The Bahamas: Compliance and Innovation in Lockstep

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

The country’s mature financial services industry, its 40 years of independence, established infrastructure, progressive government, tax neutral environment and luxury lifestyle all have been cultivated very carefully to satisfy the specific needs of this most exclusive clientele. In fact, they can be seen as the basis of distinct advantages for wealth and asset management services as well as for those seeking a location at the crossroads of the Americas to establish or operate an international business.

The past decade – amid international initiatives and the most recent financial crisis - has brought new challenges to the international financial services industry. The Bahamas’ response has been a reinvention of itself as a financial services centre, carving out new niches in wealth management and highly specialised investment vehicles but with a balanced approach to meet the evolving requirements of a global market, amid far-reaching changes in international regulatory standards and transparency requirements.

The Bahamas SMART Fund is a shining example of The Bahamas’ progressive outlook in that the concept came out of an industry think-tank and was adopted by the regulator, the Securities Commission of The Bahamas.

The Bahamas has a long history of providing investment fund services and has taken measured steps – such as the SMART Fund - over the past 10 years to differentiate it from other jurisdictions by creating a mechanism to establish different types of funds with more flexibility and appropriate levels of governance.

The Bahamas SMART Fund provides industry participants with the means to offer clients innovative, progressive and flexible structuring solutions via a regulated vehicle, domiciled in a premier international financial centre. For example, where investment funds are essentially private arrangements such as private equity or a family office fund, a SMART Fund enjoys a supervisory environment appropriate for the limited, specific nature of the project and will not suffer the ‘broad brush’ regulatory approach, which is unavoidable elsewhere.

There are now seven distinct risk-adjusted SMART Fund templates or models, giving The Bahamas a unique instrument adaptable to both the structuring needs of high net worth private investors and to the requirements of the alternative investment industry.

The latest version, formally the Super Qualified Investor Fund but popularly dubbed Model 007, was officially approved by the Securities Commission of the Bahamas on August 10, 2012. Such funds 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 – a figure that reflects legal requirements in markets such as Brazil.

The Bahamas growing attraction as a funds centre received a further boost early this year when it achieved Signatory A status under the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the MMoU) of the International Organisation of Securities Commissions (IOSCO).

Being a signatory to the MMoU is a statement of a jurisdiction’s commitment with regard to mutual assistance and the exchange of information for the purpose of enforcing and securing compliance with the laws and regulations of the relevant jurisdictions.  The Bahamas is the first independent country in the region with IOSCO Signatory ‘A’ status.

Innovation also extends into The Bahamas’ well established position as the most experienced wealth management centre in the region. The Bahamas is home to over 270 licensed banks and trust companies, including many of the world’s top private and global banks. North American banks have been doing business in The Bahamas for more than a century and European and Swiss banks have deep roots, established more than 70 years.

The broad range of financial institutions in The Bahamas delivers a myriad of 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.

The Bahamas’ leadership in wealth management is further enhanced by its progressive responses in meeting the requirements of an increasingly sophisticated financial services marketplace. Indeed, the recent amendments to the Trustee Act, Purpose Trusts Act and the Rule Against Perpetuities Act, now mean that The Bahamas has the most advantageous legislation in the region in this regard. The Bahamas is the only jurisdiction to have specifically provided for the arbitration of trust disputes as well introducing directed trust provisions. Other amendments were made in direct response to case law developments in other centres to ensure that where a judicial decision has made the law uncertain or murky, the position, at least as far as Bahamas law is concerned, is clear. This was the case with the new statutory legitimisation of ‘no contest’ clauses following a judicial decision in another centre which threw the law into disarray. “We are always seeking to ensure that practitioners have ‘clarity’ in the way in which the law will be applied.  The only way to do this is to enshrine these in statute,” notes Paul Winder, Chairman, Bahamas Financial Services Board.

The Bahamas’ progressive and innovative outlook is further demonstrative by the Executive Entity (BEE). 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.

In addition to its flexible capital structure, the BEE has other distinguishing features:

 

• it may hold shares, securities or other ownership interests in a legal person whose business is to carry out executive functions;

• its executive functions may be performed only in relation to entities, trusts or other arrangements that are domiciled in or regulated by the laws of The Bahamas or a jurisdiction specified in the First Schedule to the Financial Transactions Reporting Act;

• and the Executive Entities Act itself contains similar anti-forced heirship provisions as are contained in the Bahamas Trustee and Foundations Acts.

The advantages of the BEE lies in its ability to remove unnecessary layers of ownership at the top level of wealth structures, to concentrate control in the right people who have the assurance of limited liability and to generally facilitate proper governance within the structure to avoid the risk of family conflict damaging the family wealth.

A mature private public partnership is at the heart of the dynamics that ensure the strength and continuity of The Bahamas’ interests and goals as an international financial centre. Government and business interests in The Bahamas act in close partnership to respond to market needs and at the same time adhere to international standards. The Bahamas Financial Services Board (BFSB) is testament to this close and open working relationship. Established in 1998 as a private sector led partnership with the Bahamian government, BFSB spearheads the promotion of The Bahamas' strengths as an international financial centre. In addition to its coordinated programmes to increase confidence and expand knowledge of The Bahamas among international businesses and investors, BFSB consults with government to develop new initiatives to meet the rapidly changing demands of international financial markets.

With a long history of positive contribution to the financial service industry’s development, the country’s professional associations also offer the government a window to the industry to better identify and respond to change.

The re-establishment of the Ministry of Financial Services following the Bahamian general election in May 2012 further solidifies this partnership. Successive governments have been strong supporters and advocates of the industry, which is the second largest contributor to the Bahamian economy.  With a financial services Ministry now in place, the government has signalled an even stronger commitment and policy focus to the sector.

Both BFSB and the Ministry of Financial Services have a shared vision of The Bahamas “to be a globally competitive international business centre for private wealth management, capital investment in the Americas and emerging markets, and residency”. The Bahamas Government is committed to building an economic environment in which free enterprise can flourish and its National Investment Policy is designed to support an investment-friendly climate and facilitates Bahamian and overseas investments. It also is taking aggressive steps to ensure business processes such as company registration are efficient and streamlined.

Located 65 miles off the coast of Florida The Bahamas is situated at the crossroads of the Americas, an ideal hub for regional investment and business in the Eastern United States and Canada, and much of Central and South America.  It is in the same time zone as New York and Toronto, so office hours align with most of the major business centres in the Americas.

The Bahamas has developed its land, premises and fit-for-purpose infrastructure with the singular focus of facilitating international business. Modern office facilities are connected globally through three separate, fully redundant, self-healing, fibre optic cable networks, with data protection at the OECD Standard. With some 21 international airports and 40 other airports situated throughout the archipelago, as well as countless ports of entry and marinas, there is convenient access to major centres North and Latin America as well as the UK and Europe.

On Grand Bahama Island, the Freeport Industrial Zone has one of the most efficient and deepest harbours in the region, as well as an international airport capable of handling the largest aircraft in service and an international business and logistics park for value-added and cargo handling activities. Companies also operate tax-free within the Freeport and Lucaya areas under the terms of a long term agreement.

Shipping services, including The Bahamas’ emergence as one of largest ship registries in the world, now represent an increasingly important third pillar in the Bahamian economy. The links between the country’s buoyant tourism industry, its robust international financial service offerings and its growing maritime sector have positioned The Bahamas as a one stop location for a wide range of business needs and opportunities.