In the effort to bring The Bahamas’ financial services sector into compliance with international standards and practices, a number of the above pieces of legislation were amended in 2000 and 2001. New laws included the Financial Transactions Reporting Act 2000, the Financial Intelligence unit Act 2000 and the Financial and Corporate Service Providers Act 2000.
The Financial Transactions Reporting Act set a deadline of mid-2002 for the identification of the owners of all accounts established prior to January 1, 2001. One of the steps taken by the new government elected in 2002 was to extend the deadline to December 31, 2002. “International and domestic financial services firms have committed tremendous effort and resources to this exercise,” said the BFSB’s Wendy Warren. “They indicated to government that whilst they were able to substantially complete the exercise, they were unable to meet the 30 June deadline.”
The Financial Intelligence Unit Act 2000 provided for the establishment of a Financial Intelligence Unit (FIU) in the Bahamas, its function being to receive, analyze, obtain and disseminate information relating to the proceeds of offenses; all disclosures of information required to be made under the Proceeds of Crime Act 2000 must be made to the FIU.
The Financial and Corporate Service Providers Act 2000, sought to have all financial services providers (attorneys, accountants, management companies, brokers, insurance companies) adhere to know-your-customer rules in a manner similar to the Banks and Trust companies. Above all, every participant in the financial services industry in The Bahamas has undergone some type of training to become familiar with the new requirements of the legislation.
In July, 2004, the Bahamas Financial Services Board announced that new legislation had been passed, designed to increase the jurisdiction’s international competitiveness, included the Foundations Bill and the Segregated Accounts Companies Bill, plus amendments to the International Business Company Act, the Perpetuities Act and the Trustee Act.
The BFSB revealed that legislative priorities lined up by the government for the future include amendments to the Financial and Corporate Services Act, a new Domestic and External Insurance Act, new laws facilitating the use of Private Trust Companies and a statute to establish the Bahamas as an International Arbitration Center.
Bahamian Trust Law
Bahamian trust law is based on English common law, and the Bahamian Trustee Act 1893. Later legislation includes The Trust (Choice of Governing Law) Act 1989, the Fraudulent Dispositions Act 1991 and the Trustee Act 1998, which repeals the Trustee Act 1983 and the Variation of Trusts Act 1983. The Purpose Trust Act of 2004 introduced purpose trusts.
The Trust (Choice of Governing Law) Act 1989 gives protection to Bahamian trusts and their settlers in civil law countries against forced inheritance claims. The Act makes Bahamian law the proper law of a trust if the deed so declares, and makes the trust immune to foreign judgments.
The Fraudulent Dispositions Act 1991 establishes a 2-year limitation period for creditors’ attacks on asset protection trusts; the attacker has to prove fraud against the settler.
The Trustee Act 1998 is an important piece of legislation which updates Bahamian trust law on many fronts. Some of the more important provisions are as follows:
* A settler can retain a wide range of powers without falling foul of ’sham’ trust legislation;
* Trustees are given wide statutory investment and management powers unless the trust deed negates them;
* Trustees’ indemnities are recited in the statute;
* A wide range of trust purposes are encompassed, including accumulation trusts;
* The role of Protector is recognised;
* There are extensive disclosure provisions;
* Exemption from all taxes and from stamp duty (an initial $50 stamp is required on all trust deeds);
* Exemption from registration except where an interest in Bahamian property is to be protected;
* Exemption from exchange control regulations for non-resident beneficiaries.
The Act was to have included legislation covering purpose trusts; in fact a separate bill for purpose trusts was passed later in 2004.
The Purpose Trust Bill, 2004, added another dimension to the jurisdiction’s trust business. Trust benefits are for a purpose rather than persons or entities, and there is no one to whom beneficial entitlement in the trust property is vested.
“There are many estate planning exercises and other commercial transactions that can legitimately and properly take advantage of this kind of structure,” said Alfred Sears, Attorney General.
These uses include:
* The holding of shares of a private company, which is expressly authorised by the Act. In this structure, the settlor and members of his family and his advisors may be appointed directors of the private trust company and thereby assume some responsibility for the management of the trust. This is often useful when the assets of the trust are of an unusual nature.
* A trust which has both philanthropic and charitable purposes.
* Asset purchase or financing transactions to provide security for an entity which finances the purchase or to keep the asset and corresponding liability from appearing on the purchaser’s balance sheet.
* Separating voting from economic control.
* Temporary avoidance of controlled foreign corporation rules.
* Debt Subordination to provide ranking of priority among creditors.
* Discretionary trusts to perpetuate a particular corporate governance philiosphy.
Much trust work in the Bahamas is handled by Public or Restricted Trust Administration companies, which are often affiliated to or owned by banks. Trust Administrators are licensed by the Central Bank under the Banks and Trust Companies Regulation Act 1965. The application process is lengthy and thorough, particularly for Public Trust Administrators. A foreign company can apply for a license as a branch, or with a subsidiary, which is necessarily a Bahamian-incorporated company (not an International Business Company). The license when issued specifies that a Trust Administrator is either resident (subject to exchange controls) or non-resident (exempt from exchange controls).
The minimum capital requirement for Trust Administrators is $1m for Public and $100,000 for Restricted Administrators (the clients of a Restricted Administrator are specified in the license and cannot be changed without approval). Capital is then expected to keep pace with the growth of the business, not falling below 5% of total assets. Public Trust Administrators must also post a fidelity bond of $1m.
Bahamian Banking Law
The Bahamian banking is regulated by the Central Bank of the Bahamas under the Banks and Trust Companies Regulation Act 1965. Banking licenses are restricted or unrestricted (public); restricted licenses permit banking services to be provided only to a named list of clients which cannot be changed without approval. Restricted licenses are suited to group treasury operations.
The Central Bank prefers that applications for unrestricted banking licenses should come from reputable financial institutions; if this is not the case then the Central Bank requires ownership to be spread among five or more independent shareholders, and will examine antecedents and net worth very carefully.
The application process demands extensive information, and includes an interview at the Central Bank, a 5-year business plan including pro-forma financial statements, and a description of proposed operational control structures. Once licensed, full financial statements must be filed annually. See Offshore Legal and Tax Regimes for details of registration fees payable.
The minimum paid-up capital required for a public bank is $2m, and capital must keep pace with growth of the business, at a minimum 5% of assets, or 8% of risk assets. No more than 15% of total assets may be loaned to or invested in any one business or group. Minimum paid-up capital for a restricted-license bank is $100,000.
A foreign bank can operate either as a branch or through a subsidiary. The licensing process is the same in both cases. A subsidiary will have to be a Companies Act company rather than an International Business Company (they are not permitted to engage in banking services), which is not ideal. It is quite normal for the Bahamian operations of foreign banks to be managed by local professional firms, thus avoiding local business licensing requirements (a banking license is still required).
Banking licenses specify the exchange control status of the bank concerned: a resident license means that the bank can operate freely in Bahamian dollars, but will need to pay a premium to buy other currencies; a non-resident license means that the bank is free to operate in foreign currencies, but requires permission for Bahamian dollar transactions. As part of the Bahamas’ response to its inclusion in June 2000 on the FATF list of 15 jurisdictions having inadequate defenses against money laundering, the Bahamas amended its Bank and Trust Company Regulations to require all licensees to be physically present in the Bahamas. Companies are to maintain their banking records locally, and existing offshore companies will be required to conform to these regulations within 3 years.
The Central Bank of The Bahamas Act 2000, which is now in force, provides for improved supervision, including an appropriate level of on-site inspection of banks, full cooperation on cross-border supervision of banks, and enhanced cooperation between the Central Bank and overseas regulatory authorities. The new Act also provides extensive information gathering powers for the Central Bank.
Similarly, The Banks and Trust Companies Regulation Act 2000 enhances the role of the Central Bank Governor; expands the licensing criteria for banks and trust companies; provides enhanced supervisory powers for the Inspector of Banks and Trust Companies; provides for cross-border supervision by foreign regulators; and increases the number of expressed exceptions to the statutory duty of bank confidentiality.
Bahamian Insurance Law
Bahamian captive insurers are regulated by Office of the Registrar of Insurance, part of the Finance Ministry, under the External Insurance Act 1983. Licenses are issued by the Finance Minister on the Registrar’s recommendation after a thorough application process; the Registrar will want to meet applicants and needs to know the identity and to establish the bona fides and substance of the key parties involved.
Insurance companies need to use Companies Act incorporation since the International Business Company is not permitted to engage in insurance activity.
The External Insurance Act lays down minimum net worth figures, but the Registrar will normally expect to see at least $250,000 provided in cash for an external insurer. There is no legal requirement for these funds to be held locally, but the Registrar may in some cases insist on it. A net premium to capital and surplus ratio of not wider than 3:1 is expected. To qualify for a license under the External Insurance Act, an insurer is normally expected to take in at least $500,000 of premiums annually; smaller companies will be licensed under the domestic Insurance Act, qualified as non-resident.
The Government knows that Bahamian insurance law needs to be updated, and legislation can be expected soon. See Offshore Legal and Tax Regimes for details of registration and license fees payable.
Bahamian Mutual Fund Law
The Bahamas launched a new legislative platform for investment funds in December, 2003, which the BFSB (Bahamas Financial Services Board) is hoping will create an attractive, risk-based regime based on four classes of funds.
The legislation, known as the Investment Funds Act 2003 (”IFA”), establishes a regulatory regime for Professional, SMART, Standard and Recognized Foreign Funds. The IFA also maintains the existence of a dual licensing regime whereby the Securities Commission of The Bahamas (SCB) is authorized to license all classes of funds and Unrestricted Fund Administrators (UFA) are authorized to license Professional & SMART funds. UFAs are subject to continuous oversight by the SCB for compliance with prescribed guidelines and other prudential norms.
The new investment funds environment in The Bahamas is based on the clear introduction of categories of investors rather than the traditional reference to the value of investment. In essence, The Bahamas has created a risk-based fund regime.
The Professional Fund, which continues to be the dominant fund class in the Bahamas, is a separate class designed for sophisticated investors, with prescribed disclosure and other requirements typical of the global alternative investment fund market. While the SCB may license this class of fund at the client’s behest, it is more likely that once the UFA is satisfied that the fund meets all due diligence and regulatory standards, the Fund will be licensed by the UFA. The launch of this type of fund can take place in a two to eight week period depending on the ability of the UFA to obtain an acceptable degree of comfort over the key fund participants, the offering document and the constitutive documents.
The Bahamas SMART funds concept is the most innovative development in the country’s funds industry. It recognizes that many funds do not fit a predefined classification of retail or professional third party funds. A careful analysis of this prompted the launch of the SMART funds, or a Special Mandate Alternate Regulatory Test Fund.
SMART funds provide for the development of regulatory oversight tailored to the client structure. As the needs of clients vary and evolve, intermediaries and clients have the ability to develop and submit to the Securities Commission, proposals to establish entities with a specific mandate.
After consideration of risk - including the degree of sophistication of investors, the number of participants and the provision of service by a recognized licensed service provider - the Securities Commission may declare the mandate suitable for the alternative regulatory regime.
Typical concessions might include the use of a reduced content offering memorandum, the ability of the product to be licensed directly by a fund administrator in The Bahamas and the waiver of the standard audit requirement. These concessions, however, do not waive the requirement that clients wishing to use SMART funds are subject to due diligence reviews and are regulated by the Securities Commission.
Four SMART fund templates have received SCB approval for the following purposes:
Discretionary Managed Clients: to provide an investment vehicle for client funds managed under a discretionary management service. It includes the provision of term sheets and waiving of the audit requirement, where investors executed a discretionary mandate of recognized financial institutions and, the fund is established for administrative rather than asset gathering purposes. With these Discretionary Investment Management Funds, the investor benefits from a lower expense ratio due to lower costs for structuring and the elimination of annual management and audit fees relating purely to the fund structure.
Incubator Fund: to provide an incubator structure to generate performance history prior to upgrading to a third party fund. Recognizing the unique requirements of funds established to create a track record or to allow institutional investors to test a particular fund strategy, investment managers can utilize the Incubator Fund to receive seed capital from a limited number of institutional investors on the basis of a term sheet and an investor approved waiver of a statutory audit thereby providing a streamlined, cost efficient fund structure.
Private Client Fund: to provide a credible, licensed holding vehicle for a small group of persons, perhaps under a Family Office structure. Families and small groups of individuals quite often seek to pool funds for investment and hire (with the right to remove) the services of independent investment managers. These Private Client Fund structures do not have the same risk profile as a third party fund. The Bahamas is an attractive place to establish these funds since the SCB allows for the investors to launch them with a term sheet and to waive the statutory audit.
Transitional Exempt Fund: a special class established to permit funds previously exempt due to the existence of no more than 15 investors with the power to remove the promoter, to be brought within the regulatory scope of the SCB.
The Recognized Foreign Fund is an investment fund which is not licensed in The Bahamas, whose equity interests are listed on a prescribed exchange or an investment fund licensed or registered in a prescribed jurisdiction and not suspended from operation. This class of fund facilitates funds domiciled in other reputable jurisdictions to be administered or managed from The Bahamas.
The Standard Fund is a Bahamian-based investment fund that does not meet the definition of a Professional, SMART or Recognized Foreign fund. While the Standard fund follows similar disclosure rules of the Professional fund, it anticipates an offering to the general public or a client driven request and consequently may be licensed by the SCB only.
While administrators of a Bahamas-based fund must have a physical presence in the jurisdiction, this requirement does not encumber the contracting of certain tasks to institutions outside of The Bahamas as agreed between the fund, administrator and other third parties.
Investment Management Companies established outside The Bahamas that are appointed as investment managers to a Bahamian fund are not required to be licensed or registered in The Bahamas. Additionally, in the event the promoter wishes to appoint a Bahamian company to act as investment manager to a Bahamian fund, such company is not required to be registered or licensed by the Securities Commission of The Bahamas in cases where its activities are limited to providing investment management services to Bahamas regulated investment funds.
Holders of unrestricted licenses must have minimum capital of $500,000 (or $150,000 plus liability insurance coverage of $350,000), must have a physical office in the Bahamas, and at least two resident agents.
Licensed Administrators are subject to numerous regulations, and need to apply ‘know your customer’ rules to their clients. They are audited annually by approved auditors and must submit audited accounts within 4 months of the end of a year (the same rule applies to the mutual funds themselves).
Bahamian mutual funds have investment freedom, except as regards Bahamian real estate. Most funds choose International Business Company, Limited Duration Company, Exempted Limited Partnership or Unit Trust form, all of which have taxation and exchange control advantages - see Forms of Company and Offshore Legal and Tax Regimes. Funds of funds and umbrella funds are permitted. Units can be offered in bearer form, although many institutions won’t deal in them.
The Commission has sweeping powers to control mutual funds and mutual fund administrators, if it chooses to use them. The Act provides the Commission with ‘administrative sanctioning’ powers allowing it to deal swiftly and effectively with breaches of the Act by both regulated and unregulated funds.
