In
July 2009, Zhibargo Laing, The Bahamas’
Minister of State at the Ministry of Finance,
confirmed that a Financial Services Authority
(FSA) is to be established in order to better
regulate the Bahamian finance industry.
“The
government is giving renewed focus to the financial
services sector – the second pillar of the
Bahamian economy,” Laing said.
He
also confirmed plans to consolidate the islands’
financial services regulators and a twin system
would be created by the end of 2009 in which there
is the Central Bank and one other regulator responsible
for all areas of financial services, building
on oversight that currently only exists for domiciled
banks and trust companies. The Authority will
effectively take on the roles of the securities,
compliance and insurance commissions.
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Bahamas
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 settlors
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 judgements.
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 settlor.
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
settlor 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.
The
Perpetuities (Amendment) Act 2004 increased the
period of a perpetuity from 80 to 150 years.
In
September, 2004, a Dallas, Texas court ordered
that the settlor of a Bahamas trust, John Eulich,
should pay a fine of US$5,000 a day until he complied
with a court order to supply trust documents to
the Internal Revenue Service. After 30 days, the
daily fine would increase to US$10,000.
When
the IRS served a formal request for documents
from the trust, Mr Eulich refused to provide the
documents and claimed that he had no control over
the trust and had exhausted his powers to try
to get the documents. Judge Sam A Lindsay of the
District Court disagreed, holding that the Settlor
could still attempt to get the documents from
the trust by appointing new administrators and
by filing a lawsuit in the Bahamas. At any rate,
the Court stated, it was not going to recognize
the Settlor’s “impossibility defense” because
the impossibility was self-created, i.e., the
Settlor’s own drafting caused the impossibility.
The IRS investigated Eulich and his wife, Virginia,
for the tax years of 1995, 1995 and 1997, and
as part of its investigation, sought documents
relating to the Bahamian trust, the Mona Elizabeth
Mallion Settlement Trust No. 16 and to various
corporations controlled by the Trust. To that
end, the IRS issued formal document requests and
summonses seeking the information.
The
Eulichs gave their 'impossibility' defence in
1999, filing an action to quash the document requests
relating to the Trust, and the Government subsequently
filed counterclaims seeking to enforce the summonses.
In 2002 a Magistrate Judge recommended enforcement
of the IRS's requests, but both the Eulichs and
the government objected to various terms of the
Judge's ruling. In a Court of Appeal hearing in
2003, the judge excluded Virginia Eulich from
the action, but affirmed the enforcement order
against John Eulich.
On
June 27, 2003, the Government filed a Motion to
Hold Petitioner in Contempt of the Court's 2002
Order of Enforcement, and after a hearing on March
12, 2004, the Magistrate Judge recommended that
the court hold Eulich in civil contempt of court,
imposing a fine of US$1,500 a day pending production
of the documents. Once again, both parties objected
to the findings.
The
judge at the later hearing (18th August) imposed
the larger fine in response to the government's
objection on the grounds that the trust's assets
of between US$70m and US$100m were or could be
generating up to $14,000 in interest a day. The
judgement contains a detailed and highly interesting
discussion of various aspects of Eulich's efforts
- or otherwise - to comply with the terms of the
IRS's requests, by no means entirely in the government's
favour.
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Bahamas 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 (see Forms of 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 defences 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 pre-existing
offshore companies were 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.
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Bahamas
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.
In
mid-2009, a bill was presented in the Senate to
revise the law regulating external captive insurance
business in the Bahamas.
The
Bahamas Financial Services Board and the Ministry
of Finance have been working together on The Bahamas’
External Insurance Act to facilitate quick and
reasonably priced licence creation and licensing
of captive insurance companies in The Bahamas.
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Bahamas 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 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.
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
Recognised 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 Recognised 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.
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LAWANDTAX-NEWS.COM
13/07 
