L Burke File examines the Multiform Foundation Law in Nevis, which was created to accommodate those working and living in civil law jurisdictions, which do not recognise trusts.
The International Financial Centre of Nevis is, by most measures, a high quality flexible jurisdiction. It is worth noting that while the Federation of St Kitts and Nevis is a single nation, their international financial centre laws are different. St Kitts and Nevis each have their own set of laws.
Nevis has taken the time and effort to cultivate a jurisdiction that responds to the market needs in financial innovation, while at the same time addressing the responsibilities of the innovators to their clients and the Nevisian financial community.
One hallmark of Nevis' commitment was legislation leading to the very first LLC laws passed in 1995. These laws represented a turning point in innovation legislation, and quickly became the model for other jurisdictions.
Not to rest on its laurels, Nevis updated the laws in 2002 bringing current both the LLC laws intent as well as its functionality in a global community. Nevis is still one of the few jurisdictions where it really is possible to incorporate within one to two business days.
In 2004 Nevis passed its Multiform Foundation Law. A foundation is reasonably congruent to a common law trust in its formation and operation. The need for multiform foundation legislation has been recognised in several countries around the world. Most of Latin America has a form of civil law, and trusts do not work for those domiciled in civil law jurisdictions. The body of law in these different countries does not match the trust construction, and that law has evolved over many years under common law origin, creation, and interpretation. France, for example, will not recognise a trust - period. There is nothing inherently good or bad with this mismatch of law, it simply is. Thus, Nevis made the effort to construct laws representing the needs of those working in or dealing with civil law countries. The Multiform Foundations Law allows Nevis to respond to the financial needs of the world, becoming more inclusive instead of erecting barriers. These efforts have helped Nevis become a jurisdiction of choice for those based in civil law jurisdictions.
International Mutual Fund Ordinance 2004
The International Mutual Fund Ordinance of 2004 is a unique and flexible tool for investment, estate planning, as well as facilitating the purchase and sale of international business entities. These funds are divided into three types: recognised private, recognised professional and registered public.
Recognised private fund
A recognised private fund is for smaller funds and pools of investors. Typically private funds will have no more than 50 participants. This ‘baby fund’ was designed to service special types of clients. It allows participants access to licensed and regulated vehicles that can be used to test stratagems before a full launch in a registered public fund.
The investment strategies that can benefit include trading derivatives, purchase and renting of sailboats, or investment in art - in short, just about anything the fund manager wishes to do that is not otherwise prohibited. The important advantage is that ideas can ‘prototyped’ in a regulated jurisdiction before considering a larger jurisdiction with narrower attitudes and conventions. Of course, these proven models can also migrate to a recognised professional or registered public fund in Nevis. The recognised private fund provides a proper framework for operations as well as shelter for innovation.
The recognised private fund can also be used as a financial planning tool for a family owned business or closely held corporation. A fund can allow a more orderly transition from one set of owners to another. In many countries the transference of shares has many tax consequences, such as real taxes on phantom income, punitive transfer taxes, or outright restrictions and prohibition.
The recognised private fund also provides a unique vehicle for a small business to make acquisitions. Instead of all companies being held by one ‘parent’ company, the recognised private fund holds all companies as investments. This structure makes it easier to purchase and sell entities, as well as greater protection from ‘liability leaking’ between companies.
The private fund may soon be recognised as an attractive alternative to the old family limited partnerships.
The professional fund borrowed its conceptual design from the US and EU hedge fund industry. There is no limit on the amount that can be invested, but there can be no more than 100 investors, and the minimum investment is US$100,000. This fund can be operational in as little as 14 days.
The advantage of a Nevis domiciled professional fund is surprising. Funds can use an IBC, LLC, unit investment trust, multiform foundation, or all of the above to meet the requirements of their investors. For example, a fund can be structured with an IBC as the owner of the assets of the fund, with the owners of the IBC a combination of a unit investment trust for common law clients and a multiform foundation for civil law clients - all done in one jurisdiction, instead of being spread over two or more authorities with potentially conflicting laws.
There is no requirement for an audit of either the private fund or the professional fund, and the same person can be both the fund custodian and fund manager. On large professional funds, expect a request for an independent custodian - after all, if you as a fund manager are dealing with large sums of money, it makes sense from an operational and marketability perspective to have an independent custodian – not to mention that investors will feel much more comfortable with an independent custodian.
The public fund is a fully registered fund, and has no limits on size or the number of investors. The fund requires an independent, manager, custodian, and administrator - as well as annual audits. Further, each public fund must have two independent directors that are also independent of any legal or other professionals services rendered to the fund.
All three classes of funds require a Nevis licensed administrator.
Mutual Exchange of Information on Taxation Matters
Mutual Exchange of Information on Taxation Matters legislation was passed in 2009. Several Tax Information Exchange Agreements (TIEAs) have been entered into, and have been transparent to both the professional community and the public.
Like it or not, large nations are irresponsibly spending themselves into multi- generational debt - and these nations never blame their own spending habits. They focus on jurisdictions whose legislation they describe as ‘tax competition’, and have pursued the international financial community relentlessly on this matter for some time. We have to understand it, even if we don't like it.
If you are taxed by either citizenship or domicile of a transaction - just pay the taxes. Tax management is prudent and should be planned well in advance of a taxable event, not jury-rigged in the 11th hour exposing yourself and others who are (witting or unwittingly) enveloped in your last minute tax strategy. Tax fraud is a result of poor planning, and anyone shopping jurisdictions for the sole purpose of tax avoidance deserves what they are likely to get.
Nevis Foundations and Going Forward
Transparency is a concept Nevis has honoured since inception. All laws and regulations for Nevis are online, and available for anyone to read, along with a full list of services providers for each of the different classes of services available. Showing their commitment to transparency, the Nevis Island Administration has made the extraordinary effort of including both professionals and the public in legislation being considered. Nevis is an example of a modern jurisdiction, having a foundation of fairness and embracing the transparency provided by the digital revolution to provide disclosure.
Going forward, Nevis envisions leveraging its comparative advantage in Internet commerce, an advantage that would also serve it well in Intellectual Property and Critical Information (IPCI).
Internet commerce is a sea of change, and has drastically altered the way the world does business. As an example, online ad revenue is currently in excess of US$100 billion per year, and the US alone expects to have over US$300 billion in online sales this year (2011). These trends are rapidly moving to the small screen - handheld mobile devices - in 2010 eBay had US$1.5 billion in sales just through these devices.
Nevis has the legal and reputational foundation to attract companies moving into these new avenues of commerce. As mentioned above, IPCI now represents over 80 per cent of the book value in a modern listed company. As members of the financial community we need to look past the 20 per cent we are used to dealing with, and look toward the opportunities of the 80 per cent. The ‘Knowledge Economy’ ended in 2002 - today we are nearly a decade into the ‘Intangible Economy’, and we must embrace the changes.
The ‘Intangible Economy’ logic is sufficiently different from the conventional economy that we must take note of the differences. The Intangible Economy is driven not by scarcity, but by abundance. It lifts the constraints of geography. This is why Nevis (or for that matter, any international financial jurisdiction) ought to take notice of the close links between the international Internet based business and the Intangible Economy. Traditional pricing and transaction mechanisms do not adequately capture the economic value of intangibles. New markets and business models will emerge, and they will seek places where they are supported and nurtured as opposed to being burdened by conventions and restrictive regulations that are legacies of an economy that passed us a long time ago. What forms these new methods and structures will take, I'm certain I do not know. What I do know is that they will represent spontaneous cooperation of forward thinking people, and their seeds will not be planted in a garden where innovation and creativity are not discouraged or derided by conventional structures.
The future is here, some people just don’t know it yet.
L. Burke Files DDP CACM, President, Financial Examinations & Evaluations, Inc
Mr. Files is President of Financial Examinations & Evaluations, Inc. He is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousands dollars to over 20 billion. Along the way he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands on investigating and problem solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc. he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business and 24-hour gold, silver, and foreign currency trading. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek and more. He is the author of the award wining book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. Mr. Files is active in several civic organizations. In the past Mr. Files has served as a member of the Arizona Governor’s Board on Solid Waste Management, as an advisor to the Governor’s Board on Economic Planning and Development. Mr. Files has also received a Commission and a Medal of Merit from the President of the United States.