of
WELCOME
Montague Sterling Centre, 2nd Floor, East Bay Street, PO Box N-1764, Nassau, NP, Bahamas Tel: (242) 393-7001; fax: (242) 393-7712
Senior Commercial Partnerships Manager Tony Hopkins Tel: +44 (0)20 3771 tony.hopkins@thinkpublishing.co.uk7251
accuracy at the
A world contender that’s true to its roots
liability or responsibility for errors or omissions therein, however caused. STEP does not endorse or approve any advertisement and has no liability for any loss caused by any reliance on the content of any such advertisement. 4 INSIGHT How The
We hope that when you have finished reading this supplement, you will understand why we believe The Bahamas is the complete and compelling choice for financial ser vices.
SPONSORED BY THE BAHAMAS FINANCIAL SERVICES BOARD
the
continues to break new ground 7 INNOVATION Our evolving securities and investment environment 10 DIGITAL CURRENCY The history of money is entering a new chapter 13 PANDEMIC IMPACT Why clients and advisors are revisiting their structures 15 ESTATE PLANNING How to help clients seeking certainty in uncertain times 19 CAPTIVE INSURANCE Exploring the growth in this sector over the past decade 22 TIMELINE A brief history of financial services in The Bahamas 25 INVESTMENTS How inflation and geopolitical events are affecting investors 28 ADVERTISING FEATURE Fund administration and the impact of the pandemic 31 TOKENISATION Are tokens the future of entrepreneurial finance? 34 WRAP-UP Why financial services remain a government priority TRUST BAHAMAS 3 Dr
Financial Services Board O CONTENTS
n behalf of the BoardFinancialBahamasServicesandits member firms, we are pleased to present our STEP colleagues with this special supplement on The Bahamas as we reaffirm our position as a world contender in fiduciary services specifically and financial services in general. We hope that the editorial content demonstrates the intense commitment of The Bahamas to ensuring that our financial services industry and the business environment continue to provide a world‑class experience for you and your clients. We thank our many STEP partners for their continued support of The Bahamas. Your valuable insights over the years have played a significant role in shaping our industry and many legislative initiatives, enabling us to be nimble and responsive to the ever‑evolving global environment for financial ser vices. In this report, we focus on a number of areas that demonstrate how The Bahamas has remained highly competitive and resilient in the face of tremendous global headwinds and regulations affecting the industry. We provide an outline of our journey as a jurisdiction focused on innovation. Our success has been seen particularly in the area of trust and fiduciary services. This has been augmented with the development of bespoke client solutions, fund captiveadministration,insuranceand most recently the digital assets space. This innovation has continued despite the challenges of the past two years posed by the pandemic. While central banks around the globe are exploring digital currencies, The Bahamas was the first country in the world to introduce a central bank digital currency as a means of increasing financial inclusion. The Bahamas remains a world contender as an international financial centre while remaining true to its roots. T he Minister of Economic Affairs, who has responsibility for financial services, outlines the priorities for financial services and the economy on the final page of this supplement. We pride ourselves on being much more than a one‑product shop. Hence, we explore elements of our diverse toolkit, including investments, captive insurance, digital assets and our traditional wealth management offerings.
to press, neither they
www.bfsb-bahamas.cominfo@bfsb-bahamas.comPUBLISHEDBYTHINK 20 Mortimer Street, London, W1T 3JW Tel: +44 (0)20 3771 www.thinkpublishing.co.uk7200
Managing Editor Mike Hine Art Director George Walker Client Engagement Director Anna Vassallo This is a sponsored supplement, the content of which is paid for and controlled by the sponsor. STEP’s editorial team, including the STEP Journal Editorial Board, has not been involved in the production of this supplement. The views expressed in this supplement are not necessarily those of STEP and readers should seek the guidance of a suitably qualified professional before taking any action or entering into any agreement in reliance upon the information contained in this publication. Whilst the publishers have taken every care in compiling the content to ensure time going nor STEP accept Bahamas Tanya McCartney is CEO and Executive Director of Bahamas
y any standards, international financial centres (IFCs) such as The Bahamas have faced unprecedented challenges over the past several years and even in recent months. The ongoing COVID‑19 pandemic, recent economic turbulence and continued scrutiny by international bodies have intensified the business and competitive environment confronting IFCs. Yet despite these conditions and the associated pressures, The Bahamas continues to be among the world contenders for international financial services. This kind of resilience is a hallmark of the financial services sector in The Bahamas. No matter the state of the economy, and no matter what changes are occurring in the financial services and regulatory landscape, The Bahamas has always maintained its status as a global leader by being able to adapt to the new normal. Three factors contribute to The Bahamas’ resilience and ability to compete on the global stage: it is true to its roots and pedigree; it adopts the highest standards for compliance, innovation and client‑centric responsiveness; and it embraces emerging developments in the new e Thisconomy.trifold formula has been paramount in The Bahamas’ ability to attract and welcome international families, capital and business to its shores. In fact, the demand for residences and talent that The Bahamas satisfies, which is being embraced by family offices and private clients, underscores why The Bahamas’ location,
world contender over the past 20 years. This has facilitated a highly competitive and market‑responsive financial services offering and allowed The Bahamas to move forward into the new economy with confidence. A key element of The Bahamas’ infrastructure is its strong public‑private partnership, where communication is open and frank among government, regulator and private sector. This facilitates our engagement in creating and investing in our wealth management pedigree and areas such as digital assets, carbon credits and environmental, social and governance (ESG) solutions.
1. TRUE TO ITS ROOTS
Why The Bahamas is a
B regulatory environment and forward‑looking legislation are gaining strength and acceptance as core compelling attributes of the ju risdiction.
The Bahamas is home to over 270 licensed banks and trust companies, including seven of the world’s top eight private banks and 35 of the top 100 global banks. These institutions deliver a range of services, including private banking, trusts, fund administration, accounting, legal e‑commerce, insurance and corporate and maritime services. North American banks have been doing business in The Bahamas for more than a century, and European and Swiss banks have deep roots established over more than 70 years. Financial institutions from other regions with growing economies are recognising the advantages of operating in The Bahamas. Additionally, there are more than 800 funds that are licensed in The Bahamas and more than 60 fund a Fewdministrators.jurisdictionsoffer the wealth management experience that exists in The Bahamas, with its 80‑plus‑year track record in financial services. This heritage is the basis for the strong legal framework that has been cultivated for financial services; an investment climate that has been nurtured over the decades; and a stable and predictable business environment anchored by thousands of Bahamian professionals who work side by side with expatriate c olleagues. There is a sound and proven infrastructure in place that has been built and modernised
INSIGHT 4 TRUST BAHAMAS
2. INNOVATIVE, CLIENT- CENTRIC AND COMPLIANT Post‑2000, The Bahamas had to become more conscious of, and proactive in, reflecting global norms. As a result, our regulatory foundation has strengthened. From a global connectivity perspective, we see this transition paying dividends today in light of what we endured in the past two decades. It has been a dynamic period in that we have had to be fearless in striking the right balance between being compliant and aggressive. If we perceive there is a need to tweak, we will tweak, but we will not stand still; we will always be responsive and reflect the needs of our clients and partners. Foundations are a prime example. When The Bahamas made changes to facilitate the introduction of foundations, we received significant pushback. Some people said, ‘Wait a minute; are foundations not tools for inappropriate behaviour?’ But we were confident that our regime was sufficiently strong to provide a robust, well‑regulated environment in which foundations can be utilised in an appropriate manner. So, the NEVER ONE TO STAND STILL, THE BAHAMAS IS BREAKING NEW GROUND ACROSS ITS DIVERSE ECONOMY BY WENDY WARREN
The financial services sector’s sustainability has implications for the broader economy. The diversity of product offerings in the sector contributes to the livelihood of the Bahamian people and the country’s economy. This contribution will become more pronounced as the country pivots to invest in diversification, with a focus on ‘blue’ and ‘orange’ economies, which have been identified as pathways for greater economic expansion, business opportunities and wealth creation.
INSIGHT TRUST BAHAMAS 5
The Bahamas is looking to modernise its fishing industry, generating ocean science and marine conservation opportunities while sustainably developing marine biotechnology, aquaculture and deep‑sea exploration initiatives. Renewable energy industries are also on the horizon. Meanwhile, as a vital component of the Bahamian economy, the tourism sector is looking to design a new business model that fully integrates culture and the creative industries in The Bahamas. Both tourism and financial services are actively supporting these initiatives domestically and internationally. When the country’s traditional economic engines engage the country’s new economy, benefits accrue to b oth. Wendy Warren is a Director at Onyx Partners
The Bahamas, being true to its market‑responsive DNA, is keeping pace with changes that are required to be a world contender as a hub for digital assets. The Securities Commission of The Bahamas (the capital markets regulator) is spearheading a raft of initiatives to advance this transformation, including amendments to the DARE Act to address key developments since its promulgation.
3. THE NEW ECONOMY Despite the recent turmoil in the crypto market, The Bahamas remains bullish on the mid‑ to long‑term prospects for digital assets. It was one of the first countries to introduce a digital currency in the form of the Bahamian Sand Dollar. And the recently introduced Digital Assets and Regulatory Exchanges Act, 2020 (the DARE Act) was developed in line with how we approach the wider picture. The DARE Act is not a stand‑alone solution, but rather represents the broad features of the jurisdiction, such as private banking and funds, coming together to recognise why a broader‑based fintech capability is required.
Sustainability
‘It has been a dynamic period in that we have had to be fearless in striking the right balance between being compliant and a ggressive’ perception of foundations might have been negative elsewhere, but some ten years later, other common‑law jurisdictions have followed suit. While 2020 and 2021 have been unprecedented years for many industries, for financial and corporate service providers in The Bahamas, this period brought in a host of new and amended regulations that have the potential to transform the landscape of the i Thendustry.Financial and Corporate Service Providers Act, 2020 enhances the legal and regulatory framework for those providing corporate and administrative services. Meanwhile, the Banks and Trust Companies Regulations Act, 2020 consolidates and modernises the law regulating local banks and trust companies to enhance governing powers for the Central Bank of The Bahamas. The introduction of the Investment Funds Act, 2019, which enhances the regulatory framework of Bahamas investment funds, allows for the appointment of international fund administrators and generally rationalises the responsibilities of all key parties. Level playing field Over the past few years, The Bahamas has passed a compendium of legislation to meet international standards regarding substance,economicremoval of preferential exemptions and automatic exchange of tax information to meet the EU and OECD’s criteria on tax matters. This resulted in the EU removing The Bahamas from its list of uncooperative jurisdictions for tax purposes in March 2020. In addition, The Bahamas maintains the highest standards in the fight against money laundering, terrorist financing and other identified risks and thereforebeenhas making significant strides in the fight against financial cr ime. The anti‑money laundering, counter‑financing of terrorism and counter‑proliferation financing legislative, regulatory and enforcement landscapes have been thoroughly reviewed and strengthened, with The Bahamas being deemed compliant or largely compliant with 38 out of 40 standards established by the Financial Action Task Force (FATF).
The emergence of The Bahamas as a digital assets hub has resulted in companies such as FTX establishing their global headquarters in Nassau, as well as a strong interest in Bahamian corporate vehicles to house the operations of digital asset businesses.
The Office of The Bahamas Attorney General will be submitting a re‑rating of the final two Recommendations to the Caribbean Financial Action Task Force. One addresses not‑for‑profits and the other addresses the effective regulation and supervision/monitoring of virtual asset service providers. The intent is to ensure compliance with all 40 of the FATF Recommendations. All of these efforts aid in enhancing the risk profile of The Bahamas as an IFC, making it an attractive jurisdiction for financial services.
he Digital Assets and Registered Exchanges Act, 2020 (the DARE Act) and the Investment Funds Act, 2019 (the IFA) have gained international acclaim for their innovative, pragmatic responses to vexing regulatory concerns. Legislative initiatives are opportunities to solve problems, but they are also opportunities to innovate. We approach them as such, with the view that what will distinguish the Securities Commission of The Bahamas (SCB) is our deep commitment to providing pragmatic solutions in response to regulatory risk. To illustrate this, the investment funds legal framework, prior to the promulgation of the 2019 legislation, had not kept pace with international best practices and standards. It had supported The Bahamas’ wealth management industry at the start of the millennium, but by the time The Bahamas underwent its peer review under the International Monetary Fund’s Financial Sector Assessment Programme in 2012, the framework was found to be deficient in several key areas. As for the digital assets space, despite its growing importance to investors and wealth managers, there was no legal framework in place to provide much‑sought‑after legal and regulatory clarity. In both instances, the SCB found itself positioned to demonstrate its innovative prowess, as it set out to update or develop the respective legislation.
The SCB’s approach to these initiatives can be simplified into developing a practical understanding of regulatory concerns as well as stakeholder needs (the problems to be solved), prioritising those needs, and determining and implementing pragmatic, sustainable, best‑in‑class regulatory solutions.
A Bahamas‑based fund is no longer required to appoint an investment fund administrator in The Bahamas to provide its principal office. Investment fund administrators for Bahamian investment funds may be licensed under the IFA or licensed and operating in any prescribed jurisdiction anywhere in the world. This approach opens the door for international administrators to license funds under the IFA.
Christina R. Rolle is Executive Director of the Securities Commission of The Bahamas
NEED: PRAGMATIC LICENSING TRIGGERS FOR REGULATING INVESTMENT FUNDS Under the IFA, an investment fund that carries on/attempts to carry on business in or from The Bahamas must be licensed as a Standard, Professional or Specific Mandate Alternative Regulatory Test (SMART) fund. ‘Carrying on business’ in this context now applies to an investment fund that is incorporated in The Bahamas or offered for sale to non‑accredited investors in The Bahamas. Therefore, investment funds are eligible for licensing based on the activity they conduct or intend to conduct, and who will be impacted by those activities, rather than whether or not certain service providers to the fund are located or licensed in The Bahamas.
Under the IFA, funds must appoint an investment fund manager, except in very specific circumstances. The investment manager must be licensed if the fund is sold to non‑accredited investors but does not need to be licensed if the fund is being sold to accredited investors only. Importantly, investment funds may appoint investment managers licensed or registered in prescribed jurisdictions without the need for licensing of the investment manager in The Bahamas. In such cases, there is a simple registration process.
INNOVATION T innovationregulatoryFirst-class
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Absent a framework for the regulation of investment managers, the previous investment funds legislation consequently burdened the investment fund administrator with all responsibilities for a Bahamas‑licensed investment fund. This may have met the needs of the primary users of investment funds in the early 2000s – private banks and trust companies servicing their clients – but as the funds industry evolved, this misalignment of responsibilities became too onerous for administrators and did not address the lacuna of fiduciary duties that should be the responsibility of the investment manager. It also meant that administrators licensed in The Bahamas were at a disadvantage to administrators licensed in other jurisdictions, where they may not be saddled with fiduciary responsibilities. Funds needed flexibility in selecting administrators, and non‑accredited investors expected vetted and licensed investment managers. By developing a framework for the licensing and supervision of investment managers, the IFA framework now answers the call in both a reas.
APPOINTMENT OF INVESTMENT FUND MANAGERS
NEED: RIGHTING RELATED PARTIESRESPONSIBILITYREGULATORYAMONG
THE NEW AND EVOLVING SECURITIES AND INVESTMENT ENVIRONMENT IN THE BAHAMAS BY
ADMINISTRATORS FROM ANY PRESCRIBED JURISDICTION
CUSTODIANS AND OPERATORS Funds must appoint a custodian, who must be independent of the administrator, manager and operator of the investment fund, and is obliged to segregate the cash and other assets of the fund from those of the custodian itself. Funds are also required to appoint operators, based on how the fund is structured. Operators have responsibility for the operation of the fund in compliance with the IFA and the fund’s constitutive documents. They are subject to fit and proper CHRISTINA R. ROLLE
The SCB’s primary objective in developing the DARE Act was to bring regulatory certainty to the dynamic, fast‑paced and evolving crypto space. The SCB had observed the potential the space represented for The Bahamas’ wealth management industry, with increasing investor interest in fintech and crypto‑assets globally. The SCB fielded interest from international fintech operators seeking to operate in a well‑regulated, compliant jurisdiction. Enveloping these opportunities, the Government of The Bahamas had also made clear its intention to transform the jurisdiction into a regional fintech hub.
NEED: REGULATORY FLEXIBILITY AS THE SPACE DEVELOPS Given that the digital assets or crypto space was (and is) still in its infancy, or in any event, far from maturity, it was clear to the SCB that it needed to establish a legislative framework that was not overly prescriptive. This allows the jurisdiction to be nimble and to react to new risk trends or market development opportunities. To develop the legislation, the SCB initially conducted a benchmarking exercise of 13 select jurisdictions, homing in on regulatory approaches, global standards and best practices in the digital or virtual assets space. The SCB reached out to other regulators with relevant experience and consulted with industry and other stakeholders to develop the legal f ramework. The DARE Act came into effect on 14 December 2020. The legislation provided sought‑after clarity and successfully established a Bahamian legal and regulatory framework for the registration of digital token exchanges and for the issuance of digital tokens via initial token offerings.
The DARE Act provides key legal definitions for salient terms, including digital asset business, digital assets service provider, digital token, non‑fungible token, utility token and virtual currency token. It intentionally does not set out to answer the question of whether a digital asset is a security or not. Throughout the DARE Act, although various types of digital asset are clearly defined and the legislation is clear about what is in scope for regulation, digital assets or crypto‑assets are recognised as their own asset class. By giving the space its own regulatory regime, The Bahamas has removed the narrow question, and its inherent uncertainty, of whether a crypto‑asset is a security and instead provided a framework whereby digital assets can be addressed holistically.
NEED: COMPLIANCE WITH AML/CFT/CPF STANDARDS How the DARE Act addresses global anti‑money laundering, counter‑financing of terrorism and counter proliferation financing (AML/CFT/CPF) standards is vitally important. The SCB continues to home in on the Financial Action Task Force’s (FATF’s) Recommendation 15 and its evolving explanatory/interpretative notes. In keeping with the principles, under the DARE Act, digital assets business is subjected to the primary national AML/CFT/CPF legislation, including the Proceeds of Crime Act, 2018, the Anti‑Terrorism Act, 2019 and the Financial Transactions Reporting Act, 2018. In line with the FATF Recommendations, the DARE Act focuses AML/CFT supervision and oversight on the digital asset service provider, rather than the new technologies themselves. The term ‘beneficial owner’ in the DARE Act is assigned the same meaning as in The Bahamas’ Proceeds of Crime Act, 2018, harmonising the definition with this key legislation. The DARE Act requires financial institutions to perform initial risk assessments prior to launch. It requires digital assets businesses to have systems in place to prevent, detect and disclose money laundering, terrorist financing and suspicious transactions. They must also comply with the SCB’s rules, policies and guidelines on risk management and the prevention of money laundering and terrorist f inancing.
CONCLUSION Pragmatism is a key consideration in The Bahamas’ approach to regulation, and the jurisdiction continues to watch as trends indicate a move toward securities and other asset classes becoming tokenised. We are also mindful of recent emerging risks that came to the fore in the aftermath of the great ‘crypto winter’. These risks must now be addressed in the regulatory framework and clear best practices must be established to protect investors. If you know anything about The Bahamas, you know we do not view our size as a handicap, but a reality we can leverage to our benefit. The access that we as regulators have to industry players and regulatory addressees, policymakers and the consumers and investors we aim to protect allows us to identify and act on urgent matters and to be innovative in providing pragmatic solutions to regulatory concerns.
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INNOVATION assessment and must be independent of the administrator unless exempted from this requirement or structured as an investment c ondominium.
NEED: LEGAL CERTAINTY REGARDING DIGITAL ASSETS BUSINESS
EU MARKETS ACCESS
Finally, the IFA is also compliant with the EU’s Alternative Investment Fund Managers Directive. This allows The Bahamas to qualify for passporting under the Directive. The framework grants a distinct licence for managers operating in the EU or managing funds from the EU. The IFA also addresses the EU’s standards for investment funds regarding the regulation of auditors. Under the framework, all funds that do not submit to a full annual audit are required to receive a certification every three years from a qualified accountant that its books are being maintained within International Financial Reporting Standards or US Generally Accepted Accounting Principles standards. Auditors must be approved by the SCB to act on behalf of regulated persons.
On 16 March 2022, the SCB published its AML/CFT/CPF rules for the DARE Act. These rules are based on the FATF’s Recommendation 15 and its interpretative notes and provide specific requirements for the digital assets space. They are supplementary to the DARE Act and are also expected to evolve as the space evolves.
DIGITAL CURRENCY 10 TRUST BAHAMAS
A with the Act. It is fully backed by reserves that the Central Bank holds and represents a direct claim against the CentralAccordingBank.to the Regulations, a BDDC wallet is a digital wallet issued by a regulated wallet provider that holds BDDC and is registered under the Act.
LEGAL INNOVATIONS
CENTRAL BANKS AROUND THE WORLD ARE EXPERIMENTING WITH DIGITAL CURRENCIES, AND THE BAHAMAS IS NO EXCEPTION BY ALEXANDER M. B. CHRISTIE AND VANESSA M. R. HALL ‘The Bahamas was the first country to create a government‑backed,blockchain‑basedcentralbankdigitalcurrency’
The Regulations set out a clear and detailed process by which a firm can apply to conduct this business. They also safeguard the currency in those wallets with conditions that wallet providers must satisfy before registering as wallet providers or before continuing to provide wallet‑related services. Each applicant must: ■ have adequate software and hardware; ■ have taken adequate steps to safeguard wallet holders’ f unds; ■ have clear rules to help it resolve disputes about the provision of wallet services; ■ have a safe and reliable information technology system and ‘adequate interfaces to ensure interoperability, access and data protection, as well as robust contingency and disaster‑recovery procedures’; and
ll financial jurisdictions must evolve or die. The world is changing swiftly, and it is almost essential for anyone who wants to keep up with the times to use digital currencies. The Bahamas was the first country to implement a
The evolution of currency
The innovative Central Bank of the Bahamas Act, 2020 (the Act) includes, among other things, ‘electronic money’ in its definition of currency. A year after passing it, legislators went a step further and implemented the Bahamian Dollar Digital Currency Regulations, 2021 (the Regulations), which define the Bahamian dollar digital currency (BDDC) as an electronic version of the Bahamian dollar which the Central Bank of The Bahamas (the Central Bank) issues in accordance
■ have effective arrangements in place for the protection of clients’ assets and monetary arrangements consistent with any prescribed rules or guidelines that the Central Bank might i Registeredssue.wallet providers must also follow strict guidelines if they wish to remain registered. The Central Bank can suspend or cancel a wallet provider’s registration if it believes that the wallet provider, among other t hings: ■ ha s not distributed BDDC within 12 months of the date on which its registration was approved; ■ ha s obtained approval for registration through false statements or some other irregular me ans; ■ ha s ceased to meet the criteria set out in the Regulations; ■ is c ontravening the Regulations or breaking any other law of The Bahamas;
Serviceaagainstcentrallegalformcompanytodigitalblockchain‑basedgovernment‑backed,centralbankcurrency(CBDC).AccordingblockchainsoftwaretechnologyConsenSys,aCBDCis‘adigitalofcentralbankmoney,whichistendercreatedandbackedbyabankthatrepresentsaclaimthecentralbankandnotagainstcommercialbankoraPaymentProvider’.
The Act and the implementation of the Regulations lay the foundation for the Bahamian CBDC, the so‑called Sand Dollar. This is the digital form of the Bahamian dollar that the Central Bank issues through authorised financial institutions. The user keeps the currency in their digital wallet by means of a mobile phone app or by using a physicalUltimately,card. a CBDC such as the BDDC is an extension of paper money, also known as fiat currency. Fiat currency is legal tender issued by the Central Bank in the form of notes (sometimes called bills) and coins. The use of fiat currency is still the most popular method of payment. Some may argue that it is the most secure means of exchange, and it is certainly the fastest. A payment via credit or debit card, while still considered a digital payment, is nonetheless an example of banks moving fiat currency about. It is not as secure as a fiat currency transaction, due to the threat of accounts linked to such cards being hacked or a card being compromised, but it is certainly efficient. Both physical fiat currency and digital fiat currency have their pros and cons, and it appears that the objective of the CBDC is to merge those pros and cons. By doing so, it makes payments quick and secure.
The Bahamas has taken a bold and innovative first leap into this new chapter, accomplishing something that no jurisdiction has done before. In doing so, the country has equipped itself well for the quickly approaching brave new world of tomorrow. Alexander M. B. Christie is a Partner, and Vanessa M. R. Hall is an Associate, at McKinney, Bancroft & Hughes
A BRAVE NEW WORLD
The Act empowers the Central Bank to issue any amount of BDDC that it sees fit, as long as it promotes and oversees a safe, sound and efficient national payment system. Nobody else may issue the currency of The Bahamas as electronic money in the ju risdiction.
A growing number of central banks in emerging markets are considering setting up their own digital currencies to include more people in the financial system and decrease the cost of handling cash. This school of thought is in line with the Sand Dollar’s objective, which is to ‘achieve greater financial inclusion, cost‑effectiveness, and provide greater access to financial services across all of The Bahamas’.
THE SAND DOLLAR
A RESPONSIVE REGIME
Why are central banks going down this path? They have, traditionally, participated in two kinds of payment transaction – fiat currency and intermediary bank payments. Technology is progressing in both of these areas and has led to the implementation of other (decentralised) digital currencies. It is sometimes argued that physical fiat currency is on its way out, but the Central Bank says that it has no plans to eliminate c ash.
‘The BankCentralsaysthat it has no plans to eliminate cash’ DIGITAL CURRENCY ■ is doing business in a manner that is detrimental to the public interest or to the interests of its wallet holders; or ■ is contravening any term or condition subject to which the Central Bank granted its registration.
The Regulations empower the bank to promulgate such codes, rules, guidelines, policy statements and practice notes as it sees fit in order to set limits or restrictions on wallet balances and transaction values for different categories of wallet holders: ■ in f urtherance of its regulatory objectives; ■ in relation to any matter regarding any of its functions under the Regulations; and ■ in relation to the operation of any provisions of the Regulations. Furthermore, the Central Bank may issue written directions, generally or specifically, to any wallet provider in any circumstance where it believes t hat: ■ it is necessary or expedient for ensuring the integrity or proper management of BDDC and the technology platform; ■ it is necessary or expedient for the effective administration of the Regulations; ■ it is in the public i nterest; ■ a per son is engaged in, or is about to engage in, an unsafe, unsound or unfair practice with respect to BDDC; or ■ a per son is likely to contravene or fail to comply with the Regulations or any codes, rules, guidelines, policy statements and practice notes that have the force of law. These provisions make the regime responsive to a fast‑maturing and evolving industry.
‘Wallet providers must follow strict guidelines if they wish to remain registered’
Although only the Central Bank can issue BDDC, the need for wallet providers creates opportunities for investment in The Bahamas.
So, why is this even remotely beneficial to Sand Dollar holders? The Sand Dollar allows for a better payment process, a reduction in transaction costs and better security in the form of multi‑factor authentication, wallet security and cybersecurity a ssessment.
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Kristilina Georgina, Managing Director of the International Monetary Fund, has summed up the objective of CBDCs perfectly: ‘The history of money is entering a new chapter. Countries are seeking to preserve key aspects of their traditional monetary and financial systems, while experimenting with new digital forms of mone y.’
The issues considered above and the lessons learnt during the pandemic have added to our full range of advice on tax, estate and trust matters. This article is an excerpt of a presentation made to BFSB members in London, UK, on 30 June 2022 on the impact of the COVID‑19 pandemic on practice and developments in fiduciary services. Edward Hall is a Partner at Wiggin Osborne Fullerlove
THE COVID-19 PANDEMIC HAS PROMPTED CLIENTS, FAMILIES AND ADVISORS TO REVISIT THEIR PLANNING AND STRUCTURES BY EDWARD HALL PANDEMIC IMPACT
‘During the pandemic, we noticed an upward trend in theirre‑engagingtrusteeswithbeneficiaries’
TRUST BAHAMAS 13
A time to review
INDIVIDUALS
We also saw an increase in instructions to review structures as a whole and to consider whether they are fit for purpose: do they fit the requirements and circumstances of the family? There has been a move away from overly complex trust structures (which have now become outdated and unworkable) and a trend towards families simplifying and streamlining their structures. Lockdown restrictions meant that some international families found themselves living in countries for longer periods of time than planned or expected. Trustees were advised to check the tax residency of their beneficiaries when making distributions during the pandemic to ensure that unexpected and adverse tax consequences did not occur.
P
ractitioners know that it is good practice to review private clients’ affairs and structures regularly. The COVID‑19 pandemic brought this exercise into sharper focus, with private individuals and trustees reflecting on current structures. As a result, practitioners saw an increase in instructions to review wealth preservation measures. Below are some of the issues that we have explored with clients over the past two years during the pandemic.
We saw an increase in private individuals and their families reviewing their testamentary arrangements. This included updating existing testamentary papers (to reflect any changes to the circumstances of the family and their assets) and putting new testamentary papers in place. It is important to consider whether all members of the family have testamentary papers in place, as it is often the case that the next generation have never discussed their own testamentary ar rangements. The same applied to lasting powers of attorney (LPAs). We considered whether all family members had LPAs in place and existing LPAs were reviewed and, if necessary, updated. The importance of this exercise was exacerbated by the increased need to have attorneys in place in response to COVID‑19 complications and significant delays to register LPAs at the England and Wales Office of the Public Guardian (OPG). These delays continue to remain an issue, with the OPG reporting that it will take up to 20 weeks for it to register an LPA. Private clients also embarked on wider estate planning, and we saw a wish to accelerate wealth passing to the next generation. The pandemic has crystallised families’ estate‑planning conversations and wealth succession plans have been brought forward.
AN OPPORTUNITY TO RECONNECT Generational shifts can also prompt change and the need for review. During the pandemic, we noticed an upward trend in trustees re‑engaging with their beneficiaries, and this involved the next generation, sometimes for the first time. Our experience was that beneficiaries welcomed the opportunity to reconnect with their trustees and to develop a relationship that went beyond the usual distribution requests from beneficiaries and the administrative and due‑diligence requests from trustees.
TRUSTEES In more certain times, there are many reasons why trustees may wish to review their trust structures, such as a change in family circumstances, or a shift in the tax situation affecting the trust. During the pandemic, these reasons were accentuated and additional reasons came to the forefront. In response to this, we saw trustees reviewing their structures. Directly relevant to the pandemic was a review of incapacity provisions, with an international focus on the potential implications of COVID‑19 and concerns about health generally. We considered whether trust deeds or articles of association had provisions relating to the incapacity of trustees and/or directors and, if so, whether those provisions worked in practice. Where there was a family business, we advised the trustees to conduct a review of the directors. It is critical to ensure that the right people are appointed as directors, and this is even more important during an economic downturn. Like the review of trust incapacity provisions, we also considered whether the business could continue as normal if there was an unexpected death or incapacity of key personnel. We advised trustees to review any existing letter of wishes and consider whether those wishes should be updated to reflect any changes to beneficial interests and circumstances. During this process, we noted that a letter of wishes is often prepared on the creation of the trust structure, but keeping the letter of wishes current and updated is oftenWeoverlooked.alsoadvised trustees on their investment powers, duties and obligations. During economic difficulties and financial pressures, trustees are well advised to give their trust assets a health check. It is good practice to periodically review investment portfolios and arrangements with investment managers.
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timesinCertaintyuncertain
While the creation of wills is a prudent step, a will is effective from the date of death until the estate is wound up. To address any period where a person’s wishes cannot be effectively obtained, other documents are necessary. In particular, consideration should be given to the creation of powers of attorney (PoAs), enduring powers of attorney (EPAs) and healthcare or personal welfare declarations as part of proper estate planning. With its foundation in the law of agency, a PoA gives a person appointed by its terms authority to deal with the financial and business affairs of another. Such PoA could be used to complete a business transaction or other financial matters in circumstances where a person is prevented from attending to the transaction or matter personally. A PoA can be granted generally or limited to a specific transaction or time frame. A PoA, in its original format and usage, is terminated by any period of mental incapacity of the donor, including but not limited to mental disorders, dementia and Alzheimer’s disease. In The Bahamas, an EPA, created by the Powers of Attorney Act, 1992 (the Act), makes it possible for a PoA to remain in existence and valid after a person has become mentally incapacitated. The use of PoAs and EPAs permits the financial and business affairs of a person to continue uninterrupted during periods of absence, confinement, quarantine or incapability and enables the donee of the power to act on behalf of such person. A healthcare or personal welfare declaration enables a person to convey their wishes and desires regarding medical treatment, the extent of any medical intervention and their personal care. Faced with periods of confinement, quarantine or inability, whether as a result of health concerns, restricted movement or otherwise, these additional documents can enable the plans and aspirations of the donor to be discerned and fulfilled.
In addition to the provisions of the Act, the Powers of Attorney Rules, 1996, established pursuant to the Act, mandate conditions for the valid and effective execution of EPAs. To ensure the validity of an EPA created in accordance with the Act, the instrument must, with certain permissible deletions and adaptions provided for in the Act and its accompanying rules, be in the prescribed form under the legislation.
HOW A COMBINATION OF ESTATE‑PLANNING DOCUMENTS CAN HELP AVOID FAMILY CONFLICT AND DISCORD BY SHARMON Y. INGRAHAM ESTATE PLANNING
ENDURING POWERS OF ATTORNEY Section 4 of the Act, which introduced EPAs into the law of The Bahamas, provides that: ‘(1) The authority of a donee given by an instrument creating a power of attorney that— • provides that the authority is to continue notwithstanding any mental incapacity of the donor; and • is signed by the donor and a witness to the signature of the donor, other than the donee or the spouse of the donee, is not terminated by reason only of the subsequent mental incapacity of the donor that would but for this Act terminate the authority.’
n the wake of the uncertainty generated by the COVID‑19 pandemic, persons have taken a greater interest in obtaining certainty in other aspects of life. In particular, persons have made it a priority to organise their affairs, taking steps to ensure their wishes are documented and can be effected if necessary. Many persons consider the only necessary document in the organisation of their estate to be a will.
To the extent the instrument creating the EPA purports to exclude any required provision of the Act or its rules, the instrument would be invalid as an EPA under the statute. In that event, if such instrument becomes necessary upon a person becoming mentally incapacitated, the invalid document would be ineffective. The Act and its rules also require that the instrument be signed by both the person appointing another to deal with their financial and business affairs and the person being appointed. The duly executed and properly witnessed instrument must also be lodged at the Supreme Court Registry. After the EPA has been fully executed and lodged with the Supreme Court Registry, it may be properly relied upon I ‘In creating a healthcare guidanceonedeclaration,mayderivefromdecisionsofthecourtsintheUK’
• There are no formal requirements for the revocation of an advance directive. …
1 [1993] Fam 95 2 [1994] 1 All ER 819 3 [2003] EWHC 1017 (Fam) Sharmon Y. Ingraham is a Partner at Higgs & Johnson
In light of the above, it is clear that it is permissible to designate, in some form, directions for medical and healthcare as well as personal care. For certainty and ease of reference, it is advisable that the authorisation regarding medical, healthcare and personal care matters be addressed in writing which can be produced and consulted as necessary. There is at present no reported Bahamian case law on the issue, so it remains to be determined what guidance the court would give in the circumstances. However, setting out in an official document a person’s wishes, instructions and directions for medical treatment, and the scope of treatment to be administered when such instructions cannot be verbally communicated, would provide guidance to family members and medical professionals when determining a treatment plan. Where the declaration addresses personal care, the wishes of the person for matters like living arrangements, such as home care versus residential institutions, would assist in avoiding family conflict as to where an elderly relative should live.
• The existence and continuing validity and applicability of an advance directive is a question of fact. Whether an advance directive has been revoked or has for some other reason ceased to be operative is a question of fact.
The authors of Butterworths Wills, Probate & Administration Service (issue 119, June 2021) note at paragraph 2.3 that the England and Wales Court of Protection has deleted from EPAs provisions directed at healthcare or personal care matters. Accordingly, where it is desirable to convey wishes or instructions for medical or healthcare decisions or other personal matters, such wishes or instructions ought to be set out in a statement declaring the person’s directions.
ESTATE PLANNING and utilised by the person/s appointed to deal with the financial and business affairs of the appointor. However, where healthcare and personal care decisions need to be made, or will likely need to be made, a PoA or an EPA is inapplicable. Under s.2 of the Act, mental incapacity is defined as meaning in relation to the person ‘that the person is incapable … of managing and administering his property and affairs’. On that basis, considering the definition of mental incapacity, the scope of the authority derived from an EPA thereunder would be limited to property, business and financial matters.
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• There are no formal requirements for a valid advance directive. An advance directive need not be either in or evidenced in writing. An advance directive may be oral or in writing.
CONCLUSION Good estate planning addressing issues in the event of a prolonged absence, an inability to move freely or difficulty in communicating can be achieved through the creation of a will, an EPA and a healthcare and personal care declaration. The combination of these documents would ensure that a person’s wishes and directions are clearly discerned and effected during any periods of incapacity, whether physical or mental. The existence of such estate‑planning documents can also avoid family conflict and discord. A combination of these essential planning documents can give persons comfort and certainty in the midst of an uncertain and unsettling time.
• If there is doubt that doubt falls to be resolved in favour of the preservation of life.’
• The burden of proof is on those who seek to establish the existence and continuing validity and applicability of an advance directive.
… This right of choice is not limited to decisions which others might regard as sensible. It exists notwithstanding that the reasons for making the choice are rational, irrational, unknown or even non‑existent …’ In another English case, Re C (adult: refusal of medical treatment),2 it was held that the court, exercising its inherent jurisdiction, may via injunction or declaration rule that an individual was capable of refusing or consenting to medical treatment, and that could include future medical treatment. Finally, Mr Justice Munby in HE v A Hospital NHS Trust and Another 3 summarised the law at para.46 thereof: ‘… I can summarise the law as follows:
HEALTHCARE AND PERSONAL WELFARE DECLARATIONS
• An advance directive is inherently revocable. Any condition in an advance directive purporting to make it irrevocable … and any provision in an advance directive purporting to impose formal or other conditions upon its revocation, is contrary to public policy and void. …
Many persons consider it unthinkable and/or inhumane to be placed on machines or other treatment methods to sustain bodily functions where there is no detectable brain function, while other persons prefer that every medical resource available should be pursued to sustain life for as long as possible. To assist family members to determine a person’s position with regard to such treatment, a healthcare and personal welfare statement or declaration could be helpful. In some jurisdictions such documents are termed ‘living wills’ or ‘advanced directives’ and are supported by legislation enacted for that purpose. At present, in The Bahamas there is no legislation that specifically addresses or permits the creation of such instruments. However, a declaration of a person’s wishes may be made in accordance with the Oaths Act to help to avoid family uncertainty and conflict. In creating a healthcare declaration, one may derive guidance from decisions of the courts in the UK. In considering the issue of such instruments regarding medical treatment, the England and Wales Court of Appeal in Re T (Adult: Refusal of Treatment),1 per Lord Donaldson of Lymington MR, held: ‘… An adult patient who, like Miss T., suffers from no mental incapacity has an absolute right to choose whether to consent to medical treatment, to refuse it or to choose one rather than another of the treatments being offered
• Where life is at stake the evidence must be scrutinised with especial care. Clear and convincing proof is required. …
CAPTIVE INSURANCE
TRUST BAHAMAS 19
‘The present legislation has certainly helped the insurance sector to grow’
Success story
STREAMLINED AND ENHANCED
WHAT ARE CAPTIVES? SMEs across various industries are interested in the Bahamian captive market. Their aim is to minimise losses that they might incur during the course of their operations. Such an entity might be either a stand‑alone company, i.e., a single‑parent company, or a registered segregated account in an already licensed segregated account (captive insurance) company. A stand‑alone entity is incorporated, while a segregated account (or cell captive) forms part of a registered segregated accounts company. A typical company considers the size, nature and complexity of its operations before applying for the appropriate category of licence that best fits its strategy and commercialPresently,interests.allcaptives are licensed as ‘external insurers’ in accordance with the External Insurance Act, 2009 The Bahamas continues to register captives that insure risk associated with various industries, such as medical and healthcare administration, retail and wholesale distribution, agriculture, construction and real estate. The lines of business extended as coverage within these structures include workers’ compensation benefits, cyber‑risk, directors’ and officers’ insurance and excessAfterliability.aspate of growth earlier in the last decade, the aggregate number of segregated accounts has continued to demonstrate gradual growth over the past three years. The chart on page 21 outlines the number of external insurers identified as captives for the period 2019–2021.
OVER THE PAST TEN YEARS, THE NUMBER OF LICENSED CAPTIVE INSURANCE
ENTITIES REGISTERED IN THE BAHAMAS HAS GROWN CONSIDERABLY BY CARL CULMER T
he growth in The Bahamas’ captive market is largely attributed to small and medium‑sized entities (SMEs) seeking to set up their own segregated accounts. This option has proven to be cost‑effective for those SMEs, especially since they can and do outsource administrative and operational oversight to locally registered insurance managers, financial and corporate service providers and other financial services professionals, such as lawyers and accountants.
The present legislation has certainly helped the insurance sector to grow to a satisfactory degree, and the Insurance Commission of The Bahamas (the Commission) is determined to keep the applicable law competitive with the laws of other jurisdictions. It also remains intent on keeping its regulatory and supervisory regime effective and in line with the high standards of the International Association of Insurance Supervisors and the Recommendations submitted by the Financial Action Task Force. In 2021, as part of its strategic plan to amalgamate legislation, the Commission began a review of the jurisdiction’s two principal insurance laws – the Insurance Act, 2005 and the External Insurance Act, 2009. The purpose of the review, which is still in progress, is to streamline regulatory and supervisory requirements and to enhance legislation to help insurance structures. The Commission has collaborated with industry associations, professionals and the general public as part of its consultative effort. Individuals and companies have been keen to use these discussions to find out more about the captive market with a view to establishing captives of their own to support their medium to long‑term risk management strategies. Despite the lingering effects of the global COVID‑19 pandemic, international companies are still expressing interest in the establishment of captives in The Bahamas. The insurance industry continues to demonstrate its financial resilience to
□ a detailed business plan; □ an a ctuarial review or feasibility study; □ projected financial statements for three years (inclusive of balance sheet, income statement and solvency c alculations); □ sa mple policies to be marketed and sold by the applicant; □ details of the reinsurance programme (where applicable); and □ due ‑diligence documents for proposed shareholders, directors and senior officers. review of the application and consideration for approval by the Commission’s Board of C Thisommissioners.isgenerallyatwo‑stage process. to a satisfactory review of the application, the Commission initially grants the applicant approval in principle with conditions. Applicants are then given 30 to 60 days to satisfy these conditions of approval. Once the conditions of approval are met, the Commission issues a certificate of licence to the applicant. Carl Culmer is Manager for of The Bahamas 80
The Commission, along with the BFSB and the country’s captive insurance professionals, participates actively in the captive insurance industry’s events and training seminars. This ensures that all stakeholders remain well acquainted with the industry’s trending topics, challenges and opportunities. The Commission’s partnership with the BFSB has extended the promotional outreach of the jurisdiction as a captive domicile and has provided a forum in which meaningful discussions take place.
GROWTH AND OUTREACH
‘The financialtoindustryinsurancecontinuesdemonstrateitsresilience to economic shocks’ economic shocks. The effective use of captives can also serve as an additional absorber for companies that have suffered from such global shocks.
Subject
THE APPLICATION PROCESS
The BFSB, along with the Commission, will continue to work with the government to target the captive insurance and reinsurance industry as an area of economic interest. Companies that want to base their insurance business in The Bahamas should note the key regulatory requirements for approval. The external (captive) insurer application process includes the following: ■ a scheduled pre‑application meeting to discuss the proposed business plan; ■ subm ission of a completed application that includes, but is not limited to, the following:
REQUIREMENTSCAPTIVE
CAPTIVE INSURANCE
Every captive insurance company in The Bahamas must, among other things, satisfy the following requirements: ■ a minimum of two directors; ■ the appointment of a resident representative in The Bahamas at whose office books and records must be maintained; ■ a minimum of USD100,000 in share capital (additional regulatory capital may be required depending on the nature, size and scope of the proposed entity); ■ payment of application fees of USD100 (stand-alone) and USD250 (per segregated account); and ■ an annual (stand-alone) renewal fee of USD2,500.
Policies and Practices at the Insurance Commission
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The Bahamas’ participation in the captive insurance industry dates back to the 1960s. Given the islands’ rich history in this niche industry, the Government of The Bahamas has taken steps in recent years to ensure that this business actively contributes to the overall growth of the financial services sector. Local insurance managers and other financial intermediaries are still finding ways to promote both their own services and the jurisdiction as a whole in the captive market. The Bahamas Financial Services Board (BFSB) has helped them to do so, highlighting the jurisdiction as a competent and competitive international financial centre that promotes synergies between the industries of the financial services sector.
100120140160 180 EXTERNAL INSURERS IN THE BAHAMAS Total captive insurers Other external insurers (non-captive) Captive cells (segregated accounts) Segregated accounts companies Stand-alone insurance companies ■ 2019 ■ 2020 ■ 2021 166 152 167 455677111010 149 135 150
■
0204060
• The Investment Funds Act, 2003 repeals the Mutual Funds Act, 1995 and introduces the Specific Mandate Alternative Regulatory Test Fund (SMART Fund) as an additional style of collective investment vehicle.
• American industrialist Wallace Groves invests in Grand Bahama, creating a tax- and duty-free zone under the 1955 Hawksbill Creek Agreement Enactment of the Banking Act of 1965 , a deliberate effort to put the banking industry on a solid footing.
• The countr y becomes increasingly discriminating about who can operate in the sector and who can be brought in as clients.
• The Trustee Act, 1998 comes into force (see box).
• A 1970 law triggers the growth of the insurance industry in The Bahamas.
1995
1965 •
1998
2004
• The Foundations Act, 2004 comes into force, providing for the creation of private foundations in The Bahamas. Foundations have their origin in civil-law countries. NASSAU
THE BAHAMAS
• ‘A critical mass of big money began flooding into the country … due to the beneficial tax environment.’ – The Bahamas Investor
1955
• The Government of The Bahamas passes a package of nine anti-money laundering and counter financing of terrorism laws.
• A subsidiary of UBS AG, established as Swiss Bank Corp (Overseas) Ltd, is the first of the Swiss banks to take a foothold in The Bahamas. 1970s–1980s
1968
• The Mutual Funds Act, 1995 is passed.
inFinancialTimeline:servicesTheBahamas HISTORY 22 TRUST BAHAMAS NOW ACCOUNTING FOR ABOUT 20 PER CENT OF THE BAHAMAS’ GROSS DOMESTIC PRODUCT, ITS FINANCIAL SERVICES INDUSTRY HAS EVOLVED INTO A HIGHLY SOPHISTICATED, SUCCESSFUL SECTOR. READ ON TO DISCOVER THE KEY MILESTONES FROM THE PAST 100 YEARS OF INNOVATION AND TRANSFORMATION. 1908 • The Royal Bank of Canada opens in The Bahamas. 1930s–1940s
2000
2003
• The Register of Beneficial Ownership Act, 2018 provides for the establishment of an electronic database of beneficial ownership for legal entities registered in The Bahamas.
TRUSTS Much of the common law relating to trusts in The Bahamas has been supplanted by innovative statutory reform. The Trustee Act, 1998 (the Act) is the embodiment of that reform and provides the cornerstone of Bahamian trust legislation. One innovative feature of the Act is its displacement of the rule in Saunders v Vautier by barring beneficiaries from terminating or modifying a trust if such action would defeat a material purpose of the settlor in creating the trust. Additionally, the Act permits an extensive arrangement of powers to be reserved to the settlor. The most recent amendments to the Act were made in 2016 to re assert the rule in Re Hastings Ba ss
HISTORY TRUST BAHAMAS 23
Today, The Bahamas’ insurance industry is divided into two distinctly separate markets – domestic governingmergeisLegislativeexternal/international.andreformonthehorizontothelegislationinsurance.
2014 • The Investment Condominium Act, 2014 (ICON Act) is enacted. The ICON is intended to be an alternative to a traditional company, unit trust or exempted limited partnership vehicle for use in relation to investment funds. It is modelled on the Brazilian ‘condominium’ concept of pooling assets for collective investments in an unincorporated manner akin to the concept of joint ownership and administration of property, which is well understood in the civil-law jurisdictions of 2018
• The Bahamas meet s the OECD’s 30 September deadline to implement automatic tax information exchange with 35 partner jurisdictions.
2020 • The passage of the Digital Assets and Registered Exchanges Act, 2020 puts in place the legal framework for those interested in entering the digital asset space. The Bahamas is planning further continued refinement of digital assets legislation to address matters such as stable coins.
Did
The Bahamas has promised to generate at least 30 per cent of its energy from renewable sources by 2030. The island nation plans to invest the money from selling blue carbon credits in renewable energy and other green projects.
2012 • The Executive Entities Act, 2011 force. It is designed to facilitate the creation, operation, management and termination of a new private wealth structure, the Bahamas Executive Entity (BEE). A BEE is ‘a legal person established by a Charter to perform only executive functions and registered in accordance with the Act’ and is ‘able to sue and be sued in its own name’.
• The Investment Funds Act, 2019 (as amended) and Investment Funds Regulations, 2020 repeal and replace the Investment Funds Act, 2003 and Investment Funds Regulations, 2003 , respectively. know?you
• Economic substance legislation comes into force on 31 December.
insuranceFutureof
BY CHRIS ILLING INVESTMENTS
his has been a challenging year for the international investor. During the height of the pandemic, the volume of mobile trading by retail traders grew enormously because people had plenty of surplus disposable income, more spare time in which to trade from the comfort of their homes and increasingly reliable internetNowadays,connectivity.anyone can easily trade in securities on the internet. Online brokers make this possible, offering investors access to global trading venues through software and fintech.
TRAPS FOR THE UNWARY If someone wants to sit at home and invest on their computer or smartphone, they should compare the offers of the various online brokers. Although they offer their services at considerably lower prices than direct banks, i.e., banks with no branch networks, they are not completely free of charge. Sometimes the fee‑free depots and trades are offset by return‑reducing third‑party flat rates, negative interest, exchange fees and trading c ommissions. In addition to fees, the investor should pay attention to the asset classes in which they want to invest when choosing an online broker. Not every service offers trading in cryptocurrencies or contracts for difference, for example. It is also worth comparing the services with each other, because not every online broker offers multilingual customer service or contact by phone. The user interface should be clearly designed and easy to use. An online broker that offers a free demo account for testing is recommended. It is important for every investor in the stock market to have a balanced portfolio. Anyone who invests in stock listed all over the world and who relies on the large, well‑known global stock indices is not going to feel the effects of volatility in the markets as badly as, for example, an investor in 2022 who depends on Russian companies. One should look not at the next few weeks, but the next few years.
‘Stocks have struggled and bonds have done worse, [but] commodities are an isolated bright spot’ and
TRUST BAHAMAS 25
T
THE RUSSIA UKRAINE CONFLICT HAS BROUGHT DECADES OF PEACE IN EUROPE TO AN END. COMBINED WITH THE COVID-19 PANDEMIC AND HIGH INFLATION, THIS HAS CAUSED SIGNIFICANT UNCERTAINTY IN THE FINANCIAL MARKETS. WHAT DOES THIS MEAN FOR INVESTORS?
fallRise
The inflation rate in the US was 8.5 p er c ent for the 12 months ending in March 2022. Crypto‑assets are the most high‑profile instruments that investors are using to protect their portfolios against inflation. They are, however, only one type of asset. Investors can look to real assets as well. Gold, for example, should continue to do well during the rest of 2022. The price of this precious metal rises when inflation is high but may dip if interest rates rise. Real interest rates, i.e., interest rates after inflation, are therefore decisive and these are likely to remain negative globally. Even if the US Federal Reserve were to raise interest rates to 2 p er c ent by the end of next year, which would be extremely high, real interest rates would still be well into the red given inflation of 4 p er c ent. This should elevate the goldInprice.ayear in which stocks have struggled and bonds have done worse, commodities are an isolated bright spot. It is important to note that investors in commodities have been able to gain this year from increases in the price of raw materials. Investors obviously know that energy prices have surged this year, with the Russia‑Ukraine conflict interrupting the flow of oil and gas. The conflict has had its repercussions in many other commodity markets as well, since Russia and Ukraine export a whole host of commodities, including wheat, corn nickel and palladium. Along with exchange‑traded products that target single commodities, several multi‑commodity exchange‑traded funds (ETFs) have found themselves to be very p opular.
THE ASSET CLASS DU JOUR ?
Chris Illing is Business Developer at ActivTrades TRUST
ETF INVESTMENTS
ETFs are popular with investors as trading instruments. An ETF is a type of pooled investment security that operates much like a mutual fund. The fund tracks a particular index, sector, commodity or other asset but, unlike a mutual fund, an ETF can be purchased or sold on trading platforms in the same way that a regular stock c an. QQQQ trades on the Nasdaq exchange and is one of the more popular ETFs. This security offers broad exposure to the tech sector by tracking the Nasdaq 100 Index, which consists of the 100 largest and most actively traded non‑financial stocks on the Nasdaq e Alternatively,xchange.the Direxion Daily S&P Biotech Bear (LABD) 3X Shares seeks daily investment results, before fees and expenses, of 300 p er c ent of the performance of the S&P Biotechnology Select Industry Index. The first US bitcoin‑linked ETF is the ProShares Bitcoin Strategy ETF (BITO.US), which offers investors a familiar way to gain exposure to bitcoin returns but with the liquidity and transparency of an ETF. An investor can expose their portfolio to bitcoin easily with this. When BITO was launched in October 2021, it became the fastest ETF to reach USD1 billion in assets under m anagement.
BAHAMAS 27
Increases in the price of raw materials have benefitted investors in commodities
INVESTMENTS
THE TRIALS AND TRIBULATIONS OF INVESTING If a retail investor trades in an ETF, especially a crypto‑related one, they will gain some advantages if they do so with the help of a regulated broker. In addition to various problems that beset the spot market itself, the unassisted investor faces some complex transactions if they want to invest in bitcoin directly, even through an exchange. If they look at the disclosures made by one of the exchanges that offers bitcoin, they might see a statement in the small print that says: ‘You could lose all your money in a fork.’ They must then spend some time on the internet to find out what a fork is on the blockchain. Many people are comfortable with this process, but there are certainly some who are not amenable to the challenges of dealing in a new asset like that in its raw form. Then, of course, there are issues that surround custody and wallets. Once the investor is in an exchange, they have only just embarked on some tough decision making. They must then determine whether the exchange ought to hold their wallet, whether they ought to hold their own wallet, whether they ought to hold their wallet and keep their code on a memory stick, or on a piece of paper in a vault, and so on. Many small investors are looking for simpler ways to take part in the crypto‑market and brokers offer them one way of doing t his.
FundBastian administration and the impact of the pandemic
ADVERTISING FEATURE
THE PAPERLESS OFFICE At Genesis, we decided in early 2018 to create a paperless office. We did not have a crystal ball to help us foresee the events of 2020–2021. We did, however, see that digital technology was evolving and pushing our processes – and the industry as a whole – towards more digitisation. We had to satisfy the demands of our clients and fund investors for more advanced technological reporting, communication and management of their business data. Fortunately, before the pandemic struck, we reduced our paper processes and all remaining manual processes dramatically. COVID 19 simply hastened and obliterated any vestiges of paper processes that were left, because manual applications simply could not happen when working from home. The fund administration industry, and we here at Genesis, therefore adapted to paperless processing. We did this with subscriptions, redemptions, accounting and, most importantly, the review and collection of due di ligence data. Without the advent of the pandemic, we would simply not have collected, vetted and processed due di ligence information from home as soon as we did.
Many fund administration staff have worked arduously and conscientiously at home. Having faced the stress of working all hours in a domestic setting, they now want to take some time off. Work/life balance has therefore become a key issue for senior management. During two years of lockdowns, isolation and the need to work from home have changed the way in which so many of our colleagues view the work experience. Some of them have seen their parents and other family members succumb to COVID 19 . Many have changed careers and residency or moved to different firms. Human capital has moved around in an unpredictable and disruptive way. The retention of talent is also a top agenda item for fund administrators. I remember, years ago, working outrageously long hours – Sundays included. My employers expected this of me, but today’s firms cannot expect the same; people will not come in on Sundays. Firms must now be more flexible and competitive. They must hold onto COVID ‑19 HAS CAUSED IMMENSE DISRUPTION TO BUSINESSES THROUGHOUT THE FINANCIAL SERVICES INDUSTRY. HOWEVER, SOME FUND ADMINISTRATORS HAVE TAKEN IT IN THEIR STRIDE. By Antoine
WORK/LIFE BALANCE
D uring the COVID 19 pandemic, all business operations have had to deal with change on a large scale. Even the world of fund administration has changed and, at Genesis Fund Services, these changes have affected not only what we do but also the way we do it . Before the pandemic, we all tended to view change as inevitable. However, the general pace of change in our industry was moderate until COVID 19 arrived. That pace then accelerated enormously and catapulted us into an uncertain future. We now seem to be emerging from the worst of the pandemic and entering a ‘new normal’ for clients, employees, fund investors, fund managers and The Bahamas as a juris diction. Technology, talent management and digitisation lie at the heart of this new normality.
Before COVID 19 , Genesis would never have permitted its employees, even its most capable and trusted employees, to have taken customers’ passports, bank details and other information into their homes because of the need for privacy and accountability. A STEEP LEARNING CURVE However, to continue operations effectively and to satisfy regulatory responsibility while maintaining best practices, we had to work quickly to improve and monitor our cybersecurity and data protection. We had never anticipated a time when 100 p er c ent of the workforce had to work at home, and the firm therefore had to take on the unbudgeted costs of buying everyone a new laptop, a second screen and an updated Wi Fi device. The advent of intense training in cybersecurity and updates to controls that safeguard clients’ information have led to major improvements and benefits for financial service providers. Now, employees who are not in the compliance department must discharge responsibilities for due diligence when they are at home and must be conscious of the need to safeguard clients’ information and mitigate the risks involved. The use of two a nd three factor authentication has become the norm. Firms are far more aware of their duty to safeguard clients’ data and have overwhelmingly improved the ways in which they mitigate risks that pertain to in dividuals.
Although technology and human capital are of prime concern for a fund services organisation, it must have a good corporate culture that can knit the two together. An intentional drive to formulate and implement plans to ensure that we have a cohesive team has been crucial during the pandemic. The demand for talks and seminars on communication, mental health and mindfulness, or other subjects to do with the development of the whole person, has outweighed the demand for more accounting or compliance training by far. The creation of a new ‘conscientious culture’ during and after COVID 19 h as become as important as the development of efficient accounting or due di ligence processes. At the same time, the maintenance and progression of a vibrant corporate culture has been one of the most difficult aspects of business in the pandemic. Collaboration among leaders and coaching in the workplace will continue to be important aspects of the future work environment. All organisations should have continual plans to improve their corporate cu lture. After the pandemic, The Bahamas will continue to be an important jurisdiction for investment funds. There is a high buzz about crypto investing in our jurisdiction and the Government of The Bahamas has recently issued a white paper on the future of digital assets; it is evident that crypto fu nds as an asset class represent the future. Globally, investment by institutional investors in the crypto fun d arena is relatively small but many fund managers are starting to consider some investment there, either directly in various cryptocurrencies or through other means such as crypto deri vatives, crypto firms or crypto ET Fs (exchange traded funds).
During the pandemic, fund administrators have been working hard to improve their technology. A few years ago, an administrator would have been served adequately by one system that handled accounting and its relationships with investors, one for corporate and compliance matters and perhaps another for other aspects of the business. However, although fees have gone down for services over the past ten years, the cost of providing straight through processing (STP) safely and efficiently has sky ro cketed along with the cost of both hardware and s oftware. Investment managers and investors in funds, moreover, have been insisting that their fund administrators ought to improve their reporting, data delivery and cybersecurity continuously. Smaller fund administrators have found the piecemeal nature of their technological solutions burdensome. COVID 19 has hastened their need for software connectivity to improve results for clients. Technology is not only crucial for the provision of excellent service; it has become as essential as talented human capital. The need for fund administrators to provide collaborative business data through the use of technology has become standard. Their further collaboration with investment managers and fund administrators using technology – with regards to both the safeguarding of clients’ data and the provision of seamless services – is another part of the new nor Investmentmal. managers have had to face similar burdensome movements in human resources and changes in technology and regulatory rules. As such, they have had to reassess their service providers to ensure that their talent, the quality of their services and the technology that they require have improved beyond pre pan demic norms. Over the decade prior to the pandemic, due di ligence questionnaires for fund administrators were standard. The pandemic, however, caused a noticeable increase in questions to do with technology and due diligence that cover, among other things, data protection, redundancy and cybersecurity. Investment managers and institutional investors have also intentionally asked more questions about corporate governance, diversity, equity and inclusion. It is now normal for fund administrators to provide dynamic governance, diversity and technological p latforms.
‘The general pace of change in our industry was moderate until COVID-19 arrived’ well trained, experienced and talented p eople. They must, moreover, be able to attract and recruit talented professionals. Despite having experienced some staff attrition, fund administrators have had many opportunities recently to hire eager, talented professionals from all over the globe and from career paths outside financial services. Fund administrators no longer want to employ mechanically minded people to perform robotic functions. They would rather invest in versatile, problem sol ving individuals who can work with various aspects of the b Althoughusiness.the cost of recruiting, retraining and developing professionals has increased, firms have now fast tracked these elements of the work experience and are using creative means to do so. When COVID 19 d isappears, the result at every firm will be a well trained staff, a greater capacity for work and a better experience for cl ients.
TECHNOLOGY AND DUE DILIGENCE
ADVERTISING FEATURE
CORPORATE CULTURE
Phone: +1 242 502 7020 Email: abastian@genesisfundservices.com Web: www.genesisfundservices.comAntoineBastian is CEO GenesisatFund Services
The Bahamas’ regulated ‘SMART’ and ‘Professional’ fund classes are primed for the exploration of these new and exciting structures. Investment managers or institutions that are trying to figure it out can use the SMART fund model to gain crypto ex posure. Bahamian Professional funds have no limitation on types of assets and can also be used as vehicles for crypto as set exposure. Whether in crypto fu nds, private equity funds or hedge funds, the new normal has positioned Genesis to be even more capable of providing fund ad ministration services of high quality in the world after COVID 19 than it was before. Our base in The Bahamas has helped us retain and recruit highly talented staff. It has also been crucial for the creation of our fast and reliable technological p latform.
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A study by Ghent University concluded that tokenisation could offer total cost savings of up to EUR4.6 billion by 2030, provided adoption rates were high.
Further, tokens provide customisable opportunities and bridge legacy finance with the new world of digitisation, gleaning benefits from each.
Customising and designing security tokens carefully can equip entrepreneurs with heightened abilities to raise more capital easily and quickly. In addition, a data flow free of friction, provided that there is a regulatory framework and adequate policies are in place, permits greater transparency.
BENEFITS TO ENTREPRENEURS In modern times, in order to take advantage of the heightened process efficiency and greater ability to access global liquidity pools, we have seen new alternative assets formulated as a result of isolating specific economic functions, such as tokenised cash flows from real estate projects or royalty cash flows from works of art. For the purposes of this article, we will focus on security tokens (see the box on page 33 for Securitydefinitions).tokens introduce a myriad of benefits to entrepreneurs: first, they protocol of various cryptocurrencies is instituted by the company issuing the tokens, and thereafter, the tokens issued by the company are sent directly to the token holder’s digital wallet address or through a crypto‑exchange.
Blockchain is a shared, distributed ledger that facilitates the process of recording transactions or tracking assets in a business network. Thus, blockchain is a distributed database for recording transactions. The word ‘distributed’ means that there is no centralised storage location, such as a central server or a cloud computing platform; instead, the information and technical transactions are spread across a wide network of computers. The blockchain concept was first discussed in a bitcoin white paper, written by Satoshi Nakamoto, in which he referred to the distributed ledger as ‘a chain of blocks’. In this white paper, Nakamoto suggested a peer‑to‑peer distributed ledger platform for the processing of financial transactions without relying on trusted third parties for their execution. The network is founded on a peer‑to‑peer distributed architecture, which necessitates consensus calculations and/or algorithms to ensure that the transactions across the blockchain network are duplicated so that the ledger maintains its integrity. What this means is that anyone with access to the blockchain network will be able to see the same information. Blockchain networks can be public and accessible by anyone, such as bitcoin and ethereum, or private and permissioned, such as a corporate network for asset tracking. Beneficially, trust is incorporated into the structure of theInnetwork.somejurisdictions, tokens continue to be unregulated, while in others, regulatory guidance has been issued or a regulatory framework has been put in place to govern token offerings. In the past, some token issuers took the position that, so long as the token being offered was not a security under the laws of the jurisdiction of its issuance, there was no need to consider whether the token constituted a security in any of the jurisdictions in which the token may ultimately be purchased or resold. It is clear that this reasoning is faulty.
rom as early as the 2000s, entrepreneurs have sought innovative and dynamic methods of raising capital from the public. This is evident in the surge of crowdfunding platforms attracting professional and retail investors that have been at the centre of digital transformation. Having a significant impact on entrepreneurship financing, tokens have emerged allowing entrepreneurs to receive capital easily, quickly and efficiently. Entrepreneurs can raise capital by issuing tokens to token holders in a similar way as a company would issue shares to its investors, in exchange for consideration (the token price). While tokens customarily are not representative of actual ownership in a company, token holders often seek to acquire tokens in anticipation of such tokens increasing in value following their acquisition and later being sold on a secondary market.
TOKENISATION IS AN INNOVATIVE NEW FINANCING AND CAPITAL-RAISING MODEL FOR ENTREPRENEURS BY DR IYANDRA SMITH BRYAN F
TOKENISATION entrepreneurial create an innovative new financing and capital‑raising model that leverages scalable efficiencies. They provide enhanced and easily accessible liquidity. Moreover, by removing third‑party intermediaries traditionally involved in the post‑trading process, tokenisation offers significant cost‑efficiency benefits.
THE BLOCKCHAIN Tokenisation takes place when a new blockchain monopolising an underlying finance
The future of ‘Tokens bridgeopportunitiescustomisableprovideandlegacyfinancewiththenewworldofdigitisation’
TOKENISATION
IS A TOKEN OFFERING A SECURITY OFFERING?
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THE DARE ACT In The Bahamas, the sale or redemption of a digital token in exchange for fiat currency or another digital asset is expressly regulated by the Digital Assets and Registered Exchanges Act, 2020 (the DARE Act). The DARE Act defines what triggers registration of an initial token offering under the legislation. An issuer that intends to offer digital tokens for sale in or from within The Bahamas through a token offering shall prepare an offering memorandum and shall comply with the regulations, rules and guidelines to be promulgated under the DARE A ct.
Dr Iyandra Smith Bryan is General Manager at Quantfury Trading
Before issuing tokens, companies should ensure the requisite regulatory and legal analysis is undertaken to determine whether regulation would apply and their tokens could be considered tokens, and the steps that must be taken to ensure adequate compliance. If the primary goal is to raise money, rather than, for example, to build a network, legal and commercial issues are likely to arise that require consideration before conducting a token sale. For example, in the US, the Chairman of the Securities and Exchange Commission (the SEC) has provided guidance to the effect that the SEC will apply the tests and standards that have been laid down by the Supreme Court of the United States (the Supreme Court) in the well‑established case Securities and Exchange Commission v WJ Howey Co (Howey). In Howey, the Supreme Court held that the offering of a token constituted a security offering subject to the Securities Act of 1933 (the Act). When determining whether a token offering constitutes a security offering that is subject to the Act, the Supreme Court laid down a four‑prong test. Is t here: 1. an investment of money 2. in a c ommon enterprise 3. with the expectation of profit 4. fr om the managerial e fforts of ot hers? Factors that are relevant to this four‑prong inquiry centre on the manner in which the token is offered and/or distributed. If a token offering is considered to be a security offering, then it must adhere to all securities law requirements, which include requirements to register, cybersecurity requirements, anti‑money laundering and market manipulation requirements, among other regulatory requirements. Further, firms that are handling the token offering, including any exchange or intermediary trading, are also subject to such securities law requirements. In applying the Howey four‑prong test, the SEC has pursued a number of avenues for regulation. In 2017, the SEC applied the Howey test to digital assets for the first time, when it found that the sale of Decentralized Autonomous Organization (DAO) digital tokens was A token is a digital representation of a right (or rights) to any tangible (financial or otherwise) or intangible assets, stored and recorded on a blockchain. There are different concepts of tokens: tokenised securities, security tokens, utility tokens and payment tokens. Utility tokens are primarily focused on supporting and developing a community based ecosystem by awarding consumptive rights to token holders, while payment tokens are a means of payment in a blockchain based ecosystem. Tokenised securities are customarily considered to be a traditional, regulated security type with a digital wrapper; that is, where the proof of ownership in the company is recorded on a distributed ledger On the other hand, security tokens tend to have a much more expansive scope and inherent characteristics that are formulated to constitute or represent assets typically of an underlying financial type, such as participation in a company’s earnings streams, or an entitlement to dividends or interest payments, or a combination thereof packaged together. Such tokens may be classified as equities, bonds, collective investment schemes or derivatives, dependent upon their economic functions and terms.
What is a token? an unregistered securities offering. The DAO offering was issued via a Swiss foundation, and the SEC’s report on the token offering confirmed that the existing US securities law framework applies to token offerings and must be considered even in the case of token offerings occurring primarily outside of theTheUS SEC has also issued further regulatory guidance clarifying its view that the vast majority of token offerings are often structured as offerings of securities, for the primary reason that token holders acquired tokens very likely for the exclusive purpose to later profit from an increase in the value of the token, emanating from the company’s business model and s trategies.
The DARE Act applies to: (a) any person who as organiser, issuer, founder, purchaser or investor participates in the formation, promotion, maintenance, organisation, sale or redemption of an initial token offering; and (b) any legal entity carrying on a digital asset business irrespective of the physical location from which the activity is carriedImportantly,out. the DARE Act expressly excludes tokenised securities, non‑fungible tokens, electronic representations of fiat currencies, virtual currencies and certain other types of token. It is important that entrepreneurs, as they seek to raise financing through token offerings, remain cognisant of the trend of financial regulators to scrutinise and review token offerings, whether in the jurisdiction of issuance or the jurisdictions in which the tokens are marketed or resold. Tokenisation creates new opportunities for raising capital, heightens access to liquidity in a cost‑effective manner and boosts access to new markets in an efficient and more readily accessible way.
WHY FINANCIAL SERVICES REMAIN A GOVERNMENT PRIORITY IN THE BAHAMAS
‘We are reinforcing The Bahamas’ brand on the global stage by focusing on our unique strengths’
EMERGING OPPORTUNITIES
Open for business I people. We are also referring to our good standing internationally, our strong relationships with the global community and our commitment to transparency and anti‑money laundering measures.’ He said that, during this budget cycle, The Bahamas will be prioritising the promotion of the jurisdiction as being ‘open for business’ to global investors. ‘We are reinforcing The Bahamas’ brand on the global stage by focusing on our unique strengths while promoting awareness of our resilience and progressiveness as a financial services jurisdiction,’ he said. ‘Thanks to continued stakeholder engagement on industry challenges and opportunities, the Ministry of Economic Affairs has a clear and fully developed policy direction and strategic approach that will guide its agenda for the coming fiscal year.’
‘The Securities Commission is reviewing the position of global standards setters and leading regulators to update the DARE Act to address key issues and opportunities that are emerging in the digital assets space,’ HalkitisStablesaid.coins are a hot‑button issue globally, due to their potential application as a means of payment and the ensuing potential that they may someday pose a threat to financial stability.
The Honourable Michael Halkitis Minister of Economic Affairs
THE BAHAMAS’ BRAND Halkitis added that: ‘When we speak of jurisdictional excellence, we are talking about our geopolitical advantages, like our proximity to the US, economic and political stability, status as an international transshipment gateway, and the beauty of our sun, sand, sea and
■ A big driver of the jurisdiction’s innovative approach is the talent and expertise of its people. On a per capita basis, Halkitis said, ‘I don’t believe that any jurisdiction boasts the level of talent that we have in financial services. We have an abundance of world‑class attorneys, accountants, financial advisors, wealth management experts and insurance professionals who power the financial services sector.’
■ The legislative framework that governs The Bahamas’ financial services industry is among the strongest in the world. It is thanks to the strength and adaptability of its laws, Halkitis said, that The Bahamas is able to remain a global leader while keeping compliant with changing global standards.
n his budget contribution for the 2022/23 fiscal year, The Honourable Michael Halkitis, The Bahamas’ Minister of Economic Affairs, reinforced that despite all the recent global turmoil, the jurisdiction remains a safe harbour for financial services and investments. ‘Our financial services industry is built on the three pillars of measured innovation, world‑class expertise and jurisdictional excellence,’ he said, specifically noting that: ■ ‘Measured innovation’ refers to The Bahamas’ ability to keep pace with its global competitors while introducing innovations. But the key thing is that investors are assured that stability in The Bahamas’ financial services sector is always a pr iority.
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The minister added that The Bahamas’ financial services offering is being deepened and broadened, driven by a host of fintech advancements and developments of global importance.
The capital markets regulator (the Securities Commission of The Bahamas) is spearheading a raft of initiatives to advance this transformation, including: ■ amendments to the Digital Assets and Registered Exchanges Act, 2020 (the DARE Act) to address key developments since its promulgation; ■ an overhaul of the Securities Industry Act, 2011, which will bring commodities and securities derivatives within the scope of regulations in The Bahamas; ■ amendments to the Investment Funds Act, 2019 to clarify the investment fund manager regulatory regime and maintain the compliant, business‑friendly spirit of the legislation; and ■ the introduction of rules for non‑bank money lenders to bring much‑needed consumer protection to the space, including protecting borrowers from predatory lending practices.
‘The government is looking at issues around disclosure and valuation, as well as other investor and consumer protection issues,’ he said. ‘We expect to expand the DARE Act to address these critical issues and raise the standards for registration of this specific type of digital a sset.’
