The Bahamas continues to be Sovereign’s preferred domicile of choice for funds, whether for highly regulated standard funds, more lightly regulated Experience Investor Funds for sophisticated investors or SMART Funds for innovative structuring of investment capital.
So it is good news that the Financial Action Task Force (FATF), the regulatory body established by the G7 to combat money laundering, removed the Bahamas from its list of ‘increased monitoring’ jurisdictions in December in recognition that it had made “significant progress” in improving its anti-money laundering regime.
Earlier last year, the Bahamas was also formally removed from the European Union’s blacklist after being deemed fully compliant with the bloc’s tax standards. The decision acknowledged that the Bahamas had implemented all the necessary reform to address concerns regarding economic substance, removal of preferential exemptions and automatic exchange of tax information.
Experienced Investor Funds (EIFs) are regulated funds designed for professionals, high net worth or experienced investors. Different jurisdictions may use different names – ‘professional’, ‘sophisticated’, ‘accredited’ or ‘qualified’ – and set out different criteria, but all these fund regimes are typically subject to lighter regulation than retail funds and also permit access to a wider variety of investments and financial products.
This makes them easier and quicker to set up, and with lower regulatory costs EIFs can create more opportunities for generating greater returns – although at the same time they may expose investors to potentially higher risk. Hence the need to restrict their availability only to professional, high net worth or experienced investors.
The Bahamas ‘SMART’ funds – SMART stands for Specific Mandate Alternative Regulatory Test – also allow for a lighter touch regulatory regime and can be ready to use in just eight weeks at a fraction of the cost of fund set-ups in jurisdictions like the Cayman Islands, Ireland, Jersey or Luxembourg. This is because the Bahamas Investment Funds Act permits locally-authorised Fund Administrators to license professional and SMART investment Funds themselves, independently of the regulator.
We have recently set up a Bahamian SMART Fund that is specifically designed to accommodate investors originating from Commonwealth of Independent States (CIS) and Southeast Asian countries. The objective of the fund is to invest in technology start-ups and private limited companies, with up to 49 investors each contributing a minimum of $500,000.
Sovereign generally provides professional directors, a Fund Registrar and the requisite compliance officer, as well as outsourced accounting services via a London-based accountancy firm and, if required by any investor, auditing of the fund’s accounts. We will also be providing the mandatory statutory services through our established partner Sterling (Bahamas) Limited, which is licensed by the Securities Commission of The Bahamas as an Investment Fund Administrator.
This ensures compliance with the Commercial Entities (Substance Requirements) Act 2018 (CESA) in the Bahamas, which requires that substantial economic presence is demonstrated for entities involved in certain business activities. The core income generating activities (CIGA) of the SMART Fund will be conducted in the Bahamas – presupposing adequate amounts of annual operating expenditure, levels of qualified full-time employees, physical offices and levels of board management and control within the Bahamas.
Due to the need for enhanced confidentiality by investors from these two regions, Sovereign has structured the fund such that each investor into the SMART Fund will be issued with non-voting preference shares and we have set up a Private Trust Company (PTC) for the fund promoters, our clients, to hold the voting share capital of the fund.
Each investor will be given the option to establish an offshore trust in the most appropriate jurisdiction to suit their individual circumstances – offshore (Isle of Man), mid-shore (Mauritius) and onshore (Cyprus) – to hold their non-voting preference shares. Sovereign is authorised to act as a trustee in all these jurisdictions.
The principal benefit of holding non-voting preference shares via a trust is that it is the directors of the trust company that will generally appear on the Register of Beneficial Ownership, providing enhanced privacy and protection for a trust’s settlors and beneficiaries.
This does not in any way reduce the requirement for the trustees (Sovereign) to undertake and maintain due diligence in respect of the settlor, any intended underlying investments, the protector (if appointed) and all beneficiaries, in full compliance with all applicable anti-money laundering legislation.
For further information please contact Simon Denton on +44 (0)7887 991649 or +44 (0)207 389 0555 or by email below.