?The governments of the OECS through the East Caribbean Currency Union (ECCU) have issued a statement on their rescue plan for the Clico subsidiary, British American Insurance Company (Baico), in order to protect policyholders, investors and the stability of the financial system.
The statement is forthright, informative, written in accessible language, addresses most of the relevant questions and, very importantly, establishes a mechanism by which the public can provide feedback and ask further questions. For this, the ECCU governments must be commended. According to the statement, Baico is "financially insolvent," and the policyholders and investors would recover only ten cents in the dollar of their investments if it were liquidated. The only alternative is for reorganisation as a new insurance company, with a capital injection from governments. This is what the governments have decided to do: the new entity will have its headquarters in the Eastern Caribbean and carry on Baico's insurance business in the sub-region. Policyholders and annuitants have been warned, however, that "some losses will be inevitable;" the goal will be to cover the principal amounts invested "as far as possible."
No one can quarrel with the ECCU governments' decision to not allow Baico to go into liquidation. On the face of it, it is the "least worst" of the alternatives. What we need to think about is the meaning of the facts that have been disclosed in the statement. What these facts tell us about the state of corporate governance in what was one of Caricom's largest conglomerates and "star performers" in engaging with globalisation. What they tell us about the gaps in regulation and supervision of financial institutions in individual country jurisdictions, and across Caricom as a whole. And what they tell us about the costs of these defects–in corporate governance and in government regulation–to governments and to taxpayers.
According to the ECCU statement, Baico's total liabilities in the Eastern Caribbean amount to EC$1,050 million, of which EC$842 million is in the form of annuities or investment contracts. But Baico's total "deficiency" is EC$775 million–and this may be an underestimate, since the assets include intra-group assets held in CL Financial, the parent company, whose values are uncertain.
The statement that investors would probably recover only ten per cent of their money if Baico were liquidated, suggests that the ECCU believes the true deficiency is closer to 90 per cent–which is EC$945 million. To set this in context, EC$945 million is just under ten per cent of the combined GDP of the seven OECS countries that are members of Caricom. It amounts to EC$1,565 for every man, woman and child in these seven OECS countries. Moreover, according to the ECCU statement, "there is only approximately EC$30 million of assets set aside (pledged) in the Eastern Caribbean."
If this statement means what I think it means, what it is saying is that of Baico's $1,050 million of liabilities in the Eastern Caribbean, only $30 million is covered by assets held in the Eastern Carib-bean. The remaining balance of EC$975 million was covered–presumably–by assets held by Baico outside of the Eastern Caribbean. Then comes another bombshell: "An amount of EC$301 million was taken from the branches in the Eastern Caribbean to fund certain inter-company transactions including the purchase of property in Florida." The ECCU has taken legal action in Florida to try and recover some of this investment. �In other words, a large part of the money invested in Baico by people in the Eastern Caribbean was taken out of the sub-region and used for speculative ventures elsewhere, including Florida. And the prospects of recovering any significant portion of this money are uncertain, to put the best spin on it.
There is only one word that I can think of to characterise this kind of business behaviour, and it is not one that I can use in print. Here is another revelation: Baico is a Bahamian company operated out of Trinidad, with branches in Anguilla, Antigua and Barbuda, Dominica, Montserrat, Grenada, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines.Baico therefore–and of course its parent, CL Financial–is a quintessential Caricom company. But it is subject to no single Caricom jurisdiction. To the contrary, Baico appears to have used the absence of such a jurisdiction, in conjunction with the loopholes in individual country and sub-regional jurisdictions, to engage in its questionable practices. And because of the absence of a single Caricom jurisdiction, the ECCU is having to make a number of ad hoc arrangements with other Caricom countries to sort out the tangled web of transactions woven by Clico/CL Financial: with the Bahamas, T&T, and Barbados, where an affiliated Clico company sold policies in the OECS. Notwithstanding the candour of the ECCU statement, there are some unanswered questions. One is that the commitment of taxpayers' money is not quantified. That commitment is in two parts. The first is the "capital injection" by ECCU governments that will be required to put the new Baico back on its feet and, hopefully, allow investors to recover at least a part of their money at some time in the future.
The second part is the Medical Claims Support Fund that the ECCU is to establish to help settle the claims of Baico insurance holders, of which there are some 7,700 in the Eastern Caribbean. This is to be funded from the Liquidity Support Fund set up by the ECCU earlier this year. This support is, on the face of it, necessary and unavoidable, both on compassionate and on systemic grounds. And it may well be that it cannot be accurately quantified at this time.Nonetheless, what appears to be an open-ended commitment of taxpayers' money cannot be a source of comfort. The other questions are stated openly by the ECCU: "Who is responsible for this difficult situation in which we find ourselves?" And "how can this be avoided in the future?" �The statement says that these questions "must be addressed." It promises "further investigation" and sees the need for "regional co-operation." But it insists that the immediate priority must be to address the needs of policy holders and investors and the stability of the financial system.Fair enough. But there is no gainsaying the fact that there has been a monumental failure in the system of regulation, supervision and oversight–a system which the ECCU itself is responsible to ensure is functioning properly.A similar regulatory failure occurred in T&T, which allowed CL Financial to engage since 2004 in questionable practices–as admitted by the Governor of that country's Central Bank and its Minister of Finance. It raises questions about the political influence wielded by the CL Financial/Clico conglomerate–and other large business entities–in these small island polities. Influence that can end up threatening to destabilise the financial system and costing taxpayers hundreds of millions of dollars.
Another example is the collapse of the Stanford International Bank, which has tarnished the region's reputation and exposed the Government of Antigua and Barbuda to potentially costly litigation from international investors.
Afra Raymond of T&T has been asking pertinent questions in the press calling for greater transparency on the Clico rescue operation by the Government of T&T–apparently with little success (www.afraraymond.com).Observers have been pointing out that the Clico and Stanford Investment debacles demonstrate, inter alia, the need for a seamless regulatory structure for the financial services industry across the Caricom space as a whole.Sir Ronald Sanders, a frequent writer on this subject (www.sirronaldsanders.com), has called for establishment of separate Carib-bean (or OECS) financial service regulators to deal with the on-shore and off-shore financial sectors. And a single regulator, to be effective, should operate in a context of legislation that makes the Caricom region a single financial service jurisdiction. A draft Caricom Financial Services Agreement has been before the governments for several years. It calls for the setting up of identical regulatory requirements in all signatory statements. A document on the agreement published on the Caricom Web site ends by saying: "One (financial institution) failure can send shock waves throughout the entire region." The statement, made in 2006, was prophetic. But the draft agreement is still languishing, unsigned, in the councils of Caricom.