Aliya Allen examines how the Bahamas balanced approach to international initatives on tax transparency are beginning to pay off.
The past decade or more has not been an easy road to manoeuvre for IFCs. The Bahamas like other IFCs has faced the combined challenges of international initiatives, increased competition, industry consolidation, changing client demographics, emerging market requirements; legacy market stagnation and of course the financial crisis just a few short years ago.
It has been a period in which some might say ‘survival of the fittest’ is the end game. For The Bahamas however, the end game has never been just survival but rather one of adaptation based on meeting its international obligations while at same time choosing the path of innovation to reach new markets and better serve existing ones.
A Balanced Approach to International Initiatives
Topping the list of challenges that have been at the forefront since late 1990s is the broad issue of transparency. Bahamian innovation in its wealth and asset management services parallels the far reaching changes in international regulatory standards heralded by the revised FATF recommendations, FATCA and other initiatives. The Bahamas has taken a balanced approach in responding to these initiatives at both the legislative and product level -- one that recognises that clients operating in a compliant manner have the right to financial confidentiality. Indeed, The Bahamas has been fully engaged in the multilateral organizations’ work in ensuring compliance with international standards. As a result, The Bahamas achieved a largely compliant rating in the Phase 2 Peer Review process of the Global Forum, indicating its commitment to the practical effectiveness of its TIEA obligations, and intends to ensure the effective implementation of the FATF revised standards.
Provided the timelines remain as currently contemplated, The Bahamas is expected to adopt the OECD’s Standard on the Automatic Exchange of Information (AEOI Standard) - through bilateral mechanisms - by September 2018. Of utmost importance to The Bahamas is that the receiving country is an ‘appropriate’ country for the receipt of such information, including that such country has in place the safeguards necessary to ensure the confidentiality, safety and proper use of the information exchanged.
The Bahamas also is progressing with its Model 1 IGA with the US in respect of FATCA which will include a secure FATCA reporting system, the establishment of the Bahamas Competent Authority and a number of other elements to effectively manage compliance with FATCA Model 1 IGA requirements. In keeping with country’s public-private sector partnership for the development and management of its financial services industry the Ministry of Finance, which is responsible for FATCA compliance, has worked closely with the financial services industry to ensure its views were incorporated into the Bahamas FATCA solution.
Private banking and trust services have been and continue to be centre stage attractions of The Bahamas wealth management offerings, and the jurisdiction is not content to rest on its laurels in these areas. It has built on these core strengths through products such as the Bahamas Executive Entity (BEE) which 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.
This agility is also 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.
Smart Funds were introduced by The Bahamas more than 10 years ago but, like their name implies, they continue to be wise to market requirements. A concept created through an industry think tank, the vehicle provides industry participants with the means to offer clients regulated funds which nevertheless cater to specific solutions, domiciled in a premier international financial centre. The specific requirements for SMART Fund models are designed by means of regulator-approved templates, each of which creates a new SMART fund model. Any institution or person with a business case can submit a template for approval.
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 is able to be utilized by other funds, fitting the parameters and requirements of the template.
The latest model, formally Smart Fund Model 007 (SFM007), but popularly dubbed the Super Qualified Investor Fund, may be offered on a private placement basis to up to 50 ‘super qualified’ investors who must make a minimum initial investment of US$500,000. The new model allows a greater number of investors achieving greater economies of scale than any other template, and simplifies the qualifying criteria by providing for a minimum investment rather than qualifying on a net worth basis.
Nearly 60 per cent of all funds licensed and registered in The Bahamas are now SMART Funds. While the number of SMART Funds on the register grows, The Bahamas has taken the lessons learned from the niche marketing success of this product and applied the same innovative approach in creating and introducing the ICON - the Investment Condominium - to meet the specific needs of Brazilian investment managers and advisors, as well as Latin American managers more broadly.
Under Brazil’s civil code the condominium was the formalization of the concept of joint ownership and administration of property (in all forms) between co-owners within an unincorporated entity. The condominium is not a legal entity separate and apart from co-owners and the administrator is empowered to act on behalf of and represent it in all matters.
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. It was this commitment to building products that benefit from cultural and legal familiarity that saw The Bahamas introduce foundations law in 2004; the ICON is an extension of this effort.
Captive insurance is another area of recent expansion. The Bahamas is not a newcomer when it comes to captives but they took a back seat during a period in which it focused on growing its expertise in wealth management, trust and estate planning. That’s certainly not the case now.
Given today’s unpredictable insurance market, historically low interest rates and increased regulations, it is not surprising that captives are coming into their own as an attractive risk financing option. Fortunately, starting and operating a captive has never been more straightforward, particularly in The Bahamas.
Refocused efforts by The Bahamas on captives is seeing industry growth which can be attributed to a confluence of factors, including:
More small and medium enterprises in the US looking to manage the cost of premiums
The ability of many of those companies to utilize 831(b) of the Internal Revenue Code which allows up to US$1.2M to be funded into a captive, tax free
Reputational damage and perceived regulatory inefficiency of domiciles that previously concentrated on this business.
A more business friendly and proactive regulator in the Insurance Commission of The Bahamas
Sustained commitment by the Government and private sector to develop the domicile
Just 30 minutes of the coast of Florida, US preclearance, idyllic surroundings for board meetings The Bahamas is an ideal location for an offshore captive
A competitive pricing structure for the cost of formation and on-going regulation which encourages growth.
The statistics speak for themselves. Since 2011 following the enactment of The External Insurance Act 2009, and the External insurance Regulations 2010 which govern the establishment, licensing and business operations of captive insurance companies, The Bahamas has experienced year after year a growth in the number of captive cells and stand-alone captives.
Financial Centre Expansion
Earlier this year the Bahamian and Chinese Governments announced an agreement in principle that would allow The Bahamas to trade in Chinese denominated currency, the Renminbi (RMB). Although details are still to being negotiated, The Bahamas could become only the second recognised hub for Renminbi trading and settlement in the Americas. This acknowledges not only the strength of the diplomatic relationship and friendship that exists between the Bahamas Government and the Chinese Government but also of their confidence in The Bahamas' financial infrastructure that has been refined and developed over the course of 80 plus years.
Apart from encouraging more trade relationships and exports given the ability to settle in Renminbi, there is the potential for Bahamas institutions to invest directly in yen denominated bonds and securities without the downside of conversion.
The Bahamas has long recognized that it could act as a bridging gateway between South America and Asia utilising its depth of expertise in financial services to facilitate trading relationships and trade finance. This recent announcement would help make it a reality.
In today’s global environment for financial services success for an IFC depends on a host of factors but certainly one of them is the ability to develop market-responsive, compliant and innovative products.
Such innovation, however, must be must be based on an inherent understanding that changes to an IFC’s regulatory and business environment should not be knee-jerk reactions to market or political conditions, but measured responses that build on the trust and confidence that the jurisdiction has earned.
Historically, but even more evident in recent years, The Bahamas has demonstrated that its maturity as a wealth management centre enables it to identify and respond to opportunities to build on its many competitive advantages. In fact, the spirit of innovation has never been more apparent between the private and public sectors partners of the country’s financial services industry and will continue to guide its future growth and development both in the markets that traditionally have been attracted to The Bahamas’ financial institutions and services, and new markets such as Latin America and Asia.
The Bahamas believes its approach to international compliance through in-country dialogue and consultation between the public and private sectors is a dynamic that will keep the country at the forefront of wealth management services. This will spark further innovation in products and services that align themselves with evolving international conditions and market opportunities.
Partner, Graham Thompson, Bahamas