Pocket-sized financial powerhouse puts its faith in good housekeeping
At a time when offshore financial centres are again under fire from politicians in Washington concerned about the use of taxfree jurisdictions by US individuals and companies, as well as the difficulty of monitoring alternative funds located in territories where the writ of federal regulators does not run, Bermuda is keen to get the message across that it is anything but a brass nameplate jurisdiction for offshore business companies and hedge funds.
While most attention in recent weeks has been on the debate over the taxation of the share of fund profits received by partners in private equity firms and hedge fund managers, a fresh initiative is underway in the US Congress to clamp down on the use of offshore centres, backed by influential senators including Democratic Party presidential hopeful Barack Obama. Last month Senate Finance Committee chairman Max Baucus and senior Republican member Chuck Grassley made headlines by asking the US Government Accountability Office to examine Ugland House in George Town, Grand Cayman, the home of leading offshore law firm Maples & Calder, for possible avoidance of US taxes by the thousands of companies that use the building as a legal address.
Bermudian officials are quick to insist that the island is a financial jurisdiction of substance. 'We're not just a post box address,' says Cheryl Packwood, chief executive of the Bermuda International Business Association. 'We have the intelligence, intellectual property and infrastructure to make business decisions here. Actual business gets done here.' Acting as an official mouthpiece for the international financial industry, the group's members plan to carry this message to industry events around the world. In September, BIBA plans to host a hedge fund panel in Greenwich, Connecticut, where its mission will be to debunk the myth that Bermuda is over-regulated and expensive among offshore jurisdictions. Similar events in Paris and Geneva are also planned.
Says Packwood: 'We don't have regulations in place just for the sake of having them. They come with a good housekeeping seal.' The island's financial regulator, the Bermuda Monetary Authority, also prides itself on its long-standing 'quality over quantity' mantra. It thoroughly scrutinises fund prospectuses and subsequent financial reporting to ensure adequate disclosure to investors. Following an extensive review of its nearly decade-old regulatory framework for funds that took up most of last year, the authorities have updated the legislation with the Investment Funds Act 2006, which received the assent of the territory's governor-general at the end of December.
The legislation introduced for the first time licensing rules for fund administrators, a move the regulator hopes will strengthen its reputation as a jurisdiction that adheres to international standards, according to Pat Phillip-Bassett, the BMA's assistant director for corporate governance and communications. The recent legislation gives the BMA greater investigative powers to root out problematic funds.
However, the regulator and industry representatives are also trying to quell concerns about the jurisdiction becoming over-policed, maintaining that the island is thriving as a result of its balance between effective regulation and the freedom to let business innovation flourish.
While many other offshore jurisdictions embraced 'know your customer' rules and other measures to counter money-laundering only in the past decade, following the establishment of the Financial Action Task Force to make it harder for members of the drugs industry and other criminals to recycle their revenues into legitimate deposits and investments, Bermuda has insisted on knowing the identity of those who do business there for more than half a century, according to Julie McLean, a partner in the corporate department of law firm Conyers, Dill & Pearman.
Over the past six years, since the September 11, 2001 attacks on New York put the financing of terrorism into the spotlight, the government has further fine-tuned the code, which was originally put in place before World War II to keep out Nazi money. The BMA has been asking the hedge fund industry tough questions before it became fashionable to do so, says McLean, although this is not at the cost of speed to market. She notes that a fund can be registered in between two and 10 days and involves just USD3,000 in fees.
Bermuda seems an unlikely location for one of the world's top hedge fund jurisdictions. Until a couple of decades ago, the oldest British colony in the North Atlantic Ocean was principally sought after by wealthy European and North American individuals as a travel destination, but today financial services are its leading industry, thanks in large part to the booming reinsurance industry, and its gross domestic product per capita, estimated at USD75,441 in 2005, is among the highest of any country or territory in the world.
There's no question, however, that the territory has its own unique problems. The average cost of a house is nearly USD1m, making it one of the world's most expensive places to live, and rents on executive properties are rising. That's partly due to the territory's high population density, with an estimated 66,100 people living in an area of 53.3 square kilometres (21 square miles). To bring in employees from overseas, companies must secure work permits for them, a process that can involve a lengthy wait for the authorities to complete the paperwork and carry out background checks. That can create difficulties in maintaining staff continuity. Then there's the issue of education; executives coming from abroad can face great difficulties in finding places for their children in the island's limited number of schools. Families have to make do with one car per household, but even so, roads are limited and commuter numbers and congestion are rising.
Businesses have to deal with problems from an infrastructure point of view, says Tim Calveley, chief financial officer of hedge fund administrator Fulcrum, which moved some of its activities to Waterloo, in the Canadian province of Ontario, to capitalise on the greater availability and ease of recruitment of staff.
Fulcrum, which was established in Bermuda 12 years ago and in which UK private equity firm 3i recently took a minority stake, still maintains a small number of management staff on the island. However, Calveley expects Bermuda to maintain its role as a financial services hub, thanks to a robust regulatory framework, stable government, geographic proximity to both New York and London, a low tax environment and access to a wide network of local service providers.
The massive dominance of the Cayman Islands as a hedge fund domicile does not discourage members of the fund administration industry, who believe Bermuda can continue to win a significant share of the business. 'Cayman is like a massive snowball rolling down a hill,' says managing director Douglas Lang of Butterfield Fund Services. 'We are hoping to get pieces off that.'
The firm, which is wholly owned by Bermuda's oldest financial services company, Butterfield Bank, is also expanding in Canada, having opened a fund administration facility in Halifax, Nova Scotia earlier this year to help relieve some of the workload of its Bermuda and Cayman operations.
Butterfield Fund Services also plans to open a marketing office in New York to attract both onshore and offshore business from the US to add to its existing USD71.3bn in assets under administration. According to a recent survey by HedgeFund.Net, the firm was ranked 17th worldwide among administrators of single-manager hedge funds with USD31.4bn in assets and 11th among fund of hedge funds administrators with USD31.2bn at the end of March.
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