The law suit which threatens a nation

It must be rare if not unique for a law suit to threaten the viability of a whole nation. Yet bizarrely that is what an US$8B case launched against Antigua threatens to do. Notwithstanding, it also raises important long-term questions about whether the national and regional Caribbean financial regulatory environment, to say nothing of the probity of individuals, can be shown to bear international legal scrutiny.

The story is complicated and revolves around what the Antigua government did or did not know about the Texan businessman, Sir Allen Stanford and his activities and which individuals in successive governments in Antigua, were complicit in reaching decisions that allegedly benefited his interests.

Sir Allen, who denies all wrongdoing, is currently being held in the US on charges of conspiracy, fraud and obstruction stemming from a scheme allegedly involving the sale of certificates of deposit through Antigua-based Stanford International Bank Ltd.

The US Justice Department also alleges that the former Chief Executive Officer of Antigua’s Financial Services Regulatory Commission (FRSC), Leroy King, conducted fake audits and misled US investigators. He is also accused of providing to Sir Allen or his associates access to FSRC confidential regulatory files including US Securities and Exchange Commission requests.   Mr King was arrested in Antigua on a provisional warrant at the request of US authorities but no request for an extradition order for Mr King has been made as yet.

The case being bought against Antigua comes from a group of seven investors from the United States, Mexico, Columbia and Peru, who have filed a class action lawsuit claiming that the Government of Antigua was a ‘partner in crime.’ According to Antigua’s Attorney General, Justin Simon, this “has serious implications for the country” and came as a surprise.

The case is likely to have to be defended by figures in both the government and opposition.

“The government will certainly have to defend the suit wholly,” Attorney General Simon is reported to have told media representatives. “We expect the high officials of the [Antigua] Labour Party government [the Opposition ALP], under whose administration Stanford purchased Crown lands and obtained Antigua and Barbuda citizenship, will provide as much assistance as possible in our legal fight to defend this country’s integrity.”

In response, the ALP Chairman and Deputy Political Leader, Gaston Browne, acknowledged the seriousness of the action. It was not the time, he said, to point fingers or score cheap, political points while indicating that his party was willing to put aside political differences to work with the United Progressive Party administration to fight the legal battle the country faces.

According to reports in the US about the case, damages of US$8B are being sought, although it seems that this could be much higher if US racketeering laws were invoked as these would enable the plaintiffs to seek three times the amount of their actual losses. The lawsuit, filed in a federal court in Houston, claims that the Antigua government “became a full partner in a fraud and reaped enormous financial benefits from the scheme.” It also makes other allegations about the relationship between Sir Allen Stanford and Antigua.

The case, if it proceeds, has serious implications. At its most obvious it is hard to imagine where any of the region’s nations, many of which now face IMF programmes and many years of austerity, have the wherewithal to meet the huge costs associated with defending a class action in the US; which is to say nothing of what might happen if any final judgement went against Antigua.

While a win for the litigants would raise significant legal issues of sovereignty, liability and enforceability, in some senses the damage is already done. Bringing the case and associated hearings will bring long-term reputational damage to the island’s relationships with extra-regional governments, legislators and investors, which may harm not just Antigua but the financial services industry in the region as a whole.

Coming as all this case does, hard on the heels of the problems of CL Financial, the collapse of ponzi schemes in Jamaica and elsewhere, the suspension by the British government of the Turks and Caicos administration, numerous legal cases against hedge funds registered in the Caribbean, and the tightening of OECD rules on the financial services operations of Caribbean offshore territories, it is not hard to imagine the absence of region-wide legislation, regulation and enforcement  spurring  regulators and legislators outside the region to demand an ever more strict, timely and transparent Caribbean regulatory environment.
While it might be argued that the Caribbean’s move to financial services was as a direct consequence of the absence of any holistic longer term policy towards Caribbean development as preference attenuated or, in the case of Overseas Territories, as a result of British policy, it is hard to avoid the conclusion that in this sector in some nations, both policy and governance has failed.

This is of course not to suggest that others are blameless. The Stanford case is focusing attention on the regulatory environment in the US and on those who oversaw his banking operations there. The Miami Herald recently reported that regulators in Florida gave Sir Allen’s operations “unprecedented freedom to send cash overseas and sell investment securities,” allegedly without filing reports to government agencies or fraud checks.

What all of this seems to point to is the need for the region and the financial services sector as a whole to consider rapidly how best to handle in the short to medium term reputational problems surrounding some aspects of the industry.

It also suggests the need for a longer term regional response to a much larger difficulty facing governments across the world as an outcome of globalisation; that is, what should be done when a financial institution or conglomerate becomes so large in relation to its domicile that its operations pose a systemic risk to the nation in which they are located should they fail, for whatever reason.
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