A Decade of Regulatory Change For Caribbean IFCs

For IFCs such as the Cayman Islands, Bermuda, BVI, and the Bahamas, various regulatory initiatives over this time have still made an impression. Amidst the regulatory responses to the exacting demands imposed by international regulators, Caribbean IFCs have consolidated their leading market positions in key industries, while carefully looking to diversify their economies and the range of financial services provided. As competing jurisdictions continue to use Caribbean IFC structures as a blueprint for their own success as new financial hubs, it is essential our IFCs can maintain their focus on future growth.

In many cases, these targeted changes to legislation have been driven by the same strong collaborative approach between regulators and the local financial services industry that first propelled Bermuda, for example, to lead the global insurance market, and made the Cayman Islands the preferred option for institutional investment funds. Building on the legislative changes that have facilitated compliance for Caribbean jurisdictions with regimes such as the EU’s AIFMD, FATCA, and the FATF’s standards, other regulatory initiatives over this period have carefully targeted future growth opportunities. These include an attractive and welcoming infrastructure for reinsurance companies in the Cayman Islands and Bermuda’s early adoption of a comprehensive framework for digital assets. Such initiatives have helped Caribbean IFCs remain resilient through the unprecedented circumstances of the pandemic and the precarious economic situation that followed as inflation surged. With a more positive, yet cautious, outlook permeating through the financial services industry, reflected by strong fund formation and record CLO activity at the start of 2024, there is reason for some optimism for the Caribbean’s leading IFCs.

In considering how the next chapter of growth will evolve, moving past the era of AML blacklists, it is more important than ever for jurisdictions to strike the delicate balance between regulation and commercial success in the face of these global developments and challenges.

International Regulation

Looking back on the main regulatory changes over the past decade, there is no question that the primary IFCs in the Caribbean are better positioned now, despite many moves of the goalposts in-between. Although each of Bermuda, Cayman, Bahamas and the BVI have had their individual challenges in the past, the jurisdictions no longer feature on the FATF or EU AML lists. Ten years ago, Caribbean jurisdictions were still in the eye of the storm as the regulatory response to the global financial crisis crystalised around transparency and the automatic exchange of tax information.

Amid a general view that the OECD and others were looking to put offshore jurisdictions out of business, Caribbean IFCs raced to sign up to numerous Tax Information Exchange Agreements to demonstrate the extent of their cooperation. By the middle of the last decade, however, there was real concern the Cayman Islands would lose its status as the world’s leading jurisdiction for hedge funds. Along with the other Caribbean IFCs it was excluded from the AIFMD passport established by the EU and required to market investment funds in Europe. One of the sources of that uncertainty was that the National Private Placement Regimes, which non-EU managers of non-EU funds were utilising to sell into the continent, were set to be phased out. As IFCs implemented the specific regulatory regimes required for funds to gain access to EU investors, the European Securities and Markets Authority kept pushing back on approval, unable to authorise the AIFMD passports until the new frameworks were up and running.

Tax Transparency Changes

The combined regulatory impact has been substantial, compounded across the Caribbean IFCs by the complexity of compliance with the OECD’s Common Reporting Standards (CRS) and the US FATCA initiative. Raising the cost of compliance and introducing new layers of due diligence to conduct business through the Caribbean also had a wider effect in the region, still struggling to shake off the reputational harm from the G20 blacklists that followed the financial crisis.

In the subsequent years, having in many cases fully appeased international standard setters, Caribbean IFCs faced a new round of black and grey lists, as standards shifted once again and new criteria were introduced by which to measure compliance. Through years of engagement with these authorities, there has been a huge effort by governments and regulators across the Caribbean to address the deficiencies identified, and establish the required legislation in areas including AML compliance, beneficial ownership, and greater supervision of investment funds. There have also been new powers for regulators to impose fines on licence holders for compliance failures, which in certain cases have been quite punitive as regulators look to demonstrate to global authorities their willingness to enforce and prosecute infractions.

Notably, the waves of international regulation directed at the investment fund sector over the past ten years have done little to quell the appetite for offshore fund formation. Taking the pulse of the Cayman Islands, as the largest fund jurisdiction, the number of exempted limited partnership vehicles - which act as a proxy for private equity funds - stood at 15,455 in 2012, and then more than doubled to 36,756 by 2022.

Beneficial Ownership Agenda

At the height of global mistrust of zero tax jurisdictions in 2014, then UK prime minister David Cameron made his now infamous demand for transparency and a public register of beneficial ownership interests in the Overseas Territories and Crown Dependencies. This attack was seen as an attempt to deflect attention from growing austerity in the UK after the financial crisis, towards an easy target, and Caribbean IFCs initially resisted. The Cayman Islands argued its system, where registered corporate service providers verified information on beneficial ownership, was superior to a self-certification system at Companies House in the UK that was open to widespread abuse. Cayman officials insisted that information on its beneficial ownership register would only be accessible to law enforcement officials.

As it became increasingly clear that publicly accessible registers would eventually become the global standard and the UK outlined a range of reforms to improve transparency at Companies House, Caribbean IFCs committed to introducing public registers for beneficial ownership. The saga continued as the EU Court of Justice subsequently ruled that disclosing such information as a requirement of the EU Anti Money Laundering Directive would be in breach of EU privacy laws, leaving the initiative in limbo for the past few years.

Bermuda - New Markets For Growth

While international regulatory initiatives have clearly dominated the last ten years, IFCs have still introduced domestic measures aimed at progressing and broadening their service offering based on their own particular strengths. Bermuda’s early efforts to embrace blockchain and digital technology saw the Digital Assets Business Act 2018 provide a framework for regulated digital asset businesses and services, which has proven to be attractive to the industry. As Bermuda has developed into a hub for FinTech operations and start-ups, it also attracted leading digital exchange Coinbase to its shores. Coinbase was granted a licence in Bermuda last year to expand its global business away from the uncertain regulatory landscape in the US.

In terms of its more traditional reinsurance business, Bermuda has continued to thrive, despite the impact of greater global regulation. In addition to full equivalency with the EU’s Solvency II regime, which allows its companies to compete with the major European reinsurers, Bermuda has also gained Reciprocal Status from the National Association of Insurance Commissioners (NAIC) in the US. According to a BMA portfolio investment survey at the end of 2022, Bermuda’s total insurance assets accounted for US$1.634 trillion, equating to 83.7 per cent of the nation’s total financial services sector assets. Foreign portfolio holdings by the insurance sector were US$833.8 billion which represented an increase of 151 per cent over the ten-year period to 2022.

Cayman Islands - Reinsurance And Family Offices

Reinsurance has also been an important focus in the Cayman Islands, with recent guidance issued for licencing requirements for Class D reinsurers. The Cayman Islands has been able to succeed in its approach to reinsurance through its ability to provide balanced oversight, with regulators willing to take the time to understand particular business models. Without the constraints of Solvency II, which is less relevant to the more US centric client base, CIMA’s insurance regulators can create more bespoke capital models for prospective licence holders underserved in larger global markets.

The Cayman Islands issued 41 new international insurance licences in 2023, which was the largest number in a year for more than a decade. The number of reinsurance companies in the jurisdiction increased to eight compared with three in 2017. The Cayman Islands has also capitalised on its strong reputation in financial services and attractive lifestyle by attracting new family offices, with a number said to be currently considering either establishing a family office in the Cayman Islands or relocating one. In addition to broadening the financial services sector, family offices are also associated with increased local investment and philanthropic activity.

Rising Standards And Innovation

As part of its overall efforts to align with international standards, the BVI introduced a series of amendments to the Business Companies Act in 2022, including updated rules relating to strike offs and dissolution of companies, as well as bringing in a requirement to file annual financial statements with a registered agent and the abolishment of bearer shares. The BVI also has a track record of innovation on the regulatory front.

Recognising the potential among smaller start-up managers, the BVI’s Approved Manager regime allows funds to accelerate their launch without prior approval from the regulator. Under the regime, approved managers can set up within a week and benefit from a fast-track approval process and a quick and easy path to launch. The reduced regulatory requirements also significantly lower up-front costs for the manager. The Approved Manager regime in the BVI has seen great success since its introduction in 2012. According to the Financial Services Commission, over 800 managers are currently registered as active Approved Managers in the BVI.

In the Bahamas, an innovative approach to raising finance has seen the jurisdiction make headlines with its plans to be the first country to sell ‘blue’ carbon credits on the international market, based on the carbon within its seagrass and mangrove coastal ecosystem. The Carbon Market Initiatives Act 2022 has catalysed this vision, with some $300 million worth of carbon credits potentially able to be sold by the Bahamas. Meanwhile, additional legislation facilitates the registration of carbon trading businesses, such as exchanges, in the jurisdiction.

Clearly, the Caribbean IFCs have faced significant upheaval from the regulations imposed by international bodies, which has essentially been a matter of survival over the past ten years. As these challenges have been successfully overcome, IFCs can draw on past successes and continue to strategically carve out new opportunities for growth.