A bill to provide for the introduction of a new investment product in the Bahamas is raising concerns among some people in the financial services industry because the vehicles, known as foundations, have in the past been associated with high-profile fraud cases.
Those concerns are being felt among some industry players still jittery from the blow suffered by the country when it was placed on the Financial Action Task Force blacklist.
But the Foundations Bill being circulated would do nothing more than make the Bahamas a more competitive jurisdiction, according to Minister of Financial Services and Investments Allyson Maynard-Gibson.
“We are adamant that we ensure anti-money laundering and anti-terrorist financing in this jurisdiction,” she assured. “We are about attracting legitimate business, using legitimate vehicles that investors understand.”
The foundations, which will offer an alternative to investment trusts, will meet international standards, Minister Gibson insisted.
Foundations are similar to trusts, but they are different investment creatures.
Both investment tools allow investors to contribute assets to a legal entity to limit their exposure to liability.
Trusts are viewed as a very efficient way of handling one’s estates and like a foundation, trusts serve as a buffer against creditors seizing assets. They both provide an avenue for investors to avoid paying taxes on certain assets.
But foundations are viewed by some as being a more attractive product because they provide investors with more control over their assets.
“In its efforts to upgrade the industry and catch up with other financial centres, this jurisdiction continues to look for competitive products,” said a source working closely on the new bill. “The Bahamas wants to be seen as a one-stop jurisdiction.”
Minister Gibson said that, “What we’ve done is indicated in our five-year strategic plan that was arrived at in consultation with industry that this is a new product that industry feels is important to have.”
While Minister Gibson has said that the new law would ensure that the Bahamas is not placed in a risky position, some prominent players in the industry are doubtful, however.
An international press report this week, for instance, quotes a source at Bahamian law firm Lennox Paton as saying that foundations are perceived as being “very secretive and used for things that are not acceptable.”
While many businesspersons are reportedly pushing the government to move full steam ahead with the proposed legislation, some point out that foundations are not audited properly and not transparent because they do not have to disclose the identities of beneficiaries.
It’s precisely the concern expressed to the Journal by a key figure in one of the country’s regulatory institutions, who spoke to the Journal on condition of anonymity.
The source sees the establishment of foundations as a throwback to the pre-2000 era when the FATF branded the Bahamas a harmful tax haven.
Prior to December 2000, when the new International Business Companies Act came into effect, there had been concerns on the part of the international community that the Bahamas like a number of other countries, including the United Sates, promoted the use of IBC’s which afforded persons the means to hold assets without being subject to appropriate due diligence procedure and beyond the reach of the taxing authorities of major industrial countries.
The regulatory official equated bearer shares to leaving a loaded gun on a coffee table.
“Anyone can avail his or herself of its use with complete anonymity,” he said. “Foundations are bordering on this.”
The Bahamas responded to these concerns by removing the bearer share feature of the IBC and by implementing comprehensive regulation regarding the regulatory transparency of IBC ownership and administration.
“There is no question that foundations are questionable,” the source said. “We have to be very careful how we approach this. We have to be absolutely sure that these entities are subject to proper oversight.”
Foundations are viewed by civil law jurisdictions as very popular products, Minister Gibson explained. Because the Bahamas wants to attract more business from South America and Europe, it plans to offer this new product that is more popular in such jurisdictions as opposed to trusts.
“Very clearly, the sector feels and I’m making clear that the government is adamant about maintaining a blue-chip, well-regulated and cooperative financial services centre,” she said. “We are also about the business of attracting legitimate business and legitimate investors are very, very, clearly interested in appropriate privacy of their affairs.”
But concerns regarding foundations linger because they are seen as facilitating much of the secrecy that resulted in the Bahamas being placed on the FATF blacklist.
“A foundation by its very nature is not a very transparent vehicle,” according to the financial services expert in the regulatory agency. “Consequently, it could offer the opportunity to accommodate business which the Bahamas wishes to avoid.
“It’s a tight rope. The question is whether the foundation is just another means of providing the kinds of opportunities which IBC’s facilitated – which have now been curtailed in the Bahamas, the principal facility being anonymity and lack of knowledge and information with regard to beneficial ownership.”
These are matters, according to the source, that have been of major concern to the international community and which the Bahamas regulators have been adamant about ensuring that they no longer pose a threat to the country and its good reputation as a financial centre.
“It’s like this,” he said. “The minute your parents stop beating, the minute the pain wears off, back you go. Business people are sometimes like children, they want to flirt with the devil.
“There are just some things which we should not pursue. We sometimes think we in the Bahamas can sail close to the wind without sinking.”
These investment vehicles known as foundations have for years been associated with Liechtenstein, which is perceived by some as being a high-risk jurisdiction
Liechtenstein was also on the FATF blacklist, but was removed in June 2001, the same time as the Bahamas.
Another source, who is working closely in the drafting of the bill, recognized that foundations have been abused in the past as it is not always easy to find out who owns them.
“We are aware of the concerns, particularly as it relates to what happened in Liechtenstein, but you should not necessarily throw out the product,” he said.
He said the government will ensure that the necessary safeguards are written into the law.
“If you only dealt with products that are risk-free, you would have no products,” he added. “Not because foundations were abused in a few high-profile cases means that they are a bad product.”
The source said drafters are aware of the concerns being raised, but he pointed out that “we are not going to precisely follow the Liechtenstein model. We’ll adjust it a little bit but keep the basic product in tact.”
Minister Gibson said the Financial Services Forum is considering the bill and she added that it would be premature to anticipate what the sector is going to recommend regarding the proposed law.
“The sector has made it very clear that there are several things that make us more competitive and one of those is new products,” she said. “We’re not just going to introduce new products for the sake of introducing new products. The sector itself has said that to enable them to penetrate the South American market, a significant part of which is legitimate…this kind of product would enable them to attract business.”
She said the new product would also enable them to tap into the Asian market.
The provision of foundations would significantly grow the sector, Minister Gibson said.
By Candia Dames, The Bahama Journal
