Category Archives: Finance

The Trump Presidency – Implications and Opportunities for Caribbean IFCs

Alicia Nicholls

On March 31, 2017 I was a panellist representing FRANHENDY ATTORNEYS at the Barbados International Business Association (BIBA) Barbados International Business Forum 2017 entitled “Is the Barbados International Business Sector Under Attack?” held at the Lloyd Erskine Sandiford Centre in Barbados.

I was on the second panel which discussed the topic “The Trump Presidency – Implications and Opportunities for IFCs“. My esteemed fellow panellists were Jeremy Stephen, Economist and UWI Lecturer, Lisa Cummins, Executive Director of UWIConsulting and Cadian Dummond, Attorney at Law. The discussion was expertly moderated by Melanie Jones, Partner at Lex Caribbean Attorneys-At-Law.

I spoke to the possible implications of the Trump Presidency in regards to de-risking, FATCA and visa restrictions.

For those who missed the panel discussion and have expressed interest in my remarks, please find a copy of same in powerpoint form here. Enjoy!

For more on past presentations I have done, please see news and announcements.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

 

 

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Barbados to allow for Incorporated Cell Companies

Alicia Nicholls

Barbados is on the verge of adding another product to its international business and financial services offerings. The Companies Act, Cap 308 is currently being amended to allow for the establishment of incorporated cell companies (ICCs).

Incorporated Cell Companies (ICCs)

An ICC is a robust form of corporate cell structure which was first introduced by Guernsey by virtue of its Incorporated Cell Companies Ordinance in 2006. Each incorporated cell (IC) of an ICC has a separate legal personality from the ICC and the ICC’s other ICs. ICs can enter into binding arrangements with each other and the ICC. ICCs are more cost-efficient than a parent-subsidiary structure due to economies of scale.

Cell company structures differ from traditional company structures. They allow for the creation of one or more underlying cells within the company so that the assets and liabilities of each cell are segregated from the assets and liabilities of the company’s other cells and of the cell company itself. This “ring-fences” the cellular assets allowing for enhanced asset protection and risk management. Cell company structures are particularly attractive for insurance activity (especially captive insurance), but also for other types of financial services activities like banking and mutual fund activity.

Incorporated Cell Companies vs Segregated Cell Companies

ICCs share similarities but also important differences with segregated cell companies (SCCs) which are also known as protected cell companies (PCC).  SCCs are an older type of cell company structure which were first established by the Guernsey through its Protected Cell Companies Ordinance in 1997. Unlike ICCs, an SCC is a single legal entity which means its underlying cells do not have separate legal personality from the cell company. Segregated cell companies and segregated accounts have been permitted in Barbados since 2011.

Key Features of the proposed Barbados ICC product

The key features under the proposed Companies Act (Amendment) Bill 2016 are as follows:

  • Naming – An ICC will be required to use the suffix  “Incorporated Cell Company” or the abbreviation “ICC” after its name. ICs must include the suffix “Incorporated Cell” or the abbreviation “IC”
  • Type of Business -any company incorporated or continued under the Act for the purposes of carrying on financial services activities, including insurance, banking and mutual fund activity, may incorporate as an ICC
  • Formation – A company may conduct business as an ICC in Barbados in four ways: (a) incorporation as an ICC, (b) the incorporation of an existing company (incorporated under the Act) as an ICC, (c) the registration of an external company as an ICC in Barbados and (d) the continuation of an external company as an ICC in Barbados.
  • Creation of ICs – An ICC may by special resolution create an IC.
  • Status of ICs – An IC is a legal person separate from its ICC.
  • Transactions – The ICC has no power to enter into transactions on the behalf of its ICs. Similarly, an IC has no power to enter into legal transactions on the behalf of its ICC or any of the other ICs of the ICC.
  • Separate Assets and Liabilities – Directors of an ICC are to keep the assets and liabilities of each IC separate and separately identifiable from those of the other ICs and the ICC.
  • Creditors’ Claims – A creditor of the ICC in respect of a transaction between the creditor and the ICC may not make a claim against the assets of the company’s ICs, while a creditor of the IC in respect of a transaction with that IC, may not make a claim against the assets of the ICC or its other ICs.
  • Constitution – The IC is to file its own by-laws within 21 days of being incorporated as a cell and it may not own shares in its ICC
  • Directors – An IC may have directors other than the directors of its ICC.
  • Registered Office – An IC is required to have the same registered office as its ICC
  • Record Keeping – An ICC is required to maintain separate records of the members of each of its ICs
  • Annual returns – An ICC is required to submit an annual return for each of its ICs and to ensure that its financial statements are not consolidated with the financial statements of its ICs
  • Expulsion – An ICC may apply to the court to expel an IC under one or several of the grounds elaborated in section 356.31(1) of the proposed amended Act.
  • Migration provisions– An IC of an ICC may be transferred to another ICC or to a SCC
  • Winding Up – The same provisions on winding up under the Act which apply to a non-cell company also apply to an ICC, except that an ICC that is being wound up is not to be dissolved until each of its ICs ceases to exist as an IC of the ICC and an ICC which is dissolved will not be struck off the Registry of Companies until each of its ICs has been incorporated independently, merged with a company, continued under the law of another jurisdiction, transferred to another ICC or SCC or wound up.

Advantages of the ICC Vehicle

ICCs are a very flexible vehicle and some of the advantages are the:

  • Ease of establishment of cells – Once the ICC is incorporated, it may by special resolution establish any number of cells as it so chooses
  • Portability – An IC of one ICC can be transferred to another ICC or to an SCC
  • Cost efficiency – ICC structures are more cost-efficient than parent-subsidiary relationships as economies of scale can be achieved through shared administrative frameworks
  • Tax liability – Each IC is separate from the ICC and the other ICs for income tax purposes
  • Ability of ICs to enter contracts with each other and with the ICC
  • Absolute protection of IC assets from the risks, liabilities and claims of creditors of the ICC or other ICs.
  • Segregation – The cell structure allows for the segregation of assets and liabilities, risk and investments
  • Unlike some jurisdictions, Barbados’ ICC product is not limited to the insurance sector, but to all financial services activities

The Companies Act (Amendment) Bill 2016 was debated and passed in the House of Assembly last Tuesday, February 2nd, and is currently before the Senate for debate.

The international business and financial services sector is one of Barbados’ main foreign exchange earners, accounting for a significant portion of corporation tax receipts and is a major employer.

Besides Guernsey where it originated, the ICC product already exists in a few other jurisdictions, for example, Jersey, Isle of Man, Malta and the Cayman Islands. The introduction of the ICC product to Barbados is expected to further boost the island’s competitiveness and attractiveness as a preferred domicile for international business.
The full text of the proposed amendment bill may be viewed here.

 
Disclaimer: This article is for general information purposes only and is NOT intended to provide legal, investment, financial or any other advice. The Author accepts no liability to anyone who relies on the information in this article. The information was taken from sources deemed to be accurate and correct at the time of publication.

 
Alicia Nicholls B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. The following information is for general You can read more of her commentaries and follow her on Twitter @LicyLaw.

Bank De-risking: An Emerging Threat to Caribbean SIDS’ Survival

Alicia Nicholls

De-risking actions by banks in advanced economies are an emerging threat to Caribbean SIDS’ financial inclusion and sustainable development. This reduced risk appetite by foreign banks is in response to an increasingly stringent regulatory environment aimed at combating the twin threats of money laundering and terrorist financing. De-risking actions have impacted Caribbean countries in two main ways: the severance of correspondent banking relationships with regional banks and the denial or withdrawal of services to money transfer operators. The net result is that Caribbean SIDS face the threat of being cut out of the global financial system, while the fall-out from the loss of remittances and the impact on their financial sectors, cross-border trade and investment could pose serious threats to these states’ economic growth  and sustainable development prospects.

What is De-Risking?

In an increasingly inter-connected world where money can be moved across the globe with the click of a mouse, anti-money laundering efforts and efforts targeted at combating the financing of terrorism (AML/CFT) are national and global security priorities particularly for the US and European countries.

The regulatory authorities and courts in these countries have taken a zero tolerance approach towards their banks found to have willingly or unwillingly facilitated financial crimes like money laundering and tax evasion. Banks are increasingly facing tougher regulatory policies and sanctions and face the threat of onerous penalties, prosecution, private lawsuits and reputational damage if they are found to have facilitated financial crime

The Financial Action Task Force (FATF)’s risk based approach requires that “countries, competent authorities and banks identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk”.

However, in response to an ever stricter regulatory environment, an increasing number of banks in advanced economies are seeking to reduce their risk exposure by engaging in “de-risking”. That is, instead of managing risk in line with the FATF’s risk-based approach, they are avoiding risk altogether by terminating or restricting business relationships with clients, regions or in sectors deemed to be high risk.

Driving Factors of De-Risking

The Caribbean is increasingly seen as a high risk area for banking. This state of affairs is regrettable as Caribbean countries have expended significant time, funds and effort to make themselves compliant with international standards and best practices, including updating their anti-money laundering legislation. Caribbean states have also signed Foreign Account Tax Compliance Act (FATCA) agreements with the US government.

Despite these efforts, Caribbean countries have had to continuously duck from the target placed on their backs by authorities in advanced economies. The US Department of State’s International Narcotics Control Strategy Report 2015 identified several countries, including  in the Caribbean, as ‘jurisdictions of primary concern’ for money laundering and financial crimes. Coupled with the frequent ‘tax haven’ smear, this only reinforces the notion that dealing with Caribbean banks is literally a risky business.

Banks in advanced economies are increasingly wary of the exposure to risks of financial crime inherent in corresponding banking relationships. Correspondent banking relationships are entered into bilaterally between banks and allow banks to offer their services in a country in which they have no physical presence through the use of a correspondent bank in that foreign jurisdiction. A correspondent bank can conduct business transactions, receive deposits and make payments on behalf of the other bank. In effect, the bank is placing its faith on the due diligence and transaction monitoring rigor of the correspondent bank, increasing the risk it can be unwittingly used as a vehicle for money laundering.  As such, a major manifestation of de-risking is the severing of correspondent bank relationships with banks in countries and regions perceived to be “high risk”.

A second manifestation of de-risking by banks is seeking to limit their exposure by getting out of higher risk sectors, such money transfers, through the denial or withdrawal of bank accounts and services to money transfer operators for fear of unwittingly assisting in terrorist funding and money laundering.

Impact of De-Risking on Caribbean SIDS

The impact of de-risking is already being felt in the region. Only a limited number of foreign banks have correspondent relationships with Caribbean banks and this number has been decreasing. This has made it difficult for Caribbean banks to find corresponding banks in advanced economies for the completion of transactions. Just this year the Bank of America cut its correspondent banking relationship with Belize Bank and Atlantic Bank International in Belize, compromising these banks’ ability to execute US dollar bank drafts, wire transfers and foreign currency transactions. In most cases banks are ending correspondent relationships without evidence of wrongdoing on the part of the regional bank and without giving clear reasons for their actions.

Correspondent banking relationships are Caribbean SIDS’ links with the international financial system. The severing of this link can potentially wreck economic havoc on Caribbean countries’ economies by excluding them from the global financial system. A reduction of accessible financing for cross border transactions and of services for transmitting and authenticating payments has implications for the ability of individuals and businesses in Caribbean states to pay for and engage in the trade of goods and services across borders.

The remittances business has also been a casualty of bank de-risking. Remittances are an important source of foreign exchange inflows to Caribbean economies, particularly in Jamaica and Guyana, where they are much more impactful than official development aid.  Remittances, which are usually sent through money transfer, are a lifeline for poor households which depend on monies sent by relatives living abroad to meet their daily needs.

As a result of the high due diligence costs compared to the relatively low profits from remittances services, many banks see it in their best interest to simply sever their ties with money transfer operators in ‘high risk’ regions. In the Cayman Islands, which unlike Jamaica and Guyana is a net exporter of remittances, Fidelity Bank ceased its money transfer business with Western Union making it difficult for migrants there to repatriate remittances back to their families. Difficulties in receiving remittances due to higher fees or the unavailability of money transfer services compromise the financial well-being of dependent households and individuals, with implications for poverty reduction and eradication.

Caribbean SIDS are not the only ones affected by de-risking policies. Last year it was reported that the Central Bank of Seychelles had to swoop in to the rescue of an offshore bank, the Bank of Muscat International (BMI) Offshore Bank after the Bank of China (Johannesburg) and JP Morgan months earlier ceased correspondent banking relations, making it unable to process outward foreign transactions. In war-torn Somalia where there is a high dependence on remittances banks have been ceasing money transfers to that country for fear of sanctions by the US government, with devastating consequences on dependents. Even charities and aid groups operating in ‘high risk’ countries have felt the brunt of banks’ de-risking policies.

Global Recognition of the De-Risking Phenomenon

In recognition of the de-risking phenomenon, the FATF has reiterated the risk-based approach to AMT/CFT on a case-by-case basis as opposed to the wholesale de-risking which many banks are doing. The Global Center has begun an exploratory study on de-risking in the financial services industry, while the World Bank has launched a survey of 19 member countries (excluding the EU) to assess the impact of de-risking on remittance flows. The findings are expected to be published later this year. This month the Financial Stability Board (FSB) released its report to the G20 on actions taken to assess and address the decline in correspondent banking.

In the interim findings of its qualitative study on de-risking the G-24/Alliance For Financial Inclusion identified several drivers of de-risking and outlined several proposals for stemming the tide of de-risking.  Moreover, among the points highlighted by the recently held G-24/AFI Policymakers’ Roundtable on Financial Inclusion in Peru on the theme “Stemming the tide of De-Risking through Innovative Technologies and Partnerships” was that de-risking could have the unintended consequence of driving consumers to smaller informal providers, which only enhances the AML/CFT risk.

Several Caribbean countries have sounded the alarm about the de-risking threat. Prime Minister of Belize, the Rt. Hon. Dean Barrow raised the issue in his speech at the Summit of the Americas, noting that “our financial and trade architecture cannot survive this phenomenon“. At the recently held Institute of Chartered Accountants of Barbados (ICAB) Conference, the Minister of Finance of Barbados, the Hon Christopher Sinckler, drew attention to the ‘fresh threat’ currently posed by bank de-risking to the international business and financial services sectors of Barbados and other Caribbean SIDS.

The Bottom Line

The threat posed to Caribbean SIDS by de-risking is real, with implications for trade, investment and remittances flows which are critical to the financial stability, inclusion and sustainable growth of regional economies. The worst part is that this is only just the beginning. A balance needs to be struck between AML/CFT regimes on the other hand with the interests of SIDS and their people to conduct business and transfer money on the other. Caribbean countries and other affected SIDS need to leverage their collective strengths to raise awareness about the real and negative fall-out of this phenomenon for their economies and the urgent need for international solutions to the issue of de-risking. Their survival depends on it.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can read more of her commentaries and follow her on Twitter @LicyLaw.