Innovation drives Bahamas’ role in global wealth market
By Simon Gray – Over the past decade The Bahamas has continued to refine itself as a financial services centre, carving out new niches in wealth management and highly specialised investment vehicles to distinguish itself from other jurisdictions in the region, and to meet the evolving requirements of a global market amid far-reaching changes in international regulatory standards and transparency requirements.
In particular, the development of the highly flexible series of Specific Mandate Alternative Regulatory Test (SMART) funds – there are now seven distinct risk-adjusted templates or models – has given 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.
Meanwhile, the Bahamas Executive Entities Act was adopted in 2011 to resolve complex governance issues in fiduciary and wealth management structures. The Bahamas Executive Entity is an incorporated power holder of perpetual duration, administered by its officers, which may own sufficient assets to fulfil its functions and conduct transactions independently. Unlike a company, it has neither share capital nor shareholders; unlike a foundation, it does not have beneficiaries.
At a time when the British dependencies that make up much of the offshore financial services market are finding themselves under pressure from London either to rethink their tax systems to handle sudden budget deficits or to enter into FATCA-style information exchange agreements with the UK, The Bahamas prides itself on its ability to shape its own destiny as a sovereign entity – within the framework of evolving international standards.
“I'm very positive about The Bahamas’ competitive position because we've managed to hold onto our comparative advantage and our focus on the complex needs of high net worth individuals,” says Aliya Allen, CEO and executive director of the Bahamas Financial Services Board (BFSB). “This is due in large part to the fact that we are an independent sovereign state, and that we have a range of professionals with huge expertise in the sector and an extremely progressive and innovative legislative framework.”
Over the past few years The Bahamas has done a great deal to improve and enhance its legislative framework and to create the right tools for the industry, Allen maintains. “The SMART Fund regime has been the shining example of The Bahamas’ progressive outlook, and it reflects the adaptive and forward-thinking characteristics of this industry,” she says. “In fact, it was the product of an industry think-tank that was then adopted by the regulator. In a challenging global regulatory environment, a SMART Fund makes it possible to design, with flexibility, a product that is fully and smartly regulated.”
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 USD500,000 – a figure that reflects legal requirements in target markets such as Brazil. Says Allen: “SMART Model 007 is much more institutionally-focused [than other models], although it can also be used for private structures with a small number of investors.”
The innovative approach embodied in the SMART Fund concept is a strong asset for The Bahamas in competing for new business. “We recognise that a one-size-fits-all mentality doesn’t work,” Allen says. “The approach needs to be flexible, but at the same time you must maintain your regulatory standards and the reputation of your jurisdiction. I believe we have been exceptionally adept in achieving that balance over the years.
“The Bahamas always has led the way among countries in this region on issues relating to due diligence and anti-money laundering, and we were an early mover on the implementation of transparency and exchange of information standards in the 2000s. We have affirmed our commitment to clean business in recognition that the whole world is moving in that direction. We have much more to offer than tax neutrality.”
Allen stresses the sense of partnership between the BFSB, representing the private sector, and the government, along with the financial services industry regulators: “The Bahamas has long believed in a public-private partnership in financial services. Companies can be sure they are coming to a jurisdiction that values the fertile environment created by such collaboration, and that the regulators will always carry out their responsibilities in a way that enhances and protects business.”
It’s a view endorsed by the Hon. Ryan Pinder, who became minister of financial services in the Bahamas government in May 2012, following the return to power of the Rt. Hon. Perry Christie. “The prime minister recognised that the financial services industry needed a particular policy focus and commitment, and he therefore re-established the Ministry of Financial Services,” Pinder says.
According to the minister, the government’s strategy is to focus on promotion of the industry, interacting with the private sector to enhance the ease of doing business in the country and develop new products and promotional initiatives. He says: “We aim to raise the country's profile further and enhance its reputation for nimbleness in responding to private sector initiatives.”
Pinder says he and his colleagues at the ministry have “hit the ground running”, with the launch of the seventh SMART Fund model and an energetic approach to international business development, including promotional visits to Europe and Latin America in conjunction with the BFSB.
To some extent the government is building on efforts initiated during Christie’s previous term in office between 2002 and 2007, which prioritised the ongoing modernisation of the country’s financial services legislation to bring it into line with industry requirements and international standards.
Pinder is keen to see the financial industry extend into new sectors. “We are constantly trying to anticipate global changes such as the evolution of regulatory standards and set our own course rather than being reactive,” he says. “Our goal is to maintain a business-friendly environment that is attractive to young business owners and executives wherever they may be in the world, and who are looking for new jurisdictions in which they are comfortable locating their businesses.
“For example, we are seeing vigorous growth right now among investment managers and advisors. We can offer them one of the highest standards of living in the world, an extremely agreeable climate, political stability, democracy, a business-friendly environment, and a sophisticated financial services sector that includes talented and highly-skilled Bahamian professionals.”
The Bahamas is comfortable responding to new global standards for transparency and tax compliance, Pinder maintains: “We are committed to international best practices, and have been a front-runner since the early 2000s. We now have a network of almost 30 signed TIEAs.
“The country prides itself on being recognised as internationally compliant, while still acknowledging the confidentiality of our clients. Of course, there are more than just tax reasons for doing business in The Bahamas – not least our business-friendly environment. That's why we say we are open for business, that's why we include trade and industrial development in the same portfolio as financial services. We are working hand-in-hand to develop the two areas together.”
Today The Bahamas is dealing with a fresh wave of global regulatory change, including the implementation of the European Union’s Alternative Investment Fund Managers Directive and the US Foreign Account Tax Compliance Act. But Pinder says: “I have been an international tax lawyer in the financial services arena for the past 12 years, advising professionals and financial institutions at home and abroad on international tax planning and commercial transactions. What is happening now is nothing new for the industry. There has been a constant stream of change for the past 10 or 15 years.”
One of the most striking aspects of The Bahamas’ wealth management industry is the trend among wealthy clients to set up home in the jurisdiction. That began more than half a century ago with the development of Lyford Cay on New Providence Island, where one of the early residents was Sir John Templeton.
“We continue to see wealthy individuals relocating to The Bahamas by purchasing either developed or undeveloped real estate as a primary residence, often including a home office for the management of their own affairs,” says John Delaney, senior partner of Bahamas law firm Delaney Partners. “In a few instances, these people are also relocating their business activities to The Bahamas – not necessarily in huge numbers, but it is happening.
“The Bahamas offers a first-rate financial and technological infrastructure, alongside highly appealing homes and communities in a very attractive environment. The financial services infrastructure includes a regulatory and legislative regime allowing people to carry on proprietary or other business as needed. We are very close to the US, which means the amenities of New York, Atlanta or Miami are just a short flight away. And we have a fiscal system that relies on consumption-based and other indirect taxes rather than direct taxation.”
As attorney-general in the previous government, Delaney was actively involved in the updating of the country’s regulatory and legislative framework for the financial services industry, as well as developing tax information agreements. He argues that The Bahamas’ financial industry is ready to deal with the impact of FATCA, having already complied with the US Qualified Intermediary initiative for more than a decade, including agreements between individual firms and the IRS, although the scope of the new legislation is broader and will bring into the compliance net institutions that were not concerned by QI.
Delaney’s colleague Samantha Knowles-Pratt says the introduction of a new Securities Industry Act in December 2011, partly in response to recommendations stemming from an International Monetary Fund review, has provided the financial services industry with very sophisticated and up-to-date securities legislation.
“It gives the regulator, who has oversight over entities engaged in securities-related business such as fund administrators, greater enforcement powers than before, and the mechanisms for exchange of information with both domestic and overseas authorities,” she says.
“In addition to the Investment Funds Act for the regulation of funds, the SMART Fund regime allows promoters and clients to tailor a fund model and its reporting requirements to their needs. It is submitted to the regulator, and if approved it is available to anyone in the industry. For example, there is a SMART Fund model designed for the private wealth management area that is used especially by our Central and South American clients. Like all SMART Funds, it is a licensed, regulated entity.”
Several of the SMART Fund models, as the full name of the regime indicates, can be used to test investment strategies. Says Knowles-Pratt: “If it proves successful, you can convert it into a fund with no limitation on the number of investors or the amount of money required to be invested.”
According to Oscar Johnson, managing partner of law firm Higgs & Johnson, the Executive Entities Act represents an important addition to the arsenal of the wealth management industry. “The act provides a mechanism by which persons can use an executive entity to carry out their business activities using a limited liability company or foundation,” he says. “The structure is designed to encapsulate powers within existing wealth management and estate planning structures in the form of a legal entity.
“It can act in various capacities, as a protector, as a governance structure or as an ordinary shareholder. Its benefits include limited liability and unlimited duration, as well as its ability to exist in a standalone capacity and to be tailored to perform specific functions. It is a very useful structure that can be used instead of a traditional trust or limited liability vehicle.”
Johnson says Latin America in general, and Brazil in particular, represent increasingly important markets for The Bahamas, reflecting not only the region’s vibrant economic growth but recognition of the island nation’s readiness to comply with global standards.
“The reviews carried out by international organisations as well as the feedback that we receive indicate that onshore jurisdictions are appreciative of our efforts,” he says. “They know we provide compliant products and services, a robust and effective regulatory environment, and a level of transparency and co-operation that meets their requirements.”
Christian Coquoz, senior vice-president at Lombard Odier Darier Hentsch Private Bank & Trust in Nassau, says changes in taxation around the world stemming in large part from the financial crisis have prompted a growing willingness on the part of individuals to consider relocation. “When people's tax burdens increase significantly, they look for alternatives, and The Bahamas offers a different approach to taxation,” he says.
“We are seeing more and more queries from people wishing to relocate in a completely transparent way, paying their exit tax if necessary in their country of domicile. They are looking to a country like The Bahamas where we have no income tax, inheritance tax or capital gains tax. Revenue is based on consumption and is primarily based on import duties, most notably on luxury goods.”
Coquoz adds: “What makes The Bahamas particularly interesting is its location in the western hemisphere, close to both North and South America, and a friendly environment for incomers to move to, with agreeable weather and an attractive physical environment. It’s a dream for so many people to live on an island in or around the Caribbean, especially with a first-world infrastructure to go with it.”
Ivan Hooper, chief executive officer at Winterbotham Trust, says wealthy individuals and business owners would not choose The Bahamas unless it had the legal and financial infrastructure they need. “Financial service providers can offer their client base a wide spectrum of tools such as SMART Funds, the Bahamas Executive Entity, foundations and trusts,” he says.
“Other jurisdictions may offer some of those, too, but the Bahamas government has been very proactive in addressing the needs of the marketplace and providing practitioners with the right tools, especially for succession planning and the transfer of wealth through the generations. That makes it attractive for service providers to move here too. We are keen to see more independent trust companies and fund administrators.”
Winterbotham Trust services the largest number of funds of any Bahamian administrator, mostly SMART Funds. “Since the legislation was put in place in 2003, we have marketed the concept strongly, particularly in Latin America and especially Brazil,” Hooper says. “We have also set up funds for family offices throughout Latin America, to consolidate investments for example. The reason they choose a SMART fund in particular is because it is licensed and regulated.”
Brian Jones, president of the Bahamas Investments and Securities Business Association, also sees Latin America, especially Brazil and Mexico, as the main focus for private label funds. He says: “In this low interest rate environment, clients are seeking geographical diversification, as well as higher yields, leading a lot of professional and high net worth investors including family offices to complement traditional asset classes with alternative investments.
“Accessing hedge or private equity funds may require specialised investment structures. The Bahamas has carved out a niche in private placement funds for small numbers of sophisticated investors. The suite of seven SMART Fund models provides a maximum of flexibility with regard to the structuring of alternative fund products or as vehicles for investors themselves.”
He believes that in a global environment where tax compliance is becoming the norm, the jurisdiction is poised to win business from jurisdictions that are reluctant to embrace today’s transparency standards. “The Bahamas is trying to establish a reputation for compliance and transparency, and we can attract firms that are happy to play by the rules.” Jones says.
“Reputation is everything today, so you may see some institutions leaving jurisdictions that have not committed to compliance for others that have already met the international standards or are on the path to do so. All the players in The Bahamas are committed to the model laid down by the jurisdiction to accept only transparent cross-border business.”
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