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Family offices – Governance and The Bahamas

Family offices – Governance and The Bahamas

The Bahamas is becoming increasingly attractive to global HNW families The Bahamas is becoming increasingly attractive to global HNW families

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The Bahamas Investor Magazine
February 16, 2019
February 16, 2019
Susan Fulford

Family offices in The Bahamas are continuing to gain recognition as bespoke services are becoming increasingly in demand from an expansive cadre of international high-net-worth individuals.

One of the primary reasons for this is that the world is shrinking. Due to increased human density, wealth, technology, accessibility and shared information, more of the world’s population have the same opportunities that previously were restricted to a few. As a result, wealth can reside anywhere and many family offices are searching for the best place to call home and build their legacy.

The Bahamas’ increasing connectivity with various jurisdictions, easy access to the US and improved infrastructure are all incentives for intermediaries and other financial services providers to make the tropical archipelago their home.

Historically, choosing wealth residency would have been limited to the most sophisticated and accomplished families. The cost of establishing and maintaining offshore structures was prohibitive and there was also the question of finding the right expertise that could accommodate a wealthy individual’s needs. There are a range of factors that influence wealth residency including safety, compliance, stability, reporting competency, governance, accessibility and reliability. To align all these factors takes local knowledge and technical, legal and financial expertise. In days gone by, these services were hard to find, and expensive when you did find them.

There was also the stigma associated with “needing” to be offshore. However, governments and global agencies are working together to provide the greatest transparency ever accomplished on monetary matters. Global transparency has helped to shed the stigma and brought the dialogue into the mainstream. It has also helped to contract the offshore environment, while at the same time incentivizing the evolution of offshore hubs into international financial centres, just as it has done in The Bahamas.

Strategic thinking
Increasingly, wealth residency is a common strategic decision. Now families, and the professionals who serve them, need to decide which jurisdiction is the best place for their financial goals and legacy needs. Current themes influencing jurisdictional choice include flight to safety, compliance pursuit and global tax optimization.

These pressures directly or indirectly impact wealth residency and movement, and all of these involve risk management. All financial services providers are to some extent risk managers for high-net-worth individuals (HNWIs). Whether they are a finance minister, Central Bank representative, accountant, lawyer, asset manager, fund manager or family office executive –the number one task is not to lose the wealth that has often taken generations to accumulate. It is their job to take into account all of the risk factors that can impact their client’s assets.

Wealth migration catalysts can be spurred by a series of geopolitical and economic events that have far-reaching consequences, such as: the UK’s decision to leave the European Union, the Syrian refugee crisis and regional instability in the Middle East and Russia, President Donald Trump’s election in the US, and ongoing global safety issues. These have left many searching for less risk in more reliable, stable and predictable investment jurisdictions and prompted the global wealthy to re-evaluate their residency choices.

Challenging environments
There are also other shifts in the regulatory and economic global landscape that are causing HNWIs to reassess their current situations. Negative interest rate environments in Japan and Europe have provided a significant incentive to re-evaluate family office residency in those places. Changing tax regulatory environments have also put pressure on traditional strongholds of wealth in Europe, North America and many established offshore jurisdictions. The result is an increased scrutiny by wealthy families, and the financial industry that monitors and manages transparency, to identify jurisdictions that are no longer “safe and predictable”.

Similarly, there are ongoing issues around international compliance as, post the 2008 financial crisis, global markets scrambled to address regulatory and bank capital thresholds, as well as a push for global cooperation on anti-money laundering and combating the financing of terrorism (AML/CFT) and the common reporting standard (CRS).

With heightened transparency and country tax regulators turning their attention to capital gains in offshore trusts, coupled with media storms around secret accounts such as those uncovered in the Panama Papers, family offices everywhere are prioritizing compliance. UK case law emphasized that trusts can’t simply have the appearance of meeting standards, but must actually operate in accordance with their structure. “Sham” trusts are not upheld and can be set aside.

Linda Beidler-D’Aguilar, a partner at Glinton Sweeting O’Brien, captured the current sentiment well when she wrote: “While there is considerable debate and discussion around optimal forms of governance for family offices and their associated structures, it must be acknowledged that the current atmosphere strongly favours substance over form. The statutory and regulatory regime in The Bahamas–as well as its case law and common law antecedents– encourages the establishment and maintenance of effective governance systems within and around PTCs, foundations, funds, investment condominiums, executive entities, companies and partnerships.”

General trends
Some other factors influencing the attractiveness of The Bahamas as a location for wealth reflect ongoing global trends. Innovation disruption is everywhere, particularly when it comes to the use of technology and the accessibility of information. This has made the common man more entrepreneurial, accountable to themselves and profit aware. And undeniably, mankind is moving, by choice or by necessity. The result is that a significant portion of the world’s middle class and people are relocating for a better future and taking their wealth with them.

There is also the growth in alternate monetary instruments. Bitcoin, cryptocurrencies and securitized tokens must be considered seriously. Real estate and business transactions are now accepting non-traditional currency equivalents, challenging the global traditional banking system. In Africa, the mobile digitized monetary system has eradicated the need for traditional western banking relationships.

In layperson terms, the app is your bank. This allows for greater freedom in choosing where to locate your wealth as these platforms are truly global.

The emergence of new wealth in new markets also offers opportunities for The Bahamas. The Asia-Pacific region is enjoying the fastest growing new billionaire statistics, while there is also generational new wealth as technology sector multimillionaires are often in the under 40 demographic –creating and transitioning to liquid wealth in short periods of time.

Key markets
Hong Kong, Singapore and Dubai rank as some of the globe’s top international financial locations but The Bahamas will always be measured against its jurisdictional competitors–Barbados, Bermuda, the Cayman Islands and the British Virgin Islands–when determining the right fit. Geography will align a region as preferable, and then identifying jurisdictional fit will narrow the selection.

As Beidler-D’Aguilar says: “The Bahamas’ agility, creativity and focus on maintaining its ranking as an offshore financial centre and the contraction to an international financial centre is its strength. The ready availability of financial institutions, qualified professionals and skilled staff on the ground, as well as the opportunity for family members and their trusted advisors to establish residence within The Bahamas, all provide a framework around which compliant, practical and effective management systems may be erected.”

Historically, The Bahamas has demonstrated evolving and dynamic progression and is now ranked fourth in the world among offshore financial centres.

Along with more than 250 banks and a third of the top 20 global trust companies, it has the government and regulatory agility to meet ever demanding requirements and has met the Organisation for Economic Co-operation and Development’s (OECD) CRS 2018 directives.

Other attributes include:

  • an interwoven professional community: CBB, Insurance Commission and the Securities Commission work together on legal, accounting and regulatory initiatives AML/CFT and tax transparency;
  • Bahamas Financial Services Board (BFSB) initiatives and the Trade Commission create market awareness of expertise;
  • there are dynastic regulatory developments such as trust law evolution; and
  • an eight per cent net increase in the number of licenses under the Financial and Corporate Securities Act over recent years.

The professional community within The Bahamas is an undervalued attribute. The BFSB and key politicians have a deep understanding of their reliance on strong regulatory governance contributed to by The Central Bank of The Bahamas, the Insurance Commission of The Bahamas and the Securities Commission. It is clear that in this country every professional and entity understands the strength of having a common purpose. The common purpose is to be the first choice international financial centre and a globally recognized jurisdiction.

The Bahamas challenge
Stakeholders in The Bahamas need to continue to work together to overcome pressures from the OECD and offer world-class professional services. With the progression towards a low-tax environment rather than a no-tax environment, The Bahamas will meet global market demands. The jurisdiction has demonstrated an ability to remain fluid with global developments. Despite a decline in banking relationships, The Bahamas is embracing the growth in the family office and HNWI sector.

To keep competitive there are a few things The Bahamas could consider. A Bahamas directory of family office services, professionals and associated businesses, for example, would be immensely helpful. Practicality dictates decisions once it is established that a jurisdiction meets the compliance and transparency requirements and can provide the active management, oversight, fiscal, regulatory, residency and immigration requirements. Anticipating family office needs and making it easier to connect to the professionals and services they need is key.

Also, understanding where new wealth emerges can create meaningful connections to those markets embracing future clients and creating loyalty. Digital financial markets and transactions require the same expertise, jurisdictional support and regulatory oversight as recognized traditional institutions. There is an opportunity to lead in this new sector which may not be geographically secular.

After two decades at the forefront of the industry, the Bahamas Financial Services Board looks to the future

UK citizens look to live permanently in The Bahamas and take full advantage of all the jurisdiction can offer

The Bahamas Investor
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