The exacting pace of regulatory reform in the Bahamas

Overview by the Bahamas Financial Services Board

The exacting pace of regulatory reform in the Bahamas

Recently, in an effort to comply with criteria for tax governance laid down by the OECD and the EU, the Bahamas made changes to the laws and regulations that govern its financial sector. Other nations are making the same changes elsewhere around the globe. These initiatives include the following:

• The passing into law of the Multinational Entities Financial Reporting Act, which contains rules for country-by-country reporting in line with the OECD's Base Erosion and Profit Shifting (BEPS) initiative.
• The initiation of Automatic Exchange of Information (AEOI) with 35 jurisdictions (19 of which are in the EU) in accordance with the OECD's Common Reporting Standard (CRS), with the first exchanges having taken place in September 2018. The Bahamas has always insisted on following international best practice and has fared well in the "phase two peer reviews" to which the OECD’s Global Forum has subjected it. In fact, The Bahamas has been deemed “largely compliant” with the OECD’s existing standard for exchanges of information on request — the same rating as countries in the 'Group of 20' (actually only 19) industrialised nations such as the UK, Germany, Canada and Australia.
• The allaying of the EU's and OECD's concerns with respect to economic substance, access to information about beneficial ownership and ring-fencing by the passage of the following legislation in Parliament in December 2018:
  1. The Commercial Entities (Substance Requirements) Act 2018. This Act insists on relevant entities having economic substance. The Act defines 'relevant activities' as banking, insurance, fund management, financing and leasing, shipping, distribution or service centre operations, headquarter operations and holding companies with relevant activities. All will have to show (or be able to show) the authorities that they have a substantial economic presence in The Bahamas and that they are engaging in real economic activity.
  2. The Beneficial Ownership Register Act 2018. This calls for the establishment of a secure search system by the Attorney General that can scan databases managed by registered agents who hold information about the beneficial ownership of entities that they manage which are incorporated, registered, continued or otherwise established in accordance with the Companies Act or the International Business Companies Act.
  3. The Removal of Preferential Exemptions Act 2018. This is designed to tackle the harmful tax practice known as 'ring-fencing,' which occurs when a taxing jurisdiction runs a preferential tax regime that is unavailable to certain groups of taxpayer - often domestic taxpayers or taxpayers who operate in the domestic economy. In other words, it removes tax exemptions afforded to non-residents that are not afforded to residents.

The Government of the Bahamas has stated on record that it intends to attain and maintain "the very highest levels of conduct as a clean jurisdiction, complying with the highest standards to prevent the abuse of its financial system by money launderers and criminal elements." It has promised to satisfy the requests of the Financial Action Task Force and the Caribbean Financial Task Force. Over the last 15 months the Attorney-General and the task force that he leads have done much to address the concerns that the CFATF voiced in its aforementioned Mutual Evaluation Report. With this in mind, the CFATF positively re-rated the Bahamas favourably in December 2018 in respect of various FATF recommendations.

Expertise

Thousands of Bahamian wealth managers work side-by-side with their expatriate colleagues in more than 250 financial institutions that call the Bahamas their home. Private wealth management continues to stand centre stage on the Bahamian financial scene. It is facilitated by a diverse suite of products, of which banking and trust services are the centrepieces. These products and services are as follows.

1. Private banking
   Private banking has come of age in the Bahamas during the past decade. The country’s banking practices and standards, regulation and supervisory controls are now on a par with those of the rest of the global banking community, although the jurisdiction continues to offer clients a great deal of privacy and confidentiality. Many of the world’s largest and most prestigious financial institutions have taken advantage of the country’s stable political and economic system to establish branches or subsidiary operations there, offering private banking services to high-net-worth and ultra-high-net-worth individuals and families.
2. Trusts
   Since the Industrial Revolution, possibly the biggest generator of capital and the single greatest cause of wealth creation worldwide has been the private ownership of operating companies. Members of families who go into business together, and the entrepreneurs who lead those businesses, where different, are growing more and more sophisticated in terms of their investments, their strategies and their goals. Their 'footprints' are becoming more global as they cross borders and move their businesses into new territories and new types of technology. They are increasingly concerned with preserving their wealth and 'succession planning' for both their businesses and their families. In summary, their lives and the plans that they are making have become more complex.
   The Bahamas have some of the most innovative and sophisticated trust laws in the world. HNWIs and their families are able to choose perpetual trusts, protective trusts, trusts for purposes both charitable and non-charitable, private trust companies to administer the trusts of related settlors, trust substitutes such as foundations and pure governance structures such as the Bahamas Executive Entity. The Bahamian trust is a model of robustness and flexibility. Trust legislation in the Bahamas has always been 'cutting edge' and other jurisdictions often use it as the standard to follow.
3. The Bahamian Foundation
   Trusts are not often used in civil jurisdictions. More than ten years ago the Bahamas became the first common-law country to pass its own foundation legislation, thus creating a viable alternative for wealth planning and protection.
4. The flight of the BEE
   The Bahamas Executive Entity (BEE) provides the wealth manager with a nimble and innovative approach to his ever-changing needs. The BEE solves complex governance issues in fiduciary and wealth management structures, particularly with respect to share ownership in Private Trust Companies. It identifies persons willing to act in any number of governance roles in wealth structures.
5. Captives added to private wealth offerings
   Captive insurance is another area of recent expansion. The Bahamas is not a newcomer to captives, but this avenue of investment took a back seat during a recent period in which the jurisdiction concentrated on developing wealth management, trusts and estate planning. This is certainly not the case now, as the opportunity for captives to play a part in wealth management is undeniable.
   Segregated cell legislation is a prime example of Bahamian activity in the captive market. It provides the assets and liabilities of each account with robust statutory protection, keeping them truly separate and distinct from those of other accounts. Cell captives benefit from the natural economies of scale that such structures create. Bahamian regulators, too, have responded vigorously to the demand among small-to-medium-sized enterprises for a cost-effective means of captive insurance or self-insurance while still upholding international standards.

Innovation

Innovation, as we have already said, can be seen at work in the country’s evolving and often ground-breaking trust legislation. It has also thrust The Bahamas into the vanguard of the investment funds industry with the introduction of SMART Funds and the Investment Condominium (ICON) fund.

SMART funds

The Bahamas’ evolving investment funds sector is beginning to attract major attention from fund managers and has already added a new dimension to the jurisdiction’s wealth management and advisory capability. The Bahamas recently experienced an upward trend in investment fund registrations. The jurisdiction owes its success in this area largely to the investment 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 cost-effective investment fund vehicles for families, family offices and related investors.

The SMART fund concept was conceived in the spirit of risk-based regulation. Its creators took stock of the fact that investment funds often needed to have flexible structures and reporting requirements. Regulation of each fund is adjusted to the risk profile of the fund; there is a cap on the number of investors who may invest in many of the templates. It is permissible for the investors to waive the production of audited financials in favour of semi-annual performance reports. SMART funds are numerous and there are many types of them. Promoters have an open opportunity here - if they wish, they may ask the regulator to approve a specific business case for a fund. If the regulator grants its approval, it can then impose a risk-based licensing and supervisory regime on the fund that it has created for it. Other funds can then use the new template and can even set new parameters and requirements for it.

A new ICON for funds

The Bahamas have learnt from the niche-marketing success of SMART funds and taken the same innovative approach to the creation and introduction of the ICON – the Investment Condominium Fund – with the aim of meeting the needs of Latin American and especially Brazilian investment managers. The ICON is yet another example, along with the foundations law of 2004, of the Bahamas creating products and aiming them at groups of clients with very different cultural and legal backgrounds. The ICON provides an alternative legal structure for investment funds that, inherently, is familiar to Brazilians and people in countries with similar civil laws. Plans are underway to develop a similar product that caters to other jurisdictions.

The investment funds overhaul

A complete overhaul of the law that governs the regulation of investment funds is nearing completion, with the Securities Commission of the Bahamas (SCB) in the driving seat. The overhaul includes an updated Investment Funds Act (IFA) and some forthcoming changes to the securities industry's legislative regime as a whole. It is expected to make the Bahamas more competitive and contains the following key changes.

• Changes in the definitions of 'Bahamas-based funds' and 'non-Bahamas based funds.'
• Changes in the triggers for the licensing of funds.
• The ability to appoint international administrators without them having to be licensed.
• The introduction of licensing requirements for fund managers and regulatory oversight for custodians.
• The establishment of an Alternative Investment Funds Management Directive (AIFMD) regime with a view to the Bahamas qualifying for an EU 'passport.'

These regulatory reforms promise to be of great benefit to the Bahamas and to complement the islands' strategic location, political and economic stability, wealth and asset management options, human capital and investment incentives. ■