“We have to be prepared for the worst”

Interview: Couldip Basanta Lala,
Former Founder & Director, Sanne (Mauritius) 

Mauritius risks European Commission’s blacklist

* ‘We know what international investors want – sound law and order, stability, an independent judiciary, adherence to the rule of law… It may also be true to Mauritius if we are to stay ahead of the competition…’

* ‘Protecting the reputation of the jurisdiction is a matter for all stakeholders. We should not assign all the responsibility of reputation to solely the regulator’

What happens to Mauritius’ Global Business sector in the wake of the European Commission to place the Mauritius jurisdiction on its list of “high risk jurisdictions”? And how does it meet the competition coming from Singapore and Africa? In this interview, Couldip Basanta Lala, Founder & Director, Sanne (Mauritius) at Sanne Group plc, shares his considered views on the challenges being faced by our GB sector; he also comments on the DTA arrangements, and makes some suggestions about a way forward for restoring the country’s image as a sound financial centre.

What happens to Mauritius’ Global Business sector in the wake of the European Commission to place the Mauritius jurisdiction on its list of “high risk jurisdictions”? And how does it meet the competition coming from Singapore and Africa? In this interview, Couldip Basanta Lala, former Founder & Director, Sanne (Mauritius), shares his considered views on the challenges being faced by our GB sector; he also comments on the DTA arrangements, and makes some suggestions about a way forward for restoring the country’s image as a sound financial centre.

Couldip Lala cofounded together with Kapil Dev Joory International Financial Services Limited (IFS) in December 1993 at a time when the global business sector was nascent in Mauritius. The focus initially was to provide fund administration and support services for Indian investments. Over time, IFS expanded its geographical focus to include Africa and other parts of Asia, and at one time it was providing services to more than 1000 global entities, and with assets under administration in excess of $82 billion. In 2017, International Finance Services Limited and IFS Trustees have been acquired by Sanne, a leading global provider of alternative assets and corporate business services, with clients from 20 global networks spread across the Americas, Europe, Africa and Asia-Pacific.

Mauritius Times: Is there a feeling in our Global Business sector that the European Commission’s decision to place Mauritius on its list of “high risk jurisdictions” is unwarranted and grossly unfair?

Couldip Lala: I am no longer occupying an executive position in this sector to gauge the prevailing sentiment across the board. However, as a keen observer and having been engaged since the start of this sector, I sense that there is such a feeling among both the operators and the authorities. This feeling has been expressed every time some shortcomings have been highlighted by other countries or organisations like GAFI (Financial Action Task Force on Money Laundering/Groupe d’action financière).

Leaving that feeling aside, the question one should however ask is whether such a decision is unfair in light of the several measures being taken worldwide to counter money laundering and terrorism financing. Have we been fulfilling all the requirements expected of a financial centre of repute?

* The main shortcoming of our GB sector, according to the EU, relates to “strategic deficiencies in (its) anti-money laundering and counter terrorism financing regimes”. Would you say that the world of finance, banking and cross-border investments has become so complex that the risks of escaping the vigilance of the regulators and operators are much higher today?

It is true that the world of finance is becoming more complex, and will continue to evolve as we go along. We have been faring very well with plain vanilla structures, but now with complex structures the risk of something falling into the cracks, principally for lack of specific technical skills, is high. I am sure that there exists a mechanism of knowledge and intelligence sharing among regulators on a worldwide scale, and by operators through their associations. The risk is much higher with standalone operators having no international connections. They should equip themselves with the necessary tools to assist them in their diligence work.

Hence to mitigate the risk, we need to ensure that regulators and operators make diligent use of such intelligence and be on the alert at all times with events in the world of finance. We have to uplift our expertise and at the same time be more vigilant at all levels – be it by management companies, by banks and by the regulators.

* There have nevertheless been grave accusations levelled against some foreign investors indulging in suspicious money laundering activities from our GB sector. This has been a common occurrence over here lately and is undoubtedly causing reputational damage to our jurisdiction. Do you think the regulator is sufficiently equipped and has been doing what is required to protect the reputation of the Mauritius jurisdiction?

There are a couple of pertinent issues that are being raised in your question.

First, protecting the reputation of the jurisdiction is a matter for all stakeholders. We should not assign all the responsibility of reputation to solely the regulator, in our case the FSC. There are other important and wholesome considerations within a country that determine the reputation of a country.

Second, money laundering activities should not be ascribed to only foreign investors transacting in the global business sector. They may well exist in the domestic economy too. Admittedly the risk is higher in international transactions.

A foreign investor’s first port of call is the management company either directly or through an intermediary. The intermediary may be banks or fellow professionals from other reputed jurisdictions. The first level of due diligence on the investor therefore rests with the management company and the bank at which the investor is opening an account. The focus has to be on the assessment of source of funds.

We should however bear in mind that identifying the trail of funds in complex and cross jurisdictional structures is not too easy. There are several examples of leading and world-renowned banks which have been heavily fined under Anti-Money Laundering laws in the western financial centres.

The regulator comes in at the last leg and it relies on the diligence work carried out by the management company. It may supplement the diligence by other information that it may have on the investor through other channels. I assume that the regulator has the necessary contacts and tools in place to carry out the additional checks. The checks are done prior to granting the licence and also on an ongoing basis. I believe that it is at the ongoing monitoring level that operators and the regulator may be having shortcomings. The finance world is evolving and it will not be presumptuous to state that regulators and operators have to beef up their knowledge and skills so as to understand complex issues and detect suspicious situations.

* In the light of the reputational risks involved and given it is a sector which attracts international attention, would you say that the time is ripe to refurbish the regulatory armoury of our global business sector?

I do not think that the existing regulatory framework should be overhauled. Problems that might have cropped up are not due to absence of regulations. They would be as a result of incorrect or non-implementation or still by condoning acts of “corner cutting”. We should ensure that the existing regulations are understood by all stakeholders and are correctly interpreted and implemented. Notwithstanding, with changes taking place worldwide, we need to adapt the relevant ones and align them to international best practices.

* The element of uncertainty has however set in in everybody’s mind following the EU’s decision, especially investors. If the worst-case scenario were to happen, what could be the consequences for the GB sector?

I understand that the sector is already experiencing difficulties in attracting new or growing the business. We need not wait for the worst-case scenario to assess the impact. At this juncture, the sluggish growth may not be due to the EU’s decision. Admittedly it has come at a very difficult moment.

The pandemic has led the whole world economic situation to a catastrophic level. All countries are running on record high budget deficits and experiencing high levels of unemployment. Productivity and investor sentiment are low. In such a climate, we cannot expect our global business sector to be attracting too much of investments and to flourish.

The real impact on our economy, not only the global business, may be felt if we are unable in the very limited time available to the authorities to address the EU concerns and remedy the shortcomings that have been identified by them satisfactorily. The global business sector will be the one that will suffer the most. The consequential effect on the other closely related sectors will also be disastrous.

* What are the options available to our global business operators if all this were to come to the crunch?

We hope that this situation does not arise. We have nonetheless to be prepared for the worst.

Let us first understand the effect that the EU decision to maintain Mauritius among the high-risk jurisdictions on the global business. Investors and their advisers will shy away from setting up their investment vehicles in such a jurisdiction. International banks will probably be unwilling to act as correspondents for our local banks, hence the difficulty in transferring funds to other countries. There will be rigorous and very close scrutiny on any funds moving out of the country by a receiving counterparty.

The immediate action is for authorities to ensure that we do not fall in the list, and if we do, we should take strong remedial actions to implement the directives of the multilateral organizations within the shortest possible time – more on a proactive basis and not be reactive.

It is also time for operators to rethink their business model. The sector initially attracted several international investors on the basis of favourable tax treatments and treaties. Once established we saw interest in other structures principally for asset protection and intermediary investment holding companies. These may reduce considerably within a short time.

I am already noticing a few management companies diversifying their product offerings, focusing now on specialized legal and accounting services. We are fortunate to have an educated mass of young professionals in these two fields, but they seem to be more generalists. It is a question of training them into specialists in relevant branches of law and accounting. Side by side, we have to inculcate positive attitude and good work ethics among the upcoming professionals.

The option I am suggesting therefore regardless of the EU decision is to move away gradually from investment holding offering to service offering. We could start with referred works and gradually build up expertise of our own.

* Would the indictment of the Mauritius jurisdiction by the European Commission also affect any initiative of our GB sector to tap the African market?

I do not think that these two are mutually exclusive. The indictment is pervasive and the two are interrelated. Investors into Africa are to a large extent from Europe; they are particularly associated with Development Financial Institutions (DFI). Hence, our initiative to cause international organisations to use Mauritius as the platform for investments into Africa may not succeed.

On the other hand, Mauritian conglomerates investing into Africa and intra-African investments may not be greatly impacted, except probably for funds transfer.

As I mentioned earlier, international banks would be hesitant to act as correspondents for our local banks. The bulk of transactions are done in US Dollars, and transfers in US Dollars have to pass via a US correspondent bank for clearance.

There are a couple of Mauritian banks whose parent companies are based in mainland Africa. A suggestion would be for such parent companies to provide a clearing system for their Mauritian subsidiaries or associates. However, I do not know whether this is permissible.

* Singapore’s financial services industry has been doing fairly well; it’s said better than Mauritius, despite the lack of the special benefits which accrued to investors from the India-Mauritius treaty. Is there an important gap to fill in the case of Mauritius to drive as hard as a jurisdiction like Singapore has been doing?

We should first understand the history behind the success of Singapore. It has been a well-regarded financial centre even before Mauritius launched its offshore/global business. Singapore was rigorous in the application of its regulations, and has been agile enough to adapt the regulations to international requirements over the years.

Hong Kong and Singapore have been established financial centres of Asia. With what has happened in Hong Kong, the financial centre of Singapore may well benefit further.

Coming to the India-Mauritius Double Taxation Agreement (DTA) we should remind ourselves that it was not by design that we had negotiated such a treaty. We did not even know the incidence of the tax advantage at the time of signing the treaty. If there were any advantages it would have been accruing to India which had a banking and insurance outfit here.

When India opened up its economy, almost at the same time Mauritius came up with offshore legislations to attract international investors. The combination of the two led to mutual benefits to both countries. India attracted foreign investments and Mauritius built up its offshore/global business. Mauritius was the preferred choice of investors because of the tax advantage. We slowly built in the substance requirement in our legislation. On the other hand, Singapore required presence and substance from the investors since day one. Several investors did not mind the additional cost of setting shop in Singapore. It was peaceful, and offered a good quality of life and the right infrastructure to expatriates.

Following the renegotiated India-Mauritius DTA when the two countries are almost on a level playing field, investors may be willing to opt for Singapore instead of Mauritius. Mauritius can still make the difference on grounds of service level standard and cost. Our offering of Tax and Ease of Doing Business take a back seat.

Hence the hard drive for Mauritius would be in terms of quality of service and enhanced seriousness implementation of regulations, leaving no room for discretion on licensing and ongoing monitoring of licencees.

* Besides the Singapore jurisdiction, there is today strong competition to our GB sector coming from some African countries. That would have been unimaginable some ten years back. Does that mean that they have quietly built up their capacity and have become smarter than we are?

Setting up financial centres has been in the radar of several African countries. South Africa already has always attracted foreign investors and has a developed market. Botswana has been marketing its centre for quite a while. Nairobi may well develop into a platform for investments into other African countries. I understand that Rwanda and Ethiopia are following the same path. In West Africa, Nigeria may be a competitor. Hence, Mauritius should not be complacent and consider that it has a monopoly in this sector.

Every success creates competition. Except for South Africa, the other countries are gearing up to strengthen their regulatory arms and offer financial services to international investors. I see it as a positive sign for these countries as such measures will enhance good corporate governance practices within the countries. As regards Mauritius, they will keep us on our toes.

Will they be able to establish and sustain themselves as financial centres? Only time will tell. We know what international investors want – sound law and order, stability, an independent judiciary, adherence to the rule of law, an educated work force, reasonable labour relations, good work ethics, and quality service level, among others. The success of the aspiring countries will very much depend on whether these attributes are present. It may also be true to Mauritius if we are to stay ahead of the competition.

* It is on the strength of past DTAs that our Global Business sector was raised to the same level of the other pillars of our economy, bringing in hard currency and creating jobs for thousands of young professionals here. But when you look at the bigger picture today with some African countries terminating their DTAs with Mauritius, aren’t these same DTAs doing a disservice to the reputation of our jurisdiction?

It is true that it was our favourable treaty with India that triggered the development of our global business sector. It is however to be understood that DTAs between two countries are not carved out in a vacuum. DTAs follow either the OECD or the UN model. The tendency now is more to follow the OECD model which countries either adopt in its entirety or with such negotiated amendments. The amendments are principally on taxing rights of interest income, dividends, and capital gains.

Hence DTAs themselves are not challenged. It is the taxing right to the flow of income or gains. Whilst during the negotiation between two countries the objective might have been clear, in time it is felt that there have been an abuse by investors or a laissez-aller on the part of one of the countries on the taxing rights. In my view, instead of terminating a DTA, a better option would be to renegotiate the taxing rights and check on the abuses, if any.

Some African countries may have not experienced any abuse, but they might be feeling edgy to carry on with the DTAs in view of high-profile scandals on the international front with Mauritius linked up somehow. Also, there are continuous pressures by NGOs in Africa claiming tax leakage due to the DTAs without highlighting the benefits accruing from foreign investments as a result of the DTAs.

* Published in print edition on 28 July 2020

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