|The Bahamas Investor Magazine
June 23, 2009
June 23, 2009
Considering the present-day breadth and sophistication of the Bahamian financial sector, it’s hard to believe that it began some 80 years ago without any forward planning whatsoever; it just simply emerged. But while it may not have been planned, it would be fair to say The Bahamas was always destined to become an offshore financial hub.
One of the chief elements, a critical mass of big money, began flooding into the country in the 1930s and 1940s due to the beneficial tax environment. The absence of taxes on wealth, inheritance and income drew money to The Bahamas even though initially that was not the intended purpose. Early administrators relied on easy-to-collect customs duties, fees and fines. No thought was given to an income tax, for example, because the population was too small and too scattered to support one, and, in any case, there was very little income to tax. Even in the 20th century, when governance of the colony passed to a group of local merchant politicians, they quickly rejected the notion of an income tax since they would only have been taxing themselves.
“The fact there is no income tax in The Bahamas today was initially a decision of the merchant class,” says James Smith, a former governor of The Central Bank of The Bahamas (1987-1997) and Minister of State in the Ministry of Finance (2002-2007). And inadvertently this proved very beneficial, as Smith explains: “We backed into our no-tax policy. That became a vehicle for foreign investment, and this was the backbone on which we built our financial services sector.”
He adds that wealthy Canadians were instrumental in this, as they were taxed on residency, which in the 1930s was defined as living in a place for six months or more. “Canadians came down here for six months and a day, so they were no longer liable to be taxed in Canada. They went home and, since they paid no tax in The Bahamas, they got off scot-free.”
It may have been foreign money that got the ball rolling but it was local acumen that saw the financial sector evolve. Some observers believe the industry may not have emerged at all but for a few Bahamians who, even if they did not foresee an international financial centre, laid down the foundations upon which it now rests.
“Tourism and real estate brought in the first big waves of foreign investment that helped to launch the financial sector,” said one longtime observer. “And for that, the country owes a debt of gratitude to a handful of forward-thinking Bahamians.”
At the turn of the 20th century, The Bahamas was still desperately poor. Most of the native population, released from slavery only three generations earlier, lived hand-to- mouth on the produce of their own land and on fishing.
There was, however, a glimmer of hope. One of the first big-time investors in The Bahamas was railroad and shipping tycoon Henry M Flagler, the man who practically invented modern-day Florida. In 1898 he extended his empire to The Bahamas, acquiring the Royal Victoria Hotel—then Nassau’s finest—and building the Colonial Hotel in the same spot where the British Colonial Hilton now stands. He also set up the first steamship link between Miami and Nassau, delivering mail, freight and, most importantly for business, passengers to stay at his hotels.
Perhaps sensing an opportunity, the Royal Bank of Canada soon followed Flagler’s lead, becoming the first foreign bank to set up shop here in 1908. RBC opened a storefront operation on Bay Street and later moved down the road to a stately building that is still RBC’s main branch in The Bahamas. The largest bank by a wide margin in Canada, RBC now has a staff of more than 700 working in 30 branches around The Bahamas.
Since those early days, Canadian banks have become well represented in The Bahamas. Scotiabank arrived in 1956, the Canadian Imperial Bank of commerce in 1957 and the Bank of Montreal (BOM) in 1970. BOM was bought out in 1988 and now, after several changes of ownership, operates as the Bank of The Bahamas. Along with all the big banks in Nassau, Canadian banks are an integral part of the financial services industry, offering trust and private banking services. The first of the Swiss banks to take foothold in The Bahamas was a subsidiary of UBS AG, which was established in 1968 as Swiss Bank Corp (Overseas) Ltd.
Profit from prohibition
Tourism continued to grow, receiving a further boost in 1920 when the US introduced Prohibition. Although it caused unrest in the US, Prohibition was a godsend for the Bahamian economy. Throughout the 13-year ban, thirsty Americans travelled to Nassau by the thousands for unfettered drinking and a few Bahamians became rich bootlegging rum back to the US.
Around this time, Sir Roland Theodore Symonette (1898-1980), a Bahamian who rose from childhood poverty in Eleuthera to become the first premier of The Bahamas in 1964, capping a 52-year career in the House of Assembly, began his journey to prominence. He became one of the wealthiest men of his generation, investing in real estate, liquor stores and a shipyard. He also turned a Canadian-owned hire-purchase company into the Commonwealth Bank, still the only wholly Bahamian-owned bank in the country.
Sir Roland’s son, Robert “Bobby” Symonette, was even more influential in drawing investors to The Bahamas. A graduate of Massachusetts Institute of Technology (MIT), he made high-society connections through his love of sailboat racing and brought international recognition to the islands. He was a strong promoter of the Miami-Nassau ocean race, launched by his father, that enticed such luminaries as Ted Turner and Dennis Conner of Americas Cup fame to these shores. The younger Symonette was also an active politician, serving as the member for Exuma from 1949-67, becoming, at that time, the youngest Speaker in the House of Assembly at the age of 37.
Among many other business successes, Symonette co-founded the Bahamas Transport Company and the Bahamas Gas and Fuel Company. He took over the running of Commonwealth Bank, creating the nation’s largest publicly held firm, with around 6,500 shareholders and assets of more than $1.25 billion.
By the end of the 1920s, with the Great Depression looming, and Prohibition over, The Bahamas faced a choice between tourism and bankruptcy. The colonial governor of the day, Sir Bede Clifford, opened the public purse to create bathing beaches, tennis courts, golf courses and establish opportunities and venues for shooting, hunting and big game fishing. Hobby Horse Hall race track, now a ruin, was built behind Cable Beach in 1934. All of this lent an air of old world charm to Nassau and kept visitors coming, despite the poor economic conditions.
In the meantime, in the late 1950s, American industrialist Wallace Groves was turning 50,000 acres of Grand Bahama scrubland into a tax- and duty-free centre 50 miles away from Florida, served by a deep-water harbour and a large, international airport. Under the 1955 Hawksbill Creek Agreement that he signed with the government of the day, Groves welcomed a stream of foreign investors who helped him turn Freeport into an industrial, commercial and residential boomtown that rivalled Nassau during the glamorous days of the 1960s.
The two Bahamian pioneers most responsible for creating the conditions that brought about the financial centre, however, were Sir Stafford Sands (1913-1972)—a brilliant lawyer who, as chairman of the Development Board and Minister of Finance, promoted The Bahamas as a resort destination; and Sir Harold Christie (1906-1973)—a colourful land-owning realtor who befriended some of the world’s richest men and encouraged them to come and buy land in The Bahamas.
Notwithstanding Sir Bede’s earlier efforts, Sands is revered today as the father of the tourism industry, which now accounts for more than half the economy. He refashioned Nassau from Clifford’s stately old-world retreat into a glamorous modern winter playground. High profile events such as Speed Week, an internationally acclaimed auto racing event, which, until it ended in the 1960s, brought the best drivers in the world to race, helped put Nassau on the map.
Meanwhile, Christie was busy selling land he had acquired over a lifetime to multi-millionaires such as Sir Harry Oakes—a tough American prospector who made his millions in Canada and escaped stiff local taxes by moving to The Bahamas in 1935; Axel Wenner-Gren—a Swedish industrialist who fled Europe at the outbreak of the Second World War and established a personal Shangri-La on Paradise Island; and Sir Victor Sassoon—the urbane financier who settled in The Bahamas and reignited his fortune after his holdings in China were taken over by the communists. Others included American Pan Am founder Juan Trippe, who built the exclusive Cotton Club retreat on Eleuthera and the Canadian beer baron, E P Taylor, who created Lyford Cay on New Providence, still the most exclusive address in the Caribbean area.
Modern day financial services
Although wealth was pouring into The Bahamas, it was not until the 1940s that “you could begin to see the outline of activity which had to be catered for,” says Julian Francis, another former governor of the Central Bank (1997-2005). Now chairman of BTC, Francis says that the momentum picked up “after World War II, when … wealth in Europe was really quite concerned about the fact that they had had two wars in a relatively short period of time. There was a big push to protect wealth.”
It was not until the 1960s and 1970s that “we truly understood the significance of this [industry].” There was a concerted effort to put the sector on a solid footing with the new Banking Act of 1965. Throughout the 1970s and 1980s, the country became more and more discriminating about who could operate in the sector and who could be brought in as clients. According to Francis, that was when The Bahamas began “to plan the development of our own resources, to people the industry properly, to regulate it properly and to oversee it.”
Now accounting for about 20 per cent of The Bahamas’ gross domestic product, the financial services industry has evolved into a highly sophisticated, highly successful sector. Constant vigilance as regards to legislation and compliance has kept the jurisdiction ahead of the competition in many fields and it continues to attract the cream of international banking institutions.