In Sea of Gloom, Bahamas One of Caribbeanís Brightest Stars by Larry Luxner More than 700 islands and cays make up the Commonwealth of the Bahamas, which at its closest point is only 50 miles from the shores of Florida. Known primarily for its beautiful beaches, luxury hotels and duty-free shopping, this nation of 300,000 people is also making a name for itself as a leading offshore financial center. Thanks in part to this growing industry, the Bahamas today enjoys a per-capita gross domestic product of $12,600óamong the highest in the Caribbean. Unemployment stands at around 7 percent, inflation is restrained to under 2 percent, and the economy showed net growth in 2001 despite a slowdown in tourism resulting from last yearís terrorist attacks. ìThe outlook for the Bahamian economy is positive,î said Julian W. Francis, governor of the Central Bank of the Bahamas. ìWe are able to benefit from our history of a continuous presence as a major financial center.î On May 2, the opposition Progressive Liberal Party (PLP) regained control of the government in a major election ups et. The PLP led the Bahamas to independence from Great Britain in 1973 but was thrown out 10 years ago amid charges that then-Prime Minister Lynden Pindling had taken bribes from Colombian drug smugglers. The allegations against Pindling were never proven, but they caused a major rift with the United States that was not entirely healed until the change of government in 1992. PLP leader Perry Christie, who defeated Tommy Turnquest of the ruling Free National Movement (FNM), has vowed to ìlead a government for all Bahamiansî and that ìno one need fear victimization.î Christie replaces the FNMís Hubert Ingraham, under whose long tenure the Bahamas has become one of the wealthiest countries in the Caribbean, thanks to offshore banking and tourism. Even todayódespite a downturn in Caribbean tourism after Sept. 11 and strong indications that the Bahamas has once again become a major drug trans-shipment point for Colombian cocaineóthe country continues to attract a flurry of foreign investment. The biggest single project in the Bahamas is the $800 million Atlantis Paradise Island, a large resort owned by South African entrepreneur Sol Kerzner. Kerznerís company, Sun International Hotels, recently spent $450 million to double the size of the property, which now has more than 2,300 rooms and ranks as the Caribbeanís largest island resort. It also boasts a casino that is the largest in the world outside of Las Vegas. Not all investment projects are related to tourism. A joint venture between Hong Kongís Hutchison Port Holdings Group and the privately owned Grand Bahama Development Co. has so far invested $160 million in a Freeport container terminal, while a unit of El Paso Energy Corp. of Texas is talking about spending tens of millions of dollars to construct an 88-mile gas pipeline between Freeport and South Florida. Philip Miller, deputy director of the Bahamas Investment Authority (BIA) in Nassau, the capital, says that in a typical month, he assesses up to 25 foreign business proposals, each one representing an average $10 million in investment. Some 90 percent of all proposals win full approval within six weeks. Since its establishment in 1993, the BIAówhich bills itself as a ìone-stop shop for investorsîóhas managed to attract investments totaling $2 billion, mainly from the United States and Western Europe. The agency, a division of the Prime Ministerís Office, no longer considers investments of under $250,000. Prospective investors must also show evidence that they can finance their projects. Although tourism accounts for 50 percent of the Bahamasí gross domestic product, the financial services industry is in second place, at around 15 percent, employing more than 4,200 Bahamians and generating more than $400 million annually. Having established itself as a leading offshore financial center in the 1970s, the countryís offshore banks and mutual funds now handle around $350 billion of other peopleís money. It is also a key operational base for many of the worldís most recognized and respected banking and financial organizations. ìWe have proximity to the major financial centers of the world,î said Owen Bethel, president and general manager of Montague Securities International. ìWe also have a professional infrastructure, with all the major accounting firms, a wide selection of law firms, and a number of well-heeled financial institutions.î Montague Securities, which manages more than $70 million in assets, provides services ranging from the formation of international business companies (IBCs) to portfolio asset management and securities trading. The most important banks operating in the Bahamas are Citibank, Scotiabank, SG Hambros and the Royal Bank of Canada. In August, the local subsidiaries of two other prominent multinationalsóBarclays Bank and Canadian Imperial Bank of Commerce (CIBC)óannounced plans to merge, pending Bahamian government approval. The new bank, to be known as First Caribbean International Bank (FCIB), would be the largest bank in the Bahamas and one of the most powerful in the Caribbean, with assets topping $80 billion. Barclays and CIBC would each own 45 percent of the new bank, and executives plan to sell the remaining 10 percent to investors throughout the Caribbean. The FCIB will operate from 15 countries, hold 800,000 bank accounts, and employ more than 3,000 people. Although the economic prognosis for the country is good, the Bahamas must, in the short term, overcome several challenges. Tourism suffered both as a result of the Sept. 11 terrorist attacks and a fire one week earlier that destroyed Nassauís historic Straw Market and adjoining properties, causing $75 million in damage. And in November, Hurricane Michelle hit the island nation, resulting in an estimated $120 million in losses. The government must also respond to the Organization for Economic Cooperation and Development (OECD) initiative against money laundering and offshore tax havens in which the Bahamas was listed with 34 other countries considered to be encouraging the movement of funds from developed countries to low-tax or no-tax jurisdictions. It was also cited, along with 14 other countries, for having weak monitoring or regulatory systems with regard to money laundering or drug trafficking. Following publication of the OECD blacklist, the Bahamas legislature approved 11 laws aimed at, among other things, making it more difficult to form shell companies or use the country to launder drug money. Said Bethel, ìItís now easier to open a bank account in New York, Miami or London than in the Bahamas, in terms of documentation and verification of your source of funds.î To demonstrate its commitment to respond to the OECD initiative, the Central Bank of the Bahamas has revoked the licenses of 55 out of 410 offshore banks engaged in money laundering, causing offshore-company registrations to tumble by 70 percent. ìI think we have satisfied the international community with the policies weíre pursuing,î said Francis of the Central Bank. The effort to remove the Bahamas from the OECD blacklist has already prompted one of Bermudaís leading offshore groups, Lines Overseas Management Ltd. (LOM), to establish a Freeport sales office. LOM provides wealthy clients with services to invest in all types of securities instruments and already operates in Bermuda, Guernsey and the Cayman Islands. ìWe used three criteria in determining where to establish an additional office: stability of jurisdiction, potential for growth in the financial services industry, and quality of life for LOM personnel,î said Craig Lines, general manager of LOMís Freeport sales office. ìGrand Bahama, and specifically Freeport, meets all of these criteria.î Scott Lines, managing director, added: ìWe believe that the Bahamas, and specifically Freeport, will enjoy significant economic growth over the next 10 years, and LOM plans to be at the forefront in assisting the development of their financial services industry.î The two-year-old Bahamas International Securities Exchange (BISX) already lists 13 local stocks with a combined market capitalization exceeding $1.7 billion. ìThe Bahamas is unique in terms of capital markets,î said Keith Davis, chief legal and compliance officer at BISX. ìFrom day one, our capital market has been driven by the private sector.î Experts predict that the governmentís privatization efforts, such as the planned sell-off of state entities, including the Bahamas Telecommunications Corp. (Batelco) and the Bahamas Electricity Corp., will help boost the economy. Though a minimum price has not yet been set, the comp any is awaiting government approval to divest itself of 49 percent of its shares and is hoping that large telecom companiesósuch as British Telecom, AT&T and Japanís KDDówill be interested in bidding for them. The government will offer an exclusivity period of three years to make Batelco more attractive to potential buyers and to prepare the telecommunications sector for the influx of competition in the liberalization process. ìThe partner buying into the company would be allowed a three-year period to get the company up and running to another level, without having to be concerned about competition,î said Batelco President Michael Symonette. Although not nearly as important to the local economy in dollar terms as Batelco, the countryís ship registry businessósupervised by the Bahamas Maritime Authority (BMA)óranks third in the world behind Panama and Liberia and is much better known. ìCruise ships want to be associated with a quality register, and we have the largest concentration of cruise ships in the world,î said BMA Director John Mervyn Jones. Established six years ago, the BMA is based in London where 90 percent of all its ship registrations take place. It also maintains offices and agencies in the Bahamas, Tokyo, Seoul, New York and Athens. Interestingly, the bulk of cruise ships belonging to four of the worldís leading cruise linesóRoyal Caribbean, Disney, Cunard and Carnivalóare registered in the Bahamas. In addition, the Lucaya Harbor cruise facility has undergone a $10.6 million upgrading program and can now welcome more than 600,000 cruise passengers a year. ìWhile revenue from the ship registry business comes to $8 million, a rather modest amount compared to the overall services sector,î said Jones, ìit gives the Bahamas a very high profile in international shipping.î Meanwhile, in just four years of operation, Freeport Container Port Ltd.óa subsidiary of Hong Kong-based Hutchison Port Holdings Group (HPH)óhas become one of the Caribbeanís leading trans-shipment hubs. The 88-acre port, constructed in three distinct phases, represents an investment of $165 million. ìThere are advantages in being a dedicated trans-shipment port,î said the portís general manager, Michael Sandpearl. ìThis means we can build it as we want, without having the restrictions that other ports that have grown from handling bulk and general cargo usually have.î The port project began five years ago as a 50-50 venture between HPH and the Grand Bahama Port Authority Ltd., which controls much of Freeport. But in mid-October, HPH bought out its partnerís stake in the venture for an undisclosed amount. Separately, HPH owns a 50 percent stake in Grand Bahama Airport Co. Discussions are now under way to establish an air-cargo hub for relay operations alongside the nearby container port, as well as an ambitious Grand Bahama Sea/Air Business Center on 780 acres of land between the seaport and the airport. The center would provide a variety of warehouses and factory units tailor-built to meet the specific requirements of potential users. ìThis could help speed air and sea intermodal trans-shipment for the region, with maximum security and minimum bureaucracy in a tax-free trade zone, while offering extremely cost-effective alternatives for companies selling in the U.S., Central and South American markets,î said Sandpearl. In positioning itself as a trans-shipment hub, Freeport has taken the lead over rival San Juan, Puerto Rico, which is vying to become a trans-shipment center for cargo moving between North and South America. Other competitors for the trans-shipment business include the Panamanian port of Manzanillo, Jamaicaís Kingston and Santo Domingo in the Dominican Republic. Currently, two customers, Mediter-ranean Shipping Co. of Switzerland and Maersk Sealand of Denmark, account for 90 percent of the portís business. But Freeport is especially attractive to U.S. companies. It offers an abundance of land, tax incentives, lower labor costs, English-speaking workers, and proximity to major Florida ports including Port Canaveral, Palm Beach, Port Everglades and Miami. ìGeography is everything,î said Sandpearl. ìWeíre ideally situated on the main routes between Europe, the Gulf of Mexico, Panama, and the east coasts of North and South America, as well as the Caribbean.î Larry Luxner is a regular contributor to The Washington Diplomat.