The Bahamas - Part II: The Third Pillar

Introduction: 'The Story So Far . . . '

For the last month lowtax.net has been featuring the story of how the Bahamas emerged from its contretemps with the FATF and other multilateral bodies, finally being removed from the FATF's blacklist in June this year.

The FATF (Financial Action Task Force) had subjected the Bahamas to an extensive independent and transparent review of its anti-money laundering systems, and the jurisdiction itself had responded by passing eleven substantial pieces of new or updated legislation.

" We are pleased to have the good name of The Bahamas restored, " said Wendy Warren, CEO and Executive Director of the Bahamas Financial Services Board, "But we will continue to pay close attention to evolving international standards to ensure continued compliance."

In July the Government introduced amendments to some of its new pieces of legislation after financial services businesses had complained about unnecessary bureaucracy; but both Government and the private sector accept the need to remain fully compliant with the best international standards of money-laundering prevention and regulatory supervision. The amendments were quickly approved by the Bahamas Parliament. During the debate, it was reported that Government is in the process of completing "guidance notes" to facilitate understanding of the new legislation by the securities, banking and insurance industries.

To suggestions that the Bahamas Government had acted too quickly in legislating last year, Minister of Finance Sir William Allen indicated that "…no one in the main stream of the banking system has said that, as far as I am aware. They have been mostly grateful for the speed with which we moved in the circumstances and for our success in achieving the QJ and QI status for The Bahamas".

Minister Allen further commented that the various initiatives by the supranationals had proved to be a mixed blessing, resulting in an increase in employment in the financial services sector. "No operating bank or major institution has signalled to us that they have to reconsider their position in The Bahamas", continued the Minister, while "large international reputable institutions are now seeking to be licensed in The Bahamas".

The amended Financial Transactions Reporting Act defines cash to include travellers' cheques, bearer shares and postal and money orders, and clarifies that the requirement for verification applies to the establishment of a facility with a financial institution or to transactions in cash which exceed the prescribed $10,000.

The Minister noted that the government would not allow members of the public to come under undue scrutiny for legitimate financial transactions.

Other legislative amendments extend provisions relating to international cooperation, as previously included in the Central Bank Act and Banks & Trust Companies Act, to other legislation, but include confidentiality safeguards.

Sir William confirmed during the debate that The Bahamas has not signed on to any OECD initiative. "We have not addressed the OECD issue to date," he said, adding that the Bahamas still had difficulties with the unevenness off the OECD's approach and the concept of harmful tax competition. Sir William welcomed the stance taken by US Treasury Secretary Paul O'Neill against the tax competition elements of the OECD's initiative.

With the return to normality in terms of international relationships, the Bahamas can now concentrate on continuing to develop its financial and commercial offerings to the rest of the world. In Part I of this survey we covered banking and the 'corporate service provider' asset protection business as manifest in the IBC (International Business Company) sector, as well as looking briefly at the stock exchange, and e-commerce services.

In this second part we're going to focus in more closely on the stock exchange and mutual funds; and we're going to look in detail at the developing Freeport, which the Government sees as a keystone of its trade-oriented e-commerce strategy.

The BSIX And The Mutual Fund Industry

When the BISX launched its new listing facility for mutual funds in April, CEO Gerry Ritchie said, "The use of sponsors is central to the development of a successful mutual fund listing facility. Sponsor firms, likely to be from the licensed mutual fund administrators, legal and accountancy professions, will be required to meet BISX eligibility requirements to enable them to act as sponsors to the listing of their mutual fund clients on the Exchange."

Sure enough, in June the first sponsor firm to be approved by the BISX was KPMG Corporate Finance. KPMG is one of the largest firms of chartered accountants in The Bahamas. Previously, Peat, Marwick, Mitchell & Co., the firm first opened in Nassau in 1954 and then expanded to Freeport, Grand Bahama in 1962. Today KPMG Bahamas has 5 partners and a staff of over 70 people. KPMG Corporate Finance Ltd. was established as a separate entity in 1998 and has been involved with a substantial proportion of the Initial Public Offerings made by local companies on the BISX.

According to Alison Treco, Managing Director of KPMG Corporate Finance, "The establishment of the mutual funds listing facility is an important step for BISX in diversifying its services and expanding its revenue streams. It also adds another product to the Bahamas financial services portfolio. By becoming a sponsor, we not only see an opportunity for our own business, but also are pleased to be instrumental in the ongoing development of our financial services industry. KPMG has many years of experience in the financial services industry, particularly as it relates to mutual funds, and we will be offering this listing service to the many Bahamian regulated and overseas regulated mutual funds who may wish to seek more visibility by listing on BISX."

Gerry Ritchie, CEO of BISX stated,"BISX is very pleased to welcome KPMG Corporate Finance as the first Sponsor Member of the Exchange that is authorized to sponsor the listing of mutual funds on BISX. BISX intends to work closely with its Sponsor Members to market the listing facilities of the Exchange, and to market their sponsorship status to mutual fund clients as a means of expanding their overall business. This will help bring more breadth and depth to the service offerings for mutual funds from The Bahamas."

BISX Chief Legal Officer, Keith Davies comments, "The use of sponsors for mutual funds listing on BISX is regarded as advantageous from both a regulatory and commercial standpoint. The relationship allows Sponsor Members to work closely with BISX executive staff in the vetting of applications for listing, and for BISX fees to be set to position BISX and the Bahamian service providers competitively in relation to the cost profiles in the other financial centres, such as the Cayman Islands, Dublin and Luxembourg."

BISX says that the listing rules have a number of distinctive features:

• A close fit with Bahamian mutual funds legislation and regulations;
• Recognition of previously published offering documents as part of the listing disclosure documents, thus avoiding excessive expense to issuers in advisory fees;
• Congruence with generally accepted international listing standards; and
• Recognition of existing regulatory registrations and licenses.

To meet the demands of mutual fund operators and its sponsor-users, BISX has established a user-friendly, fast-track listing service to ensure the highest quality of listing service for all its listing products.

The chairman of BISX, Ian Fair, says that the mutual fund listing facility demonstrates the exchange's ambition to continue in its development: 'BISX will be continuing to extend its facilities in both the domestic and international sectors to ensure that the Exchange is able to contribute fully to the continued emergence of the capital market as a dynamic for growth within our economy.'

In fact, the amount of attention BISX has paid to the new mutual funds listing service demonstrates the extent to which it sees its future in international or even global terms rather than in a domestic or Caribbean context. Although naturally the Exchange can't openly say so, it probably thinks that the Caribbean is too riven by competitive pressures for a local Caribbean stock exchange to be formed successfully; and currency problems are a large part of that. There is very little chance that a Caribbean monetary zone will be formed in the foreseeable future, although it has been extensively discussed at Caricom and other regional gatherings.

The BISX says that its potential involvement in a regional market needs to be viewed in the context of:

• BISX's own relative newness as a formal market operating in the domestic economy (the element of BISX markets that would presumably be part of a regional market);
• the established nature and ambitions of the Bahamas as an international financial centre comparable to other centrers in the Caribbean region; and
• the realities of the continuing presence of exchange controls in the Bahamas.

The BISX sees exchange controls as a major problem in regional terms: 'The major structural impediment to the Bahamas' full-fledged involvement in a regional capital market is the continuing existence of exchange controls. This presents the most obvious barrier to Bahamian companies being readily cross-listed or traded on the other exchanges of the region, or conversely BISX providing such facilities for the securities of companies from the other states in the region.'

From an international as opposed to regional perspective, exchange controls are not an issue. The Bahamas' exchange controls apply only to the Bahamian dollar and to resident companies and individuals. There are no other capital or exchange controls applying to non-residents or to the various forms of offshore entity, which are allowed to import and export funds in all currencies.

The BISX says it is happy with progress, but accepts the limitations of the local market-place:

'BISX is just one year old, and whilst volumes in the domestic market are still low, it is encouraging to see the successful migration of public companies to listing on the regulated BISX market, and a number of new issues coming to market. There is a noticeable and growing awareness amongst participants of the benefits of the formal exchange environment, with the use of the BISX automated trading system setting prices by supply and demand, a greater transparency in trading activities and more and better quality information being made available to investors, as issuers adapt to the disciplines of the market in communicating price-sensitive information to their shareholders and the public under their continuing obligations of listing.

'The biggest constraint on domestic market development is a shortage of investible securities from both the private sector, and the public sector, as a result of the delays in implementing privatizetion plans. Other major challenges are to widen and deepen the shareholder base, and to implement cost-reducing infrastructural developments such as the planned centralized securities depositary and registry.'

It's obvious, therefore, that the BISX needs to put most of its energy into developing international aspects of its business, and the mutual funds listing facility can be seen as just the first step in that direction.

Every self-respecting stock exchange of course needs to have a state-of-the-art website, and the BISX is no exception. A current re-design includes:

• Colour and graphic design highlights to match the BISX corporate image, colour scheme and brand;
• A user-friendly, easy-to-use menu-riven site navigation interface;
• Provision of current in depth corporate data;
• Provision of historical trading and financial data on listed issuers;
• Details and links to BISX members;
• Marketing materials and information on BISX products and services;
• Educational and informational resources for investors; and
• A section devoted to mutual funds listed on BISX.

The Exchange says: 'The goal of this initiative is to provide visitors to the BISX web-siste with useful information that acts as a resource for historical and current market data for all BISX products. As BISX develops new products and services, we plan to continue adding additional features to improve the functionality of our website.'

The Bahamas: Hong Kong Of The Caribbean?

The Bahamas Freeport is a 230-square-mile free trade zone on Grand Bahama Island, established in 1955 by the Government of The Bahamas. The city of Freeport has emerged from a land grant comprising 50,000 acres of swamp and scrub to become a cosmopolitan center, promoting both good business and the good life.

The Grand Bahama Port Authority (GBPA) operates the free trade zone, under special powers conferred by the government under the Hawksbill Creek Agreement, which was recently extended until August 3, 2054. The agreement also increased the land grants to 138,000 acres. The GBPA is the major provider and developer of services in the free trade zone and offers an expanding portfolio of opportunities that includes investment in its own subsidiary companies.

Freeport's strategic location at the gateway to the Americas is a major incentive to industrial development. The city is only a 35-minute plane ride from southern Florida, and its harbour is the closest offshore port to the United States. The free trade zone is well-positioned for global commerce, located at the crossroads of routes between Europe, North and South American trade links, and international shipping transiting through the Panama Canal.

Under the Hawksbill Creek Agreement, businesses in the free trade zone are exempted from many taxes, including:

• Corporate and personal income taxes;
• Personal property taxes or rates for major businesses;
• Import taxes on building, manufactured, processed, assembled or warehoused goods;
• Taxes on capital gains or capital appreciation charges;
• Export tax on anything manufactured, built, produced, harvested, processed, assembled, refined, repaired or serviced by licensees of the Port for export outside or within the Bahamas;
• Real property taxes or rates applying to any land, building or structure for manufacturing.

In effect, the Hawksbill Creek Agreement guarantees residents and licensees in the Port Area freedom from taxes until 2015 and freedom from excise taxes, stamp duties and most customs duties until 2054.

The Freeport Harbour

Freeport Harbour, the achievement of a partnership between GBPA and Hutchison Whampoa Ltd, is accessible to even the largest vessels. The entrance, through an 1,800-foot-long straight channel, is 500 feet wide and 47 feet deep, with a turning basin depth of 44 feet. Already a port for six major cruise lines and welcoming more than half a million tourists annually, the harbour is currently undergoing expansion that will make it the finest deep-water container trans-shipment port in the hemisphere.

The harbour's close relationship with Freeport International Airport, a 10-minute drive away, together with excellent tug and piloting services, makes it an ideal centre for homeporting, with significant additional capacity. The port consists of a number of inter-linked facilities:

• The Container Port: capacity currently comprises a total land area of 37 hectares with 15,000 TEUs of stacking capacity, 1,036 metres of berthing, 7 Super Post Panamax quay cranes, a fleet of 22 straddle carriers, 225 reefer points, and 3 empty handling carriers. The terminal has an annual throughput capacity of 950,000 TEUs.
• The Ship Care Facility: the new yard has two fully serviced wet berths capable of taking vessels of up to 1,000 feet in length with carnage up to 50 tonnes. The floating dock is capable of lifting over 30,000 tonnes and measures 880 feet overall length with 110 feet clear breadth. It is capable of handling Panamax vessels and is fitted with two 25-tonne cranes along with a comprehensive range of services. There is a brand-new, fully-equipped workshop complex.
• The Cruise Facility: a new $11m redevelopment has upgraded cruise passenger terminal facilities able to process one million visitors annually. There are centralised check-in facilities, a 26,000 sq ft Caribbean-style retail/entertainment village centre, a Bahamian straw market, efficient ground transportation, and new tropical landscaping design. The terminal can handle a 3,000 passenger homeport cruise vessel.

There are also ro-ro facilities, ferry berthing facilities, provision for LTL (Less-than-Trailer-Load) cargo, and car transhipment.

The Freeport International Airport

Freeport International Airport is just minutes from South Florida. One of the largest privately-owned airports in the world, it enjoys state-of-the-art facilities, including an 11,000-foot-long runway that accommodates international jet aircraft 24 hours daily. Refuelling and hub operations are managed by The Grand Bahama Airport Company Ltd. at its full service terminal, complete with preclearance facilities for U.S. customs and immigration.

Freeport's airport averages nearly 50,000 flights each year. Airlines with regularly scheduled flights include: American Eagle, Comair (Delta), Continental, Laker Airways International, Gulf Stream International, and Bahamasair, with charters also available. Direct or hub flights connect Freeport with Miami, Ft. Lauderdale, Atlanta, and New York, as well as Toronto and Milan.

The Freeport As E-Commerce Infrastructure

It is Freeport's trans-shipment capabilities, that is, its ability to receive a freighter with products from a single location and efficiently sort and ship the cargo to a number of destinations that provides the Bahamas with a unique advantage in the competition to offer tax-efficient e-commerce-based trade services to the Western hemisphere. The already impressive shipping facilities are being augmented with an air-to-sea processing centre which will include a fully-equipped warehouse, order processing and distribution centre with systems designed to fulfill a customer's purchase with efficiency, accuracy and speed.

Reflecting the belief that a growing amount of the trade flowing through Freeport will be linked to e-commerce, Systems Resource Group (SRG), a leading information technology, e-commerce and communications solutions provider in the Bahamas, recently opened a network operation centre in Freeport.

As reported in Part I of this survey, SRG's subsidiary, Internet Service Provider Bahamas On-Line has already started offering corporate level Internet services to the Freeport business community. SRG has relocated staff from its existing Nassau installation to Freeport, including its Chief Technology Officer, Marcus Hinsley, who will additionally be Director, Freeport Services.

SRG is the Bahamas' leading provider of turnkey, project managed solutions that encompass business equipment, software applications, systems and network integration, consulting services, electronic commerce and wide area communications. SRG's professional services group is the alliance partner of KPMG Consulting in the Bahamas, and the Freeport offices have been co-located on the first floor of the International Building in KPMG¹s existing office space.

Bahamas On-Line scored another notable success recently when it teamed up with American Airlines to provide Internet service for American Airlines' employees based in Nassau, Freeport and Marsh Harbor.

"We are very pleased to be American Airline's chosen partner in this worthwhile exercise. It fits right in with our goals at Bahamas On-line in making the Internet more widely available and affordable throughout the residential community in The Bahamas," said Mr. Mark Sweeting, Vice President of Bahamas On-Line Internet Services.

The Bahamas On-Line program is in conjunction with American Airlines Ontime-Online Employee PC Program, under which American Airlines is purchasing computers and providing Internet access for its 120 employees based in The Bahamas.

The Freeport As A Place To Live

The Grand Bahama Development Company (DEVCO) came into being in 1960 as a subsidiary of GBPA with the remit of developing residential and resort areas in and around the Freeport.

Freeport is approximately the size of Singapore, with more than 400 miles of excellent wide-paved roads, as well as miles of well-engineered waterways bordering private homes. The average commute to work is just seven minutes. The area also enjoys modern educational and health facilities, cable television, a wealth of cultural events, extensive leisure facilities, duty-free shopping, and a cosmopolitan nightlife.

A wide variety of international sports are also available, including golf, tennis, international squash courts, American football, soccer, rugby, cricket, horseback riding and polo, softball, baseball, volleyball, netball, darts and bowling. Water sports include sailing, fishing, swimming, diving, waterskiing and windsurfing.

The mild subtropical climate makes the island a natural greenhouse, with an average temperature of 72 degrees farenheit, and 75 percent average humidity. More than 200 species of birds are sighted here regularly, and the area is home to 36 species and varieties of wild orchids. Because of prevailing winds and sensible planning, the air on Grand Bahama Island is exceptionally clean, and the fresh water table is considered capable of supporting a quarter of a million people.

DEVCO continues to offer attractive residential accommodation in new Freeport developments through realtors, including its own real estate subsidiary Grand Bahama Realty. Homes in the Freeport are available from as little as $110,000. Homes in gated communities with access to pools, tennis courts, private beach and private lake cost about $400,000.

The Future For Freeport

The Bahamas believes that its Freeport is poised to become a dominant player in the Western Atlantic trade area, and the likely expansion of NAFTA to incorporate closer links with Mercosur and Caricom can only help this process. E-commerce is expected to play a major role in determining winners and losers in the next round of international trade development, and the Bahamas is determined not to be left out.

The Freeport already serves some of the world's major shipping lines, including Maersk Sealand Services, Mediterraneum Shipping Company (MSC), Cagema Agencies Inc, Naveiras Inc (NPR), and Teekay Shipping.

Nassau-based Teekay Shipping, for example, is operator of the world's largest medium-sized tanker fleet, and recently announced a joint venture with BHP Billiton, the world's largest coal exporter and third biggest iron exporter. Teekay Marine Pty Ltd., 70% owned by Teekay, will manage BHP's 11-vessel fleet. In commenting on the growth potential afforded by the venture, BHP Billiton indicated that they are tapping the shipping expertise of Teekay's global network, giving them access to increased markets.

Teekay Shipping Corporation (TK) is an affiliate of Oceanic Bank and Trust, one of the most prominent Bahamian wealth management firms. Oceanic offers a comprehensive range of private wealth management services including private banking, trust and estate services, mutual fund administration, investment management, and corporate services including formation of IBCs.

The Bahamas' Telecommunications And E-Commerce

Part I of this survey dealt extensively with the Bahamian Government's plans for liberalisation of the telecommunications sector, privatisation of state telecommunications monopoly Batelco, development of e-commerce legislation and the installation of enhanced connectivity.

The new Public Utilities Commission's first major act was to license Caribbean Crossings Ltd, a subsidiary of Cable Bahamas Ltd to construct a 5-segment, submarine fibre-optic cable system, the Bahamas Internet Cable System (BICS), linking Abaco, Eleuthera, Grand Bahama and New Providence with the United States. Along with Batelco's existing Bahama II fibre-optic cable linking Grand Bahama and New Providence with the US, the new BICS links, expected to be operational later this year, will fully integrate the Bahamas into the ARCOS project (Americas Region Caribbean Optical-Ring System), making high-speed Internet access available to Bahamian business and residential users alike.

Cable Bahamas Ltd. began service on March 7th, 1995 and services in excess of 50,000 customers with its fibre-optic network. The company is respected internationally as one of the most progressive and advanced cable television operators in the world, being regularly featured in the international media as one of the best managed cable televisions systems. The company's video server and Pay-Per-View department are unrivaled in the world, and its working 2-way cable TV system is one of only a few in operation anywhere.

In a significant demonstration of the Bahamas' determination to 'ride the e-commerce wave of the future', Freeport, Grand Bahama was the host location of the first multinational e-commerce conference of the year 2001. The E-Commerce Working Group organised by the Bahamas Financial Services Board (BFSB) attended the seminar in full force with the support of over 25 Bahamian companies participating as both sponsors and delegates. Over thirty companies and associations comprise the E-Commerce Working Group, representing interests in financial services, infrastructure development and support, evolving e-commerce ventures and consultancy services. Barry J. Malcolm, Executive Vice President of the Grand Bahama Port Authority, and a BFSB Director, serves as Chairman, with Ms. Wendy Warren, BFSB CEO and Executive Director, serving as Deputy Chairman.

Barry J. Malcolm and Wendy Warren spearheaded a speakers' panel which consisted of high profile representatives from companies such as Maxil Communications (Cable Bahamas), Axxess International (Merchant Axxess), Bahamas Online, Emagine Bahamas Ltd. and Global Commerce Bahamas Ltd.

The E-Commerce Working Group gave the international delegation a clear and positive message which illustrated the Bahamas' commitment to becoming an ideal environment to conduct e-business. The presentations made by Barry J. Malcolm, Wendy Warren, Michael Atkin of Maxil Communications and Michael Cunningham of New World Network (Arcos), highlighted the developments that were taking place in The Bahamas, which aptly illustrated the country's commitment to making e-commerce the "third pillar" of its economy alongside financial services and tourism.

The Bahamas was able to demonstrate its ability to provide the international speakers, sponsors and delegates with high-speed connectivity through the collaborative efforts of Maxil Communications and InfoVision. A "Communication Station", consisting of numerous personal computers was set up at the seminar which allowed users to access e-mail and correspond via the internet. This tool proved to be invaluable to conference delegates, and received significant attention and praise from the seminar organisers and participants, as it allowed them to remain connected to their home countries throughout the duration of their stay in the Bahamas.

In attendance at the conference were Ian D. Fair, BFSB Chairman, as well as representatives from institutions such as Bahamas B2B (Benelda.com), BISX, Higgs and Johnson, the Grand Bahama Port Authority Group, Callenders & Co., MeesPierson Bahamas Ltd., College of The Bahamas (Centre for Entrepreneurship), Americas International Bank, Doctors Hospital Health Systems, Family Asset Management, McDonald and Co., Star Capital Securities, Nexxus International, Grand Bahama Development Company, Sterling Securities and Oceanic Bank.

The size and scope of the delegation proved that Bahamian businesses are intent on working together to propel the Bahamas forward as a leader in the e-commerce movement.

E-Commerce Technology Support

When looking to establish an e-commerce operation in a region, international companies need to pay at least as much attention to the level of technological support that is available as they do to more obvious criteria such as connectivity. Therefore it's as well that the Bahamas is seeing healthy development of its technology sector - apart from Systems Resource Group, mentioned above and in Part I of the survey, and other firms covered in Part I, significant players include:

• The Providence Technology Group (www.providenceTG.com) which offers networking, workgroup, and other business critical IT solutions; launched in 1996, Providence has developed a substantial business primarily with customers in the offshore financial services sector.
• Future-Net Training Ltd. is the first Microsoft Certified Solutions Provider (MCSP) in the Bahamas. MCSPs have proven Microsoft product expertise and also have experience with a multitude of products and technologies beyond the Microsoft product line. Future-Net is a Bahamian owned Computer Training firm and a Sylvan Prometric testing center. The company also sells Gateway computers and serves as a communications consulting firm specializing in Internet/Intranet-applications, Extra-nets and Wide Area Networks.
• Data Systems International (DSI), is a specialist software company for the banking and international financial services Industry. Data Systems International has developed a reputation as a leader in financial services software applications and became the first software company in the Bahamas to export a technology based product. International Private Banking Systems (IPBS) is a fully integrated software application package providing multiple entity, multi-currency accounting and management information systems to the international financial services industry. IPBS provides all the functional and operational support services required by an Offshore Bank or Trust company. IPBS's high level automation allows the banking administrator full control over all banking activities through a single interface. Today DSI serves clients in the Bahamas, Cayman Islands, Turks & Caicos Islands, Barbados, Brazil, Grenada, Belgium and Monaco.
• Thyme Online, a Bahamian company based in Nassau, was founded in 1997 by local businessman, Craig Thackray. The company is part of the Thyme Group, a full service design and print company, including Thyme Design and The Fine Print. The company now has 10 years experience developing web solutions, saying: Through a combination of design & marketing expertise, a real world understanding of doing business online, and some of the sharpest programmers around, we can ensure your internet strategy isn’t just another dot com disaster.'

'Not just another dot com disaster' indeed must be the message inscribed in the minds of everyone involved in the development of e-commerce in the Bahamas. The Government is doing most things right, and can reasonably hope that the country will be among the chosen few jurisdictions to sweep up the wave of e-commerce business that sooner or later will wash over the world of offshore. It is probably a correct calculation that the Freeport will act as a magnet for trade-related e-commerce; and this together with the Bahamas' re-acquired international respectability and its low-tax regime, which seems likely to survive the OECD's unwelcome attentions, should be enough to ensure success.