Bermuda, perhaps more than any other offshore center, has for decades sought to create for itself a reputation as a "respectable" offshore financial center.
Unlike many competing jurisdictions, Bermuda never enacted a bank secrecy law. It eschewed the idea of "asset protection trusts," basing its trust legislation on the time-tested provisions of English law, rather than the debtor-friendly legislation of offshore centers like the Cook Islands. Professional and government fees for offshore services and structures were and continue to be significantly higher than most other jurisdictions.
Bermuda also remained a British overseas territory, rather than opting for independence. This provided assurance that British regulators, at least in theory, were overseeing Bermuda's offshore financial industry.
If it were only true. Events in the last year have exposed corruption and money laundering on an immense scale. The head of Britain's Committee of Public Accounts, Edward Leigh, calls Bermuda's record "appalling."
It's not hard to see why:
- In April 2007, authorities in the British Virgin Islands brought criminal charges against IPOC International Growth Fund, Ltd., a Bermuda-registered mutual fund. The BVI accused IPOC of laundering money for a powerful Russian politician through the Bermuda Commercial Bank, one of Bermuda's largest and most respected banks.
- In December 2007, the U.S. Securities and Exchange Commission brought securities fraud charges against Lines Overseas Management, headquartered in Bermuda. LOM stands accused of receiving at least $5.8 million from two stock manipulation schemes.
- In August 2007, a local Bermuda newspaper reported that the prime minister, while serving in another ministry, obtained $150,000 of publicly funded renovation on his home. In connection with an alleged press leak, police arrested and detained the island's Auditor-General, whose responsibility is to oversee the government's financial affairs.
As a U.K overseas territory, Bermuda is subject to the dictates of the U.K. Parliament and the U.K. Foreign Office. However, the U.K. authorities have generally not interfered in its offshore sector, as they have historically considered Bermuda to be a well-regulated jurisdiction. For instance, while most other U.K. overseas territories are subject to the EU Savings Tax Directive, it hasn't been extended to Bermuda.
That may now be changing, thanks to the ongoing series of scandals now rocking Bermuda. I predict a much heavier regulatory hand being extended from the United Kingdom to Bermuda.
However, there's little doubt that Bermuda's ultra-successful captive insurance, investment fund, and trust management sectors will continue to thrive. Bermuda's financial infrastructure is also well developed, including numerous international law and accounting firms.
So, don't count Bermuda out of the offshore arena. But the bloom is definitely off the rose.
Copyright © 2008 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society.)
