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Latin fever: south looks north to invest

Latin fever: south looks north to invest

In the midst of political and economic turmoil, more of Latin America's affluent are making Bahamas their IFC of choice

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The Bahamas Investor Magazine
January 4, 2008
January 4, 2008
Simon Cobb

While The Bahamas is regularly described as an ideal investment destination because it is so close to the United States of America, its proximity to the rest of the Americas often goes unrecognized. Even representatives of some of those other American countries can appear hypnotized by their neighbour to the north. When the Brazilian ambassador to The Bahamas, Tomas Guggenheim, talked in April 2007 about his ambitions to see more investment between The Bahamas and Brazil, he emphasized the potential of Freeport, saying that it was “a big opportunity for a country that wishes to reach the United States.”

The general lack of recognition for other American markets is a phenomenon that puzzles Chris Gray, chief executive of Freeport Container Port Ltd. “I can’t give a reason for it,” he says. “We’re associated with the US because of our geographical location, but it’s South America and the US, if you follow me.” Freeport Container Port shifts 1.6 million TEUs (twenty-foot equivalent units) each year, and Gray says that “about 44 per cent of the traffic handled here is to and from South America—both coasts. And I believe that South America is the next big area of explosion, exporting agricultural products and minerals and raw materials, and of course as they prosper they’ll be able to import more of the nicer things in life.”

Both of Gray’s predicted trends are borne out by the Economic Survey of Latin America and the Caribbean 2006-2007, released by the Economic Commission for Latin America and the Caribbean (ECLAC) in July 2007. This survey revealed that in 2006, the region experienced growth of 5.6 per cent, with projected growth of 5 per cent in 2007 and 4.6 per cent in 2008. More specifically, the survey anticipated that the economies of South America would grow by 5.7 per cent in 2007, and the economies of Mexico and Central America by 3.6 per cent.

Although other parts of the world are growing faster, there are signs that the Latin American boom may be more sustainable than most, with the region overall showing a current account surplus, historically low inflation and increasing levels of investment, both in and, more significantly, out.

Investments without boundaries
An ECLAC report released in May 2007 found that an emerging group of ambitious Latin American-based transnational corporations, known as the “trans-Latins,” was pushing up the amount of outward foreign direct investment (OFDI) to unheard of levels. The investments made by Brazil outside its own borders, for instance, totalled $28.202 billion in 2006, dwarfing the total entering the country from foreign investments ($18.782 billion). The year’s largest transaction by a trans-Latin was the $16.730-billion acquisition of the Canadian firm, Inco, by Brazil’s CRVD. The report indicated that this outward-looking trend by regional firms showed no signs of abating, with 2007 seeing Mexico’s CEMEX buying the Australian firm, Rinker, for $14.630 billion, and Argentina’s Techint group buying the US-based Hydril for around $2 billion.

Any tendency by Latin American firms and investors to expand outside their national boundaries is potentially very good news for offshore financial centres such as The Bahamas. “The opportunities for tax-planning increase whenever you have an international family—that is, people in different locations or businesses in different locations,” says Wendy Warren, CEO of the Bahamas Financial Services Board. “If you’re purely doing business in one country, there are few chances of going outside that country for tax purposes. But if you’re naturally doing business in different locations, then suddenly you start wondering where to best position your business.”

The Bahamas provides a tax-neutral platform where assets and businesses can be positioned without attracting local taxes, making it easier to manage any interaction with a range of other, tax-levying, jurisdictions. “You only have to look at one side of the equation, instead of a very complex matrix,” says Warren, “which makes a position in The Bahamas perfect for cross-border planning.” This is just as true for families planning their estate, and here Warren notes two interrelated statistics: that wealthier families are more likely to have large “footprints,” with family members spread around the world, and that Latin America has an unusually high concentration of ultra-high-net-worth individuals amongst its rich inhabitants.

The World Wealth Report 2007, compiled by Merrill Lynch and Capgemini, revealed that the wealth of Latin America’s affluent grew by 23.2 per cent in the previous year, compared to a worldwide average of 11.4 per cent, and that the region’s population of rich individuals grew by 10.2 per cent, compared to a world average of 8.3 per cent.

A safe haven
The wealthier and more geographically scattered a family is, the greater the advantages of administering an estate from a jurisdiction such as The Bahamas. And many old, established Latin families are scattered not only from personal preference, but also because waves of political turmoil in the past may have driven them from their homes. Although nobody is willing to reveal figures or name names, the most obvious exodus of wealth and individuals from Latin America at the moment is from Venezuela, and the self-proclaimed socialist revolution of Hugo Chavez.

Commentators note that the September 2007 referendum victory by Ecuador’s president, Rafael Correa, which gave him the go-ahead to amend the Ecuadorean constitution and create a socialist republic, could generate a similar efflux of wealth and wealthy individuals, not only from his country but from Colombia, which is sandwiched between Ecuador and Venezuela.

As David McGrath, the Panamanian honorary consul in The Bahamas, observes, “People are going to Miami because they’re fleeing problems, but they don’t realize that they’re overstaying their welcome there. Now they’re starting to realize they could come here as residents, buy property, and it doesn’t affect their global assets as much as going to live in the States.”

One barrier to an increased Latin American presence in The Bahamas, says McGrath, is the lack of direct flights to and from the region, a problem that should be addressed by the proposed modernization of the Lynden Pindling International Airport announced in 2007. “And I understand that Copa Airlines from Panama is negotiating to start flying here directly two or three times a week,” he says. “When that happens, I think this place will boom with South American investment.”

The Bahamas, he says, represents an added attraction to those who are leaving unfriendly regimes. “A lot of people are from areas where they’ve seen their property confiscated. You have to do a lot of damage here before you have your assets taken away from you, by government or anyone else.”

Family matters
Latin American investors have traditionally displayed a reluctance to give up control of their assets to an outside party, which has sometimes made it difficult to convince them of the advantages of the Bahamian trust as a wealth management tool. “Latin American clients are often family-run businesses that want to keep control of what they have,” says Warren. “Partly because of their history, but also because they don’t have the familiarity with common-law trusts that, for example, European clients might have.”

The Foundations Act of 2004 provided a structure based in civil law that was more familiar. Described by Warren as “to some degree a hybrid of the trust and the company,” a foundation is a legal entity, endowed with assets by its founder, that can sue and be sued in its own name but benefits from similar creditor protection to that enjoyed by trusts. “It gives Latin American clients a greater sense of connection to their estate planning tools,” says Warren.

Bearing in mind the concentration of ultra-high-net-worth individuals in Latin America, however, she feels that the crowning effort to attract investors from the region is the private trust company (PTC), introduced into Bahamian legislation last year. “The trend recently, whether you’re from common- or civil-law countries, is for individuals to want to be more engaged in their estate planning,” she says. “The challenge is that not everyone can afford to do that, because you have to set up an environment that’s tailored to your family. The PTC is one vehicle that provides that degree of control, and it’s geared very much toward ultra-high-net-worth individuals.”

A PTC does not need to be licensed by the Central Bank, so it is subject to indirect, light-touch regulatory and supervisory oversight; interaction is exclusively between the client and its registered representative in The Bahamas. Thus, a PTC provides what wealthy Latin American clients value over all other considerations: confidentiality.

This desire for discretion affects every aspect of the ultra-high-net-worth Latin American’s life, from charitable activities to choosing schools that keep the names of their pupils top secret. For example, the World Wealth Report 2007 indicated that the rich in Latin America donate just 3 per cent of their assets to charities, compared to figures of 8 per cent in the US, and 12 per cent in Asia. However, one of the report’s co-authors suggested that this was not because they were less generous, but because they were “more concerned than others about not attracting attention because of physical security concerns.”

McGrath agrees that the respect for an individual’s privacy shown by financial institutions in The Bahamas is a major draw for Latin American investors. “Other jurisdictions, like Bermuda, are more answerable to the UK, for example, and their books are more open to the world. In the Bahamas, it’s not as it was six years ago, but banking laws have changed less than in many other places, and here it’s considered that confidentiality is a basic right.”

As much as the planning tools available here, Warren believes that The Bahamas’ banking services encourage investment from Latin America. “We have private banks that provide the full array of services from investment management, trading and currency management all the way through to specialist concierge services.” Many banks based in Latin America are represented in The Bahamas, and other banks with a strong presence here are buying Latin American banks with a view to expanding into the region.

In 2006, UBS acquired Banco Pactual, a Brazilian bank with an offshore business in The Bahamas. Richard Voswinckel, CEO of UBS (Bahamas) Ltd, says, “Latin America is a target market and it makes sense to buy a business with appropriate language skills, cultural skills. Brazil is already huge, but Pactual also offers a model that can be exported to other countries; the head of Pactual is now the head of our Latin American operations.”

Voswinckel sees the typical Latin American investor as someone who wants to diversify assets across several countries, but at the same time wants to keep them within the same time zone, and not too geographically remote. “People invest in what they are most familiar with,” he says. There are no available figures for how much Latin American money is currently in The Bahamas, and Voswinckel would not reveal them even if they existed. When asked what impact the region would have on The Bahamas in the near future, though, he responded with one word: “Significant.”

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