Bermuda and the Caribbean have lower costs and less restrictive legislation than the mainstream offsh...
While the Caribbean includes centres such as Anguilla, Bahamas, the Netherland Antilles and Turks & Caicos, the main jurisdictions are Bermuda, the Caymans and the British Virgin Islands (BVI) in descending order of experience in the industry, international recognition and regulation and, broadly, ascending order of cost and flexibility. All three are British overseas territories, their laws based on English common law, which gives them the reputation of greater political and legal stability. For example, the Bermudan final court of appeal is the Privy Council in London. It is the most mature of the jurisdictions, especially in the insurance sector, and it has the most developed legislation.
Alec Anderson, a partner with Conyers, Dill & Pearman in Bermuda, says: "In many ways Bermuda is on a par with Jersey and Guernsey - the location is just a question of convenience. It is close to the east coast of the US and Canada (New York, Boston, Atlanta and Toronto). It is only six hours from London so it is also convenient for UK investors. The insurance and reinsurance sector is a major area for Bermuda. It is a serious competitor, rivalling London and New York in certain niche areas of the sector."
In the regional fight for new business, in which both the Cayman Islands and BVI are committed to challenging its supremacy, Bermuda has generally put consideration of its reputation at a high priority, occasionally at the expense of speed and flexibility. But with the realisation that these countries are hot on its heels, things are starting to change as it no longer rests on its laurels and starts chasing business in earnest.
For example, incorporation used to be particularly slow, with registration taking up to 10 days. In comparison, it is possible to get an international business company (IBC) registered in the BVI almost instantly, one of the reasons why there are more than 300,000 now registered there. In Bermuda, that time has been cut at least in half and it usually takes one or two days.
Despite the increased turnover, regulation remains tight relative to the other Caribbean centres. The Bermudan Investment Business Act 1999, which came into force at the start of this year, requires that most local and some international investment business be licensed. Mutual funds are covered under an earlier act and reputable international businesses that deal exclusively with high net worth clients can apply for an exemption, but companies such as broker-dealers still require a licence to operate.
The Bermudan Monetary Authority has powers to withdraw the licence of, fine and even bring criminal proceedings against companies that fail to comply with regulations, but even companies that successfully apply for exemption from this can be punished for inaccurate prospectuses and non-disclosure of statements.
Ethan Johnson, a partner in law firm Morgan, Lewis & Bockius, remarks: "Bermuda is the grandfather of them all and has a clean reputation. Cayman has, somewhat unfairly, a reputation as a place where anything goes. They are willing to think out of the box, but in addition it has a good infrastructure with large numbers of banks and lawyers. It has sophisticated mutual fund, trust and partnership laws. It is also well attuned to US and European business structures."
The BVI, although it is the least developed of the three, is making good progress, especially in the mutual fund sector under the watchful eye of ex-Isle of Man regulator Kevin Mann. Companies with funds based in the BVI come from all over the world. Investment schemes can include equity, real estate or investment capital, and the legislation imposes few restrictions.
There are three categories of mutual fund - private, professional and public. Public funds have strict disclosure requirements and Mann, registrar of mutual funds, must be satisfied about the way the fund is run before they will register it, whereas less stringent demands are made of non-public funds, which are merely recognised. There are a total of 1,600 funds either recognised or registered in the BVI, of which 135 or so are public. The remainder are split evenly between professional and private funds.
Mann says: "For public funds, we are strict on disclosure. However, there is an element of caveat emptor there."
One of the main reasons for being in the BVI and, similarly, the Caymans, apart from flexibility, is cost and speed. Funds can be set up quickly and the low costs take some pressure off performance. The legislation that covers all the mutual funds on the island is the Mutual Finance Act 1996 which was amended in 1997 and made law on 2 January 1998. It describes the three categories of funds.
Professional funds require proof that the fund is being marketed to the correct class of investor (that is, those with a net worth of more than $1m and who have signed a document saying they are prepared to be treated like professionals).
There are no strict regulations that lay down what can and cannot be registered or recognised. Mann and his team of three take each company on a case-by-case basis and make a decision based on their judgement of the reliability and integrity of the fund and the manager. In the case of public funds, that means determining the assets of the fund and checking the background of the people involved. Companies that are already active in certain
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