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Why offshore’s still in

Why offshore’s still in

The Bahamas reaffirms its position in the challenging new world of global private banking

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The Bahamas Investor Magazine
January 1, 2006
January 1, 2006
Tina Novotny and Ralph Deans

The addition of two more private banks–Franklin Templeton Fiduciary Bank and Trust and Butterfield Bank–to the list of those that include The Bahamas in their global networks underscores two related facts: First, private banking is a sector to watch in the delivery of financial services to high-net-worth individuals; and second, The Bahamas is well positioned as an offshore platform of choice for this kind of business.

Global institutions with a presence in The Bahamas include private banking leaders such as UBS, Credit Suisse, HSBC, Pictet, SG Hambros, Cititrust and Royal Bank of Canada, just to name a handful. According to The Central Bank of The Bahamas, 256 banks and trust companies were licensed here as of mid-2005, of which 164 are subsidiaries of institutions from 26 originating countries. Together these operations have combined balance sheet assets of more than $300 billion and $1 trillion in assets under administration, according to the Central Bank.

Even as many observers believe the global private banking industry is ripe for consolidation at the highest end of the market, others see opportunity for more boutique and niche banks aimed at first-time private banking clients.

While most major private banks in the country draw their business via their international networks, an increasing number of clients are finding their way directly to The Bahamas, suggests the head of the industry’s regulator.

“The Bahamas has full service bank and trust companies operating within its jurisdiction,” says Wendy Craigg, governor of the Central Bank. “We have become a functional centre over the years for several large and significant private banking groups which offer services via their Bahamas operations. Several of these banking and trust companies also undertake back office services for other group companies resident in other offshore centres.

“While these licensees continue to receive referred business from their head offices, they have a growing percentage of clientele being directly attracted to their offices,” says Craigg.

To help position The Bahamas to compete against neighbouring offshore rivals and emerging banking centres in the Middle East and Asia, The Bahamas government has hired PricewaterhouseCoopers (PWC) to conduct a survey of its marketplace. It will build on global findings of PWC’s 2005 Global Private Banking/Wealth Management survey. Consultant Bruce Weatherill, PWC’s London-based global private banking and wealth management leader, sees a distinct advantage held by The Bahamas.

“The key thing is to be well known for something worldwide,” says Weatherill. “The Bahamas is known in the private banking area as a generalist … with a wide range of services. Open architecture means being able to offer ‘best of breed’ financial services even if they’re not your own. Secrecy is old; it’s probably dead. It’s no longer a chief differentiator. It’s about the expertise and the tax efficiency and the market you share with other onshore and offshore centres.”

At the same time, the reality is that banking profits are under pressure, and more countries are offering tax amnesties or imposing withholding taxes to try to repatriate wealth from offshore centres.

Changing environment
Weatherill says The Bahamas can remain competitive in this changed environment by offering long-term wealth planning, legal resources and an understanding of tax in other jurisdictions. He also says the country can cater to clientele at a mid-level of high net worth in addition to those in the top tier.

For Bermuda-based Butterfield Bank, a strategic move into The Bahamas in 2003 to establish a private banking subsidiary was partly due to the country’s attractiveness to clients whose wealth is on the rise and opportunities presented by the jurisdiction itself.

“The Bahamas still provides a tremendous opportunity for people to manage and grow their wealth.” says Robert Lotmore, managing director of Butterfield Bank (Bahamas) Ltd, based in Nassau. “We’re able to service high-net-worth clients, fund managers, entrepreneurs and assist young professionals plan their financial affairs. The future looks promising, and we expect our presence here to grow.” Butterfield established its presence in The Bahamas through the acquisition and merger of Thorand Bank & Trust and Leopold Joseph (Bahamas) Ltd, plus the 2004 acquisition of Deerfield Fund Services Ltd, a fund administrator.

The Bahamas has been a magnet for international wealth since early in the last century. Royal Bank of Canada was one of the first international banks to set up shop here in 1908.

“The Bahamas has a record of more than 300 years of political stability which has earned the confidence of foreign investors around the world,” says Andrew Raenden, managing director of Royal Bank of Canada Trust Company (Bahamas) Ltd. “International banks and trust companies appreciate this. Further, while steeped in English common law, Bahamian independence is also a key factor. Bahamian law imposes strict regulatory controls on how financial institutions operate, ensuring the utmost protection and confidentiality for international investors. These qualities give high-net-worth clients reassurance and confidence.”

The face of the industry has taken many turns over the last century, since the Banks Act of 1909 left a fairly open definition of what constituted a bank. This helped fuel the post-Second World War “brass plate” years, when hundreds of so-called banks were set up to take advantage of the nation’s longstanding tax-free status on income, dividends and capital gains. Regulatory changes in the 1960s tightened up banking oversight. Since 2001, prompted by a push for more regulatory oversight and disclosure globally influenced by the Financial Action Task Force and OECD, all banks have had to maintain a physical presence, weeding out the brass plates.

Financial Services and Investments Minister Allyson Maynard Gibson has remarked, “The Bahamas has significant comparative advantage in the private wealth management sector, and the current transition reflects a fundamental shift in the private banking business as we distance ourselves from low-cost jurisdictions. We are not seeking to be a bottom feeder in the private banking business; our aim is to be perceived as absolutely mainstream.”

In fact, the country has continued to draw a top calibre of private banking organizations, such as the 2004 opening of Franklin Templeton Fiduciary Bank and Trust Ltd, a Nassau-based subsidiary of Franklin Templeton Investments, which already has asset management operations in Lyford Cay.

“The offshore sector of the high-net-worth market is in the mature stages of its evolution,” Templeton Bank’s CEO David Sussman acknowledged at an industry event. “Clients are demanding more sophisticated, structured and compliant solutions. They are no longer satisfied with what I call ‘soft advice.’”

People cite many reasons for choosing to put wealth offshore, says Weatherill. “They want transportability of funds, they want more open structures and, of course, no tax.

“People [also] like to go where their money is,” he says. “If they enjoy going there on holiday and they can do some business when they go there in a nice environment, that sure helps.”

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