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08/09/22
Offshore Trusts, Business Empires & Charities In Bahamian Trust Law: A Business Case For Indian Family Office Relocation
The Bahamas has been positioning itself as a family office hub in the wealth management space. A significant tool to achieve this aim is the introduction of private trust companies (PTCs). As part of this renewed effort the Bahamian Parliament has enacted the Banks and Trust Companies Regulation Act, 2020 to provide for the regulation of PTCs.
Wealthy families use PTCs to act as trustees of complex family trusts composed of offshore asset protection trusts, and offshore purpose trusts that hold a controlling interest in their business empires as well as their charities respectively. In the case of single-family offices (SFOs), such structures manage their own wealthy family business whereas multi-family offices (MFOs) manage the family businesses of multiple wealthy families. Indian family offices are currently moving to international financial centres as the next generation of that nation’s wealthy considers global asset classes to diversify and grow their business or personal wealth.[i]
Private Trust Companies
There are generally no legal requirements to establishing a family office so it may be as simple as a company or as complex as a PTC depending on the complexity of assets under management. Section 2 of The Banks and Trust Companies Regulation Act 2020 defines a “Private Trust Company” as follows:
“a company incorporated under the provisions of the Companies Act, or the International Business Companies Act, which by its Memorandum of Association – (a) acts as trustee only for a trust or trusts created or to be created by or at the direction of a Designated Person or Designated Persons or an individual or individuals who are related by consanguinity or other family relationships to the Designated Person described within the Designated Instrument or, if there is more than one Designated Person so described, to a Designated person or Designated Persons need not be named in such company’s Memorandum and/or Articles of Association; (b) is required to have a Registered Representative; and (c) is not the subject of a notice of withdrawal made under section 14(1).”
For the purposes of the legislation, it is of vital importance to understand the definition of a “Registered Representative” which is also defined in section 2 as follows:
“a licensee or a Financial and Corporate Service Provider approved by the Governor, which provides to a private trust company, the services of a – (i) secretary; (ii) director; (iii) Bahamas Agent, and is resident in The Bahamas.”
Section 2 defines “Designated Person” and “Designating Instrument” as follows:
“Designated Person” means the individual or individuals (whether living or deceased) described as such within a Designated Instrument provided that if more than one Designated Person is described as such each Designated Person must be related to a Designated Person so described by consanguinity or some other family relationship.”
“Designating Instrument” means an instrument in the form specified in the First Schedule to the Banks and Trust Companies (Private Trust Companies) Regulations.” [This is a form essentially appointing a Registered Representative.]
All that is required from a registered representative is (i) a valid trust licence from the Governor; (ii) for the purpose of providing the services of Bahamas Agent, Director or Corporate Secretary to a PTC, to notify the Central Bank of the Bahamas (CBOB) prior to engaging in such activity; and (iii) to submit the name of two senior contacts overseeing this line of business, with whom CBOB can interact for the administrative, filing, and verification of identity requirements. Any subsidiary licensees set up must also be licensed or approved according to law.[ii]
Case Study: Indian Family Office Migration
India is estimated to have at least 300 family offices with an average asset under management (AUM) of US$100 million each, including those with multi-billion corpuses[iii]. They generally consider overseas jurisdictions that do not have significant capital controls, where foreign exchange is readily tradable, places that do not have inheritance tax or estate duties, and income tax is at a reasonable level[iv]. The Bahamas does not have significant capital controls, foreign exchange is freely tradable as the Bahamian dollar is on par with the US dollar, it does not have inheritance tax, and there is no income tax in The Bahamas. Therefore, from an Ultra High Net Worth Individual (UHNWI) perspective The Bahamas is an ideal place for family offices to migrate from India and beyond because it offers a distinct strategic advantage from the perspective of international finance arbitrage. In fact, The Bahamas is a low tax jurisdiction with taxes such as custom duties, stamp duty, and Value Added Tax (VAT).
Family Constitution
The governing document for the Family Office should be the Family Constitution[v]. This may also be called the Family Charter. Once it is decided within the family who does what and a board of directors is constituted, then it is important to reflect this in a formal document known as a Family Constitution. It is important to have transparency, accountability, and structure. OECD Principle Five states that “To ensure accountability on the appropriate use and value for money of development finance, blended finance operations should be monitored on the basis of clear results frameworks, measuring, reporting on and communicating financial flows, commercial returns as well as development results.”[vi] It is of crucial importance to communicate within the family the nature and progress of shared family investments to create a culture of transparency. OECD Principle Six is also of great importance.[vii] This principle speaks to the accountability of the board to the effective monitoring of management, and the board’s accountability to the company and the shareholders i.e. the family council, which acts like a board of directors elected by the wider family members to govern the family business.
Offshore Asset Protection Trusts
In a previous article, the topic of asset protection trusts and Shari’a trusts was discussed extensively.[viii] Indian family offices have traditionally moved to Dubai and Singapore as per the Shari’a law.[ix] It may however be useful to point out that Bahamian trust law enables the creation of Shari’a trusts allowing trustees to administer trusts in accordance with the needs of their Islamic clients and also to ensure that clients’ religious beliefs are observed in selecting investments for the trust.[x] This is enabled by appointing protectors or protector committee members that are Shari’a scholars and even a Shari’a compliant portfolio manager.[xi] The trust may be a directed trust to absolve the trustee of liability once they follow the directions of the settlor, protector, or portfolio manager based on the terms of the trust instrument.[xii] The trust can also provide for a no contest clause[xiii] and an arbitration clause[xiv] to ensure that the administration is consistent with the wishes of the client and follows Shari’a law. The members of the arbitral panel may also consist of skilled Shari’a legal scholars. The attractiveness of the Shari’a trust is that it ensures the settlor reserves control over decision-making, investments, ensures continued management of the family business, and succession planning without having to go through a cumbersome probate process in the event of the death of the family patriarch. Most importantly, it ensures the transmission of shared values from one generation to the next.[xv] Certainly, such complex trusts can be managed by the family through a PTC for centralised oversight of the family business, family investments and tax and estate planning. A critical feature of Bahamian trust law is the firewall provisions of the Trust (Choice of Governing Law) Act. This protects Bahamian trusts from sham attacks, fraudulent conveyance attacks, or from being impeached by foreign court orders once the choice of law for the trust is governed by Bahamian law.[xvi]
Offshore Purpose Trusts, Charities & Business Empires
Another option available with regard to structuring of financial assets, business empires, and charities would be to set up a non-charitable purpose trust under the Purpose Trusts Act, 2004 (as amended). The main advantage of this kind of structure would be to enable the creation of a trust for purposes rather than for people. One main challenge in trust law is the beneficiary principle or the notion that the trustee is accountable to the beneficiaries of the trust. The purpose trust may appoint authorised applicants[xvii] with the power to enforce the authorised purpose trust should the need arise. There can also be an investment advisory council/Protector Committee established with the mandate to advise the trustee on the selection of new investments, businesses, or charitable donations.[xviii] Therefore, a trust may be set up for the purpose of holding the shares in the settlor’s business empire, because indeed family offices mainly engage in the business of venture capital and mergers and acquisitions deal-making, as well as in management oversight of different business ventures formed or investments selected by the family business. The businesses and charities may be organised as a group of companies or Private Investment Companies (PICs) held as underlying entities to the trusts as investment holding entities (as an added layer of protection against potential sham attacks, or forced heirship attacks or in the unlikely event of the trust being set aside by a foreign court order).
Conclusion
The PTC would give sufficient flexibility to allow the wealthy family to act as trustee in order to give centralised supervision and oversight over their business ventures without giving away control as would be required under a traditional trust relationship, which could also feature special directors such as lawyers, accountants and investment managers to give skilled advice in the running of wealthy family businesses. The Bahamas has a diverse financial services sector and many savvy legal, accounting, and finance professionals to act as trusted advisors of family offices to wealthy families. This deep bench of talent meets the need of wealthy families such as those of Indian family offices searching for skilled professionals to supply much needed professional legal, accountancy, and finance skills to UHNWI and their family businesses.
Footnotes:
[i] Manghat, Sajeet. Why Indian Family Offices Are Shifting Overseas. <https://www.bqprime.com/business/why-indian-family-offices-are-shifting-overseas> 14 Jul 2022.
[ii] The Central Bank of The Bahamas. General Information and Application Guidelines For Private Trust Companies And Their Registered Representatives. Issued Jan 10, 2007. Revised March 2016.
[iii] Ibid, Manghat, para 4-5.
[iv] Ibid, Manghat, para 4-5.
[v] Ibid, McCullough, pg 185.
[vi] G20/OECD Principles of Corporate Governance, Principle Five.
[vii] G20/OECD Principles of Corporate Governance, Principle Six.
[viii] Gay, Shivron. The Bahamas: Asset Protection Trusts & Shari’a Trusts – New Wine in Old Wine Skins. <https://www.ifcreview.com/articles/2020/september/the-bahamas-asset-protection-trusts-shari-a-trusts-new-wine-in-old-wine-skins/> IFC Review (online).
[ix] Ibid, Manghat, para 6.
[x] Ibid, Gay.
[xi] Ibid, Gay.
[xii] Section 13 of the Trustee (Amendment) Act 2011 (‘TAA 2011’).
[xiii] Section 17 of TAA 2011.
[xiv] Section 18 of TAA 2011.
[xv] Ibid, Gay.
[xvi] Gay, Shivron. The Bahamas: Hastings Bass & Firewall Protection – Recent Developments in Bahamian Trust Law. IFC Review (Online). <https://www.ifcreview.com/articles/2021/september/the-bahamas-hastings-bass-firewall-protection-recent-developments-in-bahamian-trust-law/>
[xvii] Section 6 of the Purpose Trusts Act, 2004.
[xviii] Section 3(1) of the Purpose Trusts Act, 2004 states that, “A trust may be declared by trust instrument for a non-charitable purpose, including, exclusively or otherwise, the purpose of holding, or investing in shares in a company or any other assets constituting trust property”.
Mr. Shivron Gay, Esq., LLM, TEP
Shivron Gay is an attorney at law & notary public with 10 years PQE, practising at The Bahamas Bar, and a director of the STEP Bahamas Branch. He is a past Vice Chairman of the STEP Bahamas Branch.
