Turks and Caicos: McLeans Special Report

INTRODUCTION

The Turks & Caicos Islands (‘TCI’) form the south-eastern extremity of the Bahamas chain. They lie 145 km north of Haiti and the Dominican Republic and 925 km south-east of Miami. Although illegal Haiti immigration has been, and continues to be, an issue for the TCI, no additional problems were experienced by the recent unrest in Haiti. The territory comprises some 40 islands with a total land area of 500 square km. Of these islands only 6 are permanently inhabited: Grand Turk – the capital; Salt Cay; South Caicos; Middle Caicos; North Caicos and Providenciales. The estimated population of TCI is 30,000. The currency is the US Dollar and the TCI has no Central Bank. The 2001-2002 annual average for overseas aid monies received by the TCI was $5.9million, of which $3.67million was provided by Britain.

Constitutionally, TCI is an internally self-governing British Overseas Territory with a ministerial system of government. The 1988 Constitution provides for a government run through a Governor appointed by the British Crown, and Executive and Legislative Council. The Governor retains responsibility for internal security, external affairs, defence, and the public service. Until legislation in 2001 the Governor retained responsibility for offshore finance. In all other areas the Governor is normally required to act on the advice of Executive Council. Parliamentary elections are held of not more then four years. The current government, the Progressive National Party (‘PNP’) is led by Chief Minister Michael Misick and was sworn in August 2003. Previously, the People’s Democratic Movement (‘PDM’) has been in office for eight years. Members of the financial services industry are heartened by the fact that the incoming Minister for Finance is a qualified CPA and former officer of a trust company who, in common with the PNP administration as a whole. Announcements made in January 2004 by Chief Minister Misick were to the effect that the jurisdiction can expect to attract some $3 billion in inward investment in the coming years.

The legal system, based on English common law includes a Supreme Court and a Court of Appeal, and has provision for appeal to the Privy Counsel in London, England. The legal system is an amalgam of English common law, some statutes of England & Wales as extended to this jurisdiction and local statutes (known as ‘Ordinances’). In addition, the TCI is party to various international conventions: significantly the Hague Convention on the Law Applicable to Trusts and on their Recognition. English-trained Barristers continue to attract the larger value commercial litigation work. Until late February 2004 the Chief Justice was a British technical co-operation officer: with the effect that his cost was met by the British Government. That funding has now been withdrawn and the Chief Justice Richard Ground O.B.E. QC has since left to take up the post of Chief Justice inBermuda. A permanent replacement has yet to be found. At the time of this article being written, the role of Chief Justice is being fulfilled on a temporary, ad hoc, basis by Acting Chief Justice Charles Ekins: of the Bar of England & Wales, formerly Attorney General in British Overseas Territory Montserrat and currently a Crown Court Recorder (part-time Judge) in England & Wales. 

The financial services industry plays an important role in the TCI and is the TCI’s second largest source of external revenue after tourism. It is represented by the Financial Industry Association. The TCI currently faces many of the same issues faced by other offshore financial jurisdictions as to how business is carried out and with whom. Issues of due diligence and ‘know your customer’ are of paramount importance in all sectors of the financial services industry. Post September 11, 2001 and the United States’ Patriot Act doing business with financial service providers in the United States, including trust companies and brokers, now involved significantly more time and effort. The TCI was granted ‘Qualified Intermediary’ status by the US Treasury Department in 2000. In 2001 the TCI was recognised as a leading jurisdiction for producer owner re-insurance companies.

However, the financial services industry in the TCI appears to be managing well and there is well-placed confidence that the financial sector will continue to develop. Consolidation of smaller service providers is likely to accelerate in light of compliance requirements.

REGULATORY FRAMEWORK – THE FINANCIAL SERVICE COMMISSION (‘THE FSC’)

Following recommendations within the October 2000 multi-volumed Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda – VI, Turks & Caicos Islands, the FSC became an independent regulatory body. As such, FSC is now the regulatory and supervisory body responsible for the entire ambit of the financial services industry in the TCI including:

• Company management The Company Management (Licensing) Ordinance 2000
• Banking The Banking Ordinance 1979, The Banking Ordinance (Amendment) Ordinance 2002
• Insurance The Insurance Ordinance 1989 (As Amended)
• Trusts and professional trustees The Trusts Ordinance 1990, The Trustees (Licensing) Ordinance 1992
• Mutual funds Mutual Funds Ordinance 1998
• Investment Dealers Investment Dealers Licensing Ordinance 2001, Investment Dealers (Licensing Regulations) 2003

Formerly a Government department, the FSC became an independent statutory body in May 2001, following the coming into force of the Financial Services Commission Ordinance. The FSC is governed by a board of directors comprising of two ex officio members (the Permanent Secretary, Finance and the salaried Managing Director) and between five and seven other members appointed by the Governor. Presently, all five appointed members are from the private sector, with such individual members recusing themselves from situations where possible or even perceived conflicts of interest may arise.

BANKING

The Banking Ordinance 2002 and Banking (Capital) Regulations 2003 provided quite radical amendments to the original (1979) legislation; reflecting the standards as recommended by the Basle Committee on Banking. These amendments provide for

• Provision for the risk-weighting of assets
• Retention of minimum paid up share capital
• Maintenance of a prescribed capital adequacy ratio
• Calculation of ‘capital’ for certain purposes
• Creation and maintenance of a reserve fund; and
• New rules in relation to lending to persons connected with the bank and the levels of loans to individuals borrowers and related parties from 25% of the total capital to 25% of ‘paid in’ capital (such to a two year grace period for compliance in relation to existing loans)

Application can be made to the Licensing Committee of the FSC for exceptions to be made. However, the prospects of any such application (absent extraordinary circumstances) are expected to be very poor.

INVESTMENT DEALERS

The Investment Dealers Licensing Ordinance was technically brought into effect in May 2001, but was not operationally effective until the underlying regulations whereby Investment Dealers could actually apply for licensing came into force in July 2003 (Investment Dealers (Licensing) Regulations). This legislation provides for the regulation, licensing and supervision of securities brokers, asset managers and investment advisors. One contentious provision is the requirement for the maintenance within the TCI by each investment dealer of minimum capital in liquid assets of whichever is the higher of $250,000 or 2.5% of money / investments under management.

TRUSTS & COMPANIES

Often used in combination – with shares in the underlying asset holding company being issued to the trust – these form a mainstay of the work undertaken by the TCI financial services industry. The concept of trusts as developed under English common law has long been accepted and recognised in the TCI. The Trusts Ordinance 1990 sets out the essential characteristics of the formation, administration, variation and termination of trusts, including the powers and duties of the trustees, and resolves conflict rules relating to the recognition of trusts. The underlying philosophy is to give settlors and their professional advisors substantial latitude in draft trust instruments. Under applicable law, a trust shall be recognised by, and enforceable under, the laws of the TCI except to the extent that the trust purports to do anything or confer a right or power or impose any obligation which is contrary to the laws of the TCI. All forms of trust are used, with discretionary trusts being the most popular. With no local inheritance taxes, TCI trusts are used predominantly for purposes of estate planning by residents of other jurisdictions. In common with English law, it is not currently possible to create a wholly ‘purpose’ trust other than for charitable purposes.

All company management service providers are now licensed by the FSC. The TCI do not have separate legal regimes to regulate ‘onshore’ and ‘offshore’ business organisations. The Companies Ordinance 1981 (as amended) provides for a basic company form, together with certain special provisions and exemptions applicable to companies formed for particular purposes or with special characteristics. In cases of urgency incorporations can, and do, take place within very short timeframes. The following types of legal entities exist:

• Ordinary company – whose main business is carried on within the jurisdiction
• Exempted company – incorporated within the TCI but whose business is mainly outside the TCI. The names of shareholders, directors and officers are not filed with the Companies Registry for this type of company. Such companies currently obtain a 20 year guaranteed exemption from taxation at the time of incorporation
• Limited liability company – often used for doing business in the United States, this is a hybrid between a limited company and a partnership. Liability for debts is restricted to corporate property. This type of company is taxed in the United States as if it were a partnership provided certain requirements are met.
• Guarantee company – liability of any member is limited to that member’s guaranteed contribution. Usually used for non-profit entities or business organisations pooling resources
• Hybrid companies – a combination of share capital and guarantee. Often used as an alternative vehicle to an inter vivos family trust: i.e. where the assets in question may consist of a family business or where the settlor is reluctant to place assets totally beyond the settlor’s control.
• Foreign Company – where a foreign company establishes a place of business in the TCI it is required to register as a foreign company under Part X of the Companies Ordinance, thereby enabling it to carry on business within the need for incorporation of a local subsidiary
• Limited Partnerships – possible pursuant to the Limited Partnerships Ordinance 1992 and based principally on the United States’ Unified Partnerships legislation.

ANTI MONEY-LAUNDERING MEASURES

The principal anti-money laundering legislation is the Control of Drugs Trafficking Ordinance 1988, (enacted to give effect to Britain’s obligations under the Vienna Convention) the Proceeds of Crime Ordinance 1998and the Proceeds of Crime (Money Laundering) Regulation 2000 – the later introducing procedures, to be followed by all professionals in the financial services industry, in terms of customer identification, record keeping, internal reporting and training. In addition, the TCI also follow the recommendations of the Financial Action Task Force on Money Laundering in relation to anti money-laundering measures.

TAXATION

There are still no taxes (either for individuals or companies) on income, turnover or capital gains, withholding, estate, inheritance or gift taxes. Stamp duty remains payable on the transfer of real property or any security by way of mortgage or charge on real property.

Described in June 2000 as 1 of the 35 jurisdictions meeting the technical criteria for classification as a ‘tax haven’, the TCI has never been listed by the OECD as ‘un-cooperative’. Since March 2002 TCI has been committed to exchange of tax information with OECD countries by December 31, 2005. The TCI is described as one of the ‘Participating Partners’ in the March 22, 2004 OECD Report ‘OECD’s Project on Harmful Tax Practices: 2004 Progress Report’ and 1 the additional 22 non-OECD member countries that have committed to the principles of effective information exchange and transparency.

INTERNATIONAL CONTEXT

1. EUROPEAN SAVINGS TAX DIRECTIVE

The TCI Government has recently confirmed its commitment to implementing the EU Savings Directive (i.e. in respect of savings income in the form of interest payments). The effect of this will be applicable of a withholding tax during the transitional period which commences on January 1, 2005 subject to equivalent compliance from Switzerland, Liechtenstein, San Marino, Monaco and Andorra. As recently as April 5, 2004 the FSC circulated notification that the Attorney General’s chambers are working on a first draft of the necessary legislation.

2. INTERNATIONAL CO-OPERATION

The Mutual Legal Assistance Treaty Ordinance enables provision of mutual legal assistance between the United States and the TCI for the prosecution, investigation and suppression of criminal offences. For the purposes of the legislation, a criminal offence is either conduct which satisfies the dual criminality test, i.e. is conduct which is punishable by imprisonment of more than one year in both the TCI and the United States, or it is one of a number of specified listed offences which include insider trading and fraudulent securities practices. In May 2001 the Criminal Justice (International Co-operation) (Amendment) Ordinance made it an offence to use or possess property being the proceeds of crime. Overseas regulatory authority assistance legislation has been in place since 2001.  

3. INTERNATIONAL MONETARY FUND REVIEW

In common with most offshore financial centres, the TCI agreed to a voluntary review by the IMF This took place in February 2003 and, as at the latest published IMF progress report (March 12, 2004) we continue to await publication of the results of the review.

FUTURE DEVELOPMENTS

Given that implementation of the EU Savings Directive within the TCI is contingent upon various European entities offering equivalent compliance, it remains far from certain whether the TCI will be troubled by this issue in the short to medium term.

There is clearly a tension between stated aims of compliance with OECD transparency and information exchange aspirations and the tradition of confidentiality within the TCI. It remains to be seen how this is to be reconciled.

Meetings of April 2004 between the Financial Industry Association, The Governor, Minister for Finance and Attorney General in respect of the financial services industry indicate the following:

• A joint desire to further develop the industry
• Additional drafting personnel were to be brought on stream with a view to significant amendment in the near future to the Mutual Funds Ordinance and the Insurance Ordinance as well as the drafting of new legislation in respect of charitable foundations.

Longer term projects are likely to include further amendments to the Companies Ordinance as well as the Trusts Ordinance so as to provide for purpose trusts similar to those now permitted in the Cayman Islands.