Bahamas Financial Services Industry – The Latest News

On July 16, 1999 the Bahamas Bar Association (BBA) hosted The Fundamentals of International Legal Business Practice Conference. The Bahamas Financial Services Board co-sponsored the one-day event, in association with the International Bar Association, the Organisation of Commonwealth Caribbean Bar Associations, and the Inter-American Bar Association. The programme was part of an initiative by the BBA on doing business internationally. This ongoing educational initiative complements efforts to emphasise the linkages between the legal and financial services sectors, in light of the global growth of the industry.

Speakers included both international and local experts, with topics ranging from Stock Exchanges in Emerging Markets and Mutual Fund Basics to Introduction to Insolvency Law, Introduction to Joint Ventures and Issues in the Privatization of Public Service Functions.

Highlighting the event was a keynote address by Professor Mason Gaffney, Professor of Economics at the University of California. Professor Gaffney spoke on tax competition under the general topic of Opportunities for International Financial Centres in the 21st Century. (see feature article on page 4)

Peter D. Maynard, President of the Bahamas Bar Association, said the creative mix of international speakers and local counterparts created "...even more excitement and brought a cross fertilisation of ideas to the sessions."

The Bahamas Financial Services Board will collaborate next with the Bahamas Bar Association and its affiliates on a major International Law Conference to be held in Nassau during February, 2000. Nassau will also be the venue for the International Bar Association’s biennial conference in the year 2008, expected to attract some 5,000 lawyers.

At the beginning of the third quarter 1999 The Central Bank of The Bahamas announced the lowering of its discount rate from 6.5% to 5.75% - as a direct result of a surplus of money in the Bahamian economy. The tremendous increase in foreign investments- indications of continued investor confidence –alongside a recovery in tourism was credited with the surplus. This healthy position was also evidenced from record external reserves, which stood at $474 million at the end of June, com-pared to $323 million last year.

The Bahamas Financial Services Board - together with the BISX Steering Committee - has created a strategy that will lead to the timely launch of the stock market. The initial plan is to focus on the creation of a liquid, efficient and cost effective domestic market, which will then become the platform for a dynamic international market.

BISX will be financed and managed by the private sector. The initial and on-going financing structure is being fine tuned to ensure that BISX can migrate seamlessly into a publicly traded vehicle in its own right-in common with the trends for stock markets all over the globe.

BISX aims to offer a comprehensive set of services to individuals, intermediaries and institutions that seek to take advantage of the capital markets. Initially, this will include the listing of securities for issuers, an electronic forum for trading securities, and a range of integrated technologies to support all the post trade functions -- including clearing (the agreement of trading obligations), settlement (payment and transfer of securities between buyers and sellers) and central registration.

Domestically, BISX is creating a regulated market for the securities that are already publicly traded within the Bahamas. This means that the existing 15 public equity stocks will be listed on the Exchange. The planned phasing for listings will be announced soon. Once listed, trading will be undertaken electronically between brokers (as shown below), and brokers will be able to facilitate Internet access to the live market through the provision of e-commerce solutions.

In order to be the engine that will fuel economic growth in the local economy the market needs more than domestic equities. The Bahamas must launch a set of new capital market products to mobilise domestic savings into productive investment vehicles and simultaneously lower the cost of capital for issuers. To service this goal, a range of domestic product ideas has been discussed with many members of the local financial market community. These include the public trading of Government Bonds, the issuance of Privatisation Warrants, the secondary trading of Mortgage Bonds, related Housing products -- and many more ideas. As ideas are crystallised these products will be launched onto the local market. The BFSB hopes to help the private sector, in particular the intermediaries and the legal and accounting professions, with the development of some innovative ideas of how these groups can provide added value products to their clients.

The BISX Steering Committee is now pursuing in parallel a range of sub projects to expedite the launch of the Bahamas International Securities Exchange.

On the human resources side, the need to attract and retain some key professionals into the market place has been a prime focus for the BFSB and the BISX Steering Committee, who are now finalising the recruitment of a Managing Director to spearhead the launch of the Exchange. Other recruitment programmes are also underway.

The corporate finance programme for BISX is being concluded. An Information Memorandum will be presented to interested parties over the next two months, with the aim of raising the necessary capital to launch and run the domestic exchange for the next three years.

The market structure will be finalised over the next few weeks. This involves maintaining a keen eye on the international vision, so that The Bahamas can make a quantum leap in business progress and surpass many of the developmental problems other mature markets currently face.

Modern technology is central to BISX’s structure. The new electronic trading and central depository systems (CDS) are being implemented as we go to press. Acceptance testing plans and market readiness programmes for these technologies will be announced soon.

Last, but not least, will be the full legal and regulatory infrastructure. An efficient set of rules and regulations is being designed to support the market structure and technologies, adopting the philosophies that have led to the successful development of The Bahamas’ financial service industry.

Freeport Oil Holdings Company (Bahamas) Limited – exclusive supplier of petroleum needs in Freeport, Grand Bahama – recently offered 2.1 million shares in an initial public share offering. The offering was underwritten by Colina Financial Advisors and Colina Insurance Co.

BFSB will once again be playing a lead role at the 11th Annual Offshore Trust Services Conference to be held in Coral Gables, Florida September 21 to 24. BFSB’s co-sponsorship of one of the largest conferences of its kind in the world recognises the highly influential and critical role played by trust and estate specialists in international financial planning.

Last year BFSB was the lead sponsor for the event, which attracts more than 100 experts from around the world.

While in the Miami area during the conference, BFSB representatives also have meetings scheduled with banking and legal organisations.

Professor Mason Gaffney, Professor of Economics at the University of California, addressed delegates during a special luncheon session at the recent International Legal Business Practices Conference hosted by the Bahamas Bar Association. He cautioned The Bahamas to "look out" when a powerful international political organisation officially brands you as "harmful".

This was in reference to the OECD's stance that international tax competition is harmful - because it limits the power of its member nations to tax "wealth" - and its campaign to tax mobile capital wherever it may seek shelter.

Professor Gaffney characterised the OECD ideal as tax "uniformity" among nations, with an aim towards centralised control, and criticised the contradiction of an organisation preaching for competition in the private sector but calling for suppression of competition among governments. Those who sanction competition to regulate private enterprise to attract suppliers and customers and undercut monopolies, should by the same reasoning also endorse competition among governments to attract people and capital. Such competition is a major defense against the tyranny that a monopoly government can exercise.

Likewise, the OECD’s faulting of international financial centres for "distorting" world investment was viewed as incongruous in light of its own internal systems, which, in effect, distort investment. For example, the practices of some nations are being branded as harmful for allowing cost deductions when the corresponding income is not taxed; yet, this is the standard treatment of much real estate income in the United States, the largest OECD member. Ownership costs are fully deductible, while there are provisions allowing for an absence of taxation on income.

An advantage enjoyed by the major OECD nations by virtue of their occupying the best locations on the planet is a richness of the tax base. Poorer nations may replicate the magnetism given by natural advantages and attract mobile activities in two ways: either (1) by maintaining more efficient and honest governments, i.e. more service at lower cost or (2) by adopting magnetic tax structures. Hong Kong was cited as an example where the shunning of repellent taxes redoubled natural magnetism. It became a world center of both secondary and tertiary industry, with a high per capita income by world standards. The OECD effectively is targeting the magnetic tax structures of governments that are efficient and economical.

Although the independent status of The Bahamas would indicate that the country would benefit from these initiatives, picking up new business in the short run, the "honeymoon" period would likely lead to new OECD pressures, in the Professor’s view. Baroness Elizabeth Symons, a high UK official dealing with the overseas territories, reportedly has said already that the new OECD guidelines are intended not just for members and their territories, but non-members as well.

Capital can never be uniformly taxed, even within one nation, and today’s global economy has heightened the ability of creative people to minimise taxes on mobile capital. The OECD’s response has been to call for more enforcement and to scapegoat small international financial centres. While the OECD does not criminalise the earning of income, it is saying that it is criminal to earn income and not "admit" it and "pay a fine". This latest move is part of a longtime thought-control campaign to universalise that attitude toward earning income and to impose a false, self-serving - the worst kind - morality. Income-tax agents were identified as voyeurs, frustrated and offended by privacy provisions in other nations, and strongly believing that they have the moral authority to pierce those veils and invoke political force for the purpose. Income taxation cannot endure without a worldwide intelligence network: a global inquisition by the revenue agents of every nation into the records of every other nation.

The U.S. professor opined that OECD nations concerned about tax competition can look to three choices: imposition of exchange controls to prevent capital export; muscling of small nations into copying their own repressive tax systems – i.e. extending their sovereignty worldwide; or reform of their own domestic tax systems, leading to a world of benign tax competition. On this last option, Professor Gaffney commented that the OECD can move away from extra-territorial taxation to purely intra-territorial taxation; away from in personam (personal or corporate) taxes towards in rem (levied on a thing) taxes; and away from a mobile tax base towards a more immobile tax base. "Although we do not see a current move in these directions, one or two nations can face them down".

Professor Gaffney concluded with a challenge to The Bahamas: "...a determined small community, jealous and precious of its sov-ereignty, can defy, puncture and collapse a bloated world tyranny. It’s been done before. Freedom anywhere foils tyranny everywhere."

Now ranked third in the "league" table of registers with gross tonnage approaching the 30 million mark, the Bahamas Ship Register seems assured of sustained growth. Administered by the Bahamas Maritime Authority, the Register has met its objective of attracting highly responsible owners – evidenced by the favourable statistics on losses by flag as well as port state detentions. The Bahamas’ record continues to perform well among both open and national registers.

The success of ship registration in The Bahamas can be attributed to many of the same factors which have positioned the country as a leading financial services centre: a progressive legislative and judicial system, political stability, neutral tax regime, competitive fees, and high standards.

The Bahamas only registers vessels admitted by the seven best classification societies. It requires annual inspections by approved inspectors, and adheres to safety conventions of the International Maritime Organisation, of which it is an active member. Regulatory and incentive legislation includes The Merchant Shipping Act, The Merchant Shipping (Oil Pollution) Act and The Merchant Shipping (Maritime Claims Limitation of Liability) Act. Special tariff and fee concessions apply to luxury yachts and home trade vessels.

The Bahamas is a prime maritime location. Positioned as a gateway to North and South America, it is a major destination for cruise ships, and has one of the largest oil storage, blending and transshipment facilities in the Western Hemisphere, located on Grand Bahama Island. Modern facilities in Nassau and Freeport permit handling of the largest ships in the world, with the financial services industry ably catering to the needs of offshore business.

The Register was introduced in 1976 and just over 20 years later by the end of 1998 it had grown from sixty vessels comprising 58,000 gross tons to over 1,400 international vessels totalling 28 million gross tons - with sustained growth into 1999. In tonnage, it is exceeded only by Panama and Liberia. The Bahamas Maritime Authority maintains offices in Nassau, New York, and London.

When asked, the new Director of the BMA, John Mervyn Jones said "The policy for the Authority is "growth with quality" and this is demonstrated by the number of high quality owners now using the Register. The Bahamas flag can be seen flying on well run ships in ports all over the world."

Freeport Harbour is North America’s emerging cruise and maritime centre, with the capability of handling the new generation of cruise vessels. Also located at Freeport Harbour is Bradford Marine, a mega-luxury yacht service and repair facility, with yacht storage, lay-up and wetdocking capabilities. Freeport Container Port is a state of-the-art, purpose built transshipment facility, capable of handling the largest containerships in the world. A Phase II project, expected to be completed in October 1999, will add a third berth and increase total capacity to 950,000 TEUs (twenty foot equivalent units) per annum. Construction will commence shortly for "Freeport Ship Care Facility" within the Freeport Maritime Centre. This ship care facility, a joint venture between Lloyd Werft Bremerhaven and BFSB member The Grand Bahama Port Authority Group of Companies, will carry out conventional repairs to vessels of all kinds, including conversions of tankers, cargo vessels, modernisation and conversion of cruiseships, passenger vessels and ferries.

BFSB members will be returning to the UK this fall in their continuing efforts to meet directly with individuals and organisations who influence decisions with respect to the selection of international financial centres. London and several other cities will be on BFSB’s agenda during the week-long visit, which is scheduled to begin on October 28.

STEP members will be a primary focus for this visit, although meetings with other organisations are planned as well. BFSB members were in London in the fall of 1998, meeting with international bankers and law firms during their inaugural promotional tour.

The growing strength of the Bahamas financial services industry is also creating a construction boom in the country. In great part, this can be attributed to the studious avoidance by Government and the private sector of promoting the jurisdiction to brassplate business or booking operations. Of the 400+ banks and trust companies registered in The Bahamas, about 200 maintain a physical presence here, with both accommodations and staff. The banks and trusts sector alone manages in excess of $300 billion in assets, contributing some 15% to the GDP. This tendency towards a physical presence can be attributed to the tremendous support system in place for the industry – the investor-friendly environment, skilled work force, legal and accounting professions, investment advisory firms, etc. A testament to the wide range of services available is the fact that several banks in The Bahamas also provide administration, information processing, and management services for affiliates in other offshore jurisdictions.

Office space accounts for about half a million square feet currently under construction, with commercial buildings leading the way. Financial services industry operations, particularly offshore banks and trust companies, already occupy or have pre-sold arrangements for much of the new space. Other bank and trust companies are moving into expanded premises. It is estimated that the increase in both Class A (buildings with modern design and amenities) and Class B (older buildings with upgrades) sites will exceed 65% with the completion of current projects.

Modern facilities cater to and support the industry-wide reliance on first rate communications and other technological needs, in a global marketplace.

Minister of Works Tommy Turnquest estimates that some $500 million will be generated from the overall construction industry by yearend. A 47% increase in permits represents a staggering 650% increase in dollar value since 1995, with revenue from building permit fees gaining 122% during the same period. Industry sources are optimistic that the present trend will continue well into the new millennium.

In commenting on the construction boom, BFSB Member David Morley of Morley Realty Ltd. points out that "...it comes down to supply and demand. The supply is diminishing while the demand has increased in the last two years." According to the Bahamas Real Estate Association’s annual commercial rental survey of Class A and Class B buildings, there was a vacancy rate of 16.3% in February of 1997, which then declined to 12.7% in February of 1998. Excluding the new office buildings currently under construction, the vacancy rate of existing available office space was approximately 2% in February of this year.

The launching of the Bahamas International Securities Exchange later in the year will not only position the Bahamas as a one stop shop financial centre but should also increase the volume of business in the sector – contributing to the momentum in the construction industry and other key sectors of the economy.

The Bahamas Financial Services Board will host its first Annual General Meeting on Wednesday, September 8th, at the Nassau Marriott Hotel in Nassau, Bahamas. The programme, starting at 4:00 p.m., will include reports on industry developments over the last year, and how BFSB has responded to each. The Hon. William Allen, Minister of Finance & Planning, will be the keynote speaker.

Coming in 2000 - The Bahamas Financial Services Guide: A definitive handbook on all financial and related services, this BFSB publication will be a complete reference guide of information, written and compiled by practitioners in the industry. It will provide industry companies the opportunity for promotion through a medium with broad international reach and appeal.

The Bahamas is included among jurisdictions that have introduced user-friendly insurance legislation, designed to facilitate sophisticated insurance structures and investor protection. It has been successful in attracting companies and private individuals looking for transparent, compliant methods of investing internationally.

Asset protection benefits and tax efficiencies are the primary reasons that offshore insurance products have become attractive financial vehicles in the area of estate planning. Competitive costs, access to international investments, and specialised cover all add to the attractiveness of this vehicle, particularly for high net worth individuals seeking to defer income and estate taxes.

Insurance products commonly used for wealth and risk management include:

• Annuities: can be used in certain onshore jurisdictions to defer domestic tax while growing the assets within the annuity in a tax-free environment.
• International life insurance: these products permit additional tax benefits to facilitate globalised investment within a tax-free regime. "International life insurance is the way ahead for those onshore investors – particularly in the U.S. – who wish to obtain access to the international markets through a compliant declared structure. This market is in its infancy, but The Bahamas has the legislation as well as the professional and institutional presence to facilitate its growth" says Hywel Jones of the Britannia Consulting Group.
• Offshore captive insurance: an effective risk management, tax planning and investment holding vehicle – widely used by large corporations, professional groups, and others.

The offshore insurance industry is distinct from the domestic insurance sector, but also is regulated by the Office of the Registrar of Insurance Companies (ORIC), under the oversight of the Minister of State for Economic Development. Guiding legislation is The External Insurance Act, 1983 and its 1996 Amendment.

Growing opportunities for wealth management: The newly rich are fast gaining on the titled and well born who sit atop traditional fortunes. The combined wealth of the top 200 working rich has surpassed $1 trillion, more than doubling from $463 billion a decade ago.

Congratulations to Bahamas Realty, celebrating 50 years in operation.

Global Life Assurance Bahamas Limited has expanded its net-work from 3 to 6 branches. Global now has 5 branches in New Providence and one in Freeport.

Effective as of June 28, 1999 Lloyds Bank International (Bahamas) Limited changed its name to Lloyds TSB Bank & Trust (Bahamas) Limited.

Their Boards have announced an agreement providing for the transfer of Scottish Widows’ business to the Lloyds TSB Group. The proposed transaction will create the UK’s second largest provider in the life, pensions and unit trust market - with a broad and powerful distribution capability.

Norshield International and Cardinal International have become strategic partners in offshore financial management.

Systems Resource Group (SRG) recently announced a new relationship with Mitel Corporation, as a distribution partner.

• Americas International Bank & Trust Company
• Bahamas Incorporation Services Ltd.
• Bank of The Bahamas Ltd.
• Jerome E. Pyfrom & Co.
• Swiss Financial Services (Bahamas) Ltd.

As reported in the inaugural issue of BFSB NewsBriefs, the United Nations has launched an Offshore Initiative under its Global Programme Against Money Laundering. Effectively, the GPML intends not only to recognise those OFCs which have established high standards for the proper regulation of the offshore financial services industry, and to take steps to ensure that others comply, but to work with the industry in defining and upgrading such standards. The Bahamas has been commended for its efforts - with particular regard to its vanguard legislation - and, in fact, now serves on a special assessment committee established by GPML. During August, Governor Julian Francis of the Central Bank represented The Bahamas at a GPML Conference in Austria.

Also during August, The Bahamas played host for the Second Regional Judicial Symposium sponsored by the University of the West Indies (UWI) and the United Nations Drug Control Programme (UNDCP). Eighteen Caribbean Commonwealth countries participated in the 4-day legal training programme aimed at sensitising judges in areas of concern. Particular focus was given to legal and procedural intricacies of current asset forfeiture and money laundering legislation, extradition and mutual legal assistance issues. It was announced at the symposium that The Bahamas plans to establish a Financial Intelligence Unit, tasked with investigating and prosecuting suspected money launderers. In remarks to the group, Prime Minister Hubert Ingraham reaffirmed that The Bahamas has "no interest in providing a haven to any illegal money" and, further, is "..a committed member of the international community actively engaged in the international effort to stop the illicit drug trafficker, to prosecute and to imprison those found culpable…..to protect financial institutions and systems from abuse…". Arising from the Judicial Symposium was an agreement entitled "The Nassau Declaration", promoting increased regional cooperation on mutual legal assistance in criminal matters. It is hoped that this "Nassau Declaration" will be considered at a CARICOM Law Ministers meeting scheduled for later in the year.

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