The Bahamas for World-Class Financial Services

Tanya McCartney argues that The Bahamas’ strong regulatory regime and its historic determination to ensure its integrity as an international financial centre, as evidenced by its most recent commitments, reflect the mindset of a jurisdiction focused on protecting and cultivating its key assets. Regulation, as it relates to international initiatives, is the canvas upon which The Bahamas’ wealth management expertise, innovative client-centric products and services and unique geographic tropical location combine to make it an increasingly clear choice for institutions and individuals seeking a premier provider of financial services.

International financial centres such as The Bahamas play an important role in the global economy. Its very nature of being an effective and neutral environment has resulted in it developing to accommodate international trade. Jurisdictions such as ours create a global environment conducive to foreign direct investment, job creation and global economic development.

The Bahamas is one of the world’s leading jurisdictions for legitimate financial services.

For many, banking and wealth management outside of one’s home country is simply good business and wise investing for several reasons:

• Multi-national and multi-generation families and family businesses find that siting some of their assets in a strong trust law jurisdiction is appropriate for long term preservation and transmission of wealth.
• Keeping assets in a jurisdiction less exposed to expropriation, capital controls, and civil unrest is an excellent risk mitigation technique, particularly if one’s home country has a history of political or financial instability.
• International banking and wealth management centres may possess superior products and services, compared to what is available domestically.

Considering the various international initiatives impacting financial centres such as The Bahamas it is imperative that we articulate our legitimacy as a responsible, well- resourced, compliant international financial centre focused on real international business with economic substance and committed to the highest possible standards of service delivery, transparency and cooperation.

A SHARED COMMITMENT

Financial services are the second most important industry in The Bahamas after tourism. Successive governments have recognised the importance of financial services to country’s continual economic and social development. The industry’s viability therefore is a demonstrated priority of both the public and private sectors, evidenced by:

• The responsiveness of legislative and regulatory solutions to market needs and demands.
• The swiftness with which these tools can be utilised.
• Consistency in the regulatory balance of ensuring the integrity of the industry while underpinning factors conducive to industry competitiveness.
• A government Ministry dedicated to Financial Services.
• Shared commitment in the promotion and development of the industry, distinctly, the Bahamas Financial Services Board (BFSB), funded by both the private industry and the Government of The Bahamas The Bahamas Financial Services Board (BFSB), launched in April 1998, represents an innovative commitment by the financial services industry and the Government of The Bahamas to promote a greater awareness of The Bahamas’ strengths as an international financial centre.

FISCAL AND ECONOMIC STABILITY

A 2018-year end mission by the IMF reported: “The the Bahamian economy continues to recover, with real GDP growth projected to reach 2.3% in 2018 and 2.1%in 2019”; and “The Fiscal Responsibility Law (FRL) will support the government’s efforts to secure fiscal sustainability and put debt on a downward path.”

The mission’s report also noted:

• “The team welcomed the government’s transparent recognition of accumulated arrears and the budgetary provisions to clearing them, as well as the plans to put in place robust expenditure control systems.”
• “The banking system has strong capital and liquidity ratios, and banks have made progress towards improving asset quality.”
• “The mission welcomed the government’s firm commitment to a well-regulated international financial and business sector, and recognised the significant steps taken to increase compliance with international standards on Anti-Money Laundering.”

TAX NEUTRAL, NOT A TAX HAVEN

The financial services sector in The Bahamas has been impressively resilient and progressive amid the continued and sometimes challenging evolution of the global industry. In years past, “offshore” often seemed like a tainted word, given the attraction in considerable proportion, of tax avoiders and proceeds from illicit activity, to the world’s international banking and trust business centres.

An era which unfortunately still sometimes casts a shadow on the continuing success and tremendous growth of legitimate business in private banking and wealth management, in well-regulated regimes like The Bahamas, where such practices have largely disappeared.

The jurisdiction has been and remains demonstrably and effectively unwelcoming to those seeking to engage in questionable and illegal activities. The Bahamas remains committed to a tax neutral platform which is defined as an environment in which profits and gains arising here are not taxed there, but where tax liabilities in other jurisdictions are not reduced.

COMMON LAW JURISDICTION

The legal system in The Bahamas has been successful in facilitating a legislative environment that is effectively responsive to changes in market needs and demands, while also offering the certainty of common law.

As an independent nation with a financial services industry bolstered by a strong public-private sector partnership, legislative change in The Bahamas is efficient and timely in its responsiveness to the market shifts.

As a member of the Commonwealth of Nations, The Bahamas is a common law jurisdiction, with a legal system based on the system of England. The ultimate court of appeal for judgements issued by Bahamian courts is the Privy Council. This combination of advantages affords the jurisdiction a special balance to its legal identity.

THE BAHAMAS ADVANTAGE

It is not by chance that The Bahamas is the most successful international financial centre in the Caribbean today. More than 80 years of thought, effort and co-operation have produced ideal conditions for (Ultra) High Net Worth individuals, families and businesses to manage their wealth efficiently in comfort and style.

The country’s mature financial services industry, established infrastructure, progressive government, tax neutral environment and luxury lifestyle have all been carefully cultivated to satisfy the specific needs of this most exclusive clientele. The many advantages of doing business in The Bahamas are as clear as the crystal waters surrounding the 700 islands of the archipelago:

Strategic location. The Bahamas is situated at the Crossroads of the Americas, just 65 miles off the east coast of Florida. It is an ideal hub for regional investment and business in the Eastern United States and Canada, and much of Central and South America.

Political and economic stability. The Bahamas has an outstanding record of political and economic stability, progress and stewardship. With more than 280 years of uninterrupted parliamentary democracy, It has been an independent nation since 1973, and retains a Westminster-based system of Government and an English-based legal system.

Wealth and asset management options. The Bahamas offer owners of capital a broad choice of financial institutions that deliver myriad services including banking, private banking and trust services, investment fund administration, capital markets, investment advisory services, accounting and legal services, e-commerce, insurance and corporate and shipping registries.

Physical resources. The Bahamas has developed its land, premises and fit-for-purpose infrastructure with the singular focus of facilitating international business.

Human capital. The Bahamas has a highly educated local workforce and a long tenure in financial services excellence which has created a deep pool of skill and experience that is recognised and trusted worldwide.

Investment policy and incentives. The Bahamas is committed to building an environment in which free enterprise can flourish.

INTERNATIONAL FINANCIAL SERVICES: OUR VALUE PROPOSITION

Four vital features at the heart of what distinguishes The Bahamas as an international financial centre of significance are: Regulation, Expertise, Innovation and Location.

Everything the Bahamas offers is defined by these four words. Everything that comprises The Bahamas value proposition and our continued success as a leading international financial services centre is guided by these four distinguishing factors.

Regulation: committed to compliance

The strong regulatory regime that characterises the financial services sector ensures that the Integrity of The Bahamas as an international financial centre is maintained.

As a sovereign nation for more than 40 years, successive governments have consistently demonstrated the country’s commitment to international best practices, cooperation in the administration of justice, international tax transparency, anti-money laundering and the countering of financial terrorism initiatives. Bahamian regulators are well regarded and active partners with international peer groups and agencies. There is collaboration between government and private sector to ensure The Bahamas remains a well regulated, blue chip international financial centre.

The regulatory regime governing the financial services industry of The Bahamas embodies as they say, not only ‘the letter’ of international best practices, but indeed ‘the spirit’ of the overarching regulatory principles. The Bahamas’ approach to the evolving international regulatory environment has been participatory and proactive, including the country’s leadership in advancing the principle of a ‘level playing field’.

Broadly, global regulatory initiatives have revolved around three issues: combating misuse of the financial system; making it more difficult to evade taxes; and increasing transparency.

Sweeping regulatory reforms in 2000 and continued measures to strengthen compliance, in step with international efforts, has characterised the jurisdiction’s anti-money laundering/counter financing of terrorism (AML/CFT) regulatory structure.

Ongoing strengthening includes the jurisdiction’s compliance and commitments to the Caribbean Financial Action Task Force (CFATF) and the Financial Action Task Force (FATF). The FATF’S mutual evaluation report (MER) of The Bahamas was adopted in May 2017. In December 2018 in its 1st Enhanced Follow-up Report (FUR), the FATF acknowledged The Bahamas’ progress in addressing certain technical compliance deficiencies which were identified in The Bahamas’ MER. Favourable re-ratings were given on thirteen (13) recommendations.

In line with the global requirement, The Bahamas is also in compliance with the United States’ Foreign Accounts Tax Compliance Act (FATCA), since 2014. The Bahamas is also a participant in The Multilateral Convention on Mutual Administrative Assistance in Tax Matters and is implementing The Base Erosion and Profit Shifting Initiative’s Minimum Standards. Legislation was also passed in December 2018 to introduce substance requirements for commercial entities, eliminate preferential regimes and to ensure timely access to adequate, accurate and current beneficial ownership information.

Transparent and cooperative. Recently, compliance with the Organisation for Economic Cooperation and Development (OECD) and European Union (EU) criteria on tax governance has required The Bahamas to institute changes to the legal and regulatory regimes that govern its financial sector, in line with those applied globally. In doing so, the jurisdiction has been engaged in meaningful discussions with these international bodies and has drafted new legislation to ensure the achievement of the right balance of compliance with the international standards, business and economic sustainability. This includes:

1. The passing into law the Multinational Entities Financial Reporting Act, which sets out a comprehensive framework for Country by Country reporting in line with the Base Erosion and Profit Shifting (BEPS) initiative.
2. The initiation of Automatic Exchange of Information (AEOI) with 35 jurisdictions (19 of which are EU jurisdictions), in accordance with the Common Reporting Standard (CRS), with the first exchanges having taken place in September 2018. The Bahamas has always been committed to complying with international best practice and has fared well in its phase two ‘Peer Reviews’ by the OECD’s Global Forum. In fact, The Bahamas has been deemed “largely compliant” with the OECD’s existing standard of exchange of information on request –the same rating G20 countries like UK, Germany, Canada and Australia These measures and commitments send a loud and clear message to the international financial services’ community that The Bahamas is serious about adhering to global standards and remaining a clean and compliant jurisdiction committed to the principles of transparency and cooperation.
3. Addressing EU and OECD concerns with respect to economic substance, access to beneficial owner information and ring-fencing by the passing the following legislation in parliament in December 2018: (a) Commercial Entities (Substance Requirements) Act, 2018. This Act addresses EU concerns regarding entities having economic substance. The enactment of this substance requirement legislation, all companies carrying out, what is called “relevant activities” as defined in the Bill such as, banking, insurance, fund management, financing and leasing, shipping, distribution or service centre operations, headquarter operations and holding companies with relevant activities, will be required to demonstrate that they have a substantial economic presence within The Bahamas and that they engage in real economic activity. (b) Beneficial Ownership Register Act, 2018. The Register of Beneficial Ownership Bill allows for the establishment of a secure search system for enabling every registered agent to maintain a database of required on the beneficial ownership of a legal entity for which it has responsibility. (c) Removal of Preferential Exemptions Bill, 2018 to address the ring fencing concerns. This legislation removes tax exemptions afforded to non-residents that are not offered to residents and with the coming into force of the Bill, we will be removing what the European Union terms as harmful characteristics of The Bahamas’ tax regime.

Strong Anti-Money Laundering (AML) and Counter-financing of terrorism (CFT) Regime. The Bahamas has gone on record with its intention of attaining and maintaining “the very highest levels of conduct as a clean jurisdiction, complying with the highest standards to prevent the abuse of its financial system by money launderers and criminal elements”.

It has committed to satisfying recommendations coming out of the Caribbean Financial Action Task Force (CFATF), and Financial Action Task Force (FATF). Both internationally and regionally, the significant efforts and achievements over the last 15 months to address concerns identified in its CFATF Mutual Evaluation Report has been acknowledged during this period the Attorney-General and the Task Force he leads have attained many of the goals they established post the 2017 publication of the country’s CFATF MER.

Improved CFATF ratings. To reflect the progress made by The Bahamas in December 2018, the CFATF has re-rated The Bahamas on the following recommendations:

• Assessing risks and applying a risk-based approach from partially to largely compliant.
• 2 – National cooperation and coordination from partially compliant to compliant.
• 6 – Targeted financial sanctions related to terrorism and terrorist financing from non-compliant to partially compliant.
• 10 – Customer due diligence from partially compliant to compliant.
• 12 – Politically exposed persons from partially compliant to compliant.
• 15 – New technologies from partially to largely compliant.
• 17 – Reliance on third parties from partially to compliant.
• 18 – Internal controls/foreign branches and subsidiariesfrom partially to largely compliant.
• 23 – DNFBPs: other measures from partially to largely compliant.
• 25 – Transparency and beneficial ownership of legal arrangements have been re-rated from partially compliant to largely compliant.
• 30 – Responsibilities of law enforcement and investigative authorities from partially compliant to compliant.
• 32 – Cash couriers from partially to largely compliant.
• 35 – Sanctions from partially to largely compliant.

The CFATF agreed to maintain the largely compliant for Recommendation 5, the compliant rating for Recommendation 21 and partially compliant rating for Recommendations 7, 8, 19, 22, 26, 27, 28 and 33.  

Expertise: private wealth management

With an 80 plus year track record in financial services, few jurisdictions offer the wealth management experience that The Bahamas has to offer. This heritage is the basis for the strong legal framework that has been cultivated for financial services, an investment climate that has been nurtured through years of maturity and a stable and predictable business environment anchored by the thousands of Bahamian wealth management professionals who work side-by-side with expatriate colleagues in the more than 250 financial institutions that call The Bahamas their home.

Private wealth management continues to be the centre stage for financial services in The Bahamas facilitated by a diverse suite of products of which banking and trust services are the centrepieces.

Private banking. Private banking in The Bahamas has come of age during the past decade.

The country’s banking practices and standards, regulation and supervisory controls are now on par with that of the global banking community, while it continues to offer clients a high level of privacy and confidentiality.

Major legislative and regulative changes affecting the international financial community of The Bahamas, and a more sophisticated client base, have shifted the balance in favour of capital protection and growth, augmenting the region’s traditional role as a tax haven.

With nearly 250 banks and trust companies located in The Bahamas, many of the world’s largest and most prestigious financial institutions have taken advantage of the country’s stable political and economic system to establish branches or subsidiary operations in the jurisdiction, to offer Private Banking services to high-net-worth and ultra-high-net-worth individuals and families.

Trusts. Since the Industrial Revolution possibly the biggest generator of capital and the single greatest driver of wealth creation worldwide has been the private ownership of operating companies.

Families in business together, and the entrepreneurs who drive them are increasingly more sophisticated in terms of their investments, their strategies and their goals; their “footprint” is becoming more global, as family members cross borders and their businesses expand into new territories and technologies; they are increasingly concerned with wealth preservation and succession planning for both their businesses and their families.

In summary their lives and planning needs have become more complex.

As one of the most progressive jurisdictions in the world for innovative and premier trust legislation, The Bahamas provides a robust and fertile environment for tailored structures that meet the most discerning needs of high net worth individuals and families.

In The Bahamas there is the ability to have perpetual trusts, protective trusts, trusts for purposes both charitable and non-charitable, private trust companies to administer the trusts of related settlers, trust substitutes like the foundation and pure governance structures, like the Bahamas Executive Entity.

The Bahamian trust is at once a model of robustness and flexibility. Trust legislation in The Bahamas always has been leading edge and is often used as the standard for other jurisdictions to follow. This propensity to be ahead of the curve in addressing the needs of the marketplace and providing practitioners with the right tools, especially for succession planning and the transfer of wealth through the generations, extends across the wealth management spectrum.

The Bahamian foundation. The trust is not a “one size fits all” solution, particularly in civil jurisdictions. More than 10 years ago The Bahamas became the first common law country to add Foundation legislation thus creating a viable alternative planning tool for wealth planning and protection and reinforcing the jurisdiction’s well-earned reputation for innovative structuring solutions.

Bahamas Executive Entity (BEE) breaks new ground. The Bahamas Executive Entity (BEE) provides a nimble and innovative approach to the dynamics of current wealth management needs. The BEE solves complex governance issues in fiduciary and wealth management structures, particularly with respect to share ownership in Private Trust Companies and identifying persons willing to act in any number of governance roles in wealth structures

Captives added to private wealth offerings. Captive insurance is another area of recent expansion.

The Bahamas is not a newcomer to captives. However, captives took a back seat during a period in which The Bahamas focused on developing wealth management, trust and estate planning. This is certainly not the case now as the opportunity for captives to play a role in wealth management is undeniable.

Segregated cell legislation is a prime example of the Bahamas applying its focus on wealth management to the captive market. The Bahamas’ cell legislation provides robust statutory protection to ensure that the assets and liabilities of each account are truly separate and distinct. Cell captives benefit from the natural economies of scale created within such structures and the regulatory regime in The Bahamas is a clear response to the demand for cost effective means of entering captive or self-insurance for small to medium sized enterprises while satisfying international standards.

Deeply knowledgeable and skilled domestic workforce. This skilled domestic base works alongside a talented core of expatriate experts in major international institutions and locally owned financial institutions, helps to shore up the industry’s global presence while maintaining a strong domestic base. Taking these factors into account, with a broad base of knowledge of products and an enviable track record of service in the business, the professional environment in financial services in The Bahamas is highly conducive to intellectual creativity. This has allowed for ongoing product and service innovations tailored to fit client needs and market demands.

Innovation: compliant client solutions

Market responsiveness has long been a part of The Bahamas’ DNA as a forward thinking IFC, and has been the basis of legislation creating innovative, client-centric products and services in a modern, compliant regulatory regime.

Such innovation can be seen in the country’s evolving and often ground-breaking trust legislation. It has also thrust The Bahamas into the forefront of the investment funds industry with the introduction of SMART Funds and the Investment Condominium (ICON) fund.

SMART funds. Agility is clearly evident in The Bahamas’ evolving investment funds sector which is beginning to attract spotlight attention by fund managers and has added a new dimension to the jurisdiction’s wealth management and advisory capability. The Bahamas recently has witnessed an upward trend in investment fund registrations which is indicative of the successful niche fund business the jurisdiction is building, largely on the back of the investment fund vehicle known as the SMART (Specific Mandate Alternative Regulatory Test) fund. Even with more institutionally-focused templates such as the SMART 7, Smart Fund Models (SFMs) have been used as a cost-effective investment fund vehicle for families, family offices, and related investors.

The SMART fund concept was conceived in the spirit of truly risk-based regulation in recognition of the fact that depending on the structure of the investment fund, certain requirements could be tailored appropriately to fit the specific business case. This is justified by the cap on the number of investors that may invest in many of the templates. As a result, the regulation accommodates agreement by the investors to waive the production of audited financials in favour of semi-annual performance reports. The number and type of SMART funds remain an open opportunity, effectively creating a mechanism for promoters to approach the regulator for approval of a specific business case and for that fund, if approved, to be allocated a risk based licensing and supervisory regime tailored for its use. This template then can be utilised by other funds, fitting the parameters and requirements of the template.

A new ICON for funds. The Bahamas has taken the lessons learned from the niche marketing success of the SMART Funds product and applied the same innovative approach in creating and introducing the ICON – the Investment Condominium Fund – to meet the specific needs of Brazilian investment managers and advisors, as well as Latin American managers more broadly.

It was this commitment to building products that benefit from cultural and legal familiarity that saw The Bahamas introduce foundations law in 2004 and the ICON builds upon this. The Bahamas Investment Condominium (ICON) provides an alternative legal structure for investment funds that, inherently, is familiar to those in Brazil and indeed those in countries which have similar civil law constructs. Plans are underway to develop a similar product catering to other jurisdictions.

Investment funds overhaul. A complete overhaul of legislation governing investment funds’ regulatory framework is nearing completion by the Securities Commission of the Bahamas (SCB). The overhaul includes an updated Investment Funds Act (IFA) as well as some forthcoming changes to the overall securities industry legislative regime.

It is anticipated that overhauling the IFA “will accomplish key improvements to the regulatory structure which will enhance The Bahamas’ competitive appeal”. The 2018 legislation contains key changes related to:

• Changes in the definitions of Bahamas versus non-Bahamas based funds.
• Changes in the triggers for licensing of funds.
• The ability to appoint international administrators without requiring that they be licensed.
• The introduction of licensing requirements for fund managers and regulatory oversight of custodians.
• The establishment of an Alternative Investment Funds Management Directive (AIFMD) regime with a view to The Bahamas qualifying for an EU Passport.

Location: live, work and play

The unique geographical location of The Bahamas, 50 miles off the coast of Florida and positioned as the gateway to the wider Americas, is an undeniable advantage for The Bahamas.

In recent years, as more and more individuals have chosen to “follow their money” with respect to where they live and work, The Bahamas with its tropical environment has become the preferred choice for many who yearn for an excellent quality of life whilst being able to manage their financial affairs. Individuals, family offices and institutions will find a warm welcome when they come to The Bahamas as the country is committed to utilising its natural resources and cultivated assets to create an environment that is attractive to business and the enjoyment of life.

To meet the diverse and sophisticated tastes of travellers and residents alike, The Bahamas offers something to suit every taste: rest and relaxation, family fun and entertainment, or adventure and exploration. With miles of natural sand beaches, out-door attractions, luxury resorts, golf, casinos, restaurants and shopping, there is no shortage of exciting things to do.

Gated waterfront communities packed with lifestyle amenities from golf and tennis to spas and marinas are attracting more second and third-home buyers from North and South America, Europe and the Far East.

One of the newest and most popular investment vehicles is the condotel, a condominium or single family residence that converts into fully-furnished, upscale accommodations, managed by a resort company and rented when not owner occupied.

Private islands are also available for purchase.

The Bahamas is a service economy accustomed to providing concierge residential management services for homeowners who are not in residence.

Direct flights are available to The Bahamas from 18 U.S. cities, Canada, the UK, Europe and Panama; and the country has numerous ports of entry and marinas.

Commercial passengers, private jets and goods shipped from Freeport enjoy pre-clearance to the United States. U.S. pre-clearance for commercial passengers also exists from Nassau.

The Bahamas has a number of excellent private schools in New Providence and Freeport, several of which have been internationally accredited by ECIS and NAIS, the two bodies that accredit the leading European and North American schools.

There are two major hospitals in New Providence and one in Grand Bahama, staffed by internationally-trained doctors capable of handling all major procedures. Medical facilities in the United States are also easily accessible from The Bahamas.

Residency. The Bahamas has a pathway to permanent residency (which is not the same as citizenship or tax residency). Permanent Residency allows individuals to enter, live and work in The Bahamas. The Bahamas Government maintains a flexible immigration policy suited to the needs of international firms, individuals and families. Permanent residents can pass freely through Immigration and remain in The Bahamas for the number of days the permanent resident desires. Usually spouses and children can be endorsed on the permit for a one-time government fee.

Currently the investment threshold for economic permanent residence is 750,000 BSD (the Bahamian dollar is on par with the US dollar) on resident property.

Permanent residency with the right to work in one’s own business is usually suited to the individual with a family office or one who simply wants to manage investments or a business that does not interact with the Bahamian economy.

This status means that an individual automatically qualifies for the right to work in The Bahamas. With an investment of $1.5 million BSD or greater there is an expedited application process.

“Annual residence” is another alternative of residency in The Bahamas and as the name suggests it is renewed annually. Applying for a “homeowners resident card” – while not conferring any of the privileges of permanent resident, it does assist the holder to move freely through Immigration at any port of entry.

Tanya McCartney is CEO and executive director, of the Bahamas Financial Services Board. Source: International Investment

Bahamas Photo credit: davejohnsonsphotography.com on Visualhunt / CC BY-NC