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Wealth masters

Wealth masters

Financial services industry serves the world's wealthy with an ever greater depth of offshore options

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The Bahamas Investor Magazine
January 1, 2006
January 1, 2006
Julie Charles

Financial experts and institutions in this nation of tropical islands are catering to a growing class of people and enterprises for whom “global” isn’t just another media buzzword. These wealth managers and advisors have eyes focused on a new generation of high-net-worth individuals who have personal or corporate assets distributed well beyond any simple sense of place.

For a client whose fortune is typically self-made and whose mind is occupied with the day-to-day management of going concerns, the likelihood that assets are dispersed across an array of tax and legal jurisdictions calls for increasingly complex financial reporting, planning structures and estate advice.

“You find their assets get flung further than their personal ability to manage them,” says John Lawrence, director of Windermere Corporate Management Ltd, a family office service provider based in Nassau. “They’ve got operating companies and planes and boats and livestock and everything else that comes along with being wealthy. And as time goes on, families get further and further flung all around the globe, and that brings into play all sorts of tax planning issues and trust management issues … who’s going to help take care of their empire?”

Key to meeting these clients’ needs–and the evolution of the Bahamian financial services sector over the past five years–has been a move to build on the country’s long-time status as a leading offshore centre for wealth management. Since 2000, the legal system has codified structures that can be applied to a wider range of individual and institutional needs around the world. Financial services comprise the second most important component of the country’s economy, after tourism, accounting for about 15 per cent of gross domestic product. The sector is solidly anchored by a private banking and trust community that numbers more than 250 regional and international institutions and is widely regarded as a leader in the region. And the industry’s ambitions are set on growth, driven by a thoughtful analysis of what its customers value.

“People always look for the easy answers in financial services, and it’s just too complex,” says Wendy Warren, director of the Bahamas Financial Services Board (BFSB), a private-sector-led trade association that has had an influential role in the revamping of old, and the introduction of new, financial services legislation in The Bahamas. “We have high-net-worth clients. Well, what kind of high-net-worth individuals? Are they institutional? Are they using trusts? Foundations? Why are they here? Where are they from?

“It is a complex industry, and therefore you have to build systems that respond to the dynamic nature of the industry,” says Warren.

The advantages of managing personal or corporate assets out of The Bahamas are many, from the security of a stable, democratic government, reputable regulation and oversight, a healthy domestic economy and a regime that does not impose tax on income, wealth or inheritance–not to mention the fact that it is a lovely place for a visit or a second home, if you’re inclined to follow your money.

Solutions for the middle rich
The ranks of what the industry dubs the “ultra” high-net-worth people in the world–those with financial assets of US$30 million or more–grew by nearly nine per cent in 2004 to some 77,500 people, according to The 2005 World Wealth Report conducted by Capgemini and Merrill Lynch. As for mere millionaires, the report estimates that there are 8.3 million around the world today, which is 7.3 per cent more than in 2003. Those in-between, so-called “mid-tier millionaires,” with investable assets of $5 million or more according to the report, “have product and service needs that are often as complex as those of much wealthier individuals, yet they lack the wealthiest group’s deep financial resources.” With equally pressing needs for banking, insurance, trust and estate planning, accounting and legal services, “it quickly becomes clear just how daunting a challenge overseeing the management of their wealth is for these individuals.”

For this group in particular, managing wealth goes well beyond any single, catch-all financial product, such as opening a turnkey international business company in a tax-advantaged jurisdiction. Asset protection and estate planning requirements call for more technical solutions to minimize or defer taxes and other liabilities, help with succession and inheritance planning and keep a reasonable degree of personal privacy for financial affairs, among other goals.

Expanded financial service menu
To help achieve this, the BFSB brought the voices of hands-on financial services experts, tax practitioners and organizations to the government’s process of enacting new and enhanced financial services legislation and regulatory oversight since 2000, in its response to global trends in disclosure and bank supervision (see sidebar). The association has been part of a private/public collaboration that has included a Financial Services Consultative Forum and the Association of International Banks & Trust Companies of The Bahamas, giving practising trust, estate, corporate, banking and legal experts a hand in recommending market-driven ideas.

The outcome is that today’s financial sector offers up a broader selection of Bahamian-domiciled products and services that can be adopted by financial advisors worldwide. And it assures regulatory oversight that’s up-to-snuff with international reporting and compliance standards.

While the plain-vanilla trust remains the most classic Bahamian container from which to manage personal assets, the wider needs of international clients are now being served with a host of additions to the roster including:

• Foundations. In 2004, The Bahamas became the first common law jurisdiction to recognize use of foundations. These estate-planning structures are typically of interest to people residing in countries governed by a civil code where trusts are less well known. A foundation is a legal entity, resident in The Bahamas, and owner of its own assets which, therefore, remains tax-neutral in this country. Likened to a hybrid between a trust and an IBC, the Bahamian foundation can be established for charitable, commercial or private purposes.

“[Foundations were] always being employed, and we were employing them for our clients, but we were using the other jurisdictions to do it. Now we can do it all in-house,” says Adrian Crosbie-Jones, a director of The Private Trust Corporation Ltd, a licensed Bahamian bank, trust company, securities broker-dealer and mutual fund administrator.

• Purpose trusts. The Bahamas added a new depth to its already healthy trust business with legislation in 2004 formally recognizing the use of purpose trusts. These structures can be applied when there’s an advantage for a trust’s beneficiary to be a purpose rather than a person or company. It can allow for perpetual control of a family business or maintain family or business property without interference from beneficiaries, for example.

• Private trust companies. Through 2005, the government consulted with the industry to decide whether regulation would help facilitate and promote the use of private trust companies in The Bahamas, with new legislation anticipated. These are typically set up as an alternative to institutional trustees to create a family office and give settlors more control over assets held in trust.

• IBCs. While anonymous ownership, or bearer shares, of international business companies (IBCs) was banned after 2000, having been identified as providing a too-easy shelter for money laundering, the Bahamian IBC was amended and reinvented to balance client confidentiality with the need for public records. It allows shareholders to assign a Bahamian financial institution with the roles of director and officers on the Securities Commission registry, while shareholder names can remain unpublished.

“This applies for appropriate levels of privacy, so the shareholders are not a matter of public record but directors and officers are,” says the BFSB’s Warren. “And the reason is that we want to have a degree of accountability to the jurisdiction.”

• Segregated account companies. Also known as protected cell companies, these are an ideal way for companies to segregate assets into accounts that are independent and separately limited from each other and from the core account.

Wrappers on wealth
For trust and estate practitioners in North America, South America, the European Union and increasingly, Asia, The Bahamas’ product selection offers an impressive tool kit for structuring wealth to suit customized needs.

“The Bahamas is an absolute engine room for these kinds of products,” says Andrew Law, president and CEO of IPG Proctor Group Ltd, a Nassau-based advisor to family trusts. With major banking centres like Switzerland almost entirely reliant on foreign-domiciled structures such as trusts, IBCs and foundations to serve its clientele, he says the door is wide open for more flexible alternative “wrappers” in the marketplace.

“The Bahamas is, in my opinion, about to go through its heyday in providing these wrappers,” says Law. “There’s a lot of intelligence that goes into their design.”

Making sure use of those containers is transparent and legitimate in the eyes of ever-vigilant international tax authorities is also an important factor.

“It’s all about having compliant products,” says Lawrence. “Compliant means that if you’ve got somebody in any home domicile, it’s going to meet their tax objectives but it’s going to be compliant – they’ll stand up to any scrutiny by any tax authorities. You might have someone who’s domiciled in one country and their assets are domiciled in a second country, and their structures are set up in a third country. You’ve got to make sure that whatever you set up, your tax planning holds water in all the connected jurisdictions.”

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Offshore disclosure rules reinforced
By proactively responding to ever-tightening global financial disclosure rules, The Bahamas combats money laundering while at the same time supporting its thriving financial services sector. The Bahamas has taken great pains to protect its legitimacy as an offshore financial centre, boasting an attractive tax environment (it levies no income or corporate taxes and offers clients a high degree of privacy) to maintain and attract legitimate corporate and individual customers.

Even though it was one of the first countries in the world to make money laundering a crime when it introduced the Money Laundering (Proceeds of Crime) Act of 1996, the Financial Action Task Force (FATF)–an international inter-governmental body that aims to develop policies to combat money laundering and terrorist financing–declared The Bahamas “non-cooperative,” in June 2000 along with 14 other mainly offshore financial centres. Dubbed as the “blacklist,” FATF claimed these identified countries were not responding quickly enough to requests for information. The FATF Report acknowledged that The Bahamas had comprehensive anti-money laundering legislation but cited deficiencies in its regulatory system.

By the end of that year, The Bahamas enacted 11 new laws to strengthen the industry’s know-your-customer regime and took a cooperative stance in the global fight against money laundering. Satisfied with The Bahamas’ reinforcement of defences against money laundering, the FATF took the country off the list of uncooperative jurisdictions in 2001 and lifted its monitoring in 2005.

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