BAHAMAS: OFFSHORE BUSINESS SECTORS

Although the Bahamas was one of the first offshore jurisdictions to offer trust services, its growth as a significant offshore financial centre has been relatively recent, with most of the key legislative initiatives dating from the last twenty years. The Bahamas' 1989 International Business Company legislation was updated in 1994 and has been very successful, although not on the same scale as the British Virgin Islands. There is a substantial banking sector, second only to the Cayman Islands among offshore jurisdictions. The Government has particularly targeted mutual funds and trust business, and in 1999 set legislation in place covering stock and securities exchanges; a stock exchange was opened in 2000.

The captive insurance sector is small, although it is hoped that recent legislative improvements will reanimate it.

The Bahamian Government has paid great attention to financial regulation, and especially in response to attacks from the OECD and FATF in 2000 has created a world-standard regulatory structure to avoid money-laundering and other criminal activity. The islands also offer a shipping registry.

Following the increased international attention paid to illicit uses of offshore bank accounts, the emphasis in the Bahamas is now shifting to investment management, which generates significant fees for private banks. The new model of private banking includes a variety of structured banking products, which facilitates access to investment products hitherto unavailable to the majority of private banking clients, says the Bahamas Financial Services Board.

In October, 2005, it was announced that the Bahamas had been removed from the Financial Action Task Force’s monitoring list of countries with weak anti-money laundering or terrorist financing laws.

Attorney General, Alfred Sears said that the process of complying with FATF demands had been lengthy and costly, but had led to mainly positive changes for the islands' financial industry.

Minister Sears said the years of working to remove the Bahamas from the FATF’s list has led to the build up of a remarkable level of expertise, and that the Bahamas' Director of Public Prosecutions has been recognized by the FATF as “a specialist”, assisting with the evaluation of other countries.

Speaking from New York City, Dr Gilbert NMO Morris, who has been a long-time commentator on the Bahamas' financial regulatory systems, suggested that there was nothing significant in the FATF’s decision to cease its monitoring of the Bahamas. He said: “I would have found it more interesting if The Bahamas - given its long history in this industry – had ceased its monitoring of the FATF”.

In January, 2006, the Bahamas was rated as the top international financial centre in the western hemisphere by the banking industry magazine, The Banker. The magazine said that it awarded the accolade to The Bahamas on the basis of its attractive location, favourable tax environment, political stability, legal structure and regulatory framework.

This section of the lowtax.net site describes the most important types of offshore business activity carried out from the Bahamas.

Bahamas Financial Holding and Investment

More than 80,000 International Business Companies have been formed in the Bahamas, many of them as holding companies for investment or trading activity in other countries. Since there are no corporation or income taxes in the Bahamas, it is a very effective financial base, although like all low- or no-tax financial centres, it is vulnerable to 'Controlled Foreign Corporation' legislation if the Bahamian company is majority-owned by a mother company in a high-tax country.

The very rapid recent growth in IBC incorporations has been fed by political instability in Latin and Central America, and more recently the handover of Hong Kong to mainland China. Many of these newer IBCs have been formed as asset protection vehicles, sometimes in association with trusts, either to hold shares or other types of asset. The Bahamas are one of the most popular jurisdictions for these markets, because of the flexible IBC legislation, good secrecy, good reputation, and high-quality professional services.

Following pressure from the OECD in 2000, Bahamas passed the the International Businesses Companies Act 2001 under which IBCs are required to submit their identities, addresses and names of directors and owners to the Registrar General's Department.

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Bahamas Investment Fund Management

The securities industry is one of the fastest developing areas of the country's financial service industry, including more than 700 funds representing in excess of $130 billion in assets under administration. 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 recognised 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.

As each specific mandate is approved, the new established template of SMART fund setting out the regulatory requirements for the specific mandate will be made available to the industry by the Securities Commission. The wider community is then able to make use of the approved model for any number of clients.

Until 2003, the mutual fund sector was regulated under the Mutual Funds Act 1995 and the Securities Board Act 1995, which established a Securities Board operating on self-regulatory principles. In 1999 the Securities Board converted into a Securities Commission under the Securities Industry Act 1999, which laid the foundations for the stock exchange opened in 2000. The Mutual Funds Act divided investment funds into a number of classes:

Licenses were normally obtained from a Mutual Fund Administrator, who was in turn licensed by the Securities Board. See Law of Offshore for further details of the regulatory regime for investment funds.

See Offshore Legal and Tax Regimes for further details of taxation and fees payable.

In 2004 the Bahamas passed a key piece of legislation known as the Segregated Accounts Companies Bill which it was expected to enhance the effectiveness of the Investment Funds Act. (see Forms of Company)

In January, 2005, the the Securities Commission of The Bahamas (SCB) published guidelines on the fast tracking of investment fund licence applications targeting accredited investors. The fast track process, which provides for the approval of this category of investment funds within 72 hours of receipt, eliminates the delay in the processing of applications caused by the extensive due diligence exercise undertaken in regular applications.

While due diligence will still be undertaken, this will now take place following the granting of the licence as is the practice in several competing jurisdictions, the SCB revealed. This is because the investment funds in question are targeting investors who are expected to be knowledgeable of the industry and capable of conducting their own due diligence, thereby requiring a reduced level of scrutiny by the regulator.

The guidelines are comprehensive and cover the various requirements for licensing of these investment funds and the application process. Specific guidance is provided regarding the nature and quality of the documents required, as well as what due diligence information will be necessary on parties related to the investment fund.

The SCB stated that the guidelines will prove an essential element in the successful and timely consideration of applications.

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Bahamas Banking

Banks in the Bahamas must be licensed under the Banks and Trust Companies Act 1965. The Central Bank of the Bahamas applies stiff criteria to incoming banks in order to exclude money laundering and criminal activity. Banks cannot use the Bahamian International Business Company form, and operate either as branches (usually representative offices) or subsidiaries, necessitating the formation of a Bahamian company under the Companies Act (see Forms of Company). The minimum capital requirement for a full, public banking licence is $2m; there are various categories of restricted license with lower requirements. For further details of licensing requirements and procedures and fees payable see Law of Offshore and Offshore Legal and Tax Regimes.

New legislation enacted in 2000 in response to pressure from the OECD increased the degree of Central Bank supervision over the banking and trust sector.

The Bahamas is one of the world's top ten international banking centers, with 300 licensed banks from more than 30 countries, and a total asset base nearing $1 trillion. Capital ratios average over 10%. The country's improved legislation and regulatory structure, its highly-skilled workforce, and its stable government have attracted some of the most prestigious financial institutions from around the globe. About half of licensed banks are incorporated locally, and more than half offer trust services alongside banking activity.

Evidently, private banking is a major component of the Bahamian banking industry: asset protection rather than tax avoidance as such is the driving force, so that the stability of the Bahamas alongside stringent banking secrecy and its sophisticated investment environment are very attractive to wealthy individuals, particularly those from the US where the Bahamas have a very good reputation.

In 2004 the Central Bank of the Bahamas announced the official launch of the county’s new interbank electronic settlement system, designed to modernise the jurisdiction’s payment system and reduce clearing times. According to Central Bank Governor Julian Francis, the system was implemented at a cost of $2 million to the bank and will facilitate the transfer of payments in excess of $10,000 between banks.

Former Minister of Finance, Senator James Smith, explained that the launch of BIBS represents the completion of the first phase of the larger Payment System Modernisation Initiative (PMSI) which commenced in 1999. Its objectives are to bring the country’s payment system in line with international practices, mitigate risks, increase efficiency and encourage the development and growth of new financial products.

"Consistent with international best practices, funds transferred through BISS are immediate, final and irrevocable, bringing the system in line with generally accepted principles for safe and efficient national payment systems," observed Senator Smith. Phase 2 of the PMSI programme worked towards the creation of an Automated Clearing House system, and was scheduled to come online in the first quarter of 2005.

In June 2004 Bahamian Attorney General Alfred Sears told an IMF conference that the country’s Central Bank is taking a tough stance on the licensing of banks and trusts, in order to bring its shell bank rules into line with international standards.  Mr Sears observed: "One conclusion that can be clearly drawn from this march towards increased supervision and an increasingly strict regulatory environment is the attrition rate in the number of banks and trust companies registered in The Bahamas, a decline that is largely explained by the attrition of the managed banks."

He went on to explain that this policy has been “aggressively” pursued by the Central Bank, leading to a decline in the total number of banks and trust management companies registered in the Bahamas from 415 in 1999 to 284 in 2003, with the number of licenses revoked growing from 14 in 1999 to 29 in 2003. Sears also noted that this was achieved without a significant impact on the numbers of people employed in the country’s financial services sector.

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Bahamas Trust Management

Trust Management has been a major activity in the Bahamas for 50 years or more. Originally the trust was used primarily by wealthy individuals from the major common law countries, but it is now accepted as a major technique of asset protection in all parts of the world. In the last 10 years the Bahamas have extended and adapted their trust laws, most recently with a new Trustee Act 1998, to accommodate this wider market, which is not necessarily interested so much just in tax avoidance, but also in the efficient management of wealth in a more general sense. See Law of Offshore for a fuller treatment of trust law in the Bahamas.

There is a large and sophisticated community of professional advisers on trust matters in the Bahamas. Individuals can provide trust services without registration, but companies offering trust services must be licensed under the Banks and Trust Companies Act 1965. Foreign or Bahamian companies may obtain licenses. These are issued by the Central Bank of the Bahamas, following a stringent application procedure.

A licensed trust company may be 'public' or 'restricted'. 'Restricted' companies require less capital, but are more strictly controlled. See Law of Offshore and Offshore Legal and Tax Regimes for further details of the licensing regime for trusts, and fees payable.

Bahamian trusts (other than those holding Bahamian property) do not have to be registered, and the 1998 Act disapplies Exchange Control Regulations to non-resident settlors, donors, beneficiaries and trustees - therefore it is no longer necessary for trusts to be registered with the Central Bank as non-resident. This applies to existing trusts as well as to new ones.

The 1998 Act provides for the appointment of a 'protector of trust', effectively a supervisor of the trustee(s), and also managing and custodian trustees.

Bahamian Attorney-General Alfred Sears called in 2004 for the jurisdiction to catch up with many of its peers by enacting the Purpose Trust Bill. Addressing the House of Assembly, Mr Sears explained that these types of purpose trusts have become an increasingly popular way to hold shares in a special purpose vehicle often utilised in off-balance sheet transactions and securitisations.

"This type of trust can be utilised as an appropriate vehicle through which to promote the interests of an association or a club or a similar unincorporated body," stated the Attorney General. He added that around twenty jurisdictions have similar legislation, including Bermuda, Barbados and the British Virgin Islands. Legislation was indeed passed later in the year.

In December, 2005, Bahamian Minister of Financial Services and Investments, Allyson Maynard-Gibson announced that the government is in the final stages of developing additional financial services legislation to launch the country’s private trust companies product.

According to Minister Maynard-Gibson, the Government has been “meticulous” in its approach to defining the new legislation to ensure that it will stand up to international scrutiny of the highest order.

“It’s very important to roll out, when we roll it out, in a way that is effective and so the time has been taken to ensure that whatever product we launch does not open the door for any re-listing or any questions about how we do business in The Bahamas,” stated the Minister.

“The Government, together with the private sector and the regulators, has been very careful and meticulous about our approach to this and I am (very) happy that we took the time necessary to do it properly,” she added.

Comprehensive new Private Trust Companies legislation passed both houses of parliament in the Bahamas in December 2006. Under the legislation, a Bahamian PTC, like other structures such as foundations, does not require regulatory approval. The PTC need only arrange its affairs with a regulated Bahamian service provider or Registered Representative.

The legislation which allows for the formation of Private Trust Companies (PTCs) is the Banks and Trust Companies Regulation (Amendment) Act, 2006, and the Banks and Trust Companies (Private Trust Companies) Regulations, 2007.

Under the legislation this class of trust is defined by reference to the Designated Person(s). The Designated Person(s) is an individual(s) who is identified at the establishment of the PTC and with whom all other settlors of trusts, for whom the PTC acts as trustee, must be related. With the requirement that the Designated Persons must be related, and that all other settlors of trusts, for whom the PTC acts as trustee, must be related, the PTC can act as Trustee for an unlimited number of trusts and can benefit anyone (subject to due diligence requirements) from the assets of the trusts.

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Bahamas Insurance

See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

The insurance sector in the Bahamas is regulated under the Insurance Act 1969 as amended and the External Insurance Act 1983. The Government is targetting insurance as a sector for expansion, and more modern legislation is in the pipeline.

The domestic insurance sector is very active, with more than 50 licensed insurers; but the international (captive) sector, although growing, is not yet very well developed compared with the leading offshore captive jurisdictions such as Bermuda.

Insurance companies cannot use the Bahamian International Business Company form, necessitating the formation of a Bahamian company under the Companies Act (see Forms of Company), or the use of Foreign Company status, which has the same effect.

Insurance licenses are issued by the Minister of Finance, following recommendations by the Registrar of Insurance Companies. There are statutory minimum capitalisation and solvency ratios, and initial capitalisation is normally in cash. See Law of Offshore and Offshore Legal and Tax Regimes for further details of the licensing regime, minimum capital requirements and fee levels.

In 2004 lawmakers in the Bahamas passed a key piece of legislation known as the Segregated Accounts Companies Bill which will be useful in the insurance sector.

Commenting on the passing of the bill, Financial Services and Investments Minister, Allyson Maynard Gibson, explained that: "It provides in principle, the same basic statutory regimes as other jurisdictions with such legislation. It also permits a company that is registered as a Segregated Account Company to segregate its assets into separate accounts.”

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Bahamas Ship Management and Maritime Operations

See Offshore Business Review – Shipping for a more general treatment of offshore shipping registries.

The Bahamas established themselves as a shipping registry with the Merchant Shipping Act 1976, and due to a combination of geographical, financial and operational factors have been very successful, building the third largest world fleet. More than 1,500 vessels are registered in the Bahamas, totalling over 25m gross tonnes.

The Bahamas operate a 'flag of convenience' registry, which does not impose minimum wage or nationality standards on its ships. However, the Bahamas registry belongs to the International Maritime Organisation and adheres to its principal safety conventions. The Bahamas Maritime Organisation, headquartered in London, administers the registry, supervises initial and subsequent ship surveys through a world-wide network of authorised inspectors,and ensures adequate training and skill levels among the crews of Bahamian vessels.

Registration fees are as follows:

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