The demand for international financial services centres (IFSCs) has expanded since 2020. As western countries impose higher taxes, the millionaires are on the move. They are seeking more reasonable taxes and creative fund management, with the UK projected to lose 1,500 millionaires in 2022 due to its wealth tax.
One of the countries gaining accounts and even citizens is Switzerland whose strict privacy laws have attracted assets of US$10 trillion watched over by the Swiss Bankers Association. The much smaller IFCs of the Caribbean are also benefiting, fund managers claim.
IFSCs generally provide flows of finance, financial products, and similar services across borders. Services offered in an IFSC include funds management, company registration and administration, trust/trustee and directorship services, and services relating to cross-border transactions.
Paul Byles, director of FTS, a Cayman Islands compliance and management consulting firm, indicates that the demand for IFC services in the Caribbean have grown post-COVID-19.
Writing at www.IFC review.com, he outlines, “While the pandemic brought their tourism sectors to a standstill, growth in financial services and the global scrutiny tied to it did not miss a beat.”
However, he also notes how economic substance legislation forced on IFSCs by the European Union over the past three years (coming out of a push by the EU to prevent clients from using structures in the jurisdiction which do not reflect real economic activity carried out in the country) have affected the region.
The EU has published a list of non-cooperating countries and several Caribbean countries were ‘grey listed’, with threats of further blacklisting.
Byles recounts how, by early 2019, several Caribbean IFSCs, including BVI, Bermuda, The Bahamas, and the Cayman Islands established economic substance laws in their jurisdictions which impacted their financial services industries.
Economic substance calls for brick-and-mortar presence by international companies, leading possibly to additional government revenues, jobs, and broader economic impact.
But Byles notes that there is also the threat of losing some company incorporations if the requirements are too burdensome, which would result in a negative economic impact.
IFSCs continue to be pressured to meet new transparency standards to mitigate the threat of money laundering and terrorist financing involvement or simply facilitating corrupt government officials who move state resources to personal and private accounts offshore.
Meanwhile, 136 nations also try to reach agreement on a global minimum tax, the impact on IFCs is also pending.
Offshore finance centres
While some millionaires have packed bags and shifted assets, London remains a top IFC, followed by New York. Hong Kong is third and Singapore is considered fourth. Zurich placed ninth, IFC trackers indicate.
Within the Latin American region, Belize is considered the easiest country to open an account backed by political stability, zero taxation and confidentiality, high data privacy, and reduced account opening and money transfer restrictions.
In Panama, more than 80 international banks operate, benefiting from State laws that protect local and offshore investors equally. There is no taxation
The Bahamas has over 400 banks registered with more than US$200 billion in assets. Its developed infrastructure and stable Government and economy are said to be pull factors.
Competition for Caribbean IFSCs, exist in nations such as Luxembourg, which, attracting about eight per cent of all global offshore capital, pulls in funds based on a wide range of services for investment funds and the promise to keep the names of the beneficiaries on the accounts secret.
Nomadcapitalist.com makes the point that money in bank in an IFSC can provide residence permits and even citizenship eventually. But, more broadly, keeping funds offshore is a diversification tool, also providing asset protection and making it harder for funds to be seized. Investors can build up balances in other currencies prior to investing in new locations, and also choose countries with higher interest rates on currency accounts. In some regions, there are fewer questions to be answered about source of funds.
IFC Review, an analyst source for IFSCs, reports that the Cayman Islands remains on the Financial Action Task Force (FATF’s) grey list of jurisdictions under increased monitoring and is in the progress of working to address the deficiencies in its Anti-Money Laundering (AMAL)/Counter-Terrorism Financing (CTF) regime. The focus is centred around enforcement, in particular effective sanctions where there is inadequate information on beneficial ownership and to demonstrate prosecutions and effective sanctions for all types of money laundering offences.
IFC Review reports made in April 2022 state, “Cayman Islands have continued to grow in the last three years despite the global pandemic is an impressive achievement. To do this while international politicians and regulatory authorities have ratcheted up the rhetoric and intensified the pressure on IFCs to such an extent is remarkable.”
The Cayman Islands Monetary Authority’s (CIMA) recent 2021 Year in Review outlined the healthy state of the jurisdiction’s investment funds sector, with 27,398 regulated funds on the books at the end of last year, compared with 24,591 the previous year.
The analyst source says that, “Cayman remains the overwhelming domicile of choice for the world’s biggest private equity companies.”
The number of active exempted limited partnerships (ELPs) — the favoured vehicle for a private equity fund — on the Cayman Islands General Registry in 2021 was a record 34,343. That was up 10 per cent on the previous year and is a number that has trebled over the last 10 years as the private equity industry has exploded. Global private equity dry powder is at a record US$1.32 trillion, and as the funds engage in more downstream M&A activity, local service providers support those activities as well.”
Bermuda and BVI
IFC Review says Bermuda was recently rewarded for its legislative reforms and elevated to the EU’s whitelist. Changes enacted primarily related to how investment funds would sit within Bermuda’s economic substance legislation. The Government also introduced measures to regulate private funds under its Investment Funds Act. It also introduced a beneficial ownership (BO) register. BO information will be publicly accessible from 2023.
The British Virgin Islands (BVI), which is now on the EU whitelist significantly enhanced its compliance framework from a Combatting the Financing of Terrorism (CFT) perspective with the Proliferation Financing (Prohibition) Act 2021.
IFC Review says that this updated previous legislation to meet global standards on proliferation and financing of weapons of mass destruction. Alongside additional updates on the AML side, the BVI Financial Services Commission has in the past year stepped up its evaluations of how licensees are implementing client and institutional risk assessments as well as training, with onsite and desk-based supervision.
IFC Review notes how BVI has built up a strong reputation as a key domicile for startup managers with its now well-established framework for incubator funds, which can run for two years to allow managers to build a track record with less onerous regulatory requirements.
IFC Review reports how, in addition to updating regulations for corporate services providers and implementing the Digital Assets and Regulated Exchanges Act, The Bahamas introduced a more modern framework for its banking regulation, bringing resolution methods in line with international best practice for financial institutions going through stress with the potential to fail.
IFC Review says that growing competitive threat of mid-shore financial centres, particularly in Asia, new initiatives to further the development of Hong Kong and Singapore as financial centres aim to challenge the Caribbean’s IFCs historical dominance as a domicile for investment funds.
Notably, Hong Kong has introduced the limited partnership fund (LPF) regime to attract private equity and venture capital funds to its shores.