Financial Services In The Bahamas: Resilient, Evolving And Compelling

The financial services sector is estimated as the second-largest contributor to the domestic economy, accounting for approximately 10 - 15 per cent of the country's Gross Domestic Product (GDP). We often refer to financial services as the second pillar of the Bahamian economy as it provides strength and stabilising support. This has indeed been the case during the past two years of the pandemic, which is a testament to the resilience of our financial services sector and its ability to adapt to changing circumstances.

This kind of resilience is a hallmark of the financial services sector in The Bahamas. No matter what is going on in the economy, no matter what changes are occurring in the financial services and regulatory landscape, The Bahamas has always maintained its status as a global leader by being able to adapt to new situations.

The Bahamas is one of the safest options for persons looking to set up trusts and wealth management vehicles in a stable, well-reputed jurisdiction with the highest professionalism and expertise in service. In doing so, we rely on an approach that is appropriately referred to as measured innovation. Each step is carefully planned, balancing the need to rely on what has worked historically with the need to innovate and evolve constantly.

Keeping Pace With Global Standards

While global standards and requirements are constantly shifting, The Bahamas has always kept pace. “You won’t find our name on any current blacklists; we have gone above and beyond to ensure that our anti-money laundering, tax transparency, and counter-terrorism financing framework is consistent with global best practices,” said Senator The Hon. Michael Halkitis, Minister of Economic Affairs, at a recent conference in New York.

He added, "In our laws, you will see some of the world's most robust trust specific legislation. Objective observers describe the Bahamian financial services sector as well-regulated, globally compliant, and universally respected.

“When it comes to policies that are consistent across government administrations, one thing you can be certain of is that there will be continuity within our financial services industry. Successive government administrations have consistently demonstrated the country’s commitment to international best practices, evidenced by cooperation in the administration of justice, international tax transparency, anti-money laundering efforts and counter financial terrorism measures.”

Each time global standards change in recognition of new trends or concerns, The Bahamas has adeptly met each standard and prides itself on fully complying with the highest standards. And each time these standards change, industry observers speculate about the impact it will have on our competitiveness in the international market. Each time this happens, we continue to maintain our position as a global leader in financial services. We see these changes as opportunities to further strengthen our local product by providing greater transparency and promoting cooperation between jurisdictions. Investors choose The Bahamas for their financial services needs because they know that their economic interests are in good hands.

As a recent example, in October 2021 The Bahamas joined 136 other participating countries in agreeing to the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. The agreement is a part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The agreement calls for the mutual implementation of a minimum corporate tax of 15 per cent on Multinational Enterprises (MNEs) by 2023 and the elimination of double taxation of MNEs between jurisdictions. "There is some debate as to whether tax reform in The Bahamas will adversely impact the financial services sector and the overall investment environment, " said Alexander Christie from McKinney Bancroft & Hughes, a Nassau-based law firm. “The Global Minimum Corporate Tax initiative undoubtedly presents an opportunity for The Bahamas to consider its present domestic or resident taxing structure and an opportunity to attract tax resident investors to reinvest in the jurisdiction instead of repatriating funds overseas," he said.

Strategic Innovation

With hundreds of banks and trust companies in our jurisdiction, the Bahamian government is constantly engaging public and private sector stakeholders in dialogue as we explore a slate of suggested reforms and innovations that will allow us to continue to make our presence felt in the global financial services market. This has been our historical approach, focusing on making strategic moves advantageous for all parties involved.

Twenty years ago, for example, we introduced the SMART fund to allow practitioners to design innovative structures uninhibited by inflexible regulations. Years later, we brought the Investment Condominium on stream to cater and appeal to specific regional markets. Our growing array of wealth and investment vehicles allow financial services clients to protect their assets, grow their wealth, and plan for succession to suit their needs.

More recently, the overhauled Investment Funds Act, 2019, which updated the responsibilities of related parties and modernised the funds regulatory regime in The Bahamas with an AIFMD-ready legal framework, is another example of this pragmatic, protective, innovative approach to delivering world-class regulation.  

The growth in the investment funds business has not been confined to traditional funds. Chris Illing from ActivTrades shared that from his vantage point, “Exchange Traded Funds (ETFs) are among the most popular trading products of 2022”. ETFs are exchange-traded mutual funds that typically have a focus on share-investments. They belong to the "industry funds", which invest exclusively in companies of a specific industry, for example, Telecommunications, Healthcare or the Energy sector.

Traditional sector funds have been around for decades. They are often launched on the market when a particular industry is growing strongly. Examples are the solar and information technology funds at the turn of the millennium. “There are several arguments used to promote sector ETFs,” said Mr. Illing. “Low administrative costs, built-in risk diversification, and the ability to invest in multiple companies with a lower sum than you would require buying all individual shares. Another advantage is the possibility of investing in "Trend” or "Growing Markets" and, therefore, outperforming the general market.”

The Bahamas is focused on positioning the jurisdiction as a compelling captive domicile. Over the past ten years, the number of licensed captive insurance entities registered in The Bahamas has grown – at first very rapidly and then steadily in the last five years. The growth in The Bahamas’ captive insurance market is attributed to small-to-medium sized entities (SMEs) seeking to set up their segregated accounts. This option has proven cost-effective for those SMEs, especially since they can and do outsource administrative and operational oversight to locally registered insurance managers, financial and corporate service providers, and other financial service professionals such as lawyers and accountants.

The regulatory framework for the insurance sector is comparable to that of any of the significant captive domiciles. "While the present legislation has undoubtedly helped the insurance sector grow, the Insurance Commission of The Bahamas is committed to maintaining a robust yet competitive legislative framework,” according to the Commission's Carl Culmer. In 2021, as part of its strategic plan to amalgamate legislation, the Commission began a review of the jurisdiction's two principal insurance laws – the Insurance Act, 2005 and the External Insurance Act, 2009. The purpose of the review, which is still in progress, is to streamline regulatory and supervisory requirements and enhance legislation to facilitate insurance structures better.

A Global Digital Assets Hub

The Bahamas has also kept pace with emerging trends. An example of this approach manifested in the development of the Digital Assets and Registered Exchanges Act (DARE). "When we benchmarked and developed DARE, we noted that securities regulators around the world were, and to some extent still are fixated on whether certain tokens are securities or not,” said Christina Rolle, Executive Director of the Securities Commission of The Bahamas. “While this is an interesting question for the purpose of understanding whether crypto can be captured into the net of securities regulation, the question does not and cannot holistically address all that crypto encompasses and can potentially include. As a result, we determined to establish a distinct legal framework and regulatory space for crypto/digital assets.”

The emergence of The Bahamas as a crypto/digital assets hub has resulted in a flood of interest in Bahamian corporate vehicles to house the operations of digital asset businesses. But, according to Kamala Richardson from the Nassau-based law firm Higgs & Johnson,  it has also resulted in increased demand by digital asset investors and digital asset business operators alike for Bahamian trusts.    

“In alignment with recent international judicial assent, the DARE Act confirms that digital assets are property, thereby laying the foundation for digital assets to be held in Bahamian law governed trusts,” said Ms. Richardson. “A testament to its dynamism, the Bahamian trust has proven to be an adaptive vehicle for holding digital assets and for ensuring the efficient functioning of digital asset business methodologies. Digital asset investors can therefore shelter their digital assets for posterity and investment by settling them in a Bahamian trust with appropriate powers vested in the trustees and or reserved to the settlor or other persons. Where necessary, digital asset business operators may do so for similar reasons. Also, those in the stable coin space may opt to establish Bahamian stable coin reserve trusts in which reserve funds are held to maintain a fiat currency to stable coin peg to avoid market volatility,” she said.  

The New Bahamian Economy

According to Caystone Solutions’ Wendy Warren, The Bahamas is much more than a compliant, innovative and well-regulated booking centre for the services provided by the wide range of financial service providers in the country. Further, the sector's sustainability has implications for the economy and the way of life of all Bahamians and residents. “The diversity within the financial services sector in terms of product offerings contributes in a meaningful way to the livelihood of the Bahamian people and the country’s economy,” said Ms. Warren. “This contribution will become more pronounced as the country pivots to invest in diversification with a focus on the “blue and orange" economies, which have been identified as pathways for greater economic expansion, new business opportunities and wealth creation for Bahamians and international investors alike.” The Bahamas is looking to modernise its fishing industry, generating ocean sciences and marine conservation opportunities while sustainably developing marine biotechnology, aquaculture, and deep-sea exploration initiatives. Renewable energy industries are also on the horizon. Meanwhile,  as a vital component of the Bahamian economy, the tourism sector is looking to design a new tourism model which fully integrates culture and the creative industry in The Bahamas.

“Many in the financial services industry, Caystone included, are actively supporting these initiatives both domestically and internationally,” said Ms. Warren. “It’s the traditional economy of financial services and tourism in The Bahamas engaging the country’s New Economy with benefits accruing to both.”

Conclusion

There are many tentacles to the Bahamas financial services industry. These limbs include but are not limited to: banking, trust and fiduciary services, investment funds, capital markets, investment advisory services, accounting and legal services, insurance, and digital assets business. In this context, international advisors and their clients expect excellence in service and advice in all of these areas.