef that will be u For example, in the case of beef the Central American countries have agreed to the provisions. The Bush Administration responded in a letter from Secretary of Nonetheless, the sugar producing industry remained unsatisfied with these with perhaps largely offsetting employment effects in the sugar producing and sugarcontaining product industries. mechanism to compensate Central American sugar exporters in lieu of according 37 The United States mayimpose a sugarprice quota in year one, rising to 50% by year 15, after which the quota increases each year The CAFTA-DR raises the U.S. quota by an amount equal to 35% ofthe current representing less than 10% of the region s sugar production. 36 agreement. The U.S. market accounts for only 14% of the region s sugar exports,

23 CRS-21 additional sugar imports due to the CAFTA-DR, NAFTA, and other trade agreements cause the import trigger threshold of million short tons per year to be exceeded and threaten the sugar program operations. The U.S. Secretary ofagriculture agreed that in such a case, he would preclude entry of additional sugar imports into the domestic sweetener market by either making direct payments to exporters or using agricultural commodities to purchase sugar to be used for nonfood use (ethanol production). This offer also proved inadequate to bring about sugar industry support for 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 free trade in this commodity. Staples for the CAFTA-DR countries, such as rice and white corn, however, remain protected and there is a complicated system for phasing out TRQs on U.S. exports over a year period. As with sugar imports to the United States, U.S. exports of corn and rice will increase slowly due to the highly restrictive TRQs and special safeguard measures. The USITC estimates that changes in the quantity of exports from the United States will be small at first and rise by perhaps 20% by the end of the TRQ phase-out period. The USITC suggests that the long-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, particularly to the small commercial and subsistence farmers, of further opening its markets to 39 U.S. agriculture. Three recent studies, however, agree that overall, increased agricultural trade can also be one source of Central American rural development. In addition to increasing Central American agricultural exports, the majority of households are net consumers of agricultural goods, and so stand to gain from lower prices, the equivalent to an increase in family income. Because subsistence farmers produce generally does not reach the market, they are unlikely to be affected greatly by changes in market prices. 40 Still, for the minority of rural net producers of agricultural goods, economists also agree that adjustment policies are essential, beginning with targeted income assistance. For rural areas to benefit fully from the CAFTA-DR, there is also a critical need for increased investment in transportation and communications 38 Ibid., pp Oxfam International. A Raw DealforRice Under CAFTA-DR. Briefing Paper # Todd, Jessica, Paul Winters, and Diego Arias. CAFTA and the Rural Economies of Central America: A Conceptual Franeworkfor Policy and Program Recommendation. Inter-American Development Bank. Washington, D.C. December pp , Mason, Andrew D. Ensuring that the Poor Benefitfrom CAFTA: Policy Approaches to Managing the Economic Transition. Draft of Chapter 5 in forthcoming book. The World Bank. Washington, D.C. March 25, pp , 35, and Arce, Carlos and Carlos Felipe Jaramillo. El CAFTA y la Agriclutura Centroamericana. Paper presented at the World Bank Regional Conference on International Trade and Rural Economic Development, Guatemala. February 21-22, p. 17.

24 42 regulations. Investment or non-farm employment, and integrate the rural economy more fully with the the negative effects of freer trade. 4 infrastructure, education, and more fully developed financial services. This will improve agricultural productivity, help transition workers toward alternative crops CRS-22 Latin America and the Caribbean. Some 43% of the FDI in CAFTA-DR countries States has advocated clear and enforceable rules for foreign investment in all trade and most-favored-nation (nondiscriminatory) treatment. The CAFTA-DR clarifies rules on expropriation and compensation, investor-state dispute settlement, and the went to Costa Rica, followed by the Dominican Republic with 20%. The United national and international economy. Without concerted effort in adjustment assistance, the poorest segments of rural Central America may remain vulnerable to agreements, which is largely accomplished by standard language requiring national criminal activity). Transparent and impartial dispute settlement procedures provide expeditious free flow of payments and transfers related to investments, with certain recourse to investors. allows investors alleging a breach in investment obligations to seek binding exceptions in cases subject to legal proceedings (e.g., bankruptcy, insolvency, arbitration against the state through the dispute settlement mechanism defined in the protect the rights of foreign investors. Since bilateral investment treaties are usually made with developing countries that have little foreign investment in the United Circumstances changed, however, under NAFTA when Canada used investor-state provisions to raise indirect expropriation claims against U.S. state environmental Investment Chapter. U.S. investors have long supported the inclusion of investorstate rules to ensure that they have recourse in countries that do not adequately States, such a provision was not thought to be applied to the United States. NAFTA Chapter 11, by Robert Meltz. many cases are discussed in CRS Report RL3 1638, Foreign Investor Protection Under business or property owner in a way that is tantamount to expropriation. This issue and 42 Indirect expropriation refers to regulatory and other actions that can adversely affect a ibid. welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations. This provision and one that allows for early 10-C ofthe CAFTA-DR states that except in rare circumstances, nondiscriminatory respect to investment protections than United States investors. In response, Annex regulatory actions by a Party that are designed and applied to protect legitimate Congress instructed in TPA legislation that future trade agreements ensure that foreign investors in the United States are not accorded greater substantive rights with Although none of the claims filed against the United States has prevailed, U.S. bilateral investment treaties (BITs) and used in earlier FTAs, was included. It Two investment issues stood out. First, an investor-state provision, common in CAFTA-DR countries was $4.3 billion, which represents only 1.4% of U.S. FDI in In 2003, the United States stock of foreign direct investment (FD1) in the

25 of certain sovereign debt. Annex 10-A allows sovereign debt owed to the United there is uncertainty about how well the changes will operate. elimination of frivolous suits were intended to address congressional concerns, but Second, the CAFTA-DR countries requested greater flexibility in the treatment Salazar-Xirinachs and Granados, op. cit., p USTR, CAFTA Summary, p D.C USTR National Trade Estimate Report on Foreign Trade Barriers. Washington, imports because the market is already open. It does anticipate opportunities for U.S. eventual opening ofits state-run telecommunications and insurance industries, where Costa Rican economy, will have implications for Costa Rican social policy, and will The USITC suggests that the CAFTA-DR will have little effect on U.S. services firms to expand into Central America. In particular, Costa Rica agreed to the there has been strong political resistence to privatization and deregulation. require amending domestic laws, all ofwhich, the Costa Ricans argued, was difficult discussions held in January2004 and their detailed conunitments are presented in the relevant chapters ofthe CAFTA-DR. Because ofthis continued sensitivity, however, the other countries, doing so will constitute a major structural adjustment for the for 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-long 45 Unlike and telecommunications). 43 The CAFTA-DR provides broader market access and of foreign professionals in Honduras; local partner requirements in some financial presented a number of hurdles given that the Central American countries have adopted few commitments of the WTO s General Agreement on Trade in Services The United States is the largest services exporter in the world and services trade (GATS). There were also many industry-specific barriers that existed, such as: barriers to foreign insurance companies in Guatemala; heavy regulation licensing services in Nicaragua; and numerous services monopolies in Costa Rica (insurance greater regulatory transparency for most industries including telecommunications, subsidiaries, joint ventures, and branches. Regulation of service industries is required to be transparent and applied on an equal basis and e-commerce rules are insurance, financial services, distribution services, computer and business technology services, tourism, and others. Banks and insurance firms have full rights to establish clearly defined, a critical component of delivering services. Services accommodation to Central American interests. in the event of a financial crisis, to keep the CAFTA-DR from interfering in any settlement provisions in investment chapter, with the exception that it be given national and MFN treatment. Annex 10-E extends from six months to one year the amount of time required before a U.S. investor may seek arbitration related to sovereign debt with a maturity of less than one year. Both provisions are intended, sovereign debt restructuring process, and are viewed by the U.S. Treasury as an States that has been suspended and rescheduled not to be held subject to the dispute CRS-23

26 48 of patents, trademarks, and copyrights, covering print, electronic, and other media. 49 Government Procurement and complaints against purchasing processes vary from dissatisfaction with opaque and cumbersome procedures in Costa Rica to outright Government Procurement Congress. a vote on ratifying the CAFTA-DR is highly controversial in the Costa Rican CRS-24 None of the CAFTA-DR countries is a signatory to the WTO Agreement on corruption in Guatemala. El Salvador, Nicaragua, and Honduras passed new value contracts and other exceptions. It also calls for procurement procedures to be government procurement laws in 2000/01, and in general, there have been 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 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 of subnational governments many U.S. industries (e.g., sound and video recordings, pharmaceuticals, book property. Piracy, incomplete or inadequate legal protection, and enforcement publishing, computer software) consider necessary to protect their intellectual capacity remain problems and ongoing concerns exist across the range of IPR issues on Trade-Related Aspects of Intellectual Property Rights (TRIPS). That said, all InteiJectual Property Rights 48 (e.g., states and municipalities) that agree to adhere to the government procurement transparent and fair, including clear advance notices of purchases and effective Ibid and 2004 National Trade Estimate Report on Foreign Trade Barriers. USTR, AFTA Summaty, p.5. Salazar-Xirinachs and Granados, op. cit., p USTR, 2004 National Trade Estimate Report on Foreign Trade Barriers. 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 property rights (IPR) laws and are closing in on complying with the WTO Agreement All Central American countries are revising, or have revised, their intellectual 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. The CAFTA-DR grants non-discriminatory rights to bid on contracts from Central American ministries, agencies, and departments, with the exception of low procurement market. 47 that many of these countries will not be able to compete in the U.S. government issues remain. 46 Some analysts believe this is due in part to a lack of incentives given improvements in all countries in dealing with project bidding, although transparency

27 CRS-25 transparent online registration process and special system to resolve disputes over internet domain issues, among other benefits. Copyright provisions clarify use of digital materials (exceeding TRIPS standards) including rights over temporary copies of works on computers (music, videos, software, text), sole author rights for making their work available online, extended terms of protection for copyrighted materials, strong anti-circumvention provisions to prohibit tampering with technologies, the requirement that governments use only legitimate computer software, the prohibition of unauthorized receipt or distribution of encrypted satellite signals, and rules for liability of internet service providers for copyright infringement. Patents and trade secrets rules confonu more closely with U.S. norms. End-user piracy is criminalized and all parties are required to authorize the seizure, forfeiture, and destruction of counterfeit and pirated goods. The CAFTA-DR also mandates statutory damages for abuse of copyrighted material. 50 The CAFTA-DR goes a long way toward meeting U.S. business IPR protection needs and the USITC suggests that many industries will benefit from higher revenue if the new standards can be enforced. Even if laws are changed to conform to the CAFTA-DR commitments, however, enforcement issues will likely remain and technical assistance may be needed to help develop the necessary capabilities. 51 Pharmaceutical Data To bring a patented drug to market, a drug company must demonstrate through clinical trials that the drug is safe and effective. Under U. S. patent law, the data used to establish these claims are protected from use by generic manufacturers for five years from the time the drug is introduced in a country s market. Similar language was adopted in the JPR chapter of the CAFTA-DR. This provision became controversial in November 2004 when the Guatemala legislature changed its laws, adopting World Trade Organization (WTO) language that would have limited data protection to five years from the time a drug is brought to market in the first country (e.g., the United States), rather than from the presumably later time that it might be introduced in a second country (e.g., Guatemala). Protection. The USTR argued that this change was a breach of the CAFTA-DR commitments and threatened to delay implementing legislation until the law was changed. Guatemala reversed the data protection law, to the disappointment ofmany who argued that the CAFTA-DR provisions could delay access to future generic drugs. Given that data protection and patent protection often run concurrently, however, it is debatable whether the introduction of future generic drugs will be further inhibited by this provision. An August 5, 2004 side agreement among all signatories further clarifies that obligations under Chapter 15 of the CAFTA-DR do not affect a country s ability to take necessary measures [e.g., compulsory licensing for generic drugs] to protect public health by promoting access to medicines for 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 USITC, U.S.-Central America-Dominican Republic Free Trade Agreement, p. 101.

28 Labor and Environment 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 CRS-26 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. 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 consistent with the free trade model and studies suggest that these cost differentials argued that developing countries have a comparative advantage in labor costs to move U.S. investment and jobs abroad. On the other hand, economists have 53 It follows from this argument that the difference in costs is an enticement countries. Vol. 3, Issue 1, Spring pp. 75 and 78. Drezner, Daniel XV. Globalization and Policy Convergence. International Studies Review. Jackson. The Hague: Kiuwer Law International pp and 436 and CRS standards, but to the contrary, that policy convergence is affected more by countries environmental degradation, pollution, and poor working conditions may not be captured in, Report , Trade with Developing Countries: Effects on US. Workers, by J.F. agreeing to norms of governance via cooperation through international agreements. See is some broader evidence that FTAs have not forced a race to the bottom of regulatory In addition to the external costs addressed in this section, it is interesting to note that there and Nonsense in the Globalization Debate, pp Hornbeck. Productivity and wage levels are, however, highly correlated. See Rodrik, Sense Quick, eds. New Directions in International Economic Law: Essays in Honor ofjohn H. See Stem, Robert M. Labor Standards and Trade. In: Bronckers, Marco and Reirihard reflected in the final (relatively higher) price of the good or service in the market place. social problems, thereby internalizing these costs to the business, where they are then tax measures, developed countries require that businesses correct, or pay for, many of these or are extemal to, the market price (so-called external costs). Through legal, regulatory, and Access to Medicines Controversy, by Ian F. Fergusson. The difference is that in most developing countries, the social costs associated with on Guatemalan Data Protection Law. International Trade Reporter. BNA, Inc. March 10, See also: CRS Report RS2 1609, The WTO, Intellectual Property Rights, and the for a summary of the debate, see Brevetti, Rosella. CAFTA Opponents Blast U.S. Stance H.Rept PP The side agreement is available at [ and Republic-Central America-United States Free Trade Agreement Implementation Act. 52 U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican remains the primary decision factor. 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 54 Further, manyeconomists view trade are usually not high enough to determine business location alone productivity States argue that developing countries may have an unfair competitive advantage From an economic perspective, labor and environment advocates in the United

29 CRS-27 issues related to specifying standards in trade agreements and the possibility that they can be misused as a disguised form of protectionism. Labor Issues. The labor chapter proved to be the biggest point of contention in the CAFTA-DR debate, divided largely along party lines. The opening paragraph of the chapter states that all parties reaffirm their commitments under the United Nations International Labor Organization (ILO). These are defined in the ILO Declaration on Fundamental Princzples and Rights at Work as: (1) the freedom of association and the effective recognition of the right to collective bargaining; (2) the elimination of all fonris of forced or compulsory labor; (3) the effective abolition of child labor; and (4) the elimination of discrimination in respect of employment and occupation. Disagreement revolved around three issues. First, whether the CAFTADR countries had laws that complied with ItO basic principles. Second, the ability of these countries to enforce their laws. Third, and most importantly, capacity of the CAFTA-DR Labor Chapter to compel legal compliance and enforcement of ILO fundamental principles. 56 CAFTA-DR Labor Laws and Enforcement. The Central American countries entered the debate early when they requested the ILO to conduct a study of their labor laws. The final 2003 report is subject to interpretation and has been used to bolster both sides of the argument as to whether the CAFTA-DR countries guarantee core ILO principles. Some interpreted the report to affirm that the CAFTA-DR countries laws comply with internationally recognized labor standards. In response, Democratic Members ofthe House Ways and Means Committee pointed out deficiencies in many of their laws in a letter sent to the USTR s office. It identified 20 Central American laws that fail to meet core ILO principles, all cases related to freedom of association or collective bargaining, as opposed to discrimination, compulsory labor, or child labor In April2005, with the assistance ofthe litter-american Development Bank, the CAFTA-DR country ministers of trade and labor released a study of their countries shortfalls in meeting and enforcing core labor principles. Although it documented that all countries had made recent changes to their labor laws, there was clear recognition for the need to hannonize some laws better with ILO principles, as well as, address enforcement of key infractions such as employment discrimination Article 16.8 of the Labor Chapter also has a list of internationally recognized labor rights that includes all ofthese rights plus acceptable conditions ofwork with respect to minimum wages, hours of work, and occupational safety and health. 56 United Nations. International Labor Organization. Fundamental Principles and Rights at Work: A Labour Law Study: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua. Geneva, Letter to the Honorable Peter Allgeier. April 4, If Honduras and Guatemala are eliminated, concerns in this letter would focus on the use of solidarity associations, onerous strike requirements, and inadequate protection against anti-union discrimination.

30 2002. (pregnancy testing), abuses in free trade zones (application of labor laws), and the expertise to enforce adequately good labor practices, a problem that will also take of any party, but there was little disagreement that labor law enforcement is an CRS-28 need to dedicate more resources to enforcement. have admitted in their own report that many lack the financial resources and technical time and resources to overcome. The debate over the adequacy of labor laws was not resolved to the satisfaction ongoing problem and that unionization is not widespread. The CAFTA-DR countries for the other two provisions, although they are supported in principle (Articles 16.2 and 16.6). not apply to the disputable labor provision. The difference is that the option for ILO to improve existing labor laws and enforcement; and (3) building local capacity the possibility of a suspension of benefits of equivalent effect (Article 20.16), to 50% ofwhat a dispute panel determines is of equivalent effect. This article does by: (1) ensuring effective enforcement of existing labor laws; (2) working with the FTAs through a Labor Cooperation and Capacity Building Mechanism that will support a mutual approach to improve working conditions in CAFTA-DR countries resolution process as defined in the CAFTA-DR. Dispute resolution is not available resulting in the raising of tariffs, or payment of a monetary assessment (fine) equal to improve workers rights. 6 The 59 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, 60 The TPA vote, however, was highly contentious in part because of the disagreement over 61 Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC). The U.S. how the principal negotiating objectives with respect to labor were defined. Capacity. April Dominican Republic. Building on Progress: Strengthening Compliance and Enhancing Ministers of Trade and Labor. The Labor Dimension in Central America and the settlement provisions. If a commercial dispute remains unsettled, the country faces There was also concern over the differences between labor and other dispute basic principles; and (3) non-derogation from domestic standards (not weakening or reducing protections to encourage trade and investment). failure to enforce domestic labor laws, can be formally challenged in the dispute 6 The first provision, 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 Critics charged, however, that the CAFTA-DR labor provisions were too weak the principal negotiating objectives of the United States with respect to labor. 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 USTR made note of this fact and further argued that the chapter goes beyond earlier Labor Provisions in TPA and the CAFTA-DR. The Labor Chapter in the

31 CRS-29 failing to resolve a labor dispute is a monetary assessment paid by the country, which is capped at $15 million per year, per violation, with recourse to an equivalent dollar value of suspended benefits (higher tariffs) if the fine is not paid. The fine is paid into 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 workers in any of the six countries participating in the agreement. Many Members of Congress concurred, believing that the enforce your own laws standard, as well as the limited dispute settlement provisions, will be ineffective at compelling countries to meet basic ItO standards. It was also argued that they are a step backward from the provisions allowing for the suspension of trade benefits found in U.S. unilateral preferential trade arrangements, such as the Caribbean Basin Initiative (CBI) and the Generalized System of Preferences (GSP). In these, the United States has the option to suspend trade benefits (reimpose tariffs) if a country does not comply with provisions of the agreement, including the labor section. Democrats cited a number of examples, including CAFTA-DR countries, where sanctions, or threats thereof, compelled changes in labor laws 63 Further, capping the assessment in a labor dispute at $15 million and having the assessment paid into a fund in the offending country was seen as a largely ineffective mechanism for compliance. 62 Supporters ofthe Labor Chapter argued that the agreement encourages countries to 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 trade agreement where the United States is also subject to the discipline, and further, that trade sanctions are a blunt instrument, punishing all export workers whose products would come under the sanctions, potentially worsening their situation rather than improving it. It was also argued that sanctions have not been a widely used tool over the lives of the CBI and GSP programs, and to the contrary, that an annual $15 million fine per violation is a potentially significant deterrent for the CAFTA-DR countries. Finally, technical assistance, cooperation, and transparency were presented as 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 and possibly effective punitive responses to encourage deeper labor rights reforms in Central America. These provisions are similar to those found in other FTAs for which 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 clearly lacking for the CAFTA-DR countries, despite efforts to make transparent their deficiencies and to correct some laws and enforcement problems. Hence, broader 62 LAC, ibid., p See U.S. Congress. House of Representatives. Committee on Ways and Means. Dominican Republic-CentralAinerica- Un itedstates Free Trade Agreementlmplementation Act. H.Rept pp Ibid., pp See also: Gresser, Edward. The Progressive Casefor CAFTA. Progressive Policy Institute. Policy Brief. July pp

32 Environmental Issues. Maj or goals included protecting and assuring strong CAFTA-DR. support was never reached in Congress over the adequacy of these provisions in the 65 CRS-30 enforcement of existing 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 66 cooperation agreement with a framework for establishing a cooperation commission countries to enforce their laws and regulations and also creates an environmental 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 which developing countries can use to respond to specific problems. Advocates still 68 environmental cooperation, and through technical assistance programs, the latter of the environmental provisions were not the most contentious issues in the CAFTA led to catastrophic pollution problems nor encouraged a regulatory race to the DR. Many of these same advocates have conceded that trade agreements have not 67 Negotiations? Carnegie Endowment for International Peace. Washington, D.C. July Indeed, incorporating mandatory adherence to the ILO basic principles would later 66 [ Principlesfor Environmentally 67 For more details on congressional interest in environmental provisions in trade 68 See Audley, John. Environment and Trade: The Linchpin to Successful C AFTA Provisions in P.L , by Mary Tiemann. agreements, see CRS Report RS2 1326, Trade Promotion Authority: Environment Related of protectionism. See CRS Report RL3 1638, Foreign Investor Protection Under NAFTA Chapter 11, by Robert Meltz. 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 become standard language for the Peru, Panama, and Colombia bilateral FTAs. environment provisions in the CAFTA-DR and particularly the enhanced public participation process negotiated by the State Department in a side agreement. The The Trade and Environment Policy Advisory Committee supported most of the to public accountability is questioned in some cases. technical assistance, particularly in the case of Central America, where commitment 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 developing countries that may have weak laws and lax enforcement mechanisms, but Advocates raised the issue of the environmental effects of trade, particularly in and enforcement of laws and regulations. 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 been met in the proposed CA.FTA-DR agreement. It includes language requiring all The USTR argued that congressional objectives on environmental issues have environmental provisions in FTAs are subject to the same dispute resolution and enforcement mechanisms as are other aspects of the agreement.

33 dispute settlement provisions, effectively the same rules governing labor disputes, concrete funding for the program. 69 In response, the seven countries signed a a number of specific environmental concerns, and questioned whether the CAFTA were accepted as striking the proper balance. The advisory committee still raised DR would be able to meet congressional objectives on capacity building without Earlier versions of this report mentioned a fourth area, trade negotiation capacity. This typology of capacity issues was developed by Bernard Hoekman ofthe World Bank. 70 Agreement. The US. -Central American Free Trade Agreement. March 12, Trade and Environment Policy Advisory Committee on the Central American Free Trade Even before detailed discussions began on the CAFTA-DR, the Central comply with liberalized trade rules. Hence, the need for trade capacity building, which may be classified into three distinct areas beyond trade negotiation American countries were apprehensive over the possibility ofbeing overwhelmed by capabilities. First, the ability to identify priorities, including where the major adjustment costs (losers) are expected to be and how to respond to them. Second, the ability to develop resources to implement the agreement, including institutional, financial, and analytical resources. Third, the capacity to benefit from the CAFTA agreement call for one of its first priorities to be customs administration. the resource and experience advantage that the United States had to negotiate and to continue work begun in the negotiation process, and recommendations in the 7 The agreement created a permanent Committee on Trade Capacity Building DR. Trade Capacity Building If this approach is not successful, the process moves to the establishment of the Free disagreements are intended to be resolved cooperatively via a consultative process. Arbitral panels are intended to broker mutually acceptable resolutions, including providing for compensation, if appropriate. If a mutually-agreed solution is not Administrative and other technical matters (e.g., transparency issues) of trade suspension of benefits are to be administered are set out in guidelines. Resolving The dispute resolution chapter was modeled on previous FTAs, in which Trade Commission of cabinet-level representatives, and finally an arbitral panel. labor and environmental disputes will be handled slightly differently (see previous agreement implementation were also addressed by this working group. found, the complaining party may resort to a suspension of benefits of equivalent effect. This result may also be challenged, and final resolution, as well as how the section). All dispute resolution procedures are defined in Chapter 20. Dispute Resolution and Institutional Issues issues. The ECA is intended to address both short- and long-term environmental goals, including providing for a monitoring process, but does not address concerns It calls for a new unit to be established in the Secretariat for Central American supplemental Environmental Cooperation Agreement (ECA) on February 18, Integration to administer public submissions or complaints made on enforcement over funding for the implementation of environmental initiatives. CRS-31

34 American firms, particularly if barriers to world trade are reduced outside the U.S.- producer to international player. marginally productive businesses. The joint-production relationship already established in textiles and garments suggests that certain finns have already 71 This will be a difficult challenge for many Central and trade logistics problems; and in other ways make the transition from local CRS-32 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 developed some expertise in meeting these challenges. 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 Economic Commission on Latin America and the Caribbean Organization of American States OAS, Maintaining formal support for these programs, including ongoing financial Central American relationship (WTOIFTAA) putting increasing pressure on Agency, Agency for International Development, and the Department of State, among others; private groups (corporate and non-government organizations NGO5); and Central American Bank for Economic Integration DR trade capacity building peaked as the agreement came to completion, including commitments, is one challenge supporters of these programs emphasize. This is also enforcing labor and environmental commitments. and the World Bank). true for the trade capacity building efforts in specific non-commercial areas, such as $20 million for labor and enviromnental technical assistance in the FY2005 budget. CABEI, 71 Ibid. coordinate these types ofactivities. U.S. inter-agency flmding in support of CAFTA The CAFTA-DR includes a Committee on Trade Capacity Building to Central American countries. Each Central American country prepared a National From the outset of negotiations, the United States advocated assisting the ECLAC, United Nations five international organizations (the Inter-American Development Bank 1DB,

35 CRS-33 Appendix 1. Chronology of CAFTA-DR Negotiations Date January 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 Milestone President George W. Bush announces his intention to explore a free trade agreement (FTA) with Central America. President Bush signs the Trade Act of 2002 (P ), which includes Trade Promotion Authority (TPA). President Bush, as required under TPA, fonnally notifies Congress of his intention to negotiate a U.S.-Central America Free 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 negotiate an FTA with the Dominican Republic. of intent to CAFTA negotiations conclude in Washington, DC. Costa Rica requests further negotiation on telecommunications, insurance, agriculture, and textile market access issues. Costa Rica and the United States hold first round of bilateral discussions on CAFTA. First round of negotiations with Dominican Republic held. Costa Rica and United States hold second round of bilateral discussions 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 to sign CAFTA. The United States and the Dominican Republic conclude a bilateral FTA and the USTR announces it will be docked to CAFTA. President Bush formally notifies Congress of his intention to sign the U.S.-Dominican Republic FTA. USTR releases draft text of the FTA with the Dominican Republic. The USTR and trade ministers from the Central American countries sign CAFTA in Washington, D.C. The USTR and trade ministers from the Dominican Republic and Central America sign the CAFTA-DR agreement in Washington, 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 Senate Finance Committee holds hearing on CAFTA-DR.

36 of49 to 37. DR. H.R and S Stat. 462) April 21, 2005 House Ways and Means Committee holds hearing on CAFTA with one non-binding amendment. by voice vote, with no written report. two hours and all points of order against consideration of H.R are waived (H.Rept ). 16 with one non-binding amendment. Date Milestone CRS-34 implementing legislation and informally approves it 11 to 9, June 14, 2005 Senate Finance Committee holds mock markup on draft June 15, 2005 House Ways and Means Committee holds mock markup on draft implementing legislation, informally approving it 25 to 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 June 29, 2005 Senate Finance Committee orders S favorably reported favorably reported by a roll call vote, 25 to 16. consideration of H.R under which debate is limited to June 30, 2005 House Ways and Means Committee orders H.R June 30, 2005 S agreed to in the Senate, 54 to 45. July 25, 2005 H.R reported by the House Committee on Ways and Means (H.Rept ). July 26, 2005 House Committee on Rules provides a closed rule for July 28, 2005 H.R agreed to in the House, 217 to 215. July 28, 2005 Senate agrees to substitute H.R for S. 1307, 56 to 44. Deputies passes bill 118 to 4, Senate passed bill 27 to 3 on August 2, 2005 President Bush signs H.R into law (P.L ; 119 September 6, 2005 Dominican Republic ratifies CAFTA-DR. Chamber of August 26. October 9, 2005 Nicaraguan General Assembly ratifies CAFTA-DR by a vote April 1, 2006 The United States implements CAFTA-DR for Honduras and March 1, 2006 The United States implements CAFTA-DR for El Salvador. March 1, 2007 The United States implements CAFTA-DR for the Dominican Nicaragua. July 1, 2006 The United States implements CAFTA-DR for Guatemala. Republic. October 7, 2007 Costa Rica referendum supports CAFTA-DR 51.6% to 48.4%.

37 r Appendix 2.. CRS-35 Selected Economic (year 2003 data, except where otherwise indicated) Indicators 1. Costa El. Guat. ion- Jicar- Dom... Rica Salvador einala duras agua Rep. GDP ($ billions) GDP Growth (%) GDP Growth (%)* GDP Growth (%)* PPP Per Capita Gross 8,560 4,190 4,030 2,540 2,350 6,270 National Income* * Inflation (%) Current Account Balance (% of GDP) Pop. Below $1 per <2.0 day (%)*** HumanDevelopment Index (HDI) Rank# Sources: World Bank, World Development Indicators 2004, pp , 54-55, and , United Nations, 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 United States. GNI, formerly represented as GNP by the World Bank, is a different, but similar measure as GDP. Data are for year 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 in human 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.

38 -41 Country Y,çiange bange 4 1 2O l (S mi11ions Countries Appendix 3. U.S. Merchandise Trade with CAFTA-DR CRS-36 * Latin America and the Caribbean, except Mexico. Source: Table created by CRS from U.S. Department of Commerce data. LAC* 55,153 59,283 58, ,551 F 51,946 61, % 11.4% Total CAFTA -2,777-2,564-1, ,838-1,969 Mexico 7-22,812 [ -24,577-30, ,146-40, Latin America -26,124 [ -38,642-39, ,098-67,531-82,391 World f - 328,8T[ -436,104 l,8f -468, , ,735 El Salvador 1,605 1,933 1,880 1,982 2,020 2, % 27.9% El Salvador LAC* 7-3,311 [ -14,065-9,213 f -17,952-26,883-37,323 U.S. Balance of Trade U.S. Imports World 695, , , , , , % 17.6% Nicaragua % 58.3% Nicaragua % 100.2% World 1,024,618 1,218,022 1,140,999 1,161,366 1,257,121 1,469, % 43.4% LatinAmerica 168, , , , , , % 51.4% LAC* 58,464 73,348 67,370 69,503 78,829 98, % 68.9% El Salvador 1,519 1,780 1,760 1,664 1,821 1, % 23.0% Guatemala 1,812 1,901 1,870 2,044 2,263 2, % 40.6% Total CAFTA ,577 13,389 14,083 15,031 15, % 25.3% Latin America 142, , ,453 L149,021L149, , % 21.2% Guatemala 2,265 2,607 2,589 2,796 2,947 3, % 39.3% Total CAFTA 15,333 16,141 15,269 16,029 16,869 17, % 15.4% Mexico 109, , , , , ,843 l2.9%l 42.0% Guatemala Dominican Rep Honduras 2,370 2,584 2,416 2,571 2,826 3, % 29.8% Dominican Rep 4,100 4,473 4,398 4,250 4,205 4, % 5.9% Mexico 86, , , ,470 F 97, , % 27.5% Costa Rica 3,968 3,539 2,886 3,142 3,364 3, % -16.0% Honduras 2,713 3,090 3,127 3,261 3,313 3, % 34.2% Dominican Rep 4,287 4,383 4,183 4,169 4,455 4, % 5.6% Costa Rica -1,587-1, Honduras Nicaragua CostaRica 2,381 2,460 2,502 3,117 3,414 3, % 38.8% U.S. Exports

39 . You are here: Home / Publications / FAS Fact Sheets / CAFTA-DR I State Fact Sheets / Florida Home About Newsroom Data Commodities Trade Development Careers Contact Us Help USDA United States Department of Agriculture Linkini VS..\iLuf:uz Foreign Agricultural Service r htto :// gov/info/factsheets/caftaifla. asn 11/10/2010 o Advanced o Search Database-specific Searches Import U.S. Products FTA. in recent years. Current duties on tomatoes can reach 15 percent in CAFTA-DR countries, will in be eliminated immediately Central American countries, while the Dominican Republic will a establish zero duty TRQ of 1,100 metric tons which expands annually as duties are Duties on the products most important to the U.S. beef industry Prime and Choice cuts duties as high as 79 percent. Current import duties on U.S. beef exports are as high as 30 percent, and the WTO permits sector, Florida cattle and calve operators benefit from the FFA. Beef. As the state s 5th largest source of farm cash receipts and 4th largest agricultural export CAFTA-DR to service the rising demand for fresh tomatoes. and under WTO rules, could rise to as high as 60 percent. All duties in this sector will be and seasonal production considerations, the United States will be well-positioned under eliminated within 15 years, and earlier in many cases. As the hotel, restaurant, and food in service sectors the region continue to expand, along with increasing consumer incomes from elimination of duties affecting the nearly $500,000 in U.S. exports of fresh tomatoes Providing the 4th largest source of state farm cash receipts, Florida tomato growers benefit vegetable producers and processors benefit from the FTA. Vegetables and Preparations. Ranking in the nation in value of sales and 7th in exports, Florida years, and earlier in many cases. could rise to as high as 60 percent. All duties in this sector will be eliminated within 15 Florida s citrus growers, the source of nearly 30 percent of farm cash receipts, will benefit Current duties on citrus can reach 20 percent in CAFTA-DR countries, and under WTO rules, countries and on frozen concentrated orange juice by all Central American countries. from the immediate elimination of duties on concentrated grapefruit juice by all CAFTA-DR producers and processors benefit from the FTA. Fruits and Preparations. As the nation s 2 largest exporter of fruit and fruit products, Florida fruit these markets and levels the playing field with other competitors. This objective was achieved. by most CAFTA-DR exports into a two-way-street that provides U.S. suppliers with access to primary U.S. objective was to change the one-way-street of duty-free access currently enjoyed Over 50 agricultural industry and farm groups, including the American Farm Bureau, support the high tariffs and other barriers on most agricultural products, including Florida s key exports. A Despite over $1.6 billion in U.S. farm exports in 2003, CAFTA-DR countries continue to impose Florida Benefits From the U.S.- CAFTA-DR Free Trade Agreement (FTA) increase Florida s exports of agricultural products. Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) will 2003, Florida s farm cash receipts were $6.5 billion, and agricultural exports were estimated at Programs about 20,540 jobs both on and off the farm in food processing, storage, and transportation. In Market Development Export U.S. Products $1.3 billion, putting its reliance on agricultural exports at 20 percent. Implementation of the Exports of farm products help boost Florida s farm prices and income. Such exports help support Information for... May2005 Florida Farmers Will Benefit El Search All USDA (CAFTA-DR) Dominican Republic-Central America-United States Free Trade Agreement STATE FACT SHEETS: CAFTA-DR State Fact Sheets - Florida Page 1 of 3

40 J,f,... i/w, q c Quj nv/jnfn/factsheets/cafta/fla. asp 11 / 10/2010 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 Duties currently applied to other beef products and beef offals will be phased-out in S to 10 CAFTA-DR countries are working toward the recognition of the U.S. meat inspection and The American Meat Institute, the National Cattlemen s Beef Association, the National U.S. dairy exporters currently face duties as high as 60 percent, and the WTO permits Each country will establish duty-free TRQs for certain dairy products totaling over 10,000 TRQs will grow by 5 percent per year for the Central American countries and 10 percent per All Central American and Dominican duties will be eliminated within 20 years, with duties The National Milk Producers Federation, the U.S. Dairy Export Council, the Grocery 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 access on sugar (about 151,000 metric tons) amounts to about 1.7 percent of The Sweetener Users Association, the National Confectioners Association, the Grocery U.S. poultry exporters currently face duties as high as 164 percent on both fresh and frozen Each CAFTA-DR country will provide immediate duty-free access on chicken leg quarters, a Costa Rica and the Dominican Republic will establish duty-free TRQ5 for chicken leg Costa Rica in the amount of 2,000 metric tons annually. new access, and provisions have been agreed to allow alternative forms of compensation to product where the United States is the world s most competitive exporter, through countryspecific TRQ5 that expand annually as duties are eliminated in 17 to 20 years. for dairy products entering the United States. the FTA. Dairy. As the state s 6th largest source of farm cash receipts, Florida dairy operators benefit from publicly for the CAFTA-DR PTA. Renderers Association, and the U.S. Meat Export Federation have expressed support the phase-out period. about 1.2 percent of annual U.S. sugar consumption. This amount grows very slowly by percent out-of-quota duty on U.S. sugar that currently protects domestic producers. support publicly for the CAPTA-DR FTA. on some dairy products eliminated earlier. certification systems in order to facilitate U.S. exports. years. duties as high as 100 percent. Manufacturers of America, and the National Food Processors Association have expressed Sugar. The 0.3 percent of Florida farms engaged in sugar production will face no cuts in the over consumption. The United States will also establish a quota for specialty sugar goods of Manufacturers of America, and the National Food Processors Association have expressed products, and the WTO permits duties as high as 250 percent. FTA. Poultry. With nearly $200 million in farm cash receipts, Florida poultry producers benefit from the support publicly for the CAPTA-DR FrA. be established to facilitate sugar stock management by the United States. Provisions will ensure only net surplus exporting countries in the region have access to the phased-out. year for the Dominican Republic, with certain dairy products subject to safeguards during percent a year into perpetuity, so that by year 15 of FTA implementation the increased CAFTA-DR State Fact Sheets - Florida eliminated. metric tons across the six countries and each will receive the same level of TRQ access Page 2 of 3

41 Page Map CAFTA-DR State Fact Sheets - Florida 3 of 3 quarters totaling 850 metric tons, each expanding by 10 percent annually. The other four Central American countries will establish a total regional duty-free TRQ of 21,810 metric tons (with individual country minimum quota levels). After year 12, the TRQ quantity will be no less than 5 percent of regional chicken production. Duties on poultry products such as wings, breast meat and mechanically de-boned poultry meat 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 and certification systems in order to facilitate U.S. exports. The National Chicken Council, the USA Poultry and Egg Export Council, and the National Turkey Federation have expressed support publicly for the CAFTA-DR FTA. Sugar Production in Florida - (.pdf) Return to CAFTA-DR State Fact Sheets Page Last Updated: September 27, 2007 FAS Home USDA.gov Economic Research Service (ERS) I World Agricultural Outlook Board (WAOB) I Trade Links FOIA Accessibility Statement I Privacy Policy I Non-Discrimination Statement I Information Quality I USA.gov I White House I Site Map 11 / 10/2010

42 CARIBBEAN TAX HAVENS, MONEY LAUNDERING AND THE PUSH BACK FROM THE US

43 2 Paradise Lost? Offshore Financial Havens and Money Laundering INTRODUCTION Since their inception, offshore centres have been used by legitimate financial institutions seeking to minimise their tax liability, maximise profits, and avoid onerous regulatory controls. They have also been invoked by wealthy individuals, residing in highly taxed or politically unstable environments, who wish to enhance their wealth legitimately and discreetly. Indeed stability, both political and financial, and easy removal of funds, are characteristics which attract business to an offshore centre, as the absence of these facilities might be the very reason that the money is deposited offshore. For example, flight capital often represents money fleeing oppressive fiscal laws or undemocratic regimes, by persons stockpiling their assets far from the reach of their governments. However, there is another category of user which has undermined the integrity of offshore financial intermediation who exploit the benefits of the offshore world to promote their unscrupulous activities. In this respect, the illegitimate funds in offshore centres have an eclectic origin, ranging from drug trafficking and corruption to tax evasion. Whatever their provenance, all of these funds share a common bond of seeking sanctuary in the financial services and confidentiality offered by the offshore havens. It is this role as depository of illegitimate wealth. that has led to the loss of paradise, a label commonly associated with these tropical islands. For now, the concept of offshore financial centres has become synonymous with money laundering centres. The objective of this chapter is to explore the infrastructure of the region s offshore financial services industry (focusing on the laws of the Bahamas and the Cayman Islands) and specifically, to examine those aspects of the industry that have been used to facilitate money laundering. DEFINING THE OmsHoan FINANc1 INousTRY A financial entity such as a bank is designated as offshore where the host country in which it is chartered permits it to carry on its operations anywhere outside that country s borders. The services of such businesses are conducted in foreign currency and are provided exclusively to non-residents of the host State. A country is classified as an Offshore Financial/Banking Centre if its banking business is totally dispropor tionate to the needs of the domestic market and where a deliberate attempt is made to attract offshore financial business through the imposition of minimal taxation and 29 those

44 In order to appreciate the nature of the region s offshore financial sector today, a brief Barbados, Belize, the British Virgin Islands, the Cayman Islands, Dominica, Grenada, The concept of offshore finance, although traditionally associated with particular geographic locations, such as the Caribbean or the South Pacific, is also equally opment of Internet banks and banking, the conventional notion of offshore is assuming look at its origin is required. The offshore financial industry began to emerge in the prompted banks, particularly in North America, to relocate some of their financial Equalisation Act in 1963, the Voluntary Foreign Credit Restraint Program and the stabilising the US balance of payments problem, by way of restraining capital borrowing for domestic purposes, and foreign borrowing for foreign purposes. In addi interest rates exceeded those imposed as a ceiling on bank interest rates on US dollar the imposition of capital controls by the US government in the form of the Interest tion to the above, in 1966 a credit crunch was caused when the US money market 4 These factors 2 Apart from offshore banking, a developed offshore that tax havens are the nucleus of the offshore world, a tax haven being a country financial centre may also provide facilities for the establishment of offshore companies The above descriptions of offshore financial intermediation would characterise several of the jurisdictions examined in this book. Commonwealth Caribbean territo a certain amount of banking secrecy.t It is for the former reason that it has been said Money Laundering Control in the Caribbean countries. At the same time, advances in telecommunications and fund transfer mecha nisms permitted speedier connections between financial entities around the world, while decreasing the expense of operating from distant centres. activities to more liberal jurisdictions which afforded them fiscal advantages through Specifically, the growth of the offshore sector in the Caribbean may be attributed to Foreign Direct Investment Program, both in These measures were aimed at with a zero or low rate of tax. and trusts. ries associated with this industry include Anguilla, Antigua & Barbuda, the Bahamas, Montserrat, Turks & Caicos Islands, St. Kitts & Nevis, St. Lucia and St. Vincent. requiring Americans investing abroad to borrow abroad. That is, a system of domestic 3 ENrnRGENcE OF THE REOtON S OlwsHoRE FtNANctAL INDUSTRY new dimensions, without regard to territorial constraints. M. Cook, Offshore Fina,,cial Centres (t98t). M. Csssard, The Role of Offshore Centres is tnternationat Financial Entermediatios Ilta F Worki,ig Of )hore Althosgh not physically tocated is Caribbeas, Bermsda asother Commonwealth territory the is in the and Tax Free (t993). Western Hemisphere which is considered to be as offshore financial centre. tt.l. Barber, nix Hapens, How to Basic tnvest and Do Easiness low or no taxes. Paper (1994). 5 deposits. Ibid. sbnence of direct taxation on the net profits snd more importantly the lack of any withltoldiag tases on tn the Bahamas and the Caymsn Islands there are no taxes on income or cspitst gains. This includes the Euromsrket or Eurocarrency markets refer to deposits snd loans booked outside country in whose requirements and deposit insurance schemes for banks offshore rendered it cheaper own advantage. The emergence of these new international financial centres also corre deposits, and was also aimed at preventing depositors from moving their money to In 1969 the US Federal Reserve Board agreed to permit the establishment of bank In effect, the new offshore jurisdictions became havens, or sanctuaries, where the 5 where deposits could be made or loans booked abroad in US Offshore Financial Havens and Money Laundering 30 non-bank financial institutions in search of higher returns. The absence of reserve overall for them to obtain funds, thereby increasing the amount of capital available. These conditions induced American banks to establish branches offshore in the growing Euromarket currency, but free from the restrictions imposed in the US. banks and the money flowing through them could operate independent of, and unregu lated by, the laws and practices in their home jurisdiction. This worked to the banks It is for the above reasons that the majority of the offshore banks registered in the some trsnsactions, particularly loans or deposits, are normally arranged and managed Caribbean was interested in diving into the shark-infested offshore financial waters an equal and opposite reaction; what, then, were the poll factors involved? That is, the Caribbean, in light of Castro s success in implementing communism in Cuba. Of sponded to the new articulation of world capital operating on a global market scale under the hegemony of finance capital and facilitated the generation of global profit Caribbean are of US origin. The history of these institutions also explains why juris The above may be described as the push factors and since for every action there is because they offered a combination of the following: a no/low tax regime, relief from Before examining these characteristics, the still-unasked question of why the course, the Caribbean offshore territories were attractive to US banks primarily 8 Registration offshore was primarily for the purpose of taxa in another jurisdiction. in the same time zone as the Eastern seaboard and financial seat of the US. At this places which are easily accessible. The Caribbean havens also had the benefit of being by transnational banks. tion, to benefit from the absence of high taxes. For banks this spells greater profits time too, the US government was keen to advocate the promotion of capitalism within reserve ratios, no-deposit insurance premiums and the security of financial secrecy. must now 9 be answered. At the same time that the US banks were seeking to go paymesis arising from assets held there, Is both jurisdictions, there are no estate or inheritance taxes X. Gorostisga, The Role of international Financial Ce,ttres in Underdeveloped Countries (1984) 1st. Gillard, Angailia Crarks Down on Financial Piracy The Observer, May 27, t990 carrescy they are denominated. This practice originated in Europe, hence the term and lend money more competitively in the international market currency instability through saving in US dollars. The US financial market became segmented, by restricting the number of loans from local banks to foreigners while garden of the US. People like to be close to their money and the proximity of the region to the US gave the American banks the assurance of having their funds in what lured these entities to the Caribbean and not another part of the world? The strategic position of the Caribbean is one factor, situated practically in the front outflows. This was in response to the increased demand for US currency, outside of that country, by individuals and businesses wishing to insure against domestic since neither the interest on loans booked through them, nor the interest on deposits made with them, are subject to high rates of taxation. This enables the banks to borrow Commonwealth Caribbean in the 1960s. This was primarily due to the stringent restrictions and heavy taxation affecting financial institutions in the industrialised dictions such as the Bahamas and the Cayman Islands became known as offshore booking centres. That is, even though the financial transactions are registered there, applicable to larger financial centres, including London, which provide financial services to non-residents. In addition, as seen in the preceding chapter, with the devel branches offshore. This was intended to increase the effectiveness of the banks by allowing them to avoid regulations that might impede them in their bid for loans and

45 Money Ijiundering Control in the Caribbean Offshore Financial Havens and Money Laundering US Department of Treasury, Tax Havens in the Caribbean (1985) D Leppard and Burke, Robinson s Bermuda Tax Haven Sunday Times. December 7, Lambert, Iviarketing Trust Services in the 90 s puper presented a, the Cuyman Islands 5th Oie,iniel The 3()() Offshore Bunking Act (1979). An unnamed Bahamisn executive quoted in R. Btum, Offshore Bunks, Trusts and Companies and trust companies in the respective jurisdictions. Rngnlationn Law t 966 (Cayman) sought to impose u licensing procedure for the formation of new banks The Bunk and Trust Company Regutatious Act t965 (Bahamas) and the Bank and Trust Company Business of Crime in the Euromarket (1984). Many banks stilt retained a shett entity offshore. Cassard op cit. Gregory Heis ering 293 u.s. 465 (1935). it the United Kingdom. Lawyer 42. Si Quoted in B. Rider, Burbados Government to Devetop Istand us a Tax Haven (1981) 2 Company Conference, Jannary t997. US Department uf Treasury, Tax Havens in the Caribbean (1985). Islands by sum time had bees granted self.governing status although it remained a dependent terntary of 0 This was especially true for the Bahamas which gained its political independence in The Cayman interest in the Caribbean offshore financial centres and assisted the Barbados government 2t By this time too, the UK had begun to take a keen impugn Barbados reputation. utmost vigilance so as to exclude dishonest and criminal transactions which could the laundering of illegal funds and emphasised its determination to exercise the concealing the very existence of the funds from the relevant authorities. The result is otherwise be onshore. The danger arises where the transactions involved have the design and effect of 6 placed in a secret offshore bank account, or in the name of an offshore company, and illegally earned income, which was diverted to or passed through havens for the their taxes and regulations. As the offshore world became more crowded, competition increased and Caribbean offshore centres were forced to offer highly attractive legisla underlying approach taken by many Caribbean centres in developing their offshore offshore centres when enticing the offshore market to their shores. Indeed, it was the Cayman Islands. One could simply set up a company and give it full banking powers offshore industry to promote the island as a responsible offshore financial centre. Thus, in 1977 when the Barbadian government declared its intention to develop the adamantly expressed the government s refusal to create conditions that would facilitate not declared to the revenue authorities. Indeed, in the 1980s, a US Senate investigation sound financial needs, but the demand for their services remained elastic to changes in 7 industry: things which are allowed in the US is non-competitive since in every instance the appeal to activities disallowed in the US.us eagemeus of the region to find a niche in the offshore world that led it to venture hastily into the uncharted waters of the offshore world. In many cases, the supporting specific legislation governing the offshore financial sector in the Bahamas and the cautious approach. It was indeed the objective of the architects of that country s island as a tax haven and offshore financial centre, the then Attorney-General In retrospect, one could say that the following statement captures the unofficial but 2 US does it better than the Bahamas do. The Bahamas are therefore compelled in day, and having learned from the bittersweet lessons of their neighbours, took a more and, without more, have an offshore bank) By way of contrast, Barbados came on board the offshore financial scene later in the tion for offshore activities, often without installing the necessary uafeguards. offnhore financial intermediation. For instance, until the rnid-1960s there was no 9 The establishment of offshore financial centres in the Caribbean was a response to purpose of tax evasion. banking and trust operations to appeal to unallowable activities and by inference to infrastructure would not be in place, further exposing the jurisdiction to the dangers of consrnittee found that there were a large number of transactions involving legally and [T]he Bahamas must do things which are not allowed in the US because to do This statement is equally applicable to the attitude of some of the other Caribbean a coincidence of tax evasion and money laundering, and may arise where the wealth is 1 Thus, the very factors which forced several his taxes, or altogether avoid them, by means which the law permits. included not only travelling people but also money on the move. International Banking Facilities (lb F) at home. This enabled them to deal with foreign off their carefree image of simply being places of sand, sea and fun in the sun. So opportunity and flung their financial doors open to embrace these intermediaries, one continued to play the role as host to tourists, but from this time onwards their guest list customers free of reserve requirements, interest rate ceilings and deposit insurance, perfectly legitimate for a taxpayer to decrease the amount of what would otherwise be for tax in the UK. Whilst the transactions may have called into play moral and ethical draconian levels of taxation and exchange controls persist in other jurisdictions, the offshore industry will continue to flourish, by driving offshore those funds that would one. They could now establish themselves as a serious financial centre, while shaking By the early 1980s, the US Federal Reserve allowed American banks to establish use of offshore trusts in the tax havens of Bermuda and Guernsey to reduce liability these countries the chance to diversify their economy from a purely tourism-dependent without resort to an offshore facility. their appeal and by 1982 nearly 400 banks had established IBFs and shifted their been put in place, the wide range of services available continues to entice both legiti mate and illegitimate users. home. A much-publicised example of such a plan was the tax avoidance efforts of Geoffrey Robinson, former UK Paymaster-General. issues, they did not cross the nebulous line into the sphere of unlawful tax evasion. In 5 This situation highlighted the was thus of paramount importance. Embarking into the offshore world gave some of tiers between onshore and offshore activity become blurred by financial liberalisation and deregulation, it has been suggested that the need for the offshore financial sector 0 The achievement of economic independence from the UK era of political autonomy. 2 Today, as the fron offshore, several territories of the Commonwealth Caribbean were emerging into the when the American banks came knocking, many territories foresaw a golden economic arm bearing minimal taxation and the other financial secrecy. Indeed, the region banks offshore were no longer an obstacle. Offshore centres began to lose some of assets and liabilities home from existing entities in the Caribbean) will diminish. One of the core features of offshore centres is the absence of high taxation. This has always been particularly attractive for those resident tn high tax jurisdictions, as it is havens by definition capitalise on a taxpayer s desire to minimise liability to tax at cases such as this, the use of offshore jurisdictions is frowned upon because it facili tates the diversion of capital generated in another jurisdiction. However, as long as 3 Nevertheless, as the infrastructure for offshore finance has already 4 Indeed, tax

46 Money Laundering control in the Caribbean Offshore Financial Havens and Money Laundering Ernst & Young, Barbados: a Unique Offshore Business Centre (1990) Barbados offers offshore bank, Narcotics Control Strategy Report 2001 (2002). It is not considered, by the FATF, to be a uos-cooperattve jurisdiction in the fight against money sundering (see Chapter 10). Barbados is classified as a Jurisdiction of Concern by the US Department of State, lnserssatiosnl of paper ones whose stock-in-trade is fictitious or unseen capital, have been said to a building of their own, nor do they have vaults or employ local staff to service their centres, comprising both full service branches of intemational banks which offer Any kind of international criminal whose goals are to continue operations, increase 22 while still becoming a genuine, unique one-stop shopping offshore business the creation and staffing of the post of Inspector for Securities. This conservative approach to offshore finance has enabled Barbados to remain a relatively clean profit and avoid detection will run a critical phase of his business through the offshore formation, minimal controls and confidentiality that the offshore bank, company and offshore banking facilities, as well as limited service offshore banks that cater exclu customers outside the borders of the host country. Since it is not allowed to do busi entrepots or booking centres. Thus, in most cases, the offshore banks act as a mere conduit, whereby non-resident foreign currency funds are deposited into and then operations. Since they never handle cash but merely record deposits and loans, nothing presence on the islands limited to a name-bearing brass plate and their representative a local lawyer or other resident agent. This deficiency of real entities and the multitude channelled through these intermediaries to other non-resident borrowers. Often, these transactions are merely entered in the bank s records but no physical movement of As described above, many Caribbean offshore centres are essentially financial A bank is designated as offshore where it is chartered or licensed to operale with 24 As will be shown, it is because of their easy in ensuring that its offshore industry was properly monitored, including aiding in THE FACILITATORS OF MONEY LAuNoEruIo haven bank, trust and company system. trust have the most appeal to potential money launderers. Each of these financial vehi cles and the secrecy attached to them will now be examined in greater detail. Offshore Banks Several Commonwealth Caribbean jurisdictions remain vibrant offshore banking ness with local residents all its funds must be solicited from those resident outside that more than paperwork changes hands. They are essentially shell banks, their physical centre. 23 sively to non-residents. The latler may be restricted to specified customers or unre stricted to any non-residents. country or from another offshore entity. funds is involved. As such, the majority of these offshore banks do not occupy add an air of illusion and make-believe to these offshore centres Opportunities for money launderers could arise where the licensing Nevertheless, these shell banks are entitled to maintain a correspondent relationship essential money transmission services for the shell bank, including wire transfers. service banking to domestic customers, they have International Private Banking development of this practice was intended to allow the banks to tap the resources of high net worth foreigners. The original idea was that the investment needs of affluent foreigners could be satisfied by selling them personalised banking and trust products, Nowadays, anyone wishing to conduct the business of offshore banking is required procedure does not involve the rigorous screening of the prospective licensee, such as obtaining data on the applicant s financial status and history, the character and experi controlled by non-residents to have an authorised capital that has been subscribed and as well as advisory services. Although aimed at individuals with vast sums of inherited 28 Some of these correspondent A US Senate report found that large banks in the US manage thousands of correspon 27 The correspondent bank is then able to provide with a foreign bank. This would usually involve the offshore bank aligning itself with a major bank which is a member of one of the international electronic clearing banks process as much as US$1 trillion in wire transfers daily. fore not only provide his bank with a patina of respectability, it would also facilitate the passage of funds around the world. an offshore bank, the ability to have a correspondent banking relationship would there dent relationships with banks at home and abroad. 29 For a launderer with However, not all offshore banks are shells, as there exist branches of major foreign banks which maintain a physical presence in the region. In addition to providing full systems, such as CHJPS or SWIFT. facilities which allow them to conduct offshore business with non-residents. The wealth and new high earners such as entertainers, this service has aluo captured the funds of rich criminals seeking to launder criminal money, or thoae wishing to secrete SM. Roberts, The Local and tile Global: The Caynsan Islands a,sd the lvternotiosial Fissancial Systesn, to obtain a banking licence. This is usually granted on application supporled by the private wealth from their home governments, in the form of flight capital. 3 A prospective licensee must designate a local 3 address as its place of business and name its resident agents. ence of the directors, details of non-resident shareholders, and capital adequacy. Owning a bank would be even simpler where there is no requirement for offshore banks 32 A licence will usually be granted, once the carrying on of such banking business is not deemed to be against the public interesl requisite information and particulars. paid up. investor would acquire a number of banking licences and resell them to other foreigners, 34 By this, an entrepreneurial as Clearing House laterbank Payment System (CHIPS) and the Society for Worldwide Inserhauk Financial as Some of the most notorious of these estrepreneurs were in the business of purchasing, marketing and For example, Banks and Trust Companies Law (2001 Rev.) ( BTCL ) (Cl.); Bank and Truss Companies Indeed, the relative simplicity with which offshore banking licences could be obtained, in some offshore jurisdictiono, led to the development of an industry of brokering or retailing offshore banks in the 1980s. trust and insurance services as well as offshore trading companies. These may include offshore companies. For example, a. 6(6)(a) Banks and Trust Companies Law (2001 unpublished PhD thesis Syracuse University (1992). Telecommunications (SWIFT) (see also discussion in Chapter 7 relating to the use of wire translers for US Senate, Minority Staff of the Pen-sanest Sub-Committee on Investigations. Report on Correspondent Bankissg: A Gatess ay for Money Laundering, February 5,2001. Regulation Act 2000 ( BTCA ) (Bah). reselling offshore banking licences. mostly to fraudsters. 35 s. 4 BTCA (Bah.); s. 6 BTCL (CI.). a. 6 BTCL (C.!.); s. 4 BTCA (Bah.). mosey laundering). Ibid. 25 R. Bistro op. cit. Rev.) (CI.). centre, as 34 SM. Roberts op. cit.

47 often to those seeking a device for laundering wealth or for defrauding unsuspecting investors. Consequently, the offshore financial centres of the region gained notoriety as a spawning ground for small, shadowy private banks whose main activity was turning out phoney financial documents that are used.. (for) illegal purposes. Such practices prompted the British government to intervene in the financial affairs Money Laundering Control in the Caribbean Offshore Financial Havens and Money Laundering Since it was 42 At the time of its demise, the BCCI (which had 4t When the Antiguan authorities revoked the bank s of Montserrat 200 offshore banks which were allegedly engaged in unlawful activities. In that year too, the shady deals and operations of the Owens Bank and Trust Company in St. Vincent were exposed. This followed the conviction of the bank s chairman and manager, by an Italian court, in connection with a 150 million interna tional fraud and money laundering scheme. the Commonwealth Secretariat and the UK government, since the mid-1980s, during which time a Bank of England report expressed concern that the St. Vincent bank was engaging in illicit activity. A more recent example of the abuse of offshore banks is that of Antigua and the infamous European Union Bank. The misleadingly titled and self-proclaimed world s first Internet bank purposes of laundering their money and committing fraud, (including misappropri sting its depositors money). licence in 1997, they also shut down five other Russian-Owned offshore banks whose operations were equally suspect. To date, the most spectacular abuse of the offshore banking sector is that of the international financial conglomerate, the Bank of Credit and Commerce International. The bank was registered in Cayman as the principal banking subsidiary of BCCI Holdings SA, which was established in Luxembourg as a holding company and, consequently, not regulated as a bank in that jurisdiction. This structure enabled BCCI to be offshore everywhere thereby avoiding any central regulator or comprehensive supervision of its operations. branches in over seventy countries) was found to be involved in illicit activities on a worldwide scale ranging from banking fraud to drug money laundering. This was possible because no single regulator knew what the bank was doing beyond its jurisdiction. Another similarly structured institution was the Caymanx bank which operated in the Isle of Man as a subsidiary of an institution in the Cayrnan Islands. effectively offshore to both jurisdictions, it operated free of regulation. Indeed it boasted on the Intemet that its clients records were free from oversight by the authorities of any jurisdiction. 38 The bank had been under observation by 4 was allegedly a front for the Russian mafia, Set up for the 3t in 1991, and pressure its cabinet into revoking the licences of nearly S Drinkall, Con Meo are Raking in Miilions by Setting Up Own Caribbean Banks tout Street Journal, March 23, ss One of its dependent territories. B Rider, The Cost of Laundry (1995) 16 Company Louvyer 34. This action also resatted in the arrest of 2 Ministers for corruption. Si,Stail on Sunday. Storm hits offshore bank, Augnst 4, 199i. Ibid. The bank s services were conducted via the Internet. 4t The case also highlights the potential for abuse of banking over the Internet where total anonymity can be achieved and also the absence of controls on the Internet. 42 J. Adams and D. Frantz, A Full Service Bank BCCI Stole Billions Around the World (1992). Referred to in US Department of Stote, International Narcotics Control Strategy Report 1998 (1999). Offshore Companies With the help of a local lawyer and for the appropriate licensing fee, a wealthy foreigner can hide his identity behind a newly created but fictitious corporation, the activities of which would be couched in vague and obscure terms beneath the veneer of a generic corporate name. tion papers as nominees, including the incorporating lawyer, may be used to provide him with an additional layer of protection. These offshore companies are recognised legal persons and, apart from a prohibition against purchasing real property in the offshore jurisdiction, they may acquire assets and operate bank accounts. Common money laundering schemes would involve the use of offshore bank accounts held in the names of shell companies, and the transfer of such funds to a bank account held by an offahore company in another offshore juris diction, The FATF has reiterated that shell corporations continue to figure significantly in money laundering activities and, indeed, remain one of the primary tools employed by professional money launderers. They note that since there has been a rise in the use of bank accounts in the names of shell companies to shelter profits, countries should take notice of the potential for abuse of shell corporations by money launderers and should consider whether additional measures are required to prevent unlawful use of these entities, offshore companies. These are essentially companies that are set up to do business exclusively with persons resident outside the jurisdiction, They are usually precluded from carrying on banking, trust or insurance business and are intended to engage in foreign trade. In some jurisdictions there exists the creature known as the International Business Company (IBC), The IBC may be prohibited from owning an interest in real property locally, save for a lease of an office. It is usually characterised by its ease of incorpora tion, exemption from taxation and confidentiality for its members. For instance, in the Bahamas there used to be a 24-hour service for incorporation of a new entity, with off-the-shelf companies the formation of a company without the owners ever having to appear in person. Moreover, once the Memorandum of Incorporation and other supporting documents were submitted they were inspected and approved within one day of being lodged. This fast track service, popularly known as the instant registration package, was manifestly inadequate for a proper verification of the bona fides of the owners and, consequently, was subject to abuse. exempted company whose operations must take place mainly outside the jurindiction, Other potentially appealing features are that it may be registered as a company of limited duration and so automatically cease to exist on a date less than 30 years from the date of incorporation or on the happening of a specified event. divided into shares without nominal or par value capital requirements for such companies. R. Ehrenfeld, Evil Money Along the Money Trail (1992). a FATF Recommendation 25 (t996). 46 These are pre-incorporaled companies. tbcs are now governed by the International Bnninens Companies Act 2000 ( IBC Act ) which contains some stricter provisions than its predecessor. us. 197 to 201 Companies Law (2001). At this time the exempt company will be taken to base volun tarily wound-np and a liquidator appointed. s. 8(i) Componies Law How Encounters 49 and there are also no minimum 46 available for purchase. This process allowed for 45 In many Caribbean jurisdictions there are facilities for the formation of 44 The launderer s name need not appear on the registra 47 The parallel in the Cayman Islands is the 48 Capital may be

48 tion. It would then sell them an insurance policy, and after paying a lump sam premium, the policy In some jurisdictions, there isa requirement to file financial statements but these are nat open to public Offshore Financial Havens and Monrry Laundering a perfect funnel through which to pass illicit wealth. The law reports are replete diction. in order W immobiline bearer shares and limit their potential for abuse, the bearer shares must record of the shares, including the identity of the company issuing the shares (s. 87 Companies Law). Rearer shares have been abolished in the Bahamas under s. 10(a) IBC Act (2000). I be issued to an authorised custodian, such as a bank or trust company. The latter is required to keep a a. 185 Companies Law (Cl.) permits bearer shares as long as company does sot hold land. In thin Juris It may also be possible to use nominee shareholders to shield the true identity of the 5 the potential danger of bearer shares was acknowledged and, because they allow total anonymity for owners, ii was share certificate. The name of the shareholder is not on the certificate nor is a register merely on delivery of the share certificate. This device has therefore afforded the name. This adds a further layer of privacy, since in addition to the launderer not being Similarly, in a BCCI-related case, the accused was charged with false accounting tions. They exist as figureheads of the owners and, for money launderers, act as with examples of shell companies being used as instruments for wrongdoing. For paid into the accounts of several paper companies which were set up for the sole put into liquidation by the owner as soon as it fulfilled its role as recipient of the a nominal share capital, no assets, and carried on no business activity, and was in fact 52 money defrauded from the plaintiffs was such as an offshore lawyer, bank or trust company to hold his shares in that nominee s shareholders complete anonymity, as the trail of ownership would be impossible to recommended that their use in the Cayman Islands and other UK Dependent Bearer shares enable ownership to be vested in the person who is in possession of the of the names of such shareholders possible, since transfer of ownership is effected offshore business, so the identity of the beneficial owner may not be ascertainable. In some jurisdictions, bearer shares are permitted for companies conducting solely Money Laundering Control in the Caribbean In reality, the majority of offshore companies are mere shells, with no real func and secrecy surrounding the operation of these offshore companies that render them As illustrated, many of these offshore companies are mere nominees, nothing more than a name on a bank account, used purely as vehicles for the transfer of money. 55 In fact the companies were mere shells and establish. In a 1990 report to the House of Commons, Territories should be abolished. beneficial owners of the shares. By this, a launderer would nominate another person, named on the official company documents, the nominee would also be bound by confi purpose of acting as recipients for the proceeds of fraud. In each case the company had and conspiracy to defraud, where he erected a complex structure of offshore compa nies to mislead the BCCI s auditors into falsely believing that real business was being dentiality obligations not to disclose the identity of the beneficial owner. instance, in Agip (Africa) Ltd. v. Jackson, conducted with unconnected companies payments. their transactions wholly fictitious. Above all, it is the ease of incorporation, the lack of supervision over their activities Many of the offshore Caribbean havens have an active captive insurance industry, that captive company is a wholly owned subsidiary of a foreign company and the struc vehicle. Indeed, the FATF has identified the growing use of the insurance sector for 59 This usually occurs through the purchase of insurance products, 58 there is no reason why they could not be used as another money laundering 56 In many cases, the in an insurance business whereby all risks and premiumu originate outside the jurisdic tion, and where that company is owned mostly by non-residents. Offshore Insurance ture is invoked as a tax avoidance scheme. Thus, in the onshore country the ance company is in a tax haven, the receipt of the premiums does not attract any taxeo parent company in able to deduct the payment of the premiums, and since the insur There is sparse data on the use of offshore insurance companies for the purpose of money laundering but, given the ease of formation of these entities and associated redeeming them for a clean cheque from the insurance company. property from legitimate firms. The scheme involved customers being tricked into paying cut-price premiums to the companies, but once a large claim was made the offshore insurance company would be put into liquidation, and the criminals would Caymanian law allows an exempt company to be regarded as non-resident in the An example of the abuse of the offshore sector involving the insurance industry was trusl In the typical situation, the offshore trust is used for placing the ownership of may be used as the settlor or beneficiary of the offshore trust. For instance, the real assets, but their balance sheets were bolstered through asset-rental, and borrowing 6t Apparently the companies were bogus, in that they had no revealed during an investigation into the alleged use of re-insurance companies regis tered in the Caribbean by the American mafia. This formed part of a huge fraud and escape with the money, which had already been siphoned to offshore bank accounts. residing elsewhere, To add another strand to the laundering web, offshore companies 63 The latter would hold the assets on trust for the benefit of beneficiaries 62 6 Offshore Trusts assets located abroad in the hands of individuals or corporations based in the haven Another device that may be used for laundering wealth in these havens is the offshore Cayman Islands, for the purpose of being a beneficiary of an offshore trust. between the trustee, in whom legal title resides, and the beneficiaries who possess A trust involves the separation of the legal and beneficial ownership of property 64 scrutiny and there is no public record of the company s shareholders. Criminals operating onshore could arrange to have an insurance company set up in an offshore jurisdic M. Sheehan and 13. Leppard, Police Probe 100m City Swindle The limes, March 14, n tn some jurisdictions, off-the-shelf entities are available. could be terminated and the moneys returned. The scheme also allegedly involved the infiltration of the Lloyd s insurance market. M. Grundy, Tax Havens-Offshore Banking Centers: A World Survey (1993). ss. 74(1) ned 86(1) Trusts Law (2001 Rev.). money laundering. money laundering scam. 57 offshore. secrecy, country Caribbean Dependent TerritorieS (1990). 54 a perfect money laundering vehicle. per Millett I. Agip s. Jackson op. cit. R to Gokal (1997) 2Cr. App. R Ibid. 56 See for example. Rxempt Insurance Art (1983) (Bah.). 50 Rodney Gallagher, Coopers & Lybrand Report on the Survey of Offshore Financial Sectors in the 52 [1990] Ch Ibid. n FATF, Report on Money Laandering l)pologies (1996).

49 Money Laundering Control in the Caribbean Offshore Financial Havens and Money Laundering Conveyances Act 1991 ( FCA ) (flab.). This would include a disposition forming the subject-matter of 68 Undervalue means the provision of no consideration or thot which is significantly less than the value Hosvever, legislation permitling the seizure of the proceeds of crime usually provide for the tracing of of the property, for esample, s, 2 Fraadutent Dispositions Law (1996 Rev.) ( FDL ) (Cl.); s. 2 Fraudulent the explosion of the litigation industry in the US, as this represents an increased threat by volatile events, including war or some form of persecution. It has also been invoked by multinational trading companies concerned about the risk of expropriation of senior makes an inter vivos or testamentary transfer of property to the trustee for the 65 and with the intent of any purported dispositiou of his assets by will would be deemed void as against his creditors. The prop. However, it should be noted that in the flahamas where a testator bus outstanding debts and liabilities outside the ambit of the settlor s or trustee s assets in the event of a claim against such them have sought to protect their wealth by using offshore trusts. However, in addition 65 In this himself as trustee of the property for the benefit of another or it may arise where the benefit of other persons (or for the advancement of certain purposes). The classic func regard, there is an added perception that the courts are more plaintiff-oriented and willing to grant unlimited damage awards. As such, those fearing litigation against Since the beneficial ownership in trust property passes to the beneficiaries, it falls weapon for shielding property from seizure, since it is placed outside his ownership Trusts (APTs). An APT may be used by a settlor who wishes to protect his wealth Osborne, Asset Protection for United States Clients (1995) 4 Journal of Ioternatio,tol Trust and which have the effect of insulating assets placed in offshore trusts from foreign designed for the sole purpose of preserving assets against claims under foreign insol against claims by creditors for satisfaction of a debt, including a judgment debt. by the use of an offshore trust. This is because the beneficial ownership in trust prop an equitable interest in the trust property. It may be created by the settlor declaring tion of an offshore trust has been to make financial provision for relatives confronted It has been suggested that the recent growth in offshore trusts can be attributed to to individual and corporate wealth from the full range of contract and tort law. to these motivating factors, the offshore trust has been used advantageously by those wishing to secrete wealth for other less honourable purposes. assets. For a settior with criminally derived wealth, the trust would seem to be a useful erty resides in the beneficiaries and not in the settlor/debtor. Offshore trusts which are Also, it may be adopted by the settlor seeking to exclude his wealth from claims by First, the burden of proof is placed solely on creditors to establish that the disposi a former spouse or children for maintenance or property, or who simply wants his 66 Also, a debtor may seek to place his wealth safely away from creditors corporate assets located in politically unstable jurisdictions. and control. vency, matrimonial, or succession laws are commonly referred to as Asset Protection property to be devised in a manner inconsistent with domestic succession laws. Provisions exist in the trust law of some Commonwealth Caribbean jurisdictions claimants, thereby encouraging the formation of such APTs. These provisions have the Creditors seeking to have the trust set aside in order to establish that the beneficial ownership of the property still resides in the settlor/debtor, and that the property is thus effect of making claims against an APT difficult, if not impossible, to succeed. available for satisfaction of the debt, will encounter the following hurdles. tion of property, wherever situated, was made at an undervalue such assets into the hands of third parties, including trustees. erty of the deceased lestator would he considered assets for payment of the debts and the court would That is because the words intent to defruad do not appear in the relevant section of the Insolvency Act the claimant must show that such an obligation existed on or prior to the date of the 69 In establishing this claim, the creditor would have to prove disposition, and that the senior had notice of this obligation at the time of the 7 Furthermore, that in establishing the trust, the settlor had an intent to defraud him, UK there is no need to establish a specific intent to deceive creditors, 73 Therefore, in order to succeed the claimant must prove that he was a cred itor at the time of the disposition, since any transfers executed prior to the debt, even if tors whose debt did not exist at the time of the disposition, but whose existence could at the instance of a creditor unless it is proved that at the time of the trust the settlor in the Turks & Caicos Islands where the legislation provided that a trust is not voidable This effectively supersedes the established common law rule in Re Butterworth, 75 which allowed the setting aside of a trust on the grounds of being fraudulent, by credi improved, since it allows him to create trusts which cannot be avoided by future existing at the date of the disposition, the offshore settior s position is thus greatly have been anticipated by the settlor. By restricting rights of avoidance to creditors in anticipation of it would not be voidable, An even more radical position was adopted was insolvent or that the disposition rendered him insolvent. That is, mere indebted ness or future insolvency would not Vitiate the disposition. an intention to wilfully defeat an obligation owed to him. 74 defrauding that creditor By contrast, in the UK there has in the Bahamas, any actions to set aside the trust must be brought within two years There also exist relatively short limitation periods for creditor claims. For example, traditionally been no time limit for setting aside a trust if the insolvent settlor s domi slant purpose in creating the trust, was to prejudice creditors, Accordingly, the law of the place where the trust in net up deter mines the valtdity and effect of the trust, whether the trust property involves moveable would be considered valid even where the senior is in a jurisdiction that does not Protector. In such situations, the existing trustee would retire, new ones would be appointed, and the assets transferred to another trust in a different jurisdiction. In relation A significant characteristic of APTs is that they may also contain flee clauses. These The above provisions are bolstered by the choice of law provisions which enable the settior to expressly declare in the trust that the law of that offshore jurisdiction shall recognise the trust concept. As such, any third party claims against the trust property are clauses which permit the change of the riots of the trust, either automatically on the occurrence of a specified event, or at the discretion of the trustee or a third party 85 Moreover, the transfer of assets to a trust under such law a. 4(3) FDA (Bob); the Cayman Islands boa a longer limitation period of 6 years s. 4 FDL (Cl.). from the date of the transfer of wealth into the trust. or immovable property. govern the trust. would be subject to the trust and fraudulent disposition laws of the haven state. 1986; see Chohan e Sagger B.C.C ss. 2 and 6 FDL (Cl.); so. 2 and 4 FCA (Bahj. G. Kodtlinye, Caribbean Law of Trusts: Text, Cases 8 MateriaLs (1996) s. 423 Insolvency Act 1986 (emphasis mine). For esample so. 4(1) and (2) FDL (Cl.). n. 2 FCA (flab.); a. 2 FDL (CI). s.6l Trust Ordinance (1990). (1882) 19 Ch. D creditors. transfer, 72 administer the property for that purpose (s.2l Administration of Estates Act 2002). Corporate Planning 12. a trust. 87 At common law the rule for moveables is the same, but immoveables ore governed by the lex sitar. n s.4(1) Trusts (Choice of Governing Law) Act 1989 (Bob.); s. 89 Trusts Luw (2001 Revision) (CI.). For examples. 2 FDL (CI.). 7t By com?arison, in the 7 that is,

50 a situation, a claimant seeking to set aside the trust would have to try to establish that Money Laundering Control in the Caribbean Offshore Financial Havens and Money Laundering be divested of the trust property, and the trusteeship succeeded to by a named trustee alleged fraud committed by Sheikh Fahad of Kuwait. The Court of Appeal of the erty judgment-proof once in flight to an alien jurisdiction. In these circumstances it 82 As such, it was held that a pre-emptive Mareva injunction guard them from flight under the terms of the trust. This action was deemed necessary arise involving claimants from jurisdictions with forced heirship rules. Such claims rules relating to the testamentary disposition of property. Under the lex successlonis of duced discretionary provisions into their succession laws which would allow the value) if the court concludes that such disposition was made with the intention of In terms of estate planning, the general rule is that on the death of a settlor, trust 84 What is more sinister is that these clauses may result in the migra to shut the stable door before the horse bolts 83 Nevertheless, the case demonstrates jurisdiction of the Bahamian courts. Here the assets represented the proceeds of an In Private Trust Corporation v. Grupo Torras SA8 the trust deed provided for the or effect of which was to restrict the free and immediate transfer of trust property into and out of the Bahamas. Upon such cessation, it was provided that the trustees would another jurisdiction where a court order threatens the free disposal by the trustees of beneficiaries (which may include the settlor), always to be one step ahead of potential incorporated in the Turks and Caicos Islands. The result would be the ouster of the the trust property. This type of creditor resistant clause is designed to allow the to trigger clauses, ft may be expressly provided that the trust is to be transferred to was necessary to immobilise the assets beneficially owned by the Sheikh and safe how APTs can be structured to trump all challengers, by keeping the trust property creditors, thereby allowing the trust property to remain elusive. automatic termination of the tenure of the trustee upon any judicial action, the purpose Bahamas recognised that the terms of the trust would effectively render the trust prop property does not form part of his assets for probate purposes. However, conflicts may was held that the provisions create the very kind of situation which the Mareva injunc tion was developed to counteract; that is, the flight of funds to frustrate the execution tion of trusts which are potentially subject to seizure under the confiscation laws may be pursuant to the civil law or the Shari a (Islamic law) which impose mandatory tion, there are no parallel forced heirship rules. However, some jurisdictions intro of a possible judgment. out of their reach. before an order can be enforced. these systems, close family members are statutorily entitled to a specified portion of Since the common law recognises the concept of freedom of testamentary disposi court for an order setting aside any prior disposition by gift so that that property unsatisfied dependant to apply to the court for an order for reasonable provision out of 86 These laws would enable the court to quantify the value of the estate to include any proprietary dispositions by the deceased (other than for full the testator s estate. If they do not receive their share by will, they may apply to the retums to the testator s pool of assets for distribution. 85 defeating any such claims. Caymanian law specifically excludes any such claims through its non-recognition of 87 Thus, no trust will be set aside on the basis that it defeats law of an offshore jurisdiction, it may be virtually impossible for a dependant s claim to succeed. Indeed, with respect to claimants from a forced heirship jurisdiction, In any of the above situations, if the assets are located in an APT governed by the interests conferred by foreign succession laws. settlor brought an action against the offshore trustee seeking to set aside the purported settlement, since it was in violation of heirship laws. It was held that the trust was undermining or even defeating the insolvency, matrimonial or succession laws of forced heirship rights. appoint income or capital; act as a director of a company owned by the trust; instruct trustee, protector or beneficiary; and change the governing law or forum for the trust s wealth, he will retain a significant amount of control through non-binding letters of real trust, since the settior would always be in full control of the trust property. In such In most cases where the settior s aim is merely to facilitate the transfer of illicit Dishonest settlors, with the aid of equally unscrupulous trustees, may engage in of the disposition, the settlor exercised complete control and authority over the trustee rule of a valid trust by continuing to treat the trust s assets as his own, and the trustee a sham, since it appeared to be what it was not. Here the settlor breached the cardinal 89 the widow of the 88 That is, there is no 96 For instance, this was achieved by the Inheritance (Provision for. Family and Depnndants) Act 1975 P. Matthews, The Asset Protection Trust: Holy Grail or Wholly Useless? (t995 6) 6 Ktngs College D. Hayton, Trusts and Forced Heirship Problems (1993 4) 4 Kings College Law Journal 12. (England) and the Succession Act 1980 (Barbados). [ O.F.L.R per Gonsulves-Sabota P. as his nominee or agent. The facts in that case were peculiar in that, from the moment the deceased s estate. an arrangement by which the trustees recognise that the assets remain the settlor s in in the management and administration of the pretended settlement, including distribu the trustee in relation to the investment of the trust property; appoint or remove any the trust is a sham. In Rahman v. Chase Bank (CI) Trust Co. Ltd. all but name, sad that their task is to do exactly as the settlor says. A provision in the Cayman Islands trust legislation would make it even more diffi tions of capital to himself. cult to prove that the trust is a sham. This is because the settlor is allowed to reserve 95 In addition, the settlor is allowed to reserve any limited beneficial wishes or by the appointment of a Protector to guide the trustee. In an extreme form, may be held by the offshore trust, with the settlor/launderer being made chief oper mate means, one may say that everyone has the right to enhance and preserve personal wealth through lawful activities. Nevertheless, where these trusts have the effect of a launderer may exercise control by establishing his own offshore trust company to act a validly created APT lies. To the extent that the property was acquired through legiti ating officer of the company with the authority to draw funds and pay himself, thereby In the context of money laundering, one might ask where on the legal spectrum 9 Whilst the legal technicality for separation of ownership and control from authority of the settlor/jaunderer. Alternatively, the shares of the offshore company the settlor would be satisfied, in substance the trustee will merely be acting under the say or all of the following powers: to revoke, vary or amend the trust instrument; A. Edwards, Review offinancial Regulation in rite Crown Dependencies (1998). allowing him control over the trust assets. 92 as. 90 to 92 Trusts Law (2001 Rev.). interest in the trust property. administration. as trustee. 9 9I A trust company can be set up pursuant to the laws regulating the licensing of offshore banks for a. 14 Trusts Law (2001 Rev.). [19911 J.L.R Law Journal 62, example, BTCL (CI.); BTCA (flub.). 92 UNLICP, Financial Havens, Banking Serrecy and Money Laundering (1998). Ibid.

51 Confidentiality has always been particularly attractive to those who consider that considered essential for the attraction of financial business, It has been felt that any because, quite simply, even after those crimes have been and discovered, secrecy to laws substantially interfere with legitimate law enforcement bank regulators deter This stems from their ability to conceal criminal proceeds by hiding the identity of the One of the most attractive benefits of conducting financial business in the offshore why legitimate and illegitimate businesses go offshore, the common denominator is fied an existing practice of banking secrecy and rendered violations of the secrecy However, the secrecy haven has also been one of dirty money s most cherished 96 when the Swiss government codi 97 This measure was aimed at preventing Nazi agents from pursuing 95 The confidentiality laws in the offshore dependencies, the scope for the abuse of offshore trusts is considerable. law enforcement authorities to question whether the trust has been established with the the offshore jurisdictions vary in degree of strictness and apply not only in the context 93 against such property, the secretion of wealth into an offshore trust sits uneasily on proceeds of serious crimes. As pointed out by a study on financial regulation in the settlor and beneficiaries. Even if discovered, the trust assets can still be kept out of aid reach of foreign authorities, with the of short limitation periods and flee clauses. proceeds of crime and impossible to recover the funds if in fact it has. threatened by a hostile confiscatory government. In this respect, the modem prototype 94 another jurisdiction and denying those with a legitimate expectation of claiming greater cause for concern is the potential use of APTs for the purpose of laundering the Overall, the effect of APT5 is indeed worrying, by making it impossible for foreign world is the protection of financial privacy rights. It has been said that regardless of that both want secrecy, discretion and confidentiality. of bank secrecy, but also include corporate and trust laws which protect the identity of their domestic rights to confidentiality have been undermined, or that their property is of banking confidentiality emerged in the 1930s, to been one of the main features of the offshore sector. Indeed, and the secrecy attached has relations and transactions between financial institutions their clients been Offshore Financial Havens and Money Laundering the benchmark between that which is lawful and that which is unlawful. Of course, the SECRECY OF OPERATIONS ening of it would bolster them. mine who perpetrated the illicit activity and where the money went. A Report of the Criminals rely on secrecy laws to commit crimes and seizing assets belonging to German Jews. In the Caribbean, financial secrecy has US Department of Treasury concluded that one of the major barriers to dealint A. Edwards op. cit. ibid. H L Barber, Tar Havens, How to Bank, invest and Do,Business.Offshore and Tax Free (1993). The model adopted in most Caribbean offshore jnrisdtctlons. I J Horowitz, Piercing Offshore Bank Secrecy Laws Used to Launder Illegal Narcotics Prolits: The Cayrnan islands Enample (1985) 20 Texas inrernatiol,al Lao Journal 133. Donald Fleming, former President of the Bask of Nova Scotia Treat Co. (Bahamas) is a speech to the Bahamian Chamber of Commerce in 1977, quoted in H. Erbstein, Bask Secrecy Low and its Implications for Americnn Secnritiea Regulation (1995) 16 Company Lawyer A Maingot, Bucking the Trend Secrecy Centres and the Role of Government (Jane 1996) Cariconi Perspective 32. Offshore t02 Members of the IBC may request inspection of books if it is for a purpos t5t Records of the company s business, including minutes o Public Records and the specific devices utilised in many of the jurisdictions will be examined in tht offshore bank, trust or corporation, Confidentiality may be achieved in many ways following subsections. t50 This is because even when cases of abuse are identified, prosecutior registry. disclosure of minimal information Onto public records, meetings and resolutions, as well as registers of directors, may be kept by the compan registration of corporate entities, their beneficial ownership and financial activitie: Registrar of Companies. those havens. First, confidentiality may be protected by restrictions on the type of information avail in are able public registries. The latter usually the first stop in an investigator s quest on since they generally reveal data the ownership and financial activities of legal enti would provide a useful starting point. However, access to such information is limitet For example, in the Bahamas, although there is a requirement for an IBC to keel mrs to obtain usable information with respect to transactions conducted in or througi is difficult, if not impossible, as a result of the transactions taking place through a ties registered in that jurisdiction, For a money laundering investigation, details on thi by the provisions in the offshore trust and company legislation which permit thi a share register at its registered office, there is no requirement to lodge it with th at its office, but there is no requirement for them to be lodged with the publi to refuse such request if it deems it not in the best interest of the company. In UJB Financial Corporation v. C hilntark Offshore Capital Fund Ltd, to US Department of Treasury, Report on Tax Havens in rite Caribbean (1985) ? t2 s. 29 IBC Act, a. 66 tbc AcL a. 67 IBC Act. n. 41 Companies Law (2001 2nd Rev.). as. 40(1) and 41(1) ibid. s.44 [1992 3] C.I.L.R. 53. If it were construed us such, then in the absence of consent for disclosure by the defendant, the coa wonld be required to consider whether disclosure coald be ordered on the basis of one of the statutot enemptions. t55 th companies are permitted to keep such register anywhere in the world. 106 Further, th t03 It kept hidden, Also, although required to keep a register of shareholders, names of officers and shareholders in the company may remain Secret as the exemp 5 exemp 9 That law applies to a) effectively with abuses in offshore financial jurisdictions is the inability of investiga. related to that member s interest in the company, but it is in the company s discretioi an is Cayman, exempt company not required to file an annual return of its financia its dealings or of members with the Registrar of Companies, Thus, the financia the activities of company, including details about the assets and share capital, may b company is not obliged to permit public inspection of its records. Cayman Islands Grand Court had to determine whether the defendant company register of shareholders was confidential information within the meaning of th confidential information with respect to business of a professional nature which arise t57 Confidential Relationships (Preservation) Law ( CRPL )) provisions a crime. lessening of this guarantee would harm the interests of the [region] and any strength privileges and.., ardent solicitors. the true owners. Money Laundering Control in the Caribbean

52 inlernationsl frond from defeating the jurisdiction of the court through shadowy offshore Irusis sad s. 15 ETCA Contravention of this section svoutd result is a fine of up to Bah.$ or imprisonment to all communications between a lawyer and client for the purpose of giving or Offshore Financial Havens and Money Laundering tt3 In any event, by virtue of the confiden that capncity unless authorised so do so by virtue of the sectiod 3 exemptions or pursuant to an order of opplication appeared to be a fishing expedition for the purpose of ascestalning whether there was a These statutory gateways will be discussed below. In ihe insisnt csse disclosure was denied as the These will be discussed later in the chapter. ss. 2 and 5 it CRPL a resdrr crime for a public or govern ment officisi, such as the Registrar of Companies or Trusts, to disclose any information obtained in In the Caribbean offshore world, banking secrecy has been viewed as a prerequisite for tiality laws in the Cayman Islands, any information given to the Registrar of Trusts is the survival of the financial industry and indeed the economy that it upholds. tions. Essentially they prohibit the disclosure by banks of a customer s identity, busi 10 ness records and other details relating the bank account except in clearly defined A Bahamian Chief Justice voiced this belief when he stated that... the secrecy provi t2 In Cayman, although do so, the trustee may be specifically precluded from disclosing to any person infor owners. Furthermore, if bearer shares were issued, there could be no record of the Conversely, a company registered for onshore business, which is not functional, could authority. Further, unless authorised by the trust instrument or ordered by the court to the scope of the Law, and so disclosure of the shareholders names could only be made place of business was the Cayman Islands. It was administered by a Caymanian company which maintained a register of the defendant s shareholders. The court held that the register of the defendant s shareholders was confidential information within 5 Here the defendant company was founded in the BVI, but its pnncipal information at any time thereafter whether they be within the jurisdiction or present shareholders of the company. As is the situation in many jurisdictions, the confidential and may not be disclosed by that office unless under one of the estab in or is brought into the Islands and to all persons coming into possession of such if the plaintiff s application fell within one of the statutory gateways) Money Laundering Control in the Caribbean In some jurisdictions, even if access to the share register is achieved the shares are likely to be in the names of nominees, thereby concealing the identity of the real absence of a requirement to file regular financial statements or the regular monitoring of a company s business allows some offshore companies to exist as a mere shell. There is often no requirement to register a trust or file a copy with a government mation relating to the settior, beneficiary or the trust accounts. be struck off for inactivity. the instrument of an exempted trust is lodged with the Registrar of Trusts, it is not open to public inspection or examination by anyone other than the trustees and those instrument. expressly authorised by the trust Banking/Financial Confidentiality lished criteria for disclosure. sion is one of the pillars of this part of our economic structure, the destruction of Through its role as payer and receiver of a customer s money, a bank has access to which would lead to the collapse of the whole structure it supports.his intimate details regarding its customers financial transactions. Bank secrecy laws therefore exist to protect the confidentiality of information held by financial institu 2 See for example s. 83(5) Trustee Ant 1998 (Bah.); s. 3 CRPL (Ct.). 77 Trusts Low (2001 Rev.). Tins moy include a Protector. busix for the foreign proceedings to which it related. 4 circumstances. dentiality provisions, these jurisdictions have given statutory effect to the strong public Cayman Islands, the confidentiality laws render it a criminal offence for a person in possession of confidential information, however obtained, to divulge it or to attempt, customer s financial details. The common law duty of confidentiality between banker a central tenet of individual rights and freedoms. Common law countries recognise In civil law jurisdictions, the concept of financial privacy is considered to be per Knowles Ci Re Nassau Dank and Trust Company ) 1 L.R.B. I. an implied term in the banker/customer contract which precludes disclosure of the the conrt. t17 Likewise, in the thereout. v. and customer as laid down in Tournier v. National Provincial and Union Bank of sion of law; (ii) the bank is acting under a duty to the public to disclose; (iii) the inter ests of the bank require disclosure; or (iv) the customer has expressly or impliedly reveal inforrnalion relating to its customer where: (i) the bank is acting under compul breach of contract where the banker discloses information relating to the customer in or trust company to disclose to any other person any information relating to In the Bahamas, it is a criminal offence for any person who has acquired informa the Tournier principles, a customer has the right to sue his banker for damages for circumstances outside specific permitted parameters. A financial institution may only consented to disclosure. These existing rights to financial privacy have been buttressed interest inherent in maintaining one of the pillars of their economy. In doing so, they by the criminal law in some offshore havens. By criminalising breaches of the confi 116 is a part of the law of the Commonwealth Caribbean. In accordance with have also made themselves more attractive to criminals who crave anonymity. tion in his capacity as a director, officer, employee, agent or former licensee of a bank offer or threaten to divulge it or for a person to wilfully obtain or attempt to obtain for numbered bank accounts, where only senior management knew the identity of the recipient is not authorised by the principal to disclose, other than in carrying out the instructions of that principal, and includes information given to a public official, the account holder, and gave the Cayman Islands the nickname Geneva of the a customer s identity, assets, liabilities, transactions or accounts. t Such confidential information refers to information which a banker, trustee or attorney-at-law. It is such strict bank secrecy laws which allowed confidential information. Since lawyers are responsible for setting up offshore financial entities on behalf of information about these entities from the lawyer. Legal professional privilege attaches arises, it may present an impediment where law enforcement seeks to gain access to as the resident agents for offshore banks, the issue of legal professional privilege clients, and are oflen chosen as the nominee directors for such offshore companies or obtaining legal advice, even where litigation is not contemplated. could expose the attorney to liability to his client for damages. Caribbean Breach of this duty the World s Third Largest Business (1994). 2 As in the Bahamas, client should be exercised only in exceptionsl eases. Here it would be ased to prevent defendants in an was held Ihut the court s inherent power to order u solicitor to disclose Ihe name nnd address of his In Interna,ional Credit and invesi,nent Co. (Orersens) Ltd s. Adham The Times, February 10, 1997 it 20 per Miiiett 3. Price Waterhouse v BCCI Holdings (Luxembourg) SA [19921 B.C.L.C companies which were designed io make their assets judgment.proof 47 for a period not exceeding 2 yesrs, or both. Inside [ KB. 46t. s.5crpl. England J. Robinson, The L.aundryrnen o 5.3(l) CRI L.

53 the confidentiality laws may also impose criminal liability on the attorney who divulges confidential information about his client s property transactions. A duty of confidence also arises where there in a trust or fiduciary relationship in existence, so that the one to whom the duty is owed may seek injunctive or remedial relief from the trustee/fiduciary where the latter purports to breach that confidence. Additionally, the trustee may fall within the ambit of the confidentiality laws. In Re H 23 it was held that since the applicant trustee was in the position of a person to whom confidential information was imparted during the transaction of business of a professional nature, the provisions of the confidentiality laws of the Cayman Islands. Consequently, he had to seek the directions of the court before divulging information pertaining to the trusts. PENETRATING THE WALL OP SECRECY The international community has long condemned the use of financial secrecy to impede the efficient investigation of a money laundering offence. The 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention ) has established that in the specific context of drug-related money laundering, no party should decline to render mutual legal assis tance on the ground of banking secrecy. that financial secrecy laws should be conceived so as not to inhibit the implementation of its recommendations for countering money laundering. It is generally accepted that persons transacting business with banks and other finan cial intermediaries are entitled to a reasonable degree of privacy in connection with such transactions. However, the critical question is not whether a country has financial secrecy laws, but whether the country has built into its laws effecttve and efficient means of piercing bank secrecy where there is a reasonable suspicion that a bank account has been used in connection with crime or as the depository of the proceeds of a crime thing as absolute banking secrecy. built-in statutory gateways through which information may flow, as well as other investigative means for penetrating the perceived wall of secrecy. It is the adequacy of such channels that remains a moot point. In the Bahamas, where the customer does not expressly or impliedly consent to disclosure, the legislation permits disclosure of confidential information on the following grounds. First, confidential information may be revealed for the purpose of the performance of one s duties or exercise of functions under the banking legislation. disclosure may be made when lawfully required to do so by a Court of competent jurisdiction within the Bahamas. permit fishing expeditions, and in practice will only grant an order permitting disclo sure of confidential information where the request is specific. In Nissan Motor Corp. to. Adesco documents and sworn testimony for use in a foreign civil suit, where it was alleged that the proceeds of fraud were deposited in a Bahamian offshore bank account. In that case it was held that although the court would not allow Bahamian secrecy laws to be used as a screen for fraud, it would not grant a request which merely leads to a trail of enquiry to uncover probative material. That is, something more than mere inferences pointing in the direction of fraud is needed to justify a court order for disclosure of confidential information Thirdly, disclosure is permitted if required under the provisions of any other Bahamian law.t 34 The latter exception would embrace the provisions of the Proceeds of Crime Act 2000 which mandates the revelation of otherwise confidential bank information. As will be shown in subsequent chapters, this Act requires the reporting of knowledge or suspicion of money laundering, in certain circumstances, whilst specifically exempting the discloser from civil or criminal liability for breach of any non-disclosure restrictions. Fourthly, disclosure may be made to a person with a view to the institution of, or for the purpose of, criminal or disciplinary proceedings) may be in relation to proceedings involving the exercise of professional duties by an auditor, accountant or attorney, member of the Central Bank. 38 The confidentiality provisions do not preclude the Inspector of banks and trust companies from sharing, with the Financial Intelligence Unit, information relating to accounts and customers of a licensee, where he believes that a suspicious transaction report was not filed.t 39 Additionally, disclosure is allowed where such a right exists at common law. would incorporate the bases for disclosure set out in the Tournier case, and would cover the right to disclose if it is in the public interest to do so. In Douglas v. Pindling disclosure of a customer s banking records, the customer s right to non-disclosure without consent must yield to the public interest. In that case, the Privy Council concluded that it was justifiable for a commission of inquiry to decide to investigate the respondent s banking records, where this was necessary to promote the inquiry into whether or not the respondent had received any benefits or favours in connection with the transactions in question. In this respect, disclosure would also be permitted where the bank is acting under compulsion of law. However, where such compulsion emanates from a foreign court or s. t 5( t )(f)(iii) ETCA L.R.B. 4t per Gonsatves-Sabola AcIg CJ. s. t 5(t )(f)(iii) BTCA. For example. s. S. t5(t)(v) BTCA. Such proceedings may be within or outside of the Bahamas. us. t5(t)(v)(a) and (B) BTCA. 39 t5(7)(c). s. t5(7)(a). 141 [1996] 48 W.t.R. Money Laundering Control in the Caribbean Offshore Financial Havens and Money Laundering s. 15(c) BTCA. 27 [1996) C.I.LR s.3(i) CRPL. Article 7(5). Recommendation 2 (t996). US Senne Report, Crime and Secrecy: The Use of Offshore Banks and Companies (1985). P Maynard Offshore Banking Secrecy: Myth or Realily? (1998) 1 Jo,its,a! of Money Lauodertng Control 316. Such consent is not required where ioformalion is being shared between a licensee and Saperntsory Authorities for purpose of consolidated supervision or facilitating co.opecation between domestic regalalory authorities (ss. 15(5) and (6) BTCA). As well as for the performance of ones duties within the scope of one s employment ss. 15(1 )(fi) and (ii) BTCA I This 4 it was held that if the public interest appeared on good grounds to require 37 or the discharge of duties by a public officer or 32 the Supreme Court refused to entertain an application for the production of 3 However, in this regard, a Bahamian court will not In relation to the latter, these In responding to this question, one must first concede that there is no such Secondly, 24 that is, the succession to trusteeship, he fell squarely within 25 Furthermore, the FATF has recommended 28 It is a myth and the reality is that there exist 22 29

54 his knowledge or snspscion. That person would not be deemed to have violated any restriction on the Offshore Financial Havens and Money Laundering First, pursuant to a police investigation of a crime committed within the jurisdiction or t45 Otherwise, the seeking, 44 by a professional person In the Cayman Islands, confidential information may only be disclosed if authorised foreign process. Generally, disclosure would reasonably be necessary to protect the normal course of Financial Inspector acting Financial in the Services Governor business, of or by or to the Secretary, of obtaining or the the territory. of confidential information investigator divulging or by or to an into money against fraud or crime, In this case, it was the court s opinion that if the bank made bank s interests as against their customer or third parties in respect of transactions of 43 it Thurnier recognised as constituting an exception to the duty of confidence owed by a jurisdiction of the Head Office as being comprehended in the compulsion of law which administrative order, the domestic court may choose to deny disclosure. In Re Bank of produce bank records of customers at the Nassau branch. The bank sought the permis Gonsalves-Sabola found no warrant for regarding compulsion of law in the alien t42 the applicant s head office in the US was served with an IRS surnntons to Money Laundering Control in the Caribbean sion of the Bahamian court to comply with the order. In rejecting the application, Although common disclose customer information insofar at necessary law protect the bank is allowed interests, to Bank as it is of to the bank s in Re America disclosure, it would be unilaterally relieving itself of that most sensitive of its contrac local bank to its customer. was held that this exemption would not avail the Bahamian bank acting in response to the bank for or with their customer, or for protecting the bank or persons interested laundering, may be achieved in the following specified circumstances. customers or as against third parties in respect of transactions of the bank for, or with, is reasonably necessary for the protection of its interests, either as against its t46 Strictiy speaking, the latter provision would exclude the obtaining of information in matters involving taxrelated money laundering, since tax evasion is not a crime in the Cayman Islands. Secondly, where a bank uses the information in any proceedings to the extent that it if not, if such acts would have constituted a crime within the territory. process emanating from another jurisdiction, which sought to compel the production not to be taken an authorisation within the meaning of the CRPL, since that person t35 Essentially the court will make a determination as to whether the purported the Grand Court of Cayman held that this exception did not operate so as to enforce rule, a person who is required to give evidence before any proceedings (either within since it would hardly be asserting a legal right vis-à-vis its customer. In Re BCCI case it was held that the exception does not cover the situation where a bank wishes disclosure Thirdly, may be made where tine relevant professional person does so with the approval of the Financtal Secretary and it is necessary for the protection of dertng, and by virtue of which the person making the disclosure is specifically of transaction records maintained by the bank at its Caymanian subsidiary. This was so 47 In Re BankAnserica Trust and Banking Corporation (Cayman) Ltd This important gateway would include the (Overseas) Ltd) himself or any other person against crime. Finally, disclosure is allowed where this in England, it was permitted (through its liquidator) to disclose information pursuant to this exception. t5t where the applicant bank was actually a party to proceedings disclosure the Caymanian court held that the preservation of confidentiality outweighed the interests of unimpeded and eflicacioss investigation outweighed the Cayman tslsnds interest in protecting privacy where it was conclsded that the bank s failure to comply with subpoenae to issue bank records would This approach may be contrasted with that token by the US jadiciary in the Bank of Nova Scotia cases, tual obligations, non-disclosure without the customer s consent. even though failure to comply could expose the bank to contempt sanctions in the 49 Therefore, a bank cannot rely on this exception merely to save its own skin to do so by the person who had imparted the information, to disclose confidential information to third parties for use in foreign proceedings in its customer. waa a mere request by a foreign court not backed by legal Sanction. Moreover, in that America US. 142 Unreported November , 146 ss. 3(2)(b)(ii) and (iii) CRPL. 146 (1992 3] C.J.L.R. 574 This was a tax related matter and in exercising its discretion to permit or refase the US Internal Revenne Service in esforcing its summons. 5. 3(2)(b)(iv) CRPL. s. 3(2)(b)(v) CRPL. ibid. rights under its confidentiality laws. t/sv. Ba,,k ofnova Scotia 740 P (1984). 3 it was held that afortiori this exemption did not apply where there which that bank is not a party. However, In tine Matter of BCCI (Overseas) Ltd. provisions in the anti-money laundering laws, for reporting suspicions of money laun directions of the court for a determination of whether it is permissible for him to do exempted from liability for violating the confidentiality prohibitions, t54 As a general is done in accordance with any other law. or outside Cayman) in connection with confidential information must first obtain the In general, wherever confidentiality obligations exist, they may be waived by the is also an American cttizen and is the subject of the grand jury s investigations. not compelled. in the Matter ofabc Ltd.lSt it was held that a consent form signed in given freely and in the exercise of an independent and uncoerced judgment. That is, it the information by the subpoenaed applicant. Nevertheless, the court found that that is 9 This was reaffirmed in Re H where the consent of the beneficiary of the confidence, as long as such waiver is voluntary and Pennsylvania requiring htm to testifi before a grand jury there. It was deemed to be 36 lit ReHt57 the applicant disclosure within falls one of the statutory trustee sought directions exceptions. as to whether he should comply with a subpoena served in consent of the appropriate principal, the applicant is obliged to seek the court s direc compliance with the order of a foreign court is not true consent at all, since it is not in Liquidation a proper and necessary application, since under Cayman law, without the proper amounts merely to submission to force) court was told that beneficiary the of the confidence did not object to the divulging of The Issne of compelled waiver of consent wilt be examined in Chapter tions and abide by the outcome. t C.LL.R so. 152 per t4nrre 3 Re BCCI (Overseas) Ltd. op. cit. disclosure of information. [1984] C.1.L.R [1996J C.J.L.R n. 3(2)(b)(vi) CRPL. s. 3(2)(c) CRPL. S. 4 CRPL IS? 154, 50 a amount to contempt of court, even though to do so would to a amonxt in violation of offshore confiden tiality laws. Their reasoning was that the United States interest collecting revenues and ensuring an For eaample, 23(5). o. Proceeds of Crimtnal Condact Law 1(2001 Rev.) provides a defence to a of acquiring another person s charge proceeds of criminal coudsct, fora person who made prior disclosure ot tt994 3l C.5.L.R. 56. a s. 3(2)(b)(i) CRPL.

55 Money Laundering Control in the fjaribbean Offshore Financial Havens and Money Laundering acquiescence or non-objection, if given under pain of penalty, may not be accepted by Consequently, it was regarded as settled law that even an expressed Consent, let alone privilege against self-incrimination. However, it was held by the Privy Council that the witness an absolute response to refuse to answer the question whatever the nature of to Cook Islands secrecy legislation, and that they should be sllowed to raise the his testimony would expose him to criminal liability in the offshore jurisdiction. In on the ground that to do so would result in their committing criminal offences, contrary t6 the plaintiffs refused to testify in an inquiry in New Zealand Where the person required to make disclosure in the foreign proceedings has not obtained the requisite permission, he may seek to refuse disclosure on the basis that privilege against self-incrimination does not obtain where the criminal or penal sanc the Cayman courts as valid consent or authorisation. tions arise under a foreign law. The reasoning of their Lordships is that if the the activity proscribed by the foreign law, and however important that answer might be for the purposes of the domestic court s proceedings) moved. In these cases, it is clear that offshore havens remain a formidable hurdle in The challenge for offshore jurisdictions is to find the delicate balance between For far too long Caribbean offshore centres have fallen prey to the misdeeds of Otherwise, any wrong-footing could lead to a centre gaining notoriety, and perpetuate criminals from around the world, and although some attempt is now being made to of the players in the offshore sector, a workable equilibrium could be achieved. from being exploited for illicit purposes. With less confidentiality and more control 6t CoNcLusioN Drannigan v. Davison controlling money laundering. remaining competitive as an offshore centre and preventing their financial services its status as a safe haven for the proceeds of criminal activities and paradise regained. from the probing eyes and itchy fingers of the judicial, fiscal and monetary authori a protective shield by those intent on defending the machinery of peekaboo finance Offshore havens have been labelled as centres for giving explicitly criminal activity ties of other countries. 63 s Young Chang, The Economic Impact of Offshore Banking Centers on the Host Countries in 1)9971 AC. 238 This approach was also taken in Austraha in Bank of Valena plc n National Crime more tangled web could invoke a combination of the offshore bank, trust and company require months or years, when a few hours is all he may have before the funds are the spotlight shining brightly on offshore financial centres, and reinforce the stigma of t63 However, inadequate controls have led to these havens being from license fees, increasing capital inflows and developing the financial and legal 162 The offshore financial industry in the Caribbean was services sectors. delinquency. As will be discussed later, efforts are being made to control the abuse of of secrecy attained by the launderer. The money launderer wishing to spin an ever regimes. For an investigator to destroy the confidentiality barriers at each layer would a money laundering case is still very dependent on being able to break down each level tiality laws. However, much remains to be done, as the degree of success in cracking the offshore financial sector, including the dilution of the much-maligned confiden Y.S. Park and 1sT Essayyad (edt.), Inlernaiional Banking and Financial Centers (1959). 62 R.T. Naylor, Hot Money and the Politics of Debt (1994). Asshority [1999] F.C.A Brannigan e Davison at blamed for serving as the cleansing agent for dirty morley, and for permitting the proliferation of tax evasion and other white collar crimes. High-profile incidents such as those discussed in this chapter will continue to keep conceived improve the economies of those territories and not intended to entice criminals or to encourage money laundering. It was designed and, to large extent, has succeeded in producing benefits for the local economy, including generating a revenue accordance with its own law and procedures. As the Privy Council advised, different countries have their own interests to pursue. A contrary conclusion would give the reverse this downward spiral, it will take more time and a great before deal they more can shed this regulation iniquitous image. Perhaps then, the prophesy will be fulfilled privilege were applicable it would have the effect of according primacy to foreign law, since it would override the domestic court s ability to conduct its proceedings in

56 Evan Metaxatos [FNa11 PRESERVATION TRUSTS LEGISLATION AND JURISPRUDENCE WITH THE CARIBBEAN LAW GOVERNING OFFSHORE ASSET THUNDER IN PARADISE: THE INTERPLAY OF BROADENING UNITED STATES ANTI-MONEY LAUNDERING Fall 2008 University of Miami Inter-American Law Review 7 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 responses to U.S. pressure by various offshore Caribbean jurisdictions, with special focus on the which people have used offshore asset preservation trusts. This article will next focus on the myriad of Attacks on asset preservation trusts have come in the form of an increasingly broadening view of the of such trusts lead to the conclusion that they are fraudulent on a de facto basis. It will then address the their money in what have simultaneously been called offshore asset preservation trusts, asset Over $5 trillion dollars is invested in banks, mutual funds and trusts located across the world s 35 use in more legally ambiguous activities such as protection of assets from foreign civil judgments. [FN61 and illegitimate offshore asset preservation trusts, and whether some of the more ambiguous features This article will first discuss the general benefits to be derived from the management of both legitimate this pressure is the result of the frequent use of asset preservation trusts in concealing and shielding 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 [FN5] An increasing amount of pressure, however, is being directed towards these trusts due to their assets derived from fraudulent schemes and money laundering associated with the illegal drug trade. beneficiaries and settlors, their flexibility, and their ability to withstand the jurisdictional furor of foreign preservation trust is far removed from such preconceived notions and much more nuanced. international offshore financial centers FN11 and many law-abiding customers are increasingly placing protection trusts, or self-settled trusts. [FN2] In reality, asset preservation trusts offer few tax judgments. IFN41 account. While there may be some historical basis for this assumption, the modern offshore asset advantages; [FN31 their primary benefit is instead derived from the privacy they provide their 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 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 *170 I. Introduction

57 forming and managing a legitimate offshore asset preservation trust. American pressure, and what the drafter of an asset preservation trust should keep in mind when B. Self-Settled Trusts Contrary to popular belief, harboring money in an asset preservation trust does not immunize either the control they afford their settlors, their protection by strict banking confidentiality laws, and the immunity they enjoy from foreign judgments. to go offshore. [FN13} The benefits of such trusts have instead been characterized by the degree of [FN12] Avoidance of taxes is therefore not an important factor contributing to the decision of a settlor settlor or the beneficiary of the funds from tax liability in their home country. Although the settlor of settlor is still liable for any taxes in their home jurisdiction where the assets were initially procured. such trusts typically does not have to pay taxes in the offshore jurisdiction where the trust is located, the A. Tax Benefits respect the laws and sovereignty of these foreign jurisdictions. FN111 jurisdictions where such unreasonable awards are less likely to be awarded, and that U.S. courts should in the United States continue to increase, people are justified in moving their assets to offshore means by which they accomplish their role have lead some critics to conclude that such trusts are fraudulent devices by their very nature. [FN1O] Others argue, however, that as punitive damage awards Both the role asset preservations trusts play in avoiding foreign judgments and the legally tenuous [FN9] While both domestic and foreign asset protection trusts may be able to provide a base level of order to shield doctors from malpractice suits or insulate assets in dispute during a divorce proceeding. Once reserved for the ultra-wealthy, asset preservation trusts can now be opened over the internet in themselves from potential creditors by placing their assets beyond the reach of a court s jurisdiction. protection against U.S. creditors, foreign trusts provide additional benefits because of their geographical population has found themselves subject to liability by U.S. courts, they have sought to protect paralleled the sharp rise of litigation in the United States. [FN81 As an increasingly large segment of the self-settled, and immunity from foreign judgments. location, divergence from certain *172 common law forced heirship laws, the ability for a trust to be It is no coincidence that the rising popularity of offshore asset preservation trusts in recent years has II. The Benefits of Establishing an Offshore Asset Preservation Trust reached in their attempt to combat money laundering, the sufficiency of the Caribbean response to Bahamas and the Cayman Islands. Lastly, the article will address whether American laws have over

58 settlor relinquishes control of his assets. [FN161 Typically a settlor must still show caution in the amount trust legislation, a settlor can revoke, vary, or amend the trust instrument; instruct a trustee regarding states still enforce a rule against perpetuities, [FN2S1 which restrains the long-term distribution of court to conclude that an asset preservation trust is a sham which would render it vulnerable to foreign judgments. [FN2O1 their affairs private. [FN221 For instance, an offshore jurisdiction will typically not force production of interfere with how the owner of the property wishes it to be distributed. ffn27] For instance, many his or her interest in a property to another, forced heirship, marital property, and other laws may D. Circumventing Forced Heirship Laws in accordance with any other law of the Cayman Islands. [FN261 Although the circumstances in which an C. Strict Banking Secrecy Laws typically lead to the trust being considered a sham, [FN191 but this is much more difficult when these 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 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 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 and specific. [FN251 In the Cayman Islands, disclosure of confidential information is allowed when done is also a crime in the offshore jurisdiction. [FN23] Because many offshore jurisdictions also have no It should be noted, however, that no jurisdictions T confidentiality laws can be said to be absolute and a self-settled trust [FN151 seems paradoxical to people who view a trust as an instrument in which the control over both the management of the trust and its ultimate retention. [FN141 The very *173 idea of from the eyes of U.S. investigators, others do it because they fear Big Brother or simply wish to keep powers are statutorily authorized. As a result of such power, it can be nearly impossible for a Caribbean confidential information unless the debtor has *174 committed a crime in their home jurisdiction which 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 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. Another benefit derived from offshore asset preservation trusts is their avoidance of common law rules 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] regarding forced heirship. When the owner of a property in a U.S. jurisdiction typically wishes to convey The defining characteristic of an offshore asset preservation trust is its allowance of the settlor to retain

59 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

60 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

61 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 FN531 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

62 2. The USA PATRIOT Act judgments takes place under a patchwork of treaties that provide incomplete coverage. entity to the laws of the U.S.. the reach of U.S. jurisdiction. how much conduct has to take place within the United States in order to subject a foreign person or conduct is therefore dangerously broad in its assertion of extraterritorial jurisdiction and runs the When the conduct and substantial effect tests are taken in conjunction with the pressure the United evinces a broad assertion of extraterritoriality. The PATRIOT Act, however, has even further broadened United States. [FN62] In the first instance, varying U.S. courts have taken differing stances regarding just United States or the illegal activity takes place outside U.S. borders but has consequences within the extraterritoriality when either a significant part of the illegal conduct in question takes place in the some extent in U.S. currency, however, and such a rule would bring many transactions under the questions of the limits of U.S. laws and the dangers of asserting extraterritorial jurisdiction. States already exerts on settlors and financial institutions, the U.S. approach to money laundering perpetrators of fraudulent international investment schemes aimed at U.S. investors, it also raises Other scholars, however, now express concern that the United States has embarked on a bold expansion 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. extend to mere preparatory activities or the failure to prevent fraudulent acts where the bulk of the 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 illegal conduct takes place outside of the United States, so long as the conduct creates a substantial danger of infringing upon the sovereignty of other nations. Nevertheless, Courts are beginning to which have to be booked in corresponding U.S. banks. [FN64] Most banks around the world trade to For instance, Judge Friendly, writing for the Second Circuit, has held that prescriptive and enforcement jurisdiction as well. [FN611 American courts have claimed the right to prescriptive jurisdiction can be based on the perpetration of fraudulent acts themselves but does not expand their rule *182 of what sort of conduct is enough to bring financial activities under the purview It should also be noted that U.S. courts have engaged in an extraterritorial [FN6O] expansion of * Extraterritoriality of extraterritoriality and can now assert prescriptive and enforcement jurisdiction against a financial of U.S. courts and this trend is expected to continue. [FN66] Caribbean jurisdictions do not recognize U.S. judgments as a matter of comity, enforcement of U.S. jurisdiction of U.S. courts which would otherwise be excluded. 1FN651 Such an interpretation of jurisdiction. 1FN681 While the substantial effect test is indeed an effective way of targeting the however, in order for a court s judgment to be enforced, it must first be recognized. Because most institution anywhere in the world simply because the institution has executed trades in U.S. currency U.S. court must then seek to have its judgment enforced by a Caribbean court. As mentioned earlier, U.S. courts have also been willing to exert prescriptive jurisdiction over foreign entities even when their

63 significantly*183 expanded the definition of what constitutes a financial institution for purposes of with sparse opposition. [FN7O1 Under the guise of fighting terrorism, the PATRIOT Act has turmoil surrounding the worst terrorist attack in our nations history allowed the PATRIOT Act to pass was gained through legitimate means. broadening judicial interpretation of these statutes. Money laundering was initially outlawed in 1986 to combat the illicit drug trade. [FN81] Since then, however, courts have interpreted 18 U.S.C.A to encompass concealing the proceeds of bankruptcy fraud in offshore accounts as well. [FN821 As a preservation trusts. Other courts have also expanded the definition of intent under 1956 to include under a duty to investigate the origins of money deposited therein in order to ensure that the money willful blindness. [FN83} Under such an interpretation, a lawyer who establishes such a trust is now result of this interpretation, 1956 is now made applicable to a much broader number of asset The enactment of new legislation combating money laundering has also been accompanied by B. Broadening Judicial Interpretation of Anti-Money Laundering Laws of suspicious transactions. IFN8O1 (1970) by providing *184 financial institutions with legal immunity from liability for voluntary disclosures person s identity, including name, address, and other identifying information. [FN79] While such provide this information to investigators because 351 of the PATRIOT Act amends the Bank Secrecy Act information may seem trivial in nature, it helps U.S. investigators in tracking the source of funds in order to combat money laundering. For purposes of asset preservation trusts, this information also becomes proof that a debtor has funds in an offshore account. Financial institutions are now also more willing to Financial institutions are also now required to maintain records of the information used to verify a on the financial institution to comply with their laws. [FN781 to the deposit of funds into the foreign bank. {FN761 Although such subpoenas were generally issued related to such correspondent account, including records maintained outside the United States relating under 18 U.S.C.A. 1956(a) before the passage of the PATRIOT Act, when compliance with the subpoena or summons ran afoul of foreign laws governing confidentiality, the U.S. court, for reasons of any foreign bank that maintains a correspondent account in the United States and request records comity, would typically defer to the foreign court. [FN771 Now, however, U.S. courts will press forward and financial institutions will be required to submit to the jurisdiction which can exert the most pressure For instance, the PATRIOT Act enables the Secretary of the Treasury to issue a summons or subpoena to [FN75] of the PATRIOT Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 [FN741 that amends both the 1970 Bank Secrecy Act and the 1986 Anti-Money Laundering Act. over foreign persons and financial institutions. [FN73j Specifically, this is accomplished through Title Ill combating money laundering [FN71] and has conferred on district courts long-arm jurisdiction [FN721 institutions were met with widespread opposition and concerns about invasion of privacy, [FN69} the Although prior to September 11, 2001, attempts to expand the reporting requirements of financial

64 foreign state might have in enforcing bank secrecy laws. [FN861 regarding the trusts or *185 attach the assets. Courts have held that a settlor can be held in contempt of Bahamas to facilitate production of the documents. FFN9O] In Eulich, the court found that to the extent Breitenstine v. Breitenstine, [FN921 the Wyoming Supreme Court evaluated a Bahamian asset proceeding. The Court concluded that such a use was reprehensible and that the asset preservation jurisdictions. With America leading the way, the United Nations has formed the International have also expanded the scope of what sort of trusts they are willing to consider illegitimate. In Convention for the Suppression of the Financing of Terrorism, which recognizes the need for Eulich himself created by depositing between $75-$100 million dollars in a Bahamian asset preservation Of course, the United States is not alone in its attempt to stem the flow of illicit money into offshore In addition to attacking some of the specific features of offshore asset preservation trusts, U.S. courts C. The International Fight Against Money Laundering way in pressuring offshore jurisdictions to adopt more lenient bank secrecy laws, but they have also a feature that is not in itself fraudulent. However one views such accounts, the United States has led the Eulich to produce documents concerning the trust by all means possible, including filing a lawsuit in the In Eulich v. United States, [FN89] for instance, the district court did not buy the argument that the trust. [FN871 While a settlor can typically claim that they have no power to comply with such an order to that America s interest in pursuing a criminal investigation may outweigh any comparable interest a that producing the documents was impossible for Eulich, it was only because of the situation which interest of their own government in a criminal investigation. [FN851 As a result of this decision, banks trust, and that Eulich should not be allowed to benefit from the situation he had created. [FN911 settlor had no control over his trust when the IRS demanded documents relating to it. The court ordered trust was created to hinder, delay, or defraud the husband s creditors. FFN931 trusts and lead some to conclude that such trusts are fraudulent on their face. [FN941 Others argue, privacy of their bank records located offshore was substantially reduced when balanced with the can now look at the relative interests of the different states involved in order to come to the conclusion Such legally ambiguous uses raise broad public policy questions concerning offshore asset preservation Nova Scotia, [FN84} a landmark case, the 11th Circuit held that the interest of American citizens in the preservation trusts which make them desirable to customers. For instance, in United States v. Bank of court and incarcerated for failing to cooperate with a court order to turn over records regarding the 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. preservation trust used by a husband to shield assets from his wife before an impending divorce however, that they are merely another form of trust which *186 affords the settlor more control, [FN95] employed the help of others along the way. U.S. court decisions have also methodically targeted many of the specific aspects of offshore asset U.S. courts have also turned up the heat on the settlor of the trust in order to collect more information

65 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 T money laundering laws. [FN991 The FATF issued forty recommendations [FN1001 that improve countries provide a guide to countries in revising their legislation. In 2000, FATF issued a report in which it identified serious systematic problems with the anti-money laundering laws of five Caribbean nations including*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]

66 a fraudulent conveyance into a trust. The recently enacted Proceeds of Crime Act [FN12O1 stipulates The laws in St. Christopher and Nevis in like manner have established a very high burden for establishing in 2000 pursuant to the Financial Intelligence Unit Act 2000 [FN1131 in response to *189 being in the Bahamas. authorities. FFN11Q1 The primary money laundering legislation the Monetary Authority is charged with implementing the country s anti-money laundering laws and providing assistance to overseas regulatory calendar year 2006, the Financial Intelligence Unit received sixty-six requests for assistance from foreign assistance or is providing assistance ninety-one percent of the time. [FN117] These steps mark a positive upholding is the Proceeds of Criminal Conduct Law (2007 Revision), [FN1111 which covers all businesses 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 of the Monetary Authority therefore does not encompass U.S. laws unless those laws are also laws of legitimate offshore asset preservation trusts. enforce judgments against assets in a foreign jurisdiction, It is relatively recently, for instance, that the that would constitute an offense if it had been committed within the Cayman Islands. [FN112I The scope Islands remain unaltered and creditors wishing to attack some of these more legally tenuous uses of from a creditor. 1FN1091 As a result, many of the uses of the asset preservation trust in the Cayman and individuals. Like the Statement Regarding Drug Cooperation, however, the Proceeds of Criminal 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 removal from the list of countries regarded as noncompliant with the Financial Action Task Force s list of Intelligence Unit has also entered into mutual legal assistance treaties with other nations which provide forty recommendations. [FN1151 Although the Bahamas have no tax treaties in force, their Financial for the exchange of information and compliance with specific foreign court orders. [FN1161 In the time they realize the assets they seek are in a Bahamian asset preservation trust, it is too late to file suit financial investigatory units, eleven of which were from the United States, and was able to provide litigation in the United States often takes years to begin with, many creditors*190 may find that by the step forward in the fight to combat illegal money laundering without interrupting the operation of the Cayman Islands because there are no income taxes) or when a debtor is attempting to shield assets asset preservation trusts have been required to try the case anew in the Cayman Islands. fraudulent intent on the creditor seeking to set aside the transfer. [FN119] Since the ordinary course of a fraudulent conveyance into a trust [FN118I and have placed the burden of establishing the settlor s Bahamas have enacted a two-year statute of limitations on the commencement of proceedings alleging the Cayman Islands. enforcement agencies in order to stem the flow of money laundering [FN114I and as a result has won The agreement, however, is not made applicable to cases of either tax evasion (which is not a crime in The Cayman Islands has also formed the Cayman Island Monetary Authority, which is charged with Similar to the Cayman Islands Monetary Authority, the Bahamas created the Financial Intelligence Unit Not all recent laws, however, are being adopted for the purpose of making it easier for foreign courts to

67 the Eighth Circuit in Oberhauser held willful ignorance was enough to establish intent for purposes of much stricter view of what constitutes a fraudulent conveyance than do most U.S. courts. For instance, derived, directly or indirectly, from some form of serious offence. [FN121] Nevis therefore takes a hold that the burden for establishing a fraudulent conveyance has not been met and decline to enforce a U.S. court order to hand over assets in the trust. 1 B. The Caribbean Judicial Response [FN125] The Privy Council has also upheld the revocation of a trust company s license in response to It seems to me that it is one thing to ascribe to the Parliament of the Bahamas ( Parliament ) an 1 [This footnote is created by the Professor from the primary text: Nevertheless, St. Christopher and Nevis have also created a Financial Intelligence Unit in order to enforce their anti-money laundering laws through cooperation with foreign financial intelligence units [FN1231 and like their Caribbean compatriots, are no longer listed as noncompliant regarding FATF s forty recommendations because of their significant progress in strengthening their anti-money laundering capabilities. [FN1241 the minimisation of taxes or the protection of honestly acquired assets from the sometimes this jurisdiction of what are referred to in some commercial circles as asset protection trusts but it is legitimate tax haven to be used as a cover for fraudulent activity which has little or nothing to do with intention to make The Bahamas more attractive as a tax haven by encouraging the establishment in quite a different matter to attribute to Parliament an intention of allowing the Bahamas position as a of Grupo Torras S.A. v. Al Sabah. [FN127] In Grupo Torras, it was alleged that Sheikh Fahad, a member of injunction which froze the assets of one such trust, preventing the trust from invoking a flee clause in legislators, the court reasoned: the Fraudulent Dispositions Act of 1991, [FN1291 the Bahamian Supreme Court granted a mareva order to move the assets to another jurisdiction. [FN13O1 In ascertaining the intent of Bahamian the Kuwaiti royal family, had defrauded investors to the tune of $450 million dollars and then hid the assets in a series of asset preservation trusts in the Bahamas and Cayman Islands. [FN128] Employing Another landmark case in asset preservation trust jurisprudence came in 1995 with the Bahamian case legislation. The Privy Council has upheld the constitutionality of newly enacted legislation to combat the Bahamian Supreme Court, has been *191 generally supportive of new anti-money laundering suspected money laundering. [FN1261 While this may represent only one company, it is also representative of the overall belief that the era of lax regulation is now over. Caribbean courts have been as varied as their legislatures in responding to U.S. pressure to fight money laundering and the financing of terrorism. For instance, the U.K. Privy Council, which hears appeals from money laundering in the face of opposition by interest related to the trust industry in the Bahamas. conveyance upon a finding of willful ignorance and exert pressure on the settlor, a court in Nevis might proving a fraudulent conveyance. FFN122I Therefore, while a U.S. court may establish a fraudulent know or had no reasonable grounds for knowing that the property referred to in the charge was that, It shall be a defense to a charge under this section if the person satisfies the Court that he did not

68 professional person. [FN131I 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 combating money laundering and the financing of terrorism. [FN1391 self-settled trust. [FN1321 While a settlor of a self-settled trust will typically be allowed to make membership in a country club so that he could play golf, and also used trust funds to invest in property because it draws a line in the sand, defining how much control a settlor can exercise over offshore asset seventy-one examiners during the past year on more stringent AML/CFT [FN138] standards for [All] member states are now compliant with FATF s forty recommendations and the CFATF has trained *** Grupo Torras is significant not only because of the amount of money involved in the trust, but also region, some countries may seek to achieve an unfair advantage in their trust legislation, which would positive mutual evaluation by the FATF or a FATF-approved regional body. [FN136] This effort is in part, due to the recognition that if uniform standards are not maintained throughout the While Caribbean legislators and judiciaries have worked independently in response to U.S. and C. Inter-Regional Cooperation order to obscure the origins of funds and evade creditors. in the Bahamas which he ended up using as a residence. [FN133] investment decisions regarding the trust, Sheik Fahad withdrew money from the trust in order to pay for preservation trusts. It also clearly illustrates that offshore jurisdictions such as the Bahamas are willing international pressure to combat money laundering, they have produced a collaborative effort as well. and primary beneficiary of the trust, exerted control over the trust in a manner inconsistent with even a work to the detriment of the overall goal of fighting the illegitimate use of these offshore financial and supporting nations must express their commitment to the support of the CFATF and undergo a memorandum of understanding among their member states and they issue a yearly report in which they Kingston Declaration on Money Laundering. [FN135] The CFATF has facilitated the signing of a At the forefront of this inter-regional effort is the Caribbean Financial Action Task Force (hereinafter Grupo Torras, however, was the finding that the trust was a sham in that Sheik Fahad, as both settlor the court would not comply with a foreign court order. Crucial to the court s granting of an injunction in against some forms of liability were legitimate uses of such trusts and that is such circumstances* 192 to identify fraudulent conveyances into an asset preservation trust going forward. While many of the track each other s progress in addressing money laundering. Nations requesting to become cooperating It is worth noting that the court reasserted in Grupo Torras its belief that avoiding taxes and protecting CFATF ), created as a result of a 1990 meeting held in Aruba among member-states and *193 the unreasonable demands placed on those assets e.g., as a result of an award of damages against a centers. [FN1341

69 Such collaboration between the Financial Intelligence Units (hereinafter F.l.U.s ) of different countries has also been formalized by the formulation of the Egmont Group. The Egmont group...fight(s) both money laundering and the financing of terrorism. [FN1421 Caribbean members of the Egmont group include: Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Dominican Republic, Netherland Antilles, St. Kitts and Nevis and St. Vincent & the Grenadines. [FN1431 Cooperative endeavors such as the Egmont group and CFATF facilitate not only the exchange of information, but also of standards governing asset preservation trust. Going forward, it is likely that the continuation of such cooperation, coupled with U.S. pressure, is likely to result in more uniform standards 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 to fight money laundering beyond its own shores. In the process, the offshore financial industry has seen both 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 assets from foreign creditors, IJS. pressure has clearly led to an erosion of banking secrecy laws and any sensible lawyer should keep several things in mind before establishing and operating such trusts. First, a lawyer 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 be deemed a co-conspirator of the fraud. [FN144] One proposed solution to this danger is to require a client who wishes to open an asset preservation trust to sign a solvency *195 affidavit, pledging that the client has no outstanding judgments against him. [FN1451 By requiring such an affidavit, a lawyer may be 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 be beneficial, as a result of cases such as Grupo Torras [EN 1461 there is still a real danger that such trusts can nevertheless be held shams and set aside. It is therefore essential that in drafting the trust agreement, the powers of the settlor are clearly defined and that the settlor does not exceed these powers in reality. Lastly, although determining the situs of the asset preservation trust is still an important decision, as inter-regional cooperation leads to more uniform standards, the finance industry is approaching a more standardized version of the asset preservation trust, regardless of where the trust is located. While such

70 money laundering because of U.S. pressure, yet they still provide both the flexibility and the protection preservation trusts so desirable in the first place. [Footnotes Omitted] 40 UM1AIALR 169 needed in today s increasingly litigious society for assets earned through legitimate means. For the time being, however, asset preservation trusts are now less likely to be used as a means of illegal to determine whether this trend will also lead to a loss of some of the features which make asset a trend obviously makes the job of a lawyer easier in determining the situs of a trust, it is still too early

71 HR. 1265: Stop Tax Haven Abuse Act GovTrack Insider is :rnn ne iduo.jnrss o HIs in Co:igress. Check it t. G ovtrack.us httn:/iwww. ovtrack.us/congress/bi11.xpd?bi11h &tab=sunimary 11/7/2010 To the this inthnuation, eiu! a eitutioo Iorrrr tbr a suggestion: I Wikipedia TemDlate. thistrtio ds Hhiod. For more in! rmatoo bnut where this da:a romes! om, son About GovTrack.us. Becs se the LS. ( noss ooas roost egisacive intbuaion one ksiative drt oler enors oeerr, GovIiack is usuniv one tax due to transactions lacking economic substance. Sets forth rules for the application of the economic substance doctrine and imposes penalties for underpayments of requirements for transactions involving a passive foreign investment company. understatements of tax. Stop Tax Haven Abuse Act - Amends 3/3/2009--Introduced. Internal Revenue Code provisions relating to tax shelter activities to: (1) information about beneficial owners of foreign-owned financial accounts and accounts established in offshore subject dividend equivalents and substitute dividends to the 30% tax on foreign income; and (8) impose reporting hedge funds or private equity funds, to establish anti-money laundering programs, and to submit suspicious activity Modifies requirements for certain third party summonses used to obtain information in tax investigations that do not Prohibits the patenting of tax planning inventions. Prohibits tax advisor contingent fee agreements for obtaining tax savings or benefits. Denies tax deductions for certain fines and penalties for violations of law and for interest paid on certain States as domestic corporations; (4) increase the period for Internal Revenue Service (IRS) review of tax returns secrecy jurisdictions; (6) disallow tax advisor opinions validating transactions in offshore secrecy jurisdictions; (7) reports. identify the person with respect to whose liability the summons is issued (John Doe summons). jurisdictions, financial institutions, or international transactions that are of primary money laundering concern or that establish legal presumptions against the validity of transactions involving offshore secrecy jurisdictions (i.e., foreign tax havens identified in this Act and by the Secretary of the Treasury); (2) impose restrictions on foreign impede U.S. tax enforcement; (3) treat certain foreign corporations managed and controlled primarily in the United involving offshore secrecy jurisdictions; (5) require tax withholding agents and financial institutions to report certain Amends the Securities Exchange Act of 1934 and other federal enactments to impose a penalty for failure to disclose holdings or transactions involving a foreign entity. Requires the Secretary of the Treasury to publish a final rule requiring unregistered investment companies, including Increases penalties for promoting abusive tax shelters and for aiding and abetting the understatement of tax liability. Allows increased disclosure of tax information for enforcement purposes. Directs the Secretary to impose standards for written tax opinions by tax practitioners. The following summary was written by the Congressional Research Service, a well-respected nonpartisan arm of the Library of Congress. GovTrack did not write and has no control over these summaries. Congressional Research Service Summary S LI mm a ri Cs 20 OCt 20 IC) iii Congress H.R Summary: Stop Tax Haven Abuse Act (GovTrack.us) Page 1 of 2

72 (2010) Anthony D. Todero, 19 Minn. J. Int l L 241 Solution to a Abuse Act: A Unilateral The Stop Tax Haven Multilateral Problem Excerpt from:

73 - :1cc:. alt-. J1 --:: Ltfl -area note!5, at bathe eel ile toueeb I:.areL:ceeeei ::rve 3:eeeZU&rataoxts See ZZa;z cc,: nct r25, a: P: a -:!--- *;rm-to ts ate.i i Waler, tciinthre cf:ao Oeaa:r for Public :---:r--. :-.t: t- t t - - -:. -c -: trrbtcattnre-:caaeefor, -::::-e-:eowtort:. E-S: :. - i: S-D:--: Sc:: lax :;eecaucs e:c,eir: Ny ic. : 77r incerestee:re:ea;pnae l 2:c} : ruee:ein200t.1 Greer :.L i!._ r&: :-.a C- : 2..n C,.ooultmg :5 ;e Ta.r,,san )!ur,nlra j u 17?, att 1bgapors says itwilinot country s bank secrecy laws.is4 Alternatives that consider economic security is the foreign investment attracted by the can use to support its initiatives. sa Motivation for a country like Naurn is relatively simple as tax base by depleting financial resources that the government themselves out as tax shelters and guarantee bank secrecy, U.S. subordination of 115. interests are a policy that trades cash for other countries interests in promoting bank secrecy.isi The tax information and an intsrncthrnal tcz erg Lzati;r. -:ci: HIS to enforce U.S. tax po]icies,lso the Act does not consider well. Because Nauru s resources are declining, one source of dependent on other countries for tax information in order for the Rather, the problem is that although the United States is taxpayers cheat on their tax returns.152 This decreases the U.S. The problem is not that the Act puts U.S. interests first. ss others economic interests while not necessarily requiring the COflITREES m reeests U.S. motivation is obvious. When other countries hold domeetic enforccmcnt pcwcra. IV. ALTERNATIVES THAT CONSIDER OTHER incentive not to cooperate with U.S. tax autborities.155 Consulting Group predicted offshore assets will reach $8.8 what lure international financial investors.157 The Boston trillion by 2012, giving foreign banks a strong financial 2010] TilE STOP TISHAvENMUSEACT 269

74 165. The IRS has previously limited the amount of tax information mfletted See fleso, supm nate 9, at 611 (highlighting far example, that net tax 110. See Deass, eupra onto 5, at 511. 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). inheritance, or dividends. ). does not levy taxes on capitai game, corporate earninga, personal income, ealea, little or no information ); see also Gibson, oopra rote 54 (stating that the Bahamas Complianse Hoasuressant Program). well as regarding the price at which it woulitbe willing and able to provide 1L). nsasimize ito utility and to minimize its impact on privacy even if they collected 165. See Dean, supro note 9, at 659 (TIThe United States mmlii regotiato with 169. See id. at 611 (mating that a more complete market would allow a country to 167. See Id, at , 807 (2007) (noting the end of IRS goneral audita according to the Taapaycr See Dorothy A. Brawn. Race and Class Maltera in Tax Policy, 107 COLUM. L. REV. than using sanctions to force countries into compliance as the acquire extraterritorial tax information from a country with information. If the U.S. paid less for such information than the acuisifion takes into account another country s nan-reciprocal governmental actora.1s system would account for all parties interests. By doing so, a unchanged since before World War IL and is outdated. ss Rather 7 This market system of tax information private parties and to offset the burdens lmpose& on foreign relatively small amounts of collected tax information, such as jurisdiction s willingness and ability to prowide the necessary need for tax information or its inability to gather such The current method of bilateral exchange trading tax jurisdiction from which it needed tax information, that tax information would become an issue of price negotiation.is6 amount of tax revenue that information would produce, the the Bahamas. as information for tax information- remains fundamentally to collect only the smallest amount of information necessary to The final price might include compensation necessary to repay information.ow This would allow an importer of tax information goal would not be to collect as much information as possible, but enforce tax laws.i65 Once the United States identified a Stop Tax Haven Abuse Act would do, the United States might allow the use of cash as consideration for specific tax If the United States were to purchase tax information, the net importer of tax information, such as the United States, could A. CASH oa TAS INFORMAPrON the govornmente of these jurisdictions the specisc nature of the information... as 270 MINNESOTA JOURNAL OFINT L LAW [Vol. 19:1

75 171, With the increasing advent of identity theft and hackers, the case far Govzateogeorr Accoubrosantry Omcs, RErowr to tan Sueooseoaivrzz ON IterglnoAl, Rxvxosug Snavica CONUNUE to Foss Risxs (2005), reprinted in TAX Swire, Financial Privacy and the Theazy of High-Tech Government Surveillance, 77 Ceembea, Employee Sentenced for Maze Thx of Almost 201) IRS Celebritiee, Kevin Snocpinw Bacon, Tax MAXK5TWATCII. Eyet Aug. Rerorde 20, 2008, Including 172, See EcoNoMic OF LAW RlcaAie S 8.8, 2003) poaans, monepaly occurs ANatsis at 62(8th ect when (noting that a bilateral beneficial to and dealing muses high transaction male 178. neither See party has a P. Swire, alternative Traaleerap: The with the ether ). Is Elerlronec Commerce generally Peter Privacy, 54 HAS7nIO5 Importance 847, of Legal Rules (2008) and Intencel L,J See, zeg., Vito Taxi, Globalization and the Work offiscal Termitea, ss Fm. would facilitate the international cetactian and distribution of tax revenues) See Ronen Palan, Tax Haversi aad the CommercializatIon of Slate limiting the infermation sent to the ills is strong. See Rosaat F. DAolry, (acting the distant, and mere utopias, peeelhllity of a world tax ergenizatiec that argument against allowing anlimitad varnment access to sensitive personal &Dav. 1, Mar. 1, 2008, httpllcrww.iderg/externaligubelwfaaddr200lloa/tanzihta conduct an unauthorized eearch of an individuath tax iukxmatloa See Andrea (discuaaing the importance ef privacy protection in the Internet era). atorax?guld=473sbacan-c5sf4sib-af11.asc21o1e7cps)&diat=niar1. information of any bn& ). There is Mao the risk that sn IRS employee might httpalwww.marketwatckcom/eews/etooyliee werker.onooped-tax-ncerdsl Wa Ti. LQ. 461, 497 (1999) ( The possibility of intrusions..is a pewerfel Asayers, Qoea Tsx Nocss TODAY at 6 7 (2081); see generally Peter P. Poxacy, nm Tzcsaownv, INFoaMAnON ltwossas!noa Sscuxn Y: lsry,soovssnoezsta MAnE, BUT Rsistlows, WEAKNESsES tax Ar Cissus: Psoosnas tag impinge on traditional notions of national sovereignty.ne extraterritorial tax information acquisition. 74 Such a trananational actor would need to have powers on par with the domestic tax authority could overcome the problem of domestic capabilities of national tax authorities, which would act in nationally eelf-interested ways, a tranenational body with Because leaders have political and financial incentives to B. A Nw MuLnsntnaL TlJSTITUTION robust privacy protections than a market alternative. ii A information would acquire tailored information making privacy information might exceed the revenues generated by the acquisition of information or a bilateral monopoly might prevent a more complete market.17l Even though a purchaser of tax governmental alternative might avoid market failures. However, the possibility of market failure still exists in this less of a concern, a nonmarket solution might provide more privacy concerns associated with the shipment of tax data.rii cash-for-information system. For example, the fair price for to acquire tax information ox post, thereby decreasing the TIlE STOP T4SHAvEivABusEAcT 271

76 spell the n4 of the traditional Westphalian ytm ofsovereignty). Taxation Convention Between Developed and Developing Countries, U.N. Dec. No. the 1968 and 2000 OSCI) reports mark a coercive and intrusive solution that deviates from traditional 8cal remedies. ). visited Nov. 2, 2009). RaliScatton of the Convention on the OECD. (last Pot a list of OBCD member nations, sos Org. for Scan. Co.operatin & Dcv., 177 Sea, ag, U.N. Dep t of Int l Scan. & Soc. Affaira, U.N Model Double refoesn efforts. ); tatt.]ewood, supra note 09, at (deeea lbing pitfalls to ChOP 179. See Alexander Townsend. Jr.. Conunent, The Global Schoolyard Bully: The 120. Dean, aupra note 9, at n.570: tee ales Littlewood, aupro note 69. at Orgonizatiaro Theaugh National Reoporoseo to E.Ccmmerce Tax Challenges, 8 Yiz Organisatiorv for Economic Co-Operation and Deuelopmenls Coercive Efforts to Control Tax Competition, 25 PoRDaM,i INt l U. 215, (2001) (arguing that multinational firms booed in OECD countries and noting that the perceived representative of the entire world). Description and Analysis, ins HAxV. L.ScH. tn7 L ni PROGRAM & 1N1L BUREAu 0? influence of these firms nay be reclucengtlw legitimacy and effectiveness of OECD reform efforts, including the fact that tue membership is not viewed us dirent countries will help to allay cencerns that the OEOD has been captured by JL & TzcH. 136, (2006) (arguing that extending OSCO membership to, 176. Dean. eupra note 9, at See Arthur J. Cotkfiald. The Rise of the OECL) as informal World Ta ST/ESW1O2 (1960), rep,-iavted ire S7ANIZY S. SURREY, United No4one Model FiscAL DocuMRorrA rion, Sal,EoranMOeaoGRel Rs ONTAYATION (1980), Sovereignty, 56 INra Oea. 151, 178 (2502) (nathig that such an organization might Convention for Thx Treatiee Between Developed and Developing Countries: A might have greater international credibility as a fair arbiter of necessary international legitimacy because of its membership perceptions of discrimination in the development 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 makeup, which includes historically powerful nations, such as The OECD s exclusive membership fuels non-members conventions on tax information acquisition. Iii practice, could fill the gaps generated by the current patchwork system of international tax cooperation.177 In theory, either organization international tax rules.1ls This generates a perception of tax authority.178 Both the United Nations and the OECD axe bilateral t5x treaties and avoid the inequity of the multilateral the United States, France, Germany, Portugal, Spain, Italy, Japan, and the United Kingdcm.18o While the United Nations Nations and the OECD, have vied for leadership of a new global capitalizing on their history of work aimed at increasing Recently, two existing international organizations, the United however, the reality is much different. 272 MI1 1NESOl A JOURNAL OF INT L LAW rvol l9l

77 2010] THE STOP TAX HAvENABuSEACT 273 international tax controveraies,18l it lacks sufficient power to be a la-ananational tax enforcer.i82 Countries, especially the United States, might resist the necessary curtailment of sovereignty for international tax enforcement.18a Realizing its incentives to resist U.N. enforcement authority, the United States might recognize other countries similar incentives to work against the successful enforcement of a U.S. dominated multilateral tax regime such as the OECD. Thus, tax evasion is a global problem requiring a global solution. 154 V. CONCLUSION Globalization, the September 11th attacks, and two recent scandals have put tax havens in the legislative crosshairs, The Obarna Administration fully supports the Stop Tax Haven Abuse Act.155 Because of President Obama a unqualified support, the political popularity of cracking down on tax evaders in tough economic times, and banks decreasing ability to fight against such measures, the Act is likely to pass. The centerpiece of the Act is a list of offaliore secrecy jurisdictions. Although some of the motives behind enacting such legislation are laudable and some of the Act s provisions are commendable, the Act is unlikely to garner cooperation from countries vital to its success. The Act fails to account for other countries economic interests. Although alternatives are not perfect, they are 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, , at 4-5, U.N. Dec. STISGIAC.8!20001L.0 (iosg ), available as btterildaceesedds,unorg/dod DCC N03145] 851PDF1N pdflOpenElemont ( The United Nations bee recognized for some time the need to give the developing and transitional countries a voice in the dinnulation of international tel norms. ) See OenaAo Hothaway Between Poser and Principle An Integrated Theory of lntornutioni Law, 72 U. CIII. L REv. 469, 606 (2005) (noting the weabness of the United Notions ability to enfosee compliance) 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 organication would be costly to the United States) See Plan, eupra note 178, at 173 ( fajny aerious attempt to combat the tax havens phenomenon would have to be condacted on a multilateral level, ); see also MiemaL VAN Dr.nc & FRANCIS Wgyzio, Toes GLoEAL PRLISLEM OF TA HAVENS: ThE CASE 00 TSE NEmERLANDS S (Sticlsting Ondewek Multintioiiale Onolernamingen (Centre for Research on Multinational Corporations) 2008) (2007) (arguing that the Netherlands must end harmful lox poiieiee but that the tax haven problem requires a global solution) Drawbaugh & Daly, sispro note a.

78 274 MiNNESOTA JoURNAL OFIN7L LAW IVoL 19:1 States to purchase tax information from other countries, or an intergovermnental solution, such as a World Tax Organization, would facffitate a greater exchange of extraterritorial tax information and bolster the enforcement of U.S tax laws.

79 C OUNTERTRADE AND THE CARIBBEAN

80 payment for its products instead of currency. Typically, a countertrade transaction involves commercial parties from two different countries. intermediary, such as an international broker, international bank, or export management company. These facffitators, however, can increase the transaction system but will not oppose participation by U.S. businesses in countertrade Countertrade is often used in transactions where credit or convertible currency reserves. Countertrade transactions are often facilitated by trading through an the contract, rather than have one contract that makes the two parts interdependent. The separate contracts can be linked by a separate countertrade document. transactions unless such activity could have a negative impact on national parties involved in or seeking countertrade transactions. Transactions. parties simply exchange merchandise directly for other merchandise or separate parallel trade transactions that are contractually linked. For example, of the exporter s product. Counterpurchase also may be conducted through are no special exemptions for countertrade. transactions. Despite this negative UNCITRAL has published a Legal Guide on International Countertrade infrequently used in contemporary trade because of the difficulties in matching the goods each party needs and in determining the values of the goods. counterpurchase. In this transaction, an exporter purchases goods from a country in exchange for that country s purchase of an equivalent valued amount A more common form of contemporary conntertrade is referred to as [N Counterpurchase An ancient form of countertrade is barter, in which no money is used but the [a] Barter delivery and performance because of the time difference between each party s Government views countertrade as generally contrary to an open, free trading security. All normal import and export regulations must be observed, as there a country that cannot provide payment in hard currency. The lack of foreign is unavailable. It may be a resourceful way to arrange the sale of a product into [9] Countertrade dollars a day is settled through the U.S., most of it through CHIPS. In a count,ertrade transaction, one party accepts goods or services as costs. A countertrade transaction also may involve additional risks regarding The U.S. Department of Commerce (DOC) maintains that the U.S. opinion of countertrade, the DOG s export support program offers assistance to exchange may be specific to the buyer or may stem from the country s limited obligation to perform. It may be wise to draft separate contracts for each part of 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 58 MONEY, CURRENCY AND FINANCE cil.i

81 country 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 a trade. The arrangements often require certain portions of the product to be research and development, technical assistance, or patent agreements. interests in local industry or local products. In some cas the debt may be manufactured or assembled in the purchasing country. In a buy-back arrangement, a seller of capital equipment or technology may accept partial payment in products manufactured with their equipment. the parts at a reduced price. The effect is to partially pay for the auto parts with purchased are unrelated to the products being sold. In a direct offset contract, example, a steelmaker may sell steel to a foreign auto parts maker and then buy steel. A production shari ng arrangement is similar to a buyback, but used in mining and energy projects in which a developer will be paid a share of the mine or well output. reciprocal trade agreements in which the seller of a product made in one the goods on both sides are related, usually involving a form of co-production, Swaps are relatively new arrangements that are used in countries that carry large debt burdens. The debt may be swapped for other items such as equity company in Country Y if that company buys an equivalent amount of telecommunications equipment from Country X. These contracts are designed The contract may be an indirect offset, meaning that the goods and services facilitate technology transfers, providing goods or services in exchange for Typically, the seller receives some currency in addition to the products. For value industrial contracts, such as aerospace or military industries. It is quite common in civilian and military aircraft contracts. The contract involves license or joint venture. Developing countries often use offset contracts to to offset the adverse effects of large foreign purchases on a country s balance of An offset transaction is often used between countries that are involved in high [ci Buyback, Offset and Swap Transactions computer manufacturer. have the computer manufacturer ship the computers to Country X which in turn a U.S. cereal producer can be involved, the transaction may be structured to manufacturer will need rice, so a barter transaction is not feasible. However, if rice but needs computers from the U.S. It is unlikely that a computer ships the rice to the cereal producer. The cereal producer then pays the As an example of a counterpurchase, assume that Country X has abundant as a harvest. transaction requires additional time. The participating parties sign two separate contracts that specify the goods and services to be exchanged. Thus, performance so that one transaction can be completed even though the second counterpurchases can be useful if performance depends on a future event, such A counterpurchase contract separates the timing of each party s contract equivalent value of goods from the importing country using that currency. exporter (or another designated party) agrees to subsequently purchase an a contract may agree to pay the U.S. exporter in a convertible currency if the 1.02 REGULATION OF INTL FINANCIAL TRANSACTIONS 59

82 1 insidefacebook.com/facebook-global-market-monitor (last visited June 9, 2009). models try to answer iphone, blackben-models-t-to-answer-iphone.html (last visited June 9, 2009). 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. January 2009 vs. December 2008) (emphasis added). Blackberry is commonly regarded as a businessperson s phone-plus device of choice. See PRLog, 2 BlackBerry sixth most populous in the world and that Facebook s monthly growth accelerated by at least 25% in 30 countrees in rnillion-users-continuina-to-grow-bv-600kusersday/ (last visited June 9, 2009). (noting that in February of 2009, if Facebook were a country it would be the See Facebook Surpasses 175 Million Users, Continuing to Grow by 600k Users/Day, Feb. 14, 2009, 2 Justin Smith, The Facebook Global Market Monitor: Tracking Facebook in Global Markets, as part of the exchange of a commodity and the creative use of an evolving trade practice termed expansion has sparked Facebook s international explosion. 3 If the Facebook social networking Facebook audience. Facebook now has applications to the Blackberry Smartphone and iphone. That technology has applications to Blackberry, why not business? 4 Can the Facebook model of data , on the first day of 2009 that number had increased to 95 million - 70% of the total 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 nearly Roger M. Groves NETwoRKING TO BUSINESS GROWTH IN A GLOBAL RECESSION I. Introduction FAcEB00K 2 BLACKBERRY AND DATABASE TRADING SYSTEMS: M0RPHING SOCIAL While Facebook s international audience totaled 34 million people at the beginning of 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,

83 users. As the previous example illustrates, all of these social network relationships described in the Facebook Terms of Use customers, OCPs and Facebook applications in the international trade transactions. have broader business 7L+ 14 See Justin Smith, The Facebook Global Monitor: Tracking Facebook in Global Markets, 8/facebook-growth-surges-in-italy-developers-look-for-better-italianecpms (last visited June 16, 2009). 56 See Facebook Growth Surges in Italy: Developers Look for Better Italian ecpms, Now Accessing Facebook Through Mobile Platforms, million-users-now-accessing-facebook-through-mobile-platforms/ (last visited June 16, 2009). (last visited June 16, 2009). actively using Facebook through mobile platforms. Additionally, growth continues to spiral upwards internationally, particularly in Europe and South America. See Insidefacebook.com, Sandberg: 20 Million Users developers which provides a framework to interact with the core Facebook features. Facebook applications have detailed descriptions, users ratings and reviews, wiki pages, detailed features, and screen shots. See Servepath.com, Glossary of Dedicated Server Hosting Terms, (last visited June Facebook started 2008 with 5 million monthly active mobile users. By January 2009 over 20 million users were 16, 2009). The term applications refers to Facebook applications. A FaceBook application is defmed as a platform for Facebook, making Facebook the fourth most trafficked website in Italy. 56 The 2008 year also experienced growth of 2900%. Now, approximately 8.5% of the Italian population accesses There are numerous illustrations of the global Facebook explosion. During 2008 alone, Italy has recently experienced international growth in ways most business ventures only dream of. 54 applications and expand into new international markets. 53 Thus far, the plan has legs. Facebook business partners were software developers. Its hope was to increase profitability through new others as business partners in efforts to increase market share. Facebook is no exception. Its The insatiable appetite for profitability may lead a U.S. firm to tap into the expertise of A. Business Opportunities as a Multilateral clearing System V. FAcEB00K INTERNATIONAL GROWTH not, Facebook is value added to its members in making available OCP data for its Facebook

84 15 58 See e.g., Facebook, I tp:// (last visited June 16, 63 respective devices. 59 The application or connection between Facebook and the Blackberry 58 At least one million Blackberry users have already downloaded Facebook onto their users. Facebook applications have been developed for iphone and Blackberry Smartphone Switzerland, 2000% in Argentina, and 600% in Indonesia. device is not developed by Facebook. website provides the following description of RIM s business activity: Thus, for international Facebook applications there are intellectual property rights of two major June 17, 2009). 61 See Facebook, 9&vinfo&viewO (last visited facebook.corn!apps/app1ication.php?id &reis ,00.htm (last visited June 16, 2009). See supra note 46. See Natasha Lomas, Facebook for Blackberry racks up a million hits, 2009). arrangement, the software developer is Research In Motion, Ltd. (RIM). 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 , phone, SMS messaging, Internet and intranet-based applications. RIM 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 62 The Facebook 6 Facebook oniy provides the link and does not claim 57 brought Facebook an increased penetration of 600% in Spain, 400% in France, 400% in responsibility for the application of Facebook to the device. developer provides the application connectivity. In the case of the Facebook-Blackberry Research In Motion is a leading designer, manufacturer and marketer of innovative wireless technology also enables a broad array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data Rather, an independent software,75

85 Then, using the same type of provisions from its existing Terms of Use, Facebook would developer would license the software to Facebook in exchange for royalty payments. of a software developer and contractually allocate rights between them. Very likely, the software See George Cassidy, Financing Strategies- Barter s Rebirth, EAST/WEST COMMER5ANT, Dec.1, 1995, available at 66 Id. 67 Id 65 See, e.g., id WLNR the market for the goods supplied to it by the exchange participants. 67 An example is a U.S. firm the return payment for their respective goods and services. 66 That clearinghouse entity also finds clearinghouse processes a cash payment, or a voucher/credit, or a combination of these items as Both the U.S. exporter and international buyer agree to be part of the exchange system where the U.S. exporter and other exchange members An international off-shore entity, willing to purchase or sell goods or services with the 2. A clearinghouse that takes title and risk of loss of the goods. purchase goods or services in exchange. I. An exporter of goods and/or services (a U.S. firm in this model) who is also willing to technology firms. 64 The generic formulation of this system involves the following parties: international countertrade and have found a place in multilateral trading among information While barter exchanges are centuries old, they are an evolving and growing part of B. The Role of the Multilateral Clearing System (MCS) site content any more than the individual social networking users unless authorized by Facebook. of the site would not have extraction and tinkering rights to the Facebook/Software Developer s detail the relationship between the Facebook, OCPs and the business customer. Business users

86 17 VOUCHERS TRANSACTIONS 2 (9th ed Documents Supp. 2006). 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, In the clearinghouse, the U.S. firm finds an entity that has international resources and a market for those products and thereby generate profits rather than losses. of the seller until the goods reach an agreed destination. See RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS 68 These are traditionally accepted tenns in transport, known as C.I.F., for cost, insurance, freight, all at the expense NEW MARKET / STORE, INSURE AND SHIP (CIF TERMS) TITLE AND RISK OF LOSS GOODS /SERVICES CASH AND termed the multilateral clearing system ( MCS ). The graphic description of this basic system is below: store, insure and incur the risk of loss until the goods are delivered. 68 The clearinghouse is have expertise or business affiliations in international markets. Yet, it nonetheless desires to find U.S. due to a change in U.S. environmental or food and drug regulations. The U.S. firm does not the U.S. exporter has minimized its risk. All the clearinghouse requires is that the U.S. exporter with excess inventory, or a firm with a product that is no longer as marketable or available in the

87 up with minimal capital. Some credits and vouchers could even take the form of travel or other construction services if, for example, the U.S. entity is planning a plant expansion or is starting fulfill other business needs. Vouchers or credits may be tradable for office equipment or 18 Back to Barter from ICC BUSINEsS WORLD, Summer 1983, p.6). RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS TRANSACTIONS 252 (9th ed. 2006) (quoting excerpt of article 69 that cures a disease found mostly in developing countries, that patent holder may find valuable a If, however, party A is a person or small company with a U.S. patent of a pharmaceutical product expansion. They could exchange products and no sophisticated MCS model would be necessary. needs office equipment and a manufacturer of office equipment that needs a small plant A simple hypothetical two-party barter may be between a construction contractor that everybody gets what he wants. 70 entrepreneur, the expert who can form a chain of buyers and sellers so that, eventually, sophisticated system known as countertrade.... And that has, in turn, nurtured a new breed of faceted MCS. As one commentator summarized, Today, simple barter has blossomed into the gains on its own. The MCS system transforms a simple barter among two parties into a multi model is designed to expand a firm s sources for future revenues beyond what the firm otherwise system in a way that expands each firm s sales beyond its own preexisting client list. The MCS Vital to the value of the MCS is its ability to bring entrepreneurs into the same MCS clients who also see value in such voucher arrangements. firm goodwill, increased retention of existing highly-valued employees or clients, or future perks to reward employees or clients. 69 From such use, an exchange member may find enhanced The U.S. exporter may use the cash and/or voucher and credits for any number of purposes to

88 several developing countries. The developing country could itself be a member of the MCS exchange system. The WLNR See George Cassidy, Financing Strategies- Barter y Rebirth, EAST/WEST COMMERSANT, Dec. 1, 1995, available at patent holder may then earn vouchers as a credit to exchange with several of those countries. 71 An example may be the patent holder s desire for patients for further studies, paid for and provided by the one or this attempt to customize the MCS to Facebook. Obviously, the system is ultimately designed to could indeed establish a chain of buyers and sellers so that credits earned by one seller could be could be used to swap for anything from raw materials, capital equipment, supplies, and credits/vouchers? What would prevent Facebook, already expert at overseeing a value-added exchanged for the services of another entity in the exchange network. The vouchers or credits from using computer technology and global marketing techniques to allow businesses in 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 different countries to exchange products and services through the above system of cash and The value added services of the MCS are several and are perhaps best illustrated through social network exchange, from overseeing a value-added business network exchange? Facebook C. FacebookasanMCS 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. 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 worldwide services for travel, accommodations and advertising. 72 7

89 VOUCHERS CASH AND 20 at 1995 WLNR See George Cassidy, Financing Strategies- Barter s Rebirth, EAsT/WEST COMMERSANT, Dec.l, 1995, available careftully selected and categorized for their mutually beneficial aspects. connecting with college alumni, a firm could connect with exchange members who have been social network tools, is there not also vast potential for an MCS through Facebook? Instead of already? And, if Facebook devised an application for business as seductively attractive as its downloaded Facebook, isn t it likely that many are using the Blackberry for business purposes exchange network. 73 Among the million-plus and growing Blackberry owners who have already (1) making deals, (2) re-marketing inventories, and (3) paying companies that are part of the One MCS provider devoted 100 persons in a New York office to essentially three tasks: NEW MARKET VOUCHER SWAPS GOODS /SERVCCES The graphic depiction of the exchange network is below:

90 the recent shutdown of Facebook and Twitter in Iran) to facilitate international multilateral commercial transactions and affirm the goal of upholding user-friendly maimer that attracts a multitude of entities that connect with each other. But, at function would offer each member the value-added service of being the customs, cultural, and 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 least on the social networking side of transactions, no one has done it like Facebook. provisions are non-waivable by contract between the parties. Even distribution agreements may essentially a vehicle designed to fulfill the goals articulated by various nations in a recent treaty: 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 face anti-americanism or related cultural issues occasioned by fear of exploitation of another recommending or certifying agents via its role as an MCS provider. Similarly, U.S. firms may search engines and websites of those same business clients. This Facebook MCS is not mandate the designation of a local agent for the distribution of goods into that country. country s cultural or natural resources. 76 Countries currently struggle with whether to even allow 74 Such Some firms may argue that they are just as capable of finding business partners from legal translator to facilitate the international transaction. Unlike the United States, some nations social networking sites to operate within their borders. 77 The similar issue may face a business bttpi/ (last visited June 20, 2009) (discussing See CNN.com, Iranians Regain Access to Facebook, Twitter, May 26, 2009, Seeid. at n.1. n See id. at RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS TRANsACTIONS 239 n.4 (9t1 ed. 2006). be severely restricted. 75 Facebook could screen credible from unscrupulous agents by There are various challenges in an international transaction. Facebook s clearinghouse

91 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. And to achieve that goal, the MCS can assist in the effort to solve soft currency or liquidity Soft Currency refers to currency that is not backed by reserves and therefore subject to sharp fluctuations in 82 See FOLSOM, supra note 65, at (last visited June 20, 2009). customer, who, in international transactions, may be unknown to the seller. See of a customer s draft. In essence, letters of credit are instruments used to substitute a bank s credit for that of the licensing of intellectual property. See BLACK S LAW DIcTIoNARY (8th ed. 2004). lading.htm (last visited June 20, 2009). Letters of Credit are documents issued by a bank that guarantee the payment at 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 and information like item quantity, value, vessel details, date, port, consigner, consignee etc. The bill of lading is the delivery of the goods. See Legal-Explanations.com, contract to carry the goods to the said destination based on which seller can claim consideration and buyer can take A bill of lading is the official document prepared by the carrier duly accepting the goods for shipment containing h:/! currency (last visited June 20, 2009). 81 value. See BLACK S LAW DICTIONARY (8th ed 2004). Soft currencies are not in demand in world markets. See 78 See World Trade Organization, Ministerial Declaration of 20 November 2001, WT/MJN(0 1)/DEC/i 6, available relative rights, responsibilities, liabilities, and representations arid warranties between that goods in that country. 82 The legal team may therefore draft an agreement to parse out the foreign nation requires a foreign distributor or agent resident to that country in order to sell The Facebook legal team would, for example, provide value to exchange members if a these quality legal services. the transactional fee charged to facilitate the transactions, it could both provide and subsidize would be involved in such transactions. 8 If Facebook provided the legal team a small portion of the above-noted agent rules of particular jurisdictions are but a few of the specialized areas that cultural filter with the required international documents? Bills of lading, letters of credit, and contemplating international transactions prefer a specialized legal group that combines the And, rather than each member paying each of its respective counsel, would not each firm issues through voucher credits and carefluly matched exchange partners. 8 and safeguarding an open and non-discriminatory multilateral trading system. 78 Similarly, the

92 23 84 into the, say, under fifty-something entrepreneurs, which now includes Twitter. entity that was born into and profited from its internet acumen. protection types, the trademark licensing is at the core of most international franchise agreements transmission of important international documents like a letter of credit or bill of lading, and may with developers and other electronically sophisticated entrepreneurs since Facebook itself is an 85 That younger and Facebook would protect the exchange member s rights in the foreign agent agreement. 84 are through patents, copyrights and trademarks. 83 While there are varying rights among the three rights may obviously include the licensing by the foreign distributor/agent ( partner ) of the U.S. providers is its seemingly unique connectivity with the younger generations, which translates more business applications. That segment may therefore embrace rather than shun the electronic accept the related E-signatures on such documents. 86 The types of goods and services to be exchange member and its foreign agent or partner. Within an international agreement, those software developer s technology. The traditional protections of that technology under U.S. law 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 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 modeling future international business transactions in periods of global economic stress. electronic contracts, electronic signatures, and other electronic records with their paper counterparts. See BLACK S Technology and Entrepreneurs of the Data Sharing Generation at SSRN: Swartz, A World That s All a-twitter,usa TODAY, May 26, 2009, at Bi. But the point is the same. There is a 85 Facebook does not have a patent on youthful entrepreneurism. Twitter s three co-founders are all in their 30 s and 86 The Electronic Signatures in Global and National Commerce Act of 2000 establishes the legal equivalency of 87 For further description of these entrepreneurs, see Groves, Gen GT: Future Business Ventures in Global LAW DICTIONARY (8th ed. 2004). 1d. at 790, 801. incidentally they did not depend on traditional criteria for business success. They were all college dropouts. See Jon generational dynamic to information technology modeling. This article attempts to incorporate that dynamic in 83 See id. at What may also separate Facebook from the individual exchange member or other MCS

93 For the MCS exchange member, the benefits of a Facebook MCS can be summarized as Id. IL), October 5, 2006, available at 2006 WLNR See Michael Joe Medill, Illinois Trade Association Acquiredfor $4 Million, DAILY HERALD (Arlington Heights, 88 See Cassidy, supra note 64. members in the exchange, (3) website advertising, and perhaps most significantly (4) a following primary sources: (1) existing reserves dedicated to expansion, (2) monthly fees from The capital needed to establish and maintain such an MCS is typically generated from the E. C apitalization of the Entity may be advisable. purchasers of its product or a qualitative legal team for those transactions, the Facebook MCS international trade without the resources or expertise to build both a customized network of business firm. But if a firm is among the U.S. small and medium sized businesses in As stated earlier, the Facebook MCS may not be well-suited for every international conserving cash can improve cash flow since there is more cash then available for other business purposes 90 achieves the same purchasing power as a form of currency; thus it conserves cash. 89 And, revenue or needed goods or services. 88 The exchange is essentially an alternative to cash but domestically obsolete commodities, and (3) converting losses from that excess capacity into follows: (1) developing a new market! customer base, (2) the ability to sell excess capacity or D. MCS Benefits

94 25 As stated by one executive of an exchange company, Today, business is conducted in a A MCS can only effectively function if there is clarity in the legal relationships among all 92 Thriving on Barter, BUSINESS TIMES (Singapore), October 30, 2006, available at 2006 WLNR or Services Each Year, THE SAN DIEGO UNION-TRIBUNE, March 26, 2008, available at 2008 WLNR IL), October 5, 2006, available at 2006 WLNR ; Penni Crabtree, About 400,000 Companies Barter Goods 91 See Michael Joe Medill, Illinois Trade Association Acquiredfor $4 Million, DAILY HERALD (Arlington Heights, the customer s use of Facebook s many value-added features described above. borderless world and barter is an effective tool for companies to expand and penetrate global VI. THE INTELLECTUAL PROPERTY RIGHTS OF FAcEB00K AND MCS MEMBERs AS uncertainty over the parties respective rights in specific property and the extent of protection of transaction and quarterbacks the team of traders. format. The focus in this writing is on the facilitator, Facebook, which lies at the heart of the of interests and license agreements regarding those rights. Obviously, conflicting claims or INTELLECTUAL CREATIONS OF THE MCS PARTIEs DATABASE CREATORS IN INTERNATIONAL TRANSACTIONS: HARMONIZING THE advertise. Beyond advertising, each transaction facilitated by Facebook would generate a fee for from the Facebook MCS website, its considerable market penetration from being one of the most could also advertise. Each outside entity that desires the exchange members as clients could markets, and grow their bottom line. that property could thwart the buying and selling of goods and services in this transactional 92 transactional fee for each commodity exchanged. trafficked sites on the planet provides an attractive lure to advertisers. Each exchange member 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 9 As for the potential for advertising revenue

95 International Trade Administration By: Pompiliu Verariu, US. Department of Commerce, Sixth International Conference, San Diego, May 22-25, 1996 Extract of paper presented at the International Trade and Finance Association I. The 1970s and through transfers of various agreed upon economic benefits (e.g., payments in kind that minimize or creation in the buyer s country, or a combination of these.) avoid net hard currency outlays by buyers, marketing assistance in third markets, investments and job and undertake certain contractually specified commercial initiatives that compensat& the buyers The term will denote practices whereby foreign suppliers commit, as a condition of sale, to reciprocate use the term countertrade in a generic sense. Because the format and use of countertrade transactions have evolved over the years, this paper will it accounted for an estimated 10% of world trade. the Swiss franc--has now been practically phased out in international commerce. In the 1970s, however, traded goods is denominated in accounting units expressed in major currencies such as the U.S. dollar or countries agree to exchange a number of specific products over one or more years and the value of the intra-developing country trade was conducted in the s. Clearing trade--whereby two or more Bilateral trade under government-to-government clearing agreements was, after all, the way much of reasonable way to finance the imports and expand exports. energy imports, linking imports from industrialized countries to domestic exports seemed like a For many hard currency-strapped Third World countries struggling to cope with the rising prices of their countertrade deals. which enabled private sector enterprises--or directed state-owned enterprises--to participate in resources and help finance critical imports, many developing country governments enacted legislation In the belief that countertrade arrangements could alleviate net outflows of scarce hard currency Countertrade deals would typically entail two contractually-linked import/export transactions, each settled through letter of credit payment. and, by the end of the 1980s, had spread geographically to over 100 nations. command-economy countries of Eastern Europe and the Soviet Union, the practice proliferated rapidly Following the emergence in the mid-1970s of countertrade transactions in trade with the then International Trade Administration, the U.S. Department of Commerce, or the U.S. Government.) (* The views expressed in this text are those of the author and do not necessarily represent those of the The Changing Role Of Countertrade And Other Contract-Based Practices In International Trade *

96 leveling in the volume of countertrade commodity deals, while countertrade arrangements involving By the mid-1980s, supply and demand constraints in volatile commodity markets contributed to a oil. The uneven reporting on countertrade spotty information available. Contributing to widely varying figures are assessments that either lump together or exclude different categories of compensatory arrangements (e.g. government-togovernment clearing agreements, military offsets). The actual volume of such deals, as a percent of total world trade, can only be estimated because of the The transactions involved traditional Third World exports--mostly agricultural commodities and crude according to contracted terms. generic label of countertrade between 5% and 25% of total world trade--that is, somewhere between Developing Countries: Countertrade with developing countries constituted the bulk of such deals from $467 million to $580 million. billion in export sales in 1984 (about 60% of total U.S. export sales that year), reported that 5.6% of The study reported that between 1980 and 1984, defense countertrade obligations of U.S. firms military and non-military export sales that year involved countertrade obligations. A U.S. International Trade Commission study that surveyed 523 U.S. corporations accounting for $127 U.S. business community with the practice An alternate indicator of rising countertrade pressures during the period was the involvement of the a survey of 110 U.S. firms by the National Foreign Trade Council Foundation reported that the number Also significant was the rapid geographical spread of the practice during the 1970-SOs. A study based on Estimates in the mid-1980s placed the annual volume of international deals conducted under the extent to which compensatory of such transactions and about the questions about the unreported volume of countries making countertrade demands increased from 15 in 1972, to 27 in 1979, to 88 in their dollar value. about $80 and $240 billion. transactions also leaves unresolved between suppliers from industrialized countries and developing country importers in the s. peaked in the mid-1980s or in the later part of that decade in the number of transactions executed and obligations are actually fulfilled increased from $414 million to $2,182 million, while non-military countertrade obligations increased Judging by analyses of reported transactions, the number of countertrade transactions apparently

97 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 the late 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 reciprocallylinked deals included services such as transportation services and construction engineering, intellectual property 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., commercial debt-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 agreement whereby foreign contractors accept as full or partial repayment goods derived from the plant or machinery they supplied. Buy-back arrangements financed construction of much of the new production capacity in the Soviet Union. 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, and representing local earnings by foreign firms or nationals--were sold at a discount, with official permission, to other Western parties who used them to cover local costs for such activities as producing films. Industrialized Countries: Counter-trade practices were not solely restricted to trade with developing countries, as evidenced by the creation in the 1980s of public units in industrialized countries entrusted with administering compliance with both defense and non-military offsets. Offsets--an umbrella term for a broad range of industrial and commercial compensation practices required of foreign suppliers under primarily government agency of state-owned enterprise acquisitions--were made a common requirement for the procurement of either military (e.g., fighter aircraft) 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 well as other economically beneficial transfers to the importing country that are not related to the original export. Industrialized countries that established offset programs tied to both civilian and military procurements in the 1980s include Australia, Austria, Belgium, Canada, Greece, Turkey, Portugal, Norway, Sweden, Finland, and Spain.

98 countertrade-related advisory assistance to their exporters. Ministers which provided for exchanges of Soviet commodities for French agricultural and food processing equipment and technologies. To assist their exporters some industrialized country governments also promoted countertrade under For example, the French Ministry of Agriculture signed in 1989 an agreement with the USSR Council of roads, telecommunications, and power projects. procurements--commercial aircraft, industrial plants, and especially infrastructure projects such as to outbid each other for declining sales in the international marketplace--mostly by increasing the level of the offset obligations they assume. declining international orders for weapons are forcing U.S. defense contractors to undergo mergers and 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 contractual recourse to the project s revenue streams. output products of the production capacity they supplied, project financing relies instead mainly on International countertrade practices are now increasingly associated with bidding on major defense and are directly allocated to service outstanding debt and principal. non-military government procurement contracts and with project financing--a contract-based, offbalance-sheet finance technique whereby revenues generated from the output of the financed project that liberalized trade regimes, and the emergence of economic blocs such as NAFTA (U.S., Canada, result of debt reduction induced by the Brady Plan initiative, lower international interest rates, policies free market principles. 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. 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 The French Government has supported instead the formation of a separate countertrade assistance II. The 1990s In the 1990s, countertrade pressures abated in many parts of the world, notably Latin America as a Mexico), and MERCOSUR (Brazil, Argentina, Uruguay, Paraguay) which integrate regional trade based on A variation of the countertrade buy-back contract which links foreign contractors repayments to the 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 On their part, developing country governments are increasingly shifting their focus to civil government agreements.

99 Civil offset requirements, therefore, are increasingly acquiring a financing rationale in these markets. 1990s to issue new civilian offset regulations (e.g., United Arab Emirates, Kuwait). High procurement costs and tighter budgets have prompted many emerging country governments in the Russian exports in 1993 ($4.9 billion), compared with 8.3% in According to the Russian State Statistics Committee, barter transactions accounted for 11.5% of all demise of the regional clearing system, the Newly Independent States (NIS) of the former Soviet Union conducting a significant portion of trade on the basis of cashless barter. are restoring former commercial links between themselves and with East European countries by Faced with declining intra-regional trade levels and dislocations in feed-stock sources induced by the based on profit-oriented flows of money as a me dium for settling transactions, but on an accounting system for uses of domestic resources. The concept of payment in goods lent itself well to the region s centrally-planned system which was not developing countries. countertrade, the bulk of it under bilateral clearing agreements with Central Europe and a number of In the late 1980s, well over half of the former Soviet Union s trade was conducted on the basis of command economies of Eastern Europe and the Soviet Union. Countertrade practices have traditionally played a significant role in the commerce of the former production capacity. alternative for financing trade and investment linked to privatization and modernization of existing The self-financing aspects of countertrade arrangements appeal to these countries governments as one Today, Eastern Europe and the newly independent republics of the former Soviet Union still grapple with economic dislocations associated with reforming and reconstructing their obsolescent economies. the need to compete for private capital with more profitable and risk-free markets. countries limited number of investment and/or business opportunities, by low creditworthiness, and by The nations requirements for huge amounts of foreign funds are, however, constrained by the central planning toward individual forms of market-driven economies. to the former Soviet Union have embarked on a path of gradual economic reform, shifting away from Since the advent of perestroika, the emerging democracies of Eastern Europe and the successor states Countertrade pressures are also on the rise in the former Soviet bloc countries. major competitive edge. and/or to provide their clients with financial packages that can best those of competing bidders is a In a global environment of budgetary constraints, the ability of suppliers to meet offset requirements infrastructure investment, one-fifth of their total investment.) (According to the World Bank, developing countries are now spending around $200 billion a year on new

100 Russian Government has also bartered products (including military hardware) to settle outstanding debt The advance generation of foreign exchange is accomplished through the sale of NIS goods whose Hence, the emergence and proliferation of offshore escrow accounts endowed by commodity sale Because Western suppliers can no longer rely on commercial credit extensions to finance the export leg Escrow-financed trade that relies on commodity exports has become a significant and common tool in much as $4 billion annually--is escrowed abroad. 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 involving strategic raw materials. owed to Turkey, Hungary, Finland, and South Korea. 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. of countertrade transactions, they must now generate in advance, on behalf ofthe NIS importer, the foreign exchange required to finance the Western export. 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 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 III. Conclusions derived from exporting a portion of their production for their own development. to stashing foreign exchange export-revenues offshore. In 1992, approximately 10% of the production of Russian regions was exported through such regional Foreign Economic Relations estimated that about 10% of annual hard currency export revenues--or as Russian Federation, as regions and major energy producers are entitled to retain hard currency earnings trade of the Russian Federation. In 1992, the Russian Market Research Institute of the Ministry of This figure is a lower limit since it does not account for buy-back transactions, unreported nongovernment barter deals, and countertrade arrangements financed through offshore escrows. The 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 settled, and offsetting import-export contracts. proceeds are then escrowed offshore in order to secure timely payments to the Western suppliers. proceeds which have now substituted for previous countertrade practices involving linked, financially quotas. For production enterprises, countertrade fulfills a role that ranges from financing critical imports

101 heightened costs and risks they pose to the trading parties--will likely continue to find use in trade with debt-ridden countries for transactions lacking cover from multilateral development banks and Western export credit agencies. These trends portend that contract-based financing tools such as countertrade--not withstanding any costs and risks will be shared among trading parties, inclusive of government agencies. Key to the market acceptance and successful outcome of such transactions will, however, be the way arrangements is likely to continue as a way of supplementing traditional export finance business. Thus, financing based on countertrade and other similar contract-based self-liquidating financing parties to the contract. that could enhance the opportunity for liquidating debt in case of default on the part of one of the In the absence of sovereign guarantees, countertrade contracts may also provide a legal mechanism arrangements ensure continuity in repayment flows. By relying on multiyear marketing commitments for counter-delivered goods, countertrade techniques to the fore. flows and decreased dependence on sovereign guarantees are pushing contract-based financing

102 WHY COUNTERTRADE IS GETTfl\G HOT - 29, 1992 Page 1 of 2 httn://monev.cnn.comlmagazines/fortune/fortune archive! I 992/06/29/76602/index.htm 11/1/2010 National Enquirer parent plans bankruptcy filing 100 best paces to start a business The Hot List How the roof fell in on Countrywide AIG moves info the black for top holder U S Morn Company News for Monsanto, estimates that this type of trade now accounts for 20% of U.S. exports. That s close to Subscribe to Fortune Car advice WIts do buyers trust Taking the social media plunge Learning to let go Current Issue RIP muni bond insurance More from Fortune companies joined the six-year- old organization during the past 18 months. Says Neil Caplan, who conversant in whatever techniques are in vogue so we can win bids overseas. Maybe you ll get an companies bargaining for business in cash-poor countries. TRADE TRICKS The American Countertrade Association s membership reflects the diverse CHART: NOT AVAILABLE CREDIT: RENEE KLEIN FOR FORTUNE/SOURCE: ACA CAPTION: chairman of the American Countertrade Association (ACA) in St. Louis and director of countertrade association. Most are FORTUNE 500 heavyweights, including 33 of America s top exporters (See insert with your phone bill one day offering a few pounds of perch at an irresistible price. helicopters will start in 14 months. Such circuitous deals, long at the fringe of trade, are becoming currency, including a plant that will catch and process Nile perch and a factory to turn pineapples and more common as U.S. companies hungrily search for opportunity in the developing world. Dan West, $110 billion of goods and services. No government figures support this estimate (there are no Trade), but some are companies such as Arcon Manufacturing of Charlotte, North Carolina, which The ACA runs semiannual training seminars and offers a network Of countertrade cognoscenti who markets. These include countries in Eastern Europe and the former Soviet Union that want Western (FORTUNE Magazine) McDonnell Douglas Helicopter. Pacific helped set up several local projects that generate hard June 29, 1992 By Shelley Neumeier WHY COUNTERTRADE IS GETTING HOT wanted 18 helicopters to help stamp out elephant and rhino passion fruit into concentrate. Pacific says he s already found buyers in Europe. Delivery of the makes grain silos. What s incontrovertible is the growth of ACA: About 40% of ts 176 member handles such matters for Continental Grain: Countertrade is here to stay. It s a fact of life in certain goods and technology but lack the hard currency to pay for them, as well as other emerging markets. are willing to share their experience and knowledge, Its new members include many who had not the trade finance division of Nynex, says his company recently joined because we need to be Home j Fortune 500 Technology Investing 1anaoement FORTUNE 500 mostrt 1 Rankings Video Newsletters RSS Fortune Magazine!IMoneycom- News I Markets I TeehnologyPersonal Finance; Small Basleess CNN.com Enter quotes Search Fortune 1f1Ti I - - reporting requirements); West bases his guess on an informal survey of colleagues in his previously thought much about countertrade --or even exporting. Richard Frankenheimer, who runs Most expensive colleges Buzz -.. The Stocks at standstill ahead of Fed Top Stoiles Hitachi reduces costs and CO2 emissions... June poaching but didn t have the $25 million to pay for them. Enter Gary Pacific, head of countertrade for Uganda JP Morgan faces SEC subprime probe Home prices still fumbling Don t rule out Fed shock and awe -

103 main page faq indes search US Code 4 It LI1 / Legal Information Institute - T IT home search find a lawyer donate Search Law School Search Cornell sec html 1 1/1 /7fl1 0 Government; and (C) notify Federal agencies with operations abroad of instances where it would be beneficial to the United States for the Federal Government to barter Govemment-owned surplus commodities for goods and services purchased abroad by the Federal periodic lists of known commercial opportunities for barter transactions beneficial to United States enterprises; institutions, export-related Federal, State, and local government agencies, end other interested persons, including publishing (B) organize and disseminate information relating to international barter in a manner useful to business firms, educational (A) monitor information relating to trends in international barter; It shall be the function of the Office to (4) Functions carry out its functions under this section. The Secretary of Commerce shall transfer such staff to the Office as the Secretary determines is necessary to enable the Office to (3) Staff There shall be at the head of the Office a Director, who shall be appointed by the Secretary of Commerce. (2) Director this section referred to as the Office ). There is established, within the International Trade Administration of the Department of commerce, the Office of Barter (hereafter in (1) Establishment (b) Office of Barter performing any function under this subsection. of such departments and agencies shall apply in the same manner to each member of the interagency group and to any other parson thereof, for preserving the confidentiality of such information which are applicable to the officials, employees, experts, or consultants departments and agencies as the interagency group may request, except that the requirements, including penalties for violation Other departments and agencies of the United States shall provide to the interagency group such information available to such (3) Sharing of information subparagraph (A). (B) make recommendations to the President and the Congress on the basis of the review and evaluation referred to in Cooperation and Development and other appropriate international organizations, to reach agreements on the use of (iii) the need for and the feasibility of negotiating with other countries, through the Organization for Economic countertrade and offsets; and programs; and (ii) the use of countertrade and offsets in United States exports and bilateral United States foreign economic assistance and the impact of those trends on the United States economy; (i) United States policy on countertrade and offsets, in light of current trends in international countertrade and offsets (A) review and evaluate It shall be the function of the interagency group to (2) Functions interagency group. agencies of the United States as the President considers appropriate. The Secretary of Commerce shall be the chairman of the The President shall establish an interagency group on countertrade, to be composed of representatives of such departments and (1) Establishment (a) Interagency group Barter and counteitrade TiTLE 15> chapter 73> SUBcHAPTER II> 4712 United States Code: Title 15,4712. Barter and countertrade I Eli/Legal Information Instit... Page 1 of 2

104 l,j-f-r I rtpi-npsjjc nm!mrinnapre/wor1dwjde.htm 11/1/2010 Vi r HOME E-maiI to provide our readelt with a storehouse!rtpovin5 Bs tess wt, Trde BizXchang of informa:ion ideas contadi Ourpurpose at BarterNewr is The OffidoI Jornd of the Rdprood Trodo Industry BarteNews Retail Barter We Know Barter, countertrade, corporate barter, barter marketplace - from Barter News Page 1 of2 Learn USA Barter Organizations Click here you new we quaan(e Click: Modify Listing customts...- Ffrst Time Visitors The weekty newsletter for everyone interested in hotter. existing listing Click: New Listing our heavily trafficked website If you would like to add you company listing to If you would like to modify or change your Tuesday s Report Directory Annually Move with over 400,000 Companies Worldwide New contacts, strategies and techniques seven days a week!--> The Barter Organizations in This Online Billions In Goods And Services, and Interact Read The BarterNewsBIo.com Barter Companies Worldwide LE3 J mpaed.menu Need Up To S2mtIIIos For Veer Markethi?

105 Barter, countertrade, corporate barter, barter marketplace - Learn from Barter News Page 2 of 2 Africa Argentina Australia j Austria Belgium Brazil Canada Chile China Columbia Czech lepublic Denmark Egypt ] France Germany j 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 11/1/2010

106 Bolivarian Alternative for the Americas (ALBA); htttv /Iwww uvana.or/sanisb!petro agreement.html 11/1/ AGREE that, for the Latin American and the Caribbean region, integration is an essential 6. RECOGNISE the need to adopt measures, within the context of PETROCARIBE, based on a promote the eradication of social inequalities and to foster improved living standards and more sovereign use of energy resources based entirely on the principles for integration referred to as the nations. For this reason, PETROCARIBE has been conceived as an integral process intended to condition for striving to achieve development in the midst of the increasing creation of large and identity; and Caribbean societies by making them fairer, more educated, participatory and harmonious 2. RATIFY the commitments assumed at the First Meeting of Energy Ministers of the Caribbean held 5. REITERATE that the objective of PETROCARIBE is to help in the transformation of Latin American Latin America and the Caribbean while allowing them to preserve their independence, sovereignty advance to higher levels of development can help fulfil the needs and aspirations of the peoples of We, the Heads of State and / or Government, gathered in the City of Puerto Ia Cruz, Venezuela, 4. CONCLUDE that only integration based on cooperation, solidarity and the common will to of PETROCARIBE, the fundamental objective of which is to contribute to the energy security, the Ministers held in Montego Bay, Jamaica, from 26 to 27 August 2004; in Caracas, Venezuela, on 10 July 2004 and at the Second PETROCARIBE Meeting of Energy 1. WELCOME the initiative of the President of the Bolivarian Republic of Venezuela for the creation within the framework of the Energy Meeting for the creation of PETROCARIBE: social and economic development and the integration of the Countries of the Caribbean through the Post July 4th to Embassy page - Back ENERGY COOPERATION AGREEMENT PETROCARIBE embguy@cantv.net Fax: (58) Telephone: (58) Quinta Roraima, Prados del Este, Apartado 51051, Caracas 1050, Venezuela Text of PetroCaribe Agreement signed at Puerto Ia Cruz, Venezuela on 29 June 2005 Consular Information I I Mainpage II Speeches by Ambassador Odeen Ishmael II Información en Español of PetroCaribe summit Embassy of the Republic of Guyana, Caracas Venezuela Pictures (58) ENERGY COOPERATION AGREEMENT Page 1 of6 regional blocks occupying major positions in the world economy; effective participation by nations in their efforts to shape their own destiny; special and differentiated treatment for the Latin American and the Caribbean countries exhibiting

107 8. CONCERNED about global economic trends and particularly about the policies and practices non-interference in internal affairs, free determination and the right of each nation to freely determine the social, economic and political systems of its choice 7. GUARANTEE absolute respect for the principles governing the equality of States, sovereignty, region; less relative development, and on complementarity and cooperation between the countries of the agreement.html 11/1/2010 * Delegate functions and responsibilities to the agencies created for the fulfilment of specific tasks, * Coordinate relevant policies, strategies and plans; formed by the Ministers of Energy or their equivalents and assigned the following functions: In order to achieve its objectives, PETROCARIRE shall be furnished with a Ministerial Council I. INSTITUTIONAL PLATFORM kinds of energy. infrastructure and the harnessing of alternative sources of energy such as wind, solar and other complexity of the energy issue, PETROCARIBE emerges as an organization capable of ensuring the and the efficient use of these resources, technological cooperation, training, development of energy coordination and harmonization of energy policies, including oil and oil-derivatives, gas, electricity In order to guarantee the achievement of these objectives and given the dynamic nature and peoples. In this regard, PETROCARIBE will be responsible for coordinating and managing all issues Agreement. associated with the energy-related links between the signatory countries in accordance with this of the Caribbean through the sovereign use of natural energy resources to directly benefit their aimed at facilitating the development of energy policies and plans for the integration of the nations On the basis of this Agreement, it has been decided to immediately create PETROCARIBE as a body AGREEMENT represent an obstacle to their development. For these reasons, we, the Heads of State and / or colonialism, and imposed by the wealthy developed and rich countries, the current global energyrelated trends marked by the enormous waste of consumer societies, by the reduced availability of products, such as sugar, bananas and others. In view of this situation, the countries of the Government, have agreed to sign this: production capacities and by speculation leading to the rise in hydrocarbon prices, have all continuously exerted a negative impact on both the economic performance of, and the social conditions in the countries of the Caribbean. In most cases, the exports of these countries have been even more seriously affected by the fall in the prices of their products, mainly agricultural Caribbean need to possess reliable sources of energy and must be assured that prices will not 11. WE HAVE ACKNOWLEDGED that, within the context of an unfair economic order inherited from CARICOM as a reliable source of supply; 10. RECOGNISE the importance of Trinidad & Tobago as an energy exporting country of the the applicable financing arrangements will be determined through bilateral discussions with such countries; 9. GIVEN the special circumstances of heavily indebted poor countries, all terms and conditions of smaller countries of the Third World whose economies are heavily dependant on foreign countries; which now prevail in industrialized countries and which may lead to a greater marginalization of the ENERGY COOPERATION AGREEMENT Page 2 of 6

108 for these issues; workshops and work sessions, with a view to providing the necessary technical and legal support * Agree on and approve issues of absolute priority to the organization, as well as studies, whenever necessary; 99 ENERGY COOPERATION AGREEMENT Page 3 of 6 httn:// agreement.html 11/1/2010 Petroleum of the Bolivarian Republic of Venezuela and assigned the following functions: PETROCARIBE shall also posses an Executive Secretariat ascribed to the Ministry of Energy and meetings. Regular meetings shall be held once per year and special meetings shall be held as often as needed. The Council of Ministers shall appoint a President and a Deputy, who shall call and chair the * Agree on the admission or withdrawal of members whenever required. * Prioritize the studies and projects defined by the Council of Ministers; 4. PDV CARIBE shall guarantee a direct trade relationship without intermediaries in the supply additional savings for the signatories to this Agreement. 3. Freight expenses arising from these operations shall be charged at cost price, which represents its various supply-related obligations. 2. Upon beginning its operations, this affiliate shall possess adequate cargo capacity for covering purpose affiliate under the business name of PDV CARIBE. 1. With a view to commencing operations, Petroleos de Venezuela (PDVSA) has created a special IlL OPERATING ASPECTS an initial capital of Fifty Million Dollars (US$50 million). In order to activate the ALBA-CARIBE Fund, the Bolivarian Republic of Venezuela shall contribute This fund shall be called the ALBA-CARIBE Fund. savings from direct trade. contributions may, upon agreement, be drawn from the financed portion of oil invoicing and the programs and consisting of contributions from financial and non-financial instruments. Such PETROCARIBE shall have at its disposal a Fund earmarked for the financing of social and economic In order to help foster the social and economic development of the countries of the Caribbean, IL ALBA CARIBE FUND FOR SOCIAL AND ECONOMIC DEVELOPMENT * Propose the allocation of resources for the performance of all necessary studies. submit the relevant reports and recommendations; * Ensure the implementation and follow-up of the decisions adopted by the Council of Ministers and * Directly manage and administer PETROCARIBE-related affairs; * Prepare the agendas of the meetings of the Council of Ministers; * Exercise its fullest authority with regard to the performance of the Executive Secretariat;

109 and of renewable energy. 6. This affiliate shall adopt training programs designed to strengthen professional capacities and to facilities for fuels and products. Priority shall be given to countries in greatest need. storage facilities and terminals. This will include, whenever possible, refining and distribution 5. To this end, PDV CARIBE shall also be responsible for organizing a logistics network of ships, process. This arrangement shall help generate additional savings for the consumer countries. promote a non-contaminating, more energy-efficient and more rational use of conventional energy 11/1/2010 which it shall offer preferential rates. Venezuela shall be able to determine the portion that shall be paid with goods and services for including the 2-year grace period specified at 1% interest. With regard to deferred payments, Should the price per barrel exceed 40 dollars, the payment period shall be extended to 25 years, the 2-year grace period mentioned), provided that the price per barrel remains below 40 dollars. The same bases of the Caracas Energy Cooperation Agreement shall apply for 17 years (including 4. Deferred Payment The portion to be paid in the short-term shall be extended from thirty to ninety days. 3. Short-term Financing two years. With regard to financing, the grace period provided for in the CEA shall be extended from one to >= 100 dollars per barrel 1150 I > 50 dollars per barrel 1140 >= 40 dollars per barrel 1 30 >= 30 dollars per barrel 25 I 1120 >= 24 dollars per barrel >= 20 dollars per barrel 10 >= 22 dollars per barrel 1115 >= l5dollarsperbarrel TO BE FINANCED PERCENTAGE PRICE PER BARREL (%) 2. Long-term Financinq Caribbean exhibiting less relative development on the basis of bilaterally fixed quotas. Agreement, the Bolivarian Republic of Venezuela shall extend credit facilities to the countries of the Apart from the benefits set forth in the San José Agreement and in the Caracas Energy Cooperation IV. FINANCING MECHANISMS AND COMPENSATIONS ENERGY COOPERATION AGREEMENT Page 4 of 6

110 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 Minister of Trade and Industry of the Bahamas Minister of Health, Energy and Communications of Belize Willmoth Daniel Prime Minister of Commonwealth of Dominica Prime Minister of Grenada Prime Minister of the Cooperative Republic of Guyana Leonel Fernandez Prime Minister of Jamaica Prime Minister of St. Vincent and the Grenadines Percival Patterson Minister of Foreign Affairs, International Trade and Civil Aviation of St. Lucia Vildo Mann Fidel Castro Ruz V. ENERGY EFFICIENCY trade policies of rich countries. supply-related agreements. In this regard, PETROCARIBE may arrange credits and exchange operations. Venezuela offers technical cooperation to support the creation of state agencies in sugar, bananas or other goods or services to be determined that are believed to be affected by the technologies to enable beneficiary countries to develop highly functional energy-efficient programs Spanish in the City of Puerto Ia Cruz, on 29 June 2005 by: Samuel Hinds countries not possessing qualified state institutions for this purpose. President of the State Council and the Government of the Republic of Cuba President of the Dominican Republic The products that Venezuela may purchase at preferential rates may include certain items such as One essential feature of the objective of PETROCARIBE shall be to add energy saving programs to Within the framework of PETPOCAR1BE, state bodies shall be required to implement energy-related This Agreement is signed in two original and equally authentic copies drafted in English and Leslie Miller Keith Mitchell Ralph Gonsalves ENERGY COOPERATION AGREEMENT Page 5 of 6 Deputy Prime Minister of Antigua and Barbuda Roosevelt Skerrit Petrus Compton 11/1/2010

111 President of the Bolivarian Republic of Venezuela Hugo Chavez Vice President of the the Republic of Suriname Jules Rattankoemar Ajodhia Minister of Public Affairs and Energy of St. Kitts and Nevis Earl Asim Martin 3o / 1/2010 ( This page is part of Guyana News and Information. ENERGY COOPERATION AGREEMENT Page 6 of 6

112 5 Increased oil supply at lower cost, 3 unprecedented transactional efficiencies and significant economic development have already occurred One Caribbean opportunity for countertrade is through the expanding scope of the Energy The Petrocaribe as a Multilateral Clearing System. existing arrangements with industrialized countries. Apparently uncontroverted figures reveal oil and related products among themselves regionally, with flexible payment terms was superior to the enhance access to energy resources at a more advantageous price than it received from industrialized including Jamaica, the Bahamas, Dominica, the Dominican Republic and Haiti, formed an alliance to During the Global Recession through Countertrade: Exhibit A The Petrocaribe. provided from industrialized nations. On June 29, 2005, fourteen Caribbean and Mexican countries, 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 nations. Spurred into action from sudden increases of oil prices in 2005, they believed exchanging crude from the accord. 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 accelerated basis (5 years) if the development projects did not come to fruition. The total terms were day at lower price that provided from prior sources outside the region. Payment terms were agreement illustrates the terms. Under the original agreement, Venezuela provided 29,000 barrels per EXCERPT FROM Caribbean Business Growth Potential o main.htm last visited main.htm last visited main.htm last visited , 14 of the 18 members reported increased volume of oil from 59 thousand barrels to 121 and refineries for oil and electric power generation also added 59,647 direct and indirect job5 through thousand barrels daily, comprising a 105% increase over that period. representing over 88 million Latin and Caribbean inhabitants. 4 Petrocaribe sources assert that from The success of the Petrocaribe became evident and the accord expanded to 18 members, term costs. ability to process its own crude oil under the Petrocaribe agreement (Petrojam) further reducing its long particular price per barrel. As an accountability provision, Jamaica would have to settle the loan on an 20% low interest loan for devel 6pment projects over a 15 year period when the price of oil exceeded a advantageous to Jamaica in that it only had to pay 80% of the total cost from its own resources, with a has been Venezuela, a major producer of crude oil. Jamaica was an early member and its bilateral The primary beneficiaries are the countries that depend largely on imported oil. The benefactor

113 Id. Id. minister opines that the agreement has contributed to an improved standard of living for its citizenry. Petrocaribe, it has imported approximately 2.3 million barrels of oil and by-products. implementation of the crude oil supply agreements. 8 Guyana s prime 7 In the two years since Guyana participated in St. Lucia publicly stated its intent to commence, advance and become full member... with Additional Caribbean nation states are seriously considering joining the alliance. Most recently, 6 The same source concludes that the overall decrease in energy &newsid temas=1 last visited obi id=7 Petrocaribe official website, Petrocaribe Energy for Union, 2009, 6 Id. eleven new joint ventures in the region. costs and positive economic benefits generated $1.4 billion in tangible savings