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by Suraj Senarath

Labuan is a fully fledged Offshore Financial Centre (OFC). In 1990, it was established on a clean state. The unique success of Labuan provides Sri Lanka a basis to copy Labuan as a model to develop Sri Lanka into a fully fledged OFC in South Asia.

The establishment of such an OFC can have a multiplier effect on the Sri Lankan economy at this juncture, as Ministers K. N. Choksy and Milinda Moragoda are planning to take the open economy into its logical ends to compete in a globalised economy with the prospect of a negotiated peace-settlement of the North-East conflict.

In order to discuss the subject in a useful manner, we will have to look into the similarities and differences which exist between Labuan and Sri Lanka.

Similarities

Labuan is an island, which belongs to the State of Malaysia. It has a special ambience that can attract thousands of High Net Worth Individuals (HNWIs) for business as well as for pleasure. Similarly Sri Lanka is also blessed with such ambience. Since the whole of Sri Lanka itself is an Island, it is comparatively larger than Labuan. It is therefore necessary to think of a specific geographical location which has a unique ambience for the establishment of an OFC.

When comparing cities all over Sri Lanka, Trincomalee can be chosen as the best location for an OFC due to many reasons. Its natural harbour could be developed into an international harbour for both cargo ships and cruise liners. The beautiful beaches can attract HNWIs. There is adequate space to develop an international airport and sprawling hotels with golf courses.

There is also ample space to build banks and other commercial buildings, which are necessary for a fully-fledged OFC.In addition, Sri Lanka also has the professionals who are required to develop an OFC. This is a key factor.

In this regard, one can even say that Sri Lanka is even ahead of Labuan when it initiated in 1990 the provision of offshore products and services to the international financial community since highly skilled Sri Lankan lawyers, accountants and bankers have even worked in some of the leading Caribbean and European OFCs.

Labuan also has highly developed telecommunications, information technology, health services, education and other infrastructure. Sri Lanka is not that far behind when it comes to telecommunication, education and information technology.

Another similarity is the proximity to developed financial centres. Labuan can be reached easily by Japan and other Asian Tigers without difficulty as it is situated in a highly developed region. Similarly Sri Lanka is also located between Middle East and East Asian countries. This geo-political status can contribute greatly, and if India becomes a world trading centre, the position of Sri Lanka as an OFC will be greatly enhanced in the same way as the Bahamas to USA or Hong Kong to China.

Differences

As mentioned earlier, these two states have differences as well. Some of the unfavourable differences have to be mitigated when copying Labuan as an OFC by Sri Lanka.

Labuan provides a venue for offshore oil and gas operations, shipbuilding, bunkering facilities, manufacturing and import-export activities through offshore companies. Apart from these Labuan provides offshore trusts, offshore insurance companies, offshore banks etc. with the main intention of converting Labuan into an offshore financial supermarket offering wide range of financial products with a strong niche in Islamic Banking.

Sri Lanka does not service such a well-organised rich national or international economy. At present, the main industry which is funded by off-shore units in Sri Lanka is the garment industry and due to the present situation in America (after the incident of September 11) and the termination of Multi Fiber Agreement in year 2004, the position of offshore finance provided to the garment industry by our offshore units in commercial banks might run into difficulties unless concrete action is taken to avoid a financial crisis.

Sri Lanka does not have a separate offshore banking regime. Offshore banking exists within commercial banks. Most of the offshore funds are lent to garment factories that are incorporated under BoI and do not engage in financial inter-mediation. This is where Sri Lanka can copy Labuan in developing their offshore financial services effectively. It is proven world over that offshore financial services and financial inter-mediation provide a significant income to small island states.

Unlike Sri Lanka, Labuan has well-developed institutions and legislation to regulate its offshore activities. It has separate Acts of Parliament such as Offshore Banking Act of 1990, Offshore Insurance Act of 1990, Offshore Companies Act of 1990 etc. which helps Labuan to regulate different legal entities with a higher effectiveness and certainty.

It has established two institutions to develop Labuan in a more methodical manner. Those are namely, LOFSA (Labuan Offshore Financial Services Authority) and LDA (Labuan Development Authority). LOFSA takes an institutional approach to develop Labuan in regulating and supervising offshore activities of Labuan while LDA takes a practical approach in developing the physical outlook of Labuan (development of infrastructure etc.)

Sri Lanka lacks institutional framework. We have never paid much attention toward enacting separate legislation to regulate and supervise offshore activities apart from very few amendments made to existing laws with regard to banks and companies. Hence the part VIII of the Companies Act of 1982 needs to be repealed and replaced by a new International Business Companies Act on the basis of Labuan or Bahamian legislation.

The Banking Act of 1988 (Amended in 1990) also has to be amended so that not only Commercial Banks but also any other foreign banking entity could carry on offshore banking business in Sri Lanka. Most importantly, Sri Lanka will have to introduce a separate legislation for Offshore Trusts. This is very popular among HNWIs in asset and wealth management.

If Sri Lanka tries to establish an offshore centre without offshore trusts, it would be like a golfer trying to complete 18 holes without a proper set of clubs.

It must also be mentioned that the effort made by Lalith Authulathmudali to attract offshore shipping companies to Sri Lanka has been unsuccessful due to insufficient support and planning by the successive governments.

The most important difference is the lack of political stability. It is an essential ingredient. This is where Sri Lanka will have to focus a lot if they are to develop as an OFC. The recent change of government with a stable majority and the prospect of a peaceful settlement of the North-East conflict augurs well towards initiating a plan for the establishment of a fully fledged OFC in Sri Lanka. In this regard, action should be taken to assure HNWIs and rich corporate clients by our Embassies abroad that Sri Lanka would soon become a reliable, reputed and safe offshore centre in South Asia.

The secrecy and confidentiality provided by an OFC is equally important towards attracting HNWIs to an OFC. Labuan has a different approach in this regard compared to other leading OFCs in the world. When it comes to companies, they do not release the information related to companies to public unless it is compelled by courts. When it comes to Banking, total blanket secrecy is not provided, so that illegal activities such as drug trafficking; terrorism etc. would not tarnish the reputation of Labuan. Nonetheless, the legitimate customers will be provided with confidentiality.

However, Labuan has been able to attract high networth individuals and rich corporate clients in various other ways like providing niche services as illustrated in an earlier paragraph, tax benefits etc. Labuan has a range of tax benefits to offshore activities such as double tax treaties, no tax for non-trading offshore activities, no stamp duty for offshore companies etc. These are very important areas that should be emulated by Sri Lanka if we are to develop as a fully-fledged OFC.

One last important factor is the role LOFSA plays towards registration of companies and offshore banks. It is not the policy to increase company and bank registration just for the sake of enhancing the volume. They have maintained it at a very low number when compared to other OFCs, but they thereby have ensured a clean yet vibrant offshore centre and have been able to attract genuine business with solid reputation. I strongly believe that this aspect should be strongly considered by Sri Lanka if we are to emerge as an OFC and to survive for a long period.

Sri Lanka has the potential to emerge as a key player in the offshore financial activities in the South-Asian region. Without further delay she must successfully follow and copy Labuan. Finally, I would like to bring to your notice a very important matter.

Maldives has shown willingness to copy Labuan and has the capability to do so with the assistance of Sri Lankan professionals. If they lead the way, Sri Lanka will "miss the bus" and will have to give up hopes of becoming a key player in the offshore financial services in the South-Asian region.

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