Nassau, Bahamas — ''The real nuts and bolts of bank business here is secrecy and tax avoidance, '' observed the managing director of one of the country's largest offshore banks.
Those incentives, coupled with rising economic and political uncertainty abroad, have in the past year triggered an unprecedented flow of international investors in search of a secure and tax-free base of operations.
Rapid growth of the trust side of the business is one of the reasons Bahamian authorities are no longer so worried about the impact of United States free bank zones on this money center.
On Dec. 3 the Federal Reserve Board gave American-based banks the green light to set up international banking facilities (IBFs) so as to compete more effectively in the Euromarket without having to go offshore.
Some $129 billion in Eurodollar assets, or nearly 80 percent of the total in Caribbean centers, is on the books of US bank branches in the Bahamas and the Cayman Islands. Approximately $61 billion is expected to shift to New York IBFs within the next six months.
The impact, however, will be minimal. Although IBFs are free from reserve requirements and interest-rate ceilings, remaining restrictions and the ever-present risk of a change in the rules will keep US banks from closing their offshore branches, says Robert Hill, vice-president of Morgan Guaranty Trust.
Furthermore, bankers point out, the volume involved in the transfer has tended to cloud the fact that the Euromarket business conducted through US banks in the Bahamas is largely a bookkeeping operation.
Nearly all of the 89 US branches are ''shells,'' managed by already established banks and trust companies and accounting for less than 10 percent of those employed in the banking field.
Of the 325 licensed banks and trust companies, about 80 have a physical presence. Most are non-US entities whose main business is managing the assets of their international clients.
The most significant trend has been the number of Swiss banks that have opened offices in Nassau over the past five years. Of the 25, 18 are subsidiaries concerned mainly with tax deferral and the offshore buildup of capital.
Three of Switzerland's biggest banks - Credit Suisse, Swiss Bank Corporation, and Bank Leu, as well as Pictet and Company, the largest private bank in Geneva, are among those with Bahamian representation.
The Swiss have moved offshore for several reasons. Among them: high US interest rates, increasing tax and regulatory pressure at home, and what many see as growing hostility by the Swiss public to the financial sector.
The proposed introduction of a 5 percent withholding tax on the interest from fiduciary accounts, together with the present 35 percent tax on income from domestic deposits, has prompted a further shift in business from Switzerland to the Bahamas.
Equally important, though less visible, is the nervousness of many multinational and institutional investors over political tensions in Europe and the Middle East.
The recent election of socialist governments in France and Greece has increased that concern. As one prominent banker put it: ''People want their assets near the US where economic and political prospects appear a good deal rosier.''
Arab businessmen in growing numbers are also using the tax advantages of Bahamian companies as financial vehicles for their overseas investments. At least a dozen of these companies have been registered in the past year.
For example, a Bahamian company, Interdec Properties Ltd., controlled by Saudi Arabian interests, earlier this year purchased a 5 percent share in Club Mediterranean, a resort company, for $13 million.
Although decisive in the phenomenal growth of trustee business, the strict secrecy that surrounds bank activity in the Bahamas has also been one of the few sources of friction in US-Bahamian relations.
Refusal by the Bahamian government to comply with demands for a bilateral tax treaty in exchange for exemption from the US tax on offshore conventions has already cost this country more than $50 million in lost tourist revenue.
The treaty would provide the Internal Revenue Service with access to Bahamian bank accounts held by US citizens but would destroy the secrecy guarantees that form the basis of the Bahamas' second most important industry after tourism.