Sound, but market sensitive, regulation is the hallmark of an outstanding international financial centre. In The Bahamas, policy makers and regulators are committed to creating an environment designed to encourage the continued growth of the sector through not only ongoing regulatory refinements and the enactment of market sensitive legislation, but efficiency and responsiveness.
The jurisdiction’s commitment to meet internationally agreed regulatory principles has been especially evident in the past several years, starting with the significant legislative changes that occurred in 2000. Leading up to 2000, the various multinational agencies identified the need for international financial centres to improve the availability of information, appropriate access to information and establishment of exchange of information mechanisms as essential to the health of the world’s financial systems.
The Bahamas response was all encompassing. It included among a range of measures the elimination of bearer shares, stronger Know Your Customer (“KYC”) requirements, a regulatory regime for financial and corporate service providers, and provision for regulator to regulation cooperation.
The Bahamas recognizes that it operates in a globally integrated market for financial services and its sole interest is legitimate international business. As a result the country’s counter-money laundering legislation is as advanced as any OECD country.
In fact, counter money laundering vigilance and measures have been a priority in The Bahamas for a number of years.
The Bahamas’ excellent track record in the fight against money laundering dates back to 1987 when it criminalized the proceeds of drug trafficking through legislation. Two years later The Bahamas became the first country to ratify a UN Convention against the illicit trafficking of narcotic drugs. This was followed by its comprehensive Money Laundering Act in 1996 which expanded the offenses covered to encompass proceeds of other crimes besides drugs. Since this time, efforts have continued with the establishment of the Financial Intelligence Unit in 2000, now a member of the Egmont Group, a comprehensive assessment of all bank, trust, and brokerage facilities for compliance with the FATF 40 recommendations and many other developments.
What is clear is that The Bahamas along with other centres have moved quite far along the regulatory landscape. So much so that the IMF reported in its 2005 report that compliance levels for OFCs are, on average, better than in other jurisdictions assessed under the Financial Services Assessment Programme.
At the same time this does not diminish the fundamental fact that The Bahamas is wedded to the belief that law abiding persons and entities have a right to privacy and confidentiality with respect to the conduct of their affairs. This position is not unique to The Bahamas as many countries including the UK, the United States, Austria and Canada recognize and enforce respect for financial privacy.
Following the IMF review which confirmed the existence of a banking and securities market regulatory environment in compliance with international standards, The Bahamas has turned its attention to ensuring that the jurisdiction secures the benefits of its regulatory regime.
Plans are now well underway to consolidate regulation and supervision of the country’s financial services industry. This regulatory reform is designed to achieve both efficiency and cost gains while simultaneously, adhering to international standards in the area of financial services regulation.
##Regulatory Agencies ##
The Central Bank of The Bahamas, the Securities Commission of The Bahamas (SCB) and the Registrar of Insurance Companies ensure adherence to international standards of oversight, service and confidentiality through progressive regulation and supervision. The adoption of prudential norms established by the Basle Committee, International Organisation of Securities Commissions (“IOSCO”) and the International Association of Insurance Supervisors are the established benchmarks for evaluating supervisory quality in the jurisdiction.
While structural regulatory reform is a priority agenda, the regulatory agencies have established a Group of Financial Services Regulators to coordinate policy setting and their activities. This level of coordination has received strong support from the financial services industry.
**Central Bank of The Bahamas**
With over 200 banks and trust companies operating in The Bahamas, and the banking industry itself the cornerstone of the country’s financial services industry, the Central Bank plays a lead role among the country’s regulatory agencies and enjoys full autonomy. Its stature within The Bahamas is reinforced by its longstanding presence in the jurisdiction; the Central Bank in fact has been regulating banks and trust companies in The Bahamas since 1965.
The Central Bank fills the traditional roles as issuer of legal tender, banker to both domestic banks and the government, and regulator and supervisor of the banking sector. As supervisor of banks, the Central Bank promotes the soundness of banks through the effective application of international regulatory and supervisory standards.
Continued vigilance is required to secure an effective regulatory environment. As such, the past 24 months has seen additional legislative initiatives designed to provide products relevant to the international market place, to enhance the regulatory oversight and supervision of the financial service sector, and to further its counter money laundering regime. These initiatives include the introduction of modernized frameworks for Private Trust Companies, a focus on risk management, and new Anti-Money Laundering / Counter Terrorism Financing guidelines? measures? following the publication of revised FATF 40 recommendations.
With clarity one of the important hallmarks of good regulation, the series of guidelines published by the country’s major regulator were welcomed by the financial services industry as a number of practical matters were addressed including a guide to the Central Bank’s Ladder of Supervisory Intervention and the arrangements through which regulators may share information.
The results have been evident both in terms of the Bank’s approach to licensing new financial institutions, as well as in a more enhanced supervisory framework for financial institutions. Important features of the new regulatory regime now include broader and more uniform supervision of bank and non-bank financial activities, and stronger mechanisms for international cooperation among Bahamians and similarly placed foreign supervisory and law enforcement agencies.
One such initiative was the Central Bank ceased issuing licenses for managed banks. It now insists that all banking institutions maintain adequate corporate governance in The Bahamas itself and that books and records are kept in the country, ensuring full accountability to KYC requirements. In all, the Bank’s overall policy objective is the promotion of a stable economic environment conducive to high levels of domestic production, employment and growth.
**Securities Commission of The Bahamas**
Regulation of the securities industry is structured to protect the interests of those who do business with financial institutions licensed in The Bahamas, and to ensure the Bahamas’ business environment continues to meet the highest international standards.
The Securities Commission was established in 1995. As part of its endeavour to keep abreast in an ever-changing global regulatory environment, and to ensure a Bahamian contribution toward improving the efficiency and conduct of international markets, SCB became a member of the IOSCO and the Council of Securities Regulators (COSRA) in 1996 and 1997 respectively. SCB’s mission is to effectively oversee and regulate the activities of the securities and capital markets, and to protect investors, while strengthening public and institutional confidence in the integrity of those markets.
The principal areas of focus are the Securities Industry, including the oversight of broker dealing and securities investment advisory services, and the growing area of investment fund administration. A special focus on the regulation of this dynamic area, including that of hedge and private equity funds is provided below.
**Registrar of Insurance**
The Office of the Registrar of Insurance Companies (ORIC) has been responsible for the prudential regulation of all insurance activity in or through the Bahamas since 1971. It is concerned with the ongoing monitoring and control of insurers, agents, brokers, salesman, underwriting managers and external insurers.
Following the enactment of an updated and comprehensive Domestic Insurance Act, ORIC is slated to be the beneficiary of significant policy, operational and administrative resources as The Bahamas seeks to redefine its insurance industry.
Bahamas Compliance Commission
In addition, a unique supervisory body, the Bahamas Compliance Commission, was established in 2000.The Compliance Commission, an essential part of the jurisdiction’s rigorous anti-money laundering efforts, is a supervisory body for non-traditional groups of financial institutions such as lawyers, accountants and other professionals where these institutions hold funds on behalf of clients.
##Bahamian Fund Administration Balances Flexibility with Governance ##
Market responsiveness within a proper regulatory environment is the philosophy that is followed in The Bahamas, and will continue to be the driving force for development. This is especially evident in the country’s growing funds sector.
The Bahamas has a long history of providing investment fund services and has taken measured steps over the past ten years to differentiate itself from other jurisdictions by creating a mechanism to establish different types of funds with more flexibility and appropriate levels of governance.
With the overriding objective set as compliance with the IOSCO, close attention is paid to the need for a strong corporate governance environment while maintaining a regulatory framework that is appropriately responsive and vigilant for funds and clients investing in them.
In this regard, a dual licensing regime exists in The Bahamas. The
Securities Commission of The Bahamas (SCB) is authorized to license all classes of funds and Unrestricted Fund Administrators (UFA) are authorized to license funds offered only to accredited investors. A restricted fund administrator can not license but only administer funds. Irrespective of who licenses the fund, the fund must operate in a manner that is consistent with its constitutive documents and adherence to Bahamian law, specifically the Investment Funds Act and anti-money laundering legislation.
All administrators also have a statutory duty to take reasonable efforts to ensure among other matters that a fund adheres to its constitutive documents and is not carrying on its business in a manner which is – or likely to be – prejudicial to investors and creditors.
What distinguishes The Bahamas from other jurisdictions is the latitude provided to administrators that at the same time must meet and maintain certain licensing and governance requirements. This has also negated the need to impose the requirement for independent directors.
This combination of SCB or administrator oversight, depending on the fund, creates a high degree of flexibility for fund administration in The Bahamas while providing an appropriate level of corporate governance for the growing but increasingly complex funds industry.
An Unrestricted Fund Administrator (UFA) in The Bahamas has several advantages within its regulatory scope. It can, for example, complete the necessary due diligence review of fund parties and coordinate with onshore and offshore parties for the completion of the offering memorandum and constitutive documents. The UFA can also certify fund compliance within Bahamian law and license the fund under its own internal authorization procedures.
These capabilities provide the UFA with competitive advantages within a regulated environment. For example, it can market a fund within 24 hours of company incorporation and the completion of licensing procedures; and can also administer funds domiciled in recognized jurisdictions from The Bahamas without any further licensing procedures other than a filing notification with SCB.
Speed to market is also a factor that was recognized several years ago by the Securities Commission of The Bahamas (SCB) when it published guidelines, providing direction for the fast tracking process of applications for investment funds that target accredited or high net worth investors. Under this process SCB guarantees approval of these categories of investment funds within 72 hours of receipt of a complete application and complement the fast tracking process that already existed for Unrestricted Fund Administrators (UFA) to license Professional and SMART©Funds.
The fast tracking process utilizes a declaration, signed by either the lawyer or the administrator to the fund, certifying to the SCB that the application and all supporting documentation are in compliance with the Investment Funds Act and Regulations, 2003.
The rationale for this course of action is that the investment funds in question are targeting investors who are deemed to be knowledgeable of the market and capable of conducting their own due diligence, thereby requiring a reduced level of scrutiny by the regulator.
##The Bahamas. The Better Choice.##
The Bahamas is constantly reviewing its legislative and regulatory environment to ensure the jurisdiction meets the needs of the international market. Many of the world’s largest and most prestigious financial institutions have branches or subsidiary operations in the country, taking advantage of its stable political and economic system, and establishing The Bahamas as a regional leader in financial services.
The jurisdiction will stay at the forefront of this increasingly competitive global environment for the conduct of international financial services business by keeping pace with evolving trends. This is consistent with the country’s historic views and legislative actions on regulatory issues and its determination to be recognized for its professionalism and the attraction of sound, legitimate business.