Professionals in our financial sector are familiar with the «high-risk countries» list and the «list of offshore zones.» The former is compiled by Financial Intelligence, while the latter is maintained by the National Bank. Individuals registered in countries from these lists face discrimination when investing in financial businesses in Kyrgyzstan, as well as when opening bank and brokerage accounts, both directly and for subsidiaries and joint ventures. Consequently, their investment activity in our country is hindered by numerous inconveniences and outright prohibitions.
Historically, these lists have been a mix of various sources, including countries with low taxes, participants in the FATF’s «gray» and «black» lists, countries subject to UN Security Council sanctions, and even more exotic sources such as the «list of the Basel Institute of Governance.»
The issue is that those who have included more than 60 countries in these lists are still living in the late 1990s and early 2000s mindset when money was indeed laundered through notorious «offshores,» which served as havens for capital of dubious origin.
Much has changed since then, as many financial centers have undergone reforms, making them more transparent and strictly regulated than traditional (onshore) economies. Furthermore, some «offshore» financial centers have developed their own investment specializations, creating specific types of investment institutions such as investment funds, often backed by the world’s top financial organizations.
Take, for example, the Cayman Islands, which was once a haven for US tax evaders in the 1990s. For more than 15 years, it has been the world’s largest center for investment funds, with regulations mirroring EU norms. It now boasts its own stock exchange and numerous management companies and banks, many of which were established by global banking giants.
Some of the banks found in the Cayman Islands (over 130 in total):
— American Express National Bank
— Banco do Brasil SA
— Banco Morgan Stanley SA
— Bank of America NA
— Bank of China Ltd.
— Bank of India
— Barclays Bank PLC
— BNP Paribas
— Canadian Imperial Bank of Commerce
— Commerzbank AG
— Credit Suisse AG — Deutsche Bank AG
— Merrill Lynch Bank and Trust Co
— Misuho Bank
— National Australia Bank
— National Bank of Kuwait
— Royal Bank of Canada
— Societe Generale
— Sumitomo Mitsui Banking Corporation
— Bank of New York Mellon
— Wells Fargo Bank
— UBS AG
The similarity between the above list and the list of the world’s largest banks is striking for one reason: almost all of them have branches in the Cayman Islands. According to 2022 statistics, the total amount of investment capital placed in investment funds in the Cayman Islands surpasses $503 billion. Yet, for some reason, our country remains stuck in the 1990s, refusing to accept investments from there because it is a «low-tax» zone.
Regarding «low-tax» countries and «offshores,» there are numerous small states worldwide where the financial industry is a significant component of the economy. To attract foreign investors to manage their capital through local banks, brokerages, management companies, and funds, no additional taxation should be imposed on this capital. Investments are already taxed in the country of direct use and in the country where the investor earns a profit. The issue with this arrangement remains unclear.
The United Arab Emirates (UAE) is also on the Financial Intelligence Agency’s discriminatory list. It is worth noting that the UAE is the largest financial center in the Middle East, where enormous investment capital is concentrated. UAE private equity funds alone manage over $400 billion, excluding the sovereign funds of individual emirates, which amount to more than $1.5 trillion at the beginning of 2023.
UAE Sovereign Fund Assets:
Abu Dhabi Investment Authority $708.75 billion
Investment Corporation of Dubai $299 billion
Mubadala Investment Company $284 billion
Abu Dhabi Development Holding Co $159 billion
Emirates Investment Authority $87 billion
It is both amusing and disheartening that numerous statesmen in Kyrgyzstan emphasize the need to attract foreign investment, yet our legislation, for some far-fetched reasons, discriminates against investments from several major international financial centers. It appears as if there is a long line of investors in Kyrgyzstan, allowing us the luxury of treating some as second-class.
As part of urgent regulatory reform, administrative complexities and restrictions concerning all major international financial centers must be eliminated. Otherwise, investors from these centers, upon realizing they share a list with countries like Somalia, the Central African Republic, and North Korea, will prudently avoid Kyrgyzstan.
Alexei Gorin
