WHAT-TO-DO - NASSAU, CABLE BEACH & PARADISE ISLAND - JULY 2003 EDITION
The Bahamas is a highly attractive investment destination for businesses and high-net worth individuals who want to manage their wealth in a well-regulated environment.
There are a number of compelling reasons for business to move offshore, says Brian Moree, senior partner at McKinney, Bancroft and Hughes and chairman of the 33-member Financial Services Consultative Forum (FSCF), which advises government on matters affecting the sector.
At the top of the list is The Bahamas' tax-neutral platform, including no tax on personal income, corporate earnings, capital gains, sales, inheritance or dividends.
"Tax deferral is still a major issue, where you can legitimately and quite properly defer taxes by using fully compliant structures," says Moree.
Beyond a wide range of innovative investment products, The Bahamas boasts a depth of professional services not found in every financial centre.
The numbers are impressive: 317 banks and trust companies with assets of $258 billion; 600 lawyers trained in English common law; 300 accountants representing the biggest firms in the world; a financial services workforce of 4,000 Bahamians; 724 mutual funds with assets of $89 billion; and 83 insurance companies with $687 million in assets.
"Investors, when they go into a jurisdiction, are looking for a high level of professionalism and competence and integrity in their professional advisers. I think that because we have been in this business for so long, we certainly qualify on that front," says Moree.
The Bahamas is also ranked highly by outside economic analysts. In a fall 2002 report on the country's sovereign debt and creditworthiness, Moody's Investors Service gave The Bahamas an A3 rating and a positive outlook. And in January 2003, Institutional Investor announced that The Bahamas was a top performer in its country credit ratings, finishing 2002 among the Top 10 countries in the world for most improved sovereign creditworthiness.
Strict reporting
"We have one of the most robust regulatory regimes anywhere in the world. So if an investor is looking for a clean, blue chip international financial centre which is fully compliant with international best practices, it would be easy to demonstrate to them that we qualify," explains Moree.
In fact, while strict oversight of the industry - including more onerous Know Your Customer (KYC) rules than exist in many OECD member states - has created more paperwork than ever, it is a key reason many investors choose The Bahamas: their wealth is secure and properly and legally managed.
For example Hywel Jones, president of Britannia Consulting Group in Nassau, uses insurance structures to legally defer taxes for his clients.
"I am looking for the same tax treatment a US insurance company would get, except that if I do it through an offshore insurance company I have a massive amount of flexibility in what happens to the money," says Jones, who has more than 25 years' experience in the industry.
Rather than in-house mutual funds, for example, investors can put their money into offshore mutual funds, hedge funds, houses, hotels, or even planes and boats.
Even before the OECD came along, insurance was a growth area, says Ian Fair, a financial expert with extensive experience in the private banking industry and former chairman of the Bahamas Financial Services Board (BFSB).
"Insurance products in general are being used to a greater extent in estate planning and financial planning, and certainly in that area The Bahamas already has attracted quite a lot of business."
The Bahamas' tax neutrality also works well for families with complex financial situations, says Wendy Warren, CEO and executive director of the BFSB.
"Tax planning is recognized as being an important part of fiduciary responsibilities, not only in a corporate environment, but also in an individual environment," notes Warren, particularly for families whose members live in different countries, and therefore different tax regimes.
"Globalization has not only reached the business world, but it's also, I think, at the heart of families. And the parents or the trustees have a responsibility of ensuring that the assets of those families are best managed across many tax regimes," says Warren.
By basing their assets in The Bahamas, they are not subject to tax liabilities here and therefore avoid double taxation or tax penalties.
"It simplifies clients' affairs substantially. If you imagine families being based in five different tax regimes, the ability to have The Bahamas as their primary domicile and be accountable from The Bahamas to each one of those tax regimes, is far simpler than being domiciled in a complex tax regime and being responsible to each one of the other four tax regimes," says Warren.
A tax-neutral platform also allows for the transition of wealth from one generation to another in the best manner for families, says Warren.
"In addition to that, we know there are persons who place a very high value on privacy, and centres like The Bahamas are able to afford them that sense of security and the ability to not have their wealth known to persons around them - sometimes at risk of personal safety."
The Bahamas, for example, is particularly attractive to clients from politically unstable countries or regions, who need a safe place for their money - "a jurisdiction which is neutral, if you want, from the major political upheavals going on," says Owen Bethel, president of Montaque Securities International, who cites the movement of Saudi royal family funds to The Bahamas during the Gulf War. Add to that list wealthy clients from South America and Europe, which is not immune to the vagaries of war and politics.
"Look at what's happened in the old Yugoslavia. You could forgive a few Bosnians for wanting to make sure they had their money somewhere that was safe and secure. That is what The Bahamas offers," says Fair.
And despite the keen regulatory oversight, "the cost of business is sometimes a little less offshore than it would be in the main onshore centres," says Moree.
Ahead of the curve
The challenge now, most everybody in the industry agrees, is to develop new legislation and products that will help secure The Bahamas' place among the top financial centres of the world.
"One does have to ask [one]self in this environment, ?What are the advantages to going offshore?'" says Moree. "I think that is a challenge for the industry - to develop new products based upon what we have in The Bahamas, which is a tax-neutral platform, which is extremely important to our future."
Adds Fair: "All of our legislation in the last few years has understandably been defensive and reactive, because of the OECD and the FATF (Financial Action Task Force) issues. I think we need to send a message to the outside world, and also to the inside world in The Bahamas, that we are actually looking for new business, that we're open for business, and we need to pass some new legislation to demonstrate that."
New legislation
At the start of 2003, government and the FSCF were reviewing legislation governing a host of investment products, including foundations, protected cell companies, mutual funds, International Business Companies (IBCs), domestic and external insurance, special purpose trusts, and e-commerce.
It is all part of the evolution of the industry, says Moree, and the hallmark of a dynamic sector.
"The development of products is always a work in progress. It should be a constant activity that is going on, which is listening to the markets and looking at our competitors and product development. That should be a constant emphasis for us as it is in other jurisdictions."
He is confident that with the new legislation, The Bahamas will be able to offer "a turnkey operation to both corporates and high-net worth individuals alike, which will comprise a full range of products, that is comparable to what they can get in New York or Paris or London or Switzerland or anywhere else in the world."
Foundations
Fair is especially eager to see foundation legislation developed.
"We will become the first common law jurisdiction to have foundation legislation," he explains. "Foundations are more of a civil law concept. A foundation basically, if you like, is a civil law trust."
Whereas a trust is based quite literally on the concept of trusting a trustee to manage your money, foundations have a corporate structure and allow for family members to sit on their boards.
"A lot of people from the civil law countries in the world don't come to The Bahamas to set up trusts because they'd rather go somewhere where they can have a foundation. They go to Liechtenstein or Panama or Curacao," says Fair. "Not only would a foundation product indicate to the world that we are open for business and that we want new business, but it would also... be a product that we were the first to introduce rather than playing catch-up."
Bethel says development of the Bahamas International Stock Exchange (BISX) will also round out the jurisdiction's offerings.
"It's not insignificant that we are in the same time zone as New York, the largest trading centre there is. I think certainly from the global international securities perspective, BISX can certainly do wonders," says Bethel.
It will be a natural for "bulletin board" or second-tier stocks - those that have not reached the NASDAQ or New York Stock Exchange level of quotation, but are growth companies, he says.
"They are looking for funding, and really the exchange is an avenue for funding. So you can attract this type of organization or company to list on your exchange."
And because the international side of the exchange would be in US currency, "they can use The Bahamas and BISX as a launching pad for raising US dollars," says Bethel.
"You can almost see The Bahamas exchange, BISX, as a stepping stone. You start off on this exchange and you grow yourself to the point where you can then be listed on a NASDAQ or a New York Stock Exchange. That is only the United States. You can replicate that same concept in other countries, whether it be Brazil or Indonesia or anywhere in the world where companies want to raise US dollars."
The value for investors will be the opportunity to invest in fledgling companies they believe are going to do well.
"It is up to the companies to prove themselves, that they are worthy of the investors. And people will invest... You never have a lack of people who want to get on that ride, and think that this is the next Microsoft."
Charity work
Another area ripe for development is the ability to formalize charities, says Warren.
"Wealthy individuals are increasingly committed to charitable organizations and quite often they want to manage those charitable organizations. So we are seeing that increased emphasis on charities," says Warren.
Managing charities offshore has several advantages, says Fair, chief among them less red tape.
"If you look at the amount of regulation on charities in places like the US and the UK, it is substantial. In order to get tax exempt status they have to go through an incredible amount of hoops and regulatory involvement," says Fair.
The Bahamas could offer a more regulatory friendly environment, which is already tax free in all respects and therefore neutral.
Fair believes the timing is perfect. "There is a going to be a huge transfer of wealth in the next 20 to 30 years from the baby boomers. It is going to be the largest transfer of wealth the world has ever seen from one generation to the next," he says.
"It is conceivable that the next generation will be the first generation since the advent of the Industrial Revolution in the early 1800s to actually not be worth more than their parents are worth. The jury is still out as to whether that will happen or not, but I think there is a view... that there will be more of a desire to pass more of their money on to their children as a result of that."
There has also been so much wealth created in the super economies of the last 10 years that a lot more people are becoming charitable, says Fair. "If you look at somebody like Bill Gates, what he's set up, there is going to be more of that."
Indeed, Microsoft founder and billionaire Gates has said that he plans to give most of his fortune to charity, not his children.
"I don't think it's constructive to grow up having billions of dollars," he told Forbes Global during a November 2002 trip to India, during which he pledged $100 million to fight AIDS and HIV in that country.
"The idea that I will take a sizeable portion of my fortune and have them (his children) inherit that, I don't think that would be to society's benefit or to their benefit... I've spoken out about this before... my philosophy of giving back my wealth to society." And that's where The Bahamas comes in.
"The ability of jurisdictions to offer a very good charitable platform is certainly highly relevant and I think that is an area where The Bahamas could shine," says Fair.
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