Our dysfunctional banking system
PHILIP C. GALANIS
Nassau, The Bahamas
The key insight of Adam Smith's Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another. – Milton Friedman
Once upon a time, banking in The Bahamas was a relatively pleasant experience. One could meet with a banker, solicit prudent financial advice and, with relative ease, obtain a loan to start or expand a business, purchase a home or a car and even address challenging financial matters facing the customer. But that was a very long time ago and today, that has all changed. Therefore this week, we would like to Consider This… why has banking in The Bahamas become such an ordeal and so dysfunctional?
What has changed?
Following the blacklisting of The Bahamas by the Organisation for Economic Co-operation and Development and with the passage of the compendium of financial services legislation in 2000, The Bahamas entered a new banking era, one that was characterized by over-regulation by the Central Bank and a private sector gestapo-like gatekeeper, nominally called the bank compliance officer.
This relatively new bank compliance officer that has recently emerged has rapidly joined the ranks of threats to the progressive development of our financial services sector by imposing extraordinary and often ridiculously rigid requirements on prospective customers, some of whom have had long-standing relationships with their banks. Like many faceless bureaucrats, it appears as if some compliance officers take a delight in thwarting positive bank-customer relationships. Instead of seeking to find a happy medium between due diligence and sensible regulation, the insistence on some of their non-negotiable requirements seems to be a zero-sum exercise. Banking in The Bahamas could be an experience where everybody wins. However, recent experiences have resulted instead in chasing business away from the jurisdiction.
Many persons who bank in The Bahamas have experienced those institutions imposing stringent reporting requirements over the past few years. Long-standing customers complain about banks requiring them to provide excessive information on a regular basis, even though much of the same information requested has previously been submitted. Equally vexing is requiring customers to provide the same information if they wish to open new accounts at the same bank, notwithstanding that they have operated an account or various accounts for many years. Some customers complain that they are treated like strangers at best and criminals at worse just to open new accounts.
This writer recalls a recent frustrating experience of opening a bank account to service a client which took more than a month, despite providing all the information that was requested by the compliance officer at the bank. The client became so frustrated with the constantly changing additional requirements of the Compliance Department that the person gave up on The Bahamas and this writer had to open an account in a major New York bank in order to satisfy the client’s needs. It took exactly one week to complete the account opening procedures in New York, the same procedures that took over a month in The Bahamas, and the Bahamian bank still has not yet opened the account. The frustrated client wrote: “I thought that The Bahamas was a very investor-friendly jurisdiction. I simply don’t understand why it’s so difficult to open a bank account there.” The client, a major South American multinational, reputable company with banking relationships all over the world, had intended to transfer millions of dollars to The Bahamas for management here, but that business and those funds will now move to New York. We believe that this experience is replicated many times each week.
It is unfortunate, but reasonable, to assume that these harmful practices are allowed to persist with the full knowledge and complicity of some of the banks whose head offices are located in North America, principally in Canada. While those banks have significantly contributed to the national job market here, they have invested very little in The Bahamas, compared to the enormous profits that they earn in our country. The unfortunate fact is that too many of our Bahamian bankers have become nothing more than glorified paper pushers with impressive job titles but very little authority. Sadly, they seem determined to frustrate their customers, domestic and foreign.
The short- and long-term consequences of the attitude of some compliance officers are that the jurisdiction is fast becoming an increasingly difficult and undesirable place to do business. Considerable losses are resulting from this behavior on the part of some Bahamian bankers. Not only are we losing an enormous amount of banking business, we are also losing legal and accounting fees and government taxes because of the attitudes of some compliance officers in Bahamian banks. In fact, some Bahamian professionals are now advising their clients to incorporate and bank in another jurisdiction and not to conduct business in The Bahamas because of the inordinately difficult and ridiculously rigid scrutiny to which they are subjected. And the word is rapidly spreading internationally.
The implications for our financial services sector are ominous. If we are not careful, we will experience a larger number of banks leaving The Bahamas because of the over-regulation of the jurisdiction and the generally unfriendly attitude of some bankers. This cannot be a positive development. It is therefore critically important to arrest the behavior of some of our banks and to change the harmful attitudes of their compliance officers.
It is ironic that a large Bahamian delegation is presently in the United Arab Emirates on a business promotion trip, encouraging high-net-worth individuals and businesses to establish their businesses here. Therefore, while this delegation is doing all it can to encourage business to come to our shores, here at home we seem to be doing little to make it easy for them to actually conduct business should they decide to invest here. If we are not careful, and if we do not arrest the negative attitude by some of our banks and compliance officers, there will be little need to have a Ministry of Financial Services. Instead of the influx of business that we need, we will experience the exodus of sound businesses from our jurisdiction.
As a part of the global village, we need to remember, in the words of Milton Friedman, the famous United States economist, that business activity, including banking, does not have to be a zero-sum experience where one party can gain only at the expense of another.
• Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to firstname.lastname@example.org.
October 28, 2013