Memorandum from the Finance Ministry,
Government of Bermuda
"BERMUDA'S ROLE IN THE PROVISION OF
INTERNATIONAL FINANCIAL SERVICES"
1. Ministry of Finance makes this submission
on behalf of the Government of Bermuda in response to the Treasury
Committee press notice no.42 dated 30 April 2008 regarding the
inquiry into Offshore Financial Centres.
2. Bermuda's modern economy is based primarily
on international business and tourism. International insurance
and reinsurance is the dominant component of international business.
The volume of premium flows (US$116 billion) and the size of total
assets (US$440 billion) in 2006 position Bermuda as one of the
top insurance markets in the world.
3. As a world market for insurance and reinsurance,
Bermuda bolsters global financial stability through the efficient
spread and diversification of insurance risk and provides market-driven
solutions at the pace of modern business.
4. Bermuda's long-established consumption-based
tax model assists in the efficient accumulation and deployment
of capital on a global basis and results in greater competitive
pricing for insurance premiums.
5. Bermuda has not adjusted its tax base
to attract mobile capital from other jurisdictions.
6. Bermuda has a strong tradition of KYC
in its business culture. Its institutional and legal framework
for the supervision and oversight of financial services is based
upon recognised international standards established by standard-setting
bodies for the purpose of enhancing transparency and financial
7. Bermuda embraces international cooperation
and is regarded as a cooperative, transparent and responsible
8. Bermuda is a small island nation in the
mid-Atlantic with a land mass of 53 square kilometers and a population
of 62,000. From the very early days of settlement in the 17th
Century, Bermuda has been engaged in some form of international
business. From whaling, ship-building and salt-raking (in the
Turks Islands) during the 17th Century to export of spring vegetables
to the eastern United States in the 19th Century, international
commerce has been an enduring feature of Bermuda's economic history.
Its modern economy is based primarily on tourism and international
business. The Ministry of Finance has estimated Bermuda's GDP
for 2007 at $5.8 billion.
9. As Bermuda's economy developed during
the 20th Century, tourism was the principal source of jobsespecially
for those segments of the population not employed in managerial,
professional, and technical occupations. But, during the last
half of the 1990s, employment in hotels, restaurants, and other
travel-related sectors declined appreciably. In contrast, employment
levels in the expanding financial services and international business
sectors were on a rising trend.
10. As the first decade of the 21st Century
draws to a close, international business activity and the provision
of business services have strengthened their positions as the
leading sectors of Bermuda's economy, together accounting for
some 45% of GDP.
These leading sectors helped to sustain an average annual growth
rate of 4% during the period 2000-06.
11. For a small island nation situated 600
miles offshore from the North American continent, Bermudamainly
through its international businesses and financial institutionshas
leveraged the economic advantages of the Country's geographic
position at the crossroads between North America, Europe and the
Caribbean to provide market-driven solutions at the pace of modern
12. The development of international business
in Bermuda, particularly financial services, was both serendipitous
and fortuitous. There was no marketing campaign, no re-writing
of laws, no specially created income or corporate tax codes designed
to lure onshore companies to Bermuda's international marketplace.
Rather, the business developed first. Once it had taken root,
the government soughtover a 60-year period beginning in
ensure there was a suitable regulatory framework to govern operations
in the emerging sector. Among the factors that have attracted
international companies to Bermuda are (1) an effective legal
framework; (2) a well-developed infrastructure; (3) high quality
professionals and business services; (4) close geographic proximity
to major markets in the United States and Canada; and (5) political
13. At the end of 2007, there were 15,358
international companies and international partnerships on Bermuda's
business registry compared to 13,509 in 2003.
The majority of the international entities registered in Bermuda
are owned and controlled by "Fortune 1000" companies.
14. In Bermuda, the emphasis has always
been on quality over quantity. This emphatic focus by the Ministry
of Finance has established Bermuda in the top tier of premier
international financial centres and distinguishes Bermuda from
many other jurisdictions that compete in the arena of offshore
financial services. Not all centres provide the same services
or the same quality of service. Business leaders choose Bermuda
for its high quality, its probity and its speed to market.
15. In Bermuda, international insurance
is the primary component of the international business sector.
Captive insurance, life insurance and catastrophe reinsurance
companies have a significant presence. With gross annual premiums
of US$116 billion, capital and surplus of US$158 billion, and
total assets of US$440 billion recorded in 2006, Bermuda is a
dominant player in the global insurance and reinsurance market.
In establishing this position, Bermuda joins with other major
centres such as London and New Yorkin a complementary rather
than a purely competitive paradigmto spread and diversify
insurance risk around the world. This role is important to worldwide
financial markets as it averts the concentration of risk and thereby
bolsters financial stability in the wake of an event that triggers
16. Bermuda's insurance market has significant
depth and sophistication in terms of product offerings. There
is a fully developed mezzanine layer and the product lines extend
well beyond excess liability coverage and property catastrophe
protection. More recent lines include integrated occurrence coverage,
punitive damages, secondary products recall and many other lines.
Consequently, the Bermuda market has become a focal point for
insurance managers, brokers, and underwriters with a global footprint.
Further, the stability provided to the global financial system
through well distributed catastrophe risk has been underscored
by the reinsurance industry in the aftermath of Hurricanes Katrina
17. Had US insurers been restricted to buying
reinsurance in the US market, the burden of reinsurance claims
arising from an event such as Hurricane Katrina could have led
to the collapse of the US reinsurance industry and the primary
market in 2005.
18. From the Ministry of Finance's perspective,
Bermuda has demonstrated a comparative advantage in the development
and provision of financial services to the global community. Moreover,
this economic achievement has been recognised by leading businesses
and financial organizations worldwide.
19. The wide array of financial service
entities doing business in Bermuda include:
insurance and reinsurance;
20. Bermuda has achieved a significant degree
of development in insurance and reinsurance. While the Country
is not an international banking centrethere are only four
banks in Bermudait has made considerable progress also
in providing services for trust business, mutual funds and asset
managers. At the end of 2007, there were some 1,300 funds domiciled
in Bermuda with a combined net asset value of $249 billion.
21. Bermuda's financial services sector
is complemented by the dynamic and well-regulated Bermuda Stock
Exchange. This international exchange provides regulated securities
trading on one of the most technologically-advanced and secure
electronic trading platforms in the world. The Bermuda Stock Exchange
(BSX) is a member of the America's Central Securities Depositories
Association (ACSDA). The BSX was successful in attaining this
membership because of its modern clearing, settlement and depository
service; it was assessed as a mainstream exchange, rather than
a listings exchange service provider. In early 2006, the BSX was
granted Designated Investment Exchange status by the UK Financial
Services Authority. The BSX has also been approved by the US Securities
and Exchange Commission (SEC) as a designated offshore exchange.
The BSX was accepted as a full member of the World Federation
of Exchanges (WFE). It is also recognised by the Australian Tax
Authority under the Foreign Investment Fund Taxation Rules.
22. Bermuda has a long-established and highly
efficient consumption-based tax system that has been in place
since the 19th Century. One of the first legislated taxes, the
Revenue Act 1898 that made provision for the collection of customs
duty, remains in effect today.
For the greater part of the 20th Century, customs duty accounted
for more than 50% of government revenue. Stamp duties accounted
for the next largest share of tax revenue. In the latter part
of the 20th Century, other forms of indirect taxes were introduced,
including payroll tax, passenger taxes, and property tax. For
the fiscal year 2007-08 (April-March), these five tax sources
together with annual fees for international companies generated
$745 million or 80% of the revised estimate of $929 million in
total revenue for the year.
23. In a broader sense, it should be noted
that the scale of taxes imposed by the Government of Bermuda is
in line with those prevailing in several other countries with
which it conducts the bulk of its foreign trade. In Bermuda, the
ratio of total Government receipts in relation to GDP was approximately
17.8% of GDP in 2007.
For the United States and Canada the same ratio was in the range
of 19.5 to 20.5% of GDP in 2007.
24. In making the comparison, it is important
also to take account of the fact that as a British Overseas Territory,
Bermuda does not bear the costs of an external affairs department,
external defence, foreign embassies and membership in international
organizations. In 2005, such costs were estimated in the range
of $10 million to $15 million,
equivalent to about 0.3% of GDP.
25. Bermuda does not have, nor has it ever
had, any form of direct tax on income. Further, the absence of
direct tax does not provide a necessary and sufficient condition
for labeling a jurisdiction as a "tax haven".
26. In this regard, it is important to note
that Bermuda's consumption-based tax system has not been targeted
by the Organization for Economic Cooperation and Development (OECD)
as unfair or designed for the purpose of attracting mobile capital.
OECD has not recommended any changes to Bermuda's tax structure.
In a sense, this can be seen as an important victory for Bermuda,
because it means that OECD has recognised Bermuda's system of
taxation as legitimate, fair and principled in the context of
the global economy.
27. The tax structure is an element of Bermuda's
success and should be evaluated in objective economic terms. The
tax system was shaped for efficiency and fairness to Bermudian
taxpayers. It was not designed to attract mobile capital from
onshore jurisdictions. Further, Bermuda authorities do not condone
tax evasion. There are treaties in place to exchange tax information
with other jurisdictions including for instance the United Kingdom
and the United Sates of America.
28. The Government of Bermuda rejects absolutely
any reference to Bermuda as a "tax haven". Bermuda's
tax regime applies equally to local and international companies
and other entities. Businesses, in particular international companies,
pay a significant share of total taxes in Bermuda.
29. The comparative tax differences that
exist in the international arena are due to the nature of the
tax model that is adopted by different jurisdictions. In Bermuda's
case, the consumption-based model has proven to be quite compatible
with the operation of an economy based primarily on the provision
financial service activities. Further, it has been shown that
the scale of taxes levied in Bermuda is not out of line with that
of developed countries.
30. As there are no taxes on capital, firms
domiciled in Bermuda are able to allocate capital efficiently.
Subsidiaries or branches that operate in various other countries
of the world pay all taxes that are applicable in the country
where the business activity occurs. The remaining profits can
be re-invested in that country or distributed to the company's
head office. If that head office is in a country that charges
income tax against a firm's foreign income, then the firm is in
effect suffering from double taxation on its profits. If the distributed
profits are accumulated in Bermuda, or a jurisdiction with a similar
tax structure, then the capital pool remains intact and is available
to be reinvested anywhere in the world where the firm has the
31. Thus, Bermuda's tax structure allows
a greater proportion of the capital pool to remain in the private
sector thereby permitting a higher level of corporate investment
worldwide. This may be viewed as one of Bermuda's major contributions
to the global economy. In the case of the insurance sector, which
is the largest segment of Bermuda's international business, the
ability of reinsurance companies to accumulate loan loss reserves
without paying tax on interest earned actually facilitates competitive
pricing for insurance premiums that ultimately benefits purchasers
of insurance products worldwide.
32. Bermuda's connection to the US insurance
market is instructive in this respect. In 2005, US insurance companies
reinsured some 45% of their risks with Bermuda companies compared
to some 41% for companies based in the United Kingdom, Germany
and Switzerland combined.
Based upon the research by Professor J. David Cummins, it is likely
that, in 2008, Bermuda will again provide the largest share of
property and catastrophe reinsurance coverage for the United States
of America. Further, it has now been affirmed that Bermuda reinsurers
will cover more than 30% of the losses of Hurricane Katrina and
pay out more than $22 billion to rebuild Florida and the Gulf
33. The development of Bermuda's local and
international business environment is based on three key principles:
transparency and know your customer;
responsible but appropriate regulation;
34. Transparency: Bermuda has a long standing
practice of know your customer or KYC. Further, Bermuda does not
have bank secrecy legislation. Rather Bermuda relies on the common
law principles of privacy of information which may be disclosed
provided there is express power under law. Any entity seeking
to register and carry on business in and from Bermuda is vetted
fully by the public authorities. This approach to vetting includes
a review of the owners as well as the proposed business. Further,
the Bermuda Monetary Authority vets all shareholder controllers
and directors of licensed entities. In addition to these vetting
procedures, Bermuda law expressly prohibits companies from certain
specific activities, including gambling and dealing in arms. Such
a review process for registration of businesses in Bermuda has
served the jurisdiction very well, especially in our efforts to
35. Regulation: The independent regulator
of financial services is the Bermuda Monetary Authority which
has the mandate for overseeing the financial services sector.
The regulator is independent and has responsibility for reviewing
the operations and controls of financial institutions operating
in and from Bermuda. In addition, the Bermuda Monetary Authority
is an active representative in standard-setting bodies such as
the International Association of Insurance Supervisors (IAIS),
International Organization of Securities Commissions (IOSCO) and
participates in the deliberations of the Offshore Group of Banking
36. Financial services operating in and
from Bermuda are subject to international standards that have
been incorporated into our domestic laws and related supervisory
practices. Key standards include:
Basle I and Basle II capital standards
IAIS standards for insurance (Bermuda
is presently finalizing a multilateral mutual agreement with IAIS).
IOSCO core principles for investment
business (Bermuda recently signed a multilateral mutual agreement
Financial Action Task Force (FATF)
recommendations for anti-money laundering and combating terrorist
37. Bermuda's regime for oversight of its
financial services and systems for prevention of money laundering
has been assessed by the International Monetary Fund in 2003 and
2007. As well the jurisdiction's regime was reviewed by the Financial
Stability Forum in 2000 and KPMG on behalf of the Foreign and
Commonwealth Office in 2000. Bermuda has been a full member of
the Caribbean Financial Action Task Force (CFATF) since 1995.
The CFATF was the first regional body of the FATF.
38. In 1997, Bermuda adopted legislation
to make money laundering an offence subject to criminal prosecution.
Presently the Bermuda Monetary Authority, as the independent regulator,
carries out supervisory reviews of the AML systems and controls
of all financial service providers. Bermuda authorities are implementing
a national action plan to enhance Bermuda's AML/CFT regimes. The
enhancements will ensure that the jurisdiction complies with the
most recent recommendations of the FATF.
39. As Bermuda has strictly practiced KYC,
the IMF assessors have recognised that the risk of money laundering
within Bermuda's financial services sector has been minimal.
40. Bermuda's well developed regime for
monitoring closely those businesses which set up in Bermuda has
served Bermuda well not only to know customers, but also to identify
business trends. As financial structures become more complex and
involve cross border transactions, cooperation and appropriate
regulatory structures are key. For example, as Special Purpose
Vehicles (SPV's) and transformers became popular, Bermuda authorities
reviewed such structures closely with both industry and the regulator
to determine the nature of the risk. SPV's related to insurance
are fully regulated. Where such vehicles are owned by an overseas
financial institution, Bermuda adopted the practice of coordinating
approval of any structure with that institution's relevant regulator.
As these structures have developed, Bermuda has undertaken to
implement appropriate regulatory regimes and oversight.
41. At the same time, standards and regimes
must be developed to check abusive use of structures. This is
not a simple task but Bermuda is a strong advocate of the basic
fundamentals. First, Bermuda does not condone abuse of business
structures. Second, Bermuda does cooperate internationally in
all areas including tax. Third, Bermuda continues to commit more
resources for development of highly skilled professionals and
an effective regulatory regime.
42. Terrorist financing is not seen as a
high risk in Bermuda. This is mainly due to the nature and high
quality of business that the jurisdiction has supported and the
long-standing policy of turning away dubious business. There is
domestic legislation dealing with anti-terrorist financing and
for enforcing international sanctions. In addition, there is a
MOU which deals with the enforcement of UN sanctions extended
to Bermuda. There is a requirement for companies to seek consent
to carry on business in designated areas which is managed by the
Minister of Finance. Where there have been breaches the Minister
has exercised her power to investigate and is presently winding
up one company for dealings in oil contrary to UN sanction on
Iraq. Again Bermuda has had an occasion to deal with suspect financing
and dealt with it accordingly.
43. We note for the record that the current
President of the Financial Action Task Force visited Bermuda in
April 2008. He was greatly encouraged by the robust nature of
Bermuda's AML/CFT regimes and the enhancements that Bermuda authorities
are in the process of implementing in the wake of the International
Monetary Fund's most recent assessment of same.
44. International Cooperation: Bermuda embraces
international cooperation and is regarded as a cooperative jurisdiction.
The Country has entered into a number of international agreements
to assist other jurisdictions by sharing information with overseas
regulators, tax authorities, and policing services.
45. As a case in point, collaboration between
authorities in Bermuda and authorities in the British Virgin Islands
(BVI) led to the conviction in the BVI of a group of companies
known as IPOC, and a wind-up Order issued by the Supreme Court
of Bermuda against the same group of companies in May 2008. As
a result of the conviction in the BVI, $45 million of assets held
by IPOC was confiscated as proceeds of crime and is to be shared
between the two jurisdictions.
46. The action against the IPOC group was
initiated in Bermuda in 2004 and took four years to conclude.
Bermuda authorities remained steadfast throughout and committed
significant resources and public funds to the process. This case
and its outcome represent clear and substantial evidence of Bermuda's
commitment to financial stability and transparency in the global
47. The Bermuda Monetary Authority has the
capacity to assist a foreign regulator of financial services by
sharing information in its possession and has entered into MOUs
for this purpose. The Authority also has the capacity to assist
in matters which are not under review by the Authority, provided
it is satisfied that it is a legitimate regulatory review being
conducted in the overseas jurisdiction. The scope of assistance
extends to seeking information from both regulated and non-regulated
48. With regard to criminal investigations,
there is express power to cooperate under the Criminal Justice
(International Cooperation) (Bermuda) Act 1994 (CJIC). The Bermuda
Financial Intelligence Unit (FIU) has been a member of the Egmont
Group since 1999. The Egmont Group consists of country representatives
of financial investigation units and now represents over 100 countries.
It was set up to facilitate effective international cooperation
between FIUs to combat money laundering. At the annual plenary
meeting held in Bermuda in 2007, the Bermuda Charter was signed
by all members. This Charter formalised the Egmont Group and established
a permanent secretariat. Further, Bermuda's law enforcement authorities
have access to Interpol via Her Majesty's Government.
49. With respect to tax matters, under CJIC
the Attorney General may assist overseas authorities in tax fraud
cases. Bermuda has entered into international agreements to exchange
information on taxin both civil and criminal matterswith
other tax authorities. The first agreement was entered into with
the United States more than 20 years ago. Recently, agreements
were concluded with Australia and the United Kingdom.
50. Bermuda's cooperative stance in the
fight to counter and prevent tax evasion has been publicly recognised
by the OECD, the United States of America, Australia and the United
Kingdom. On December 4, 2007, on the occasion of signing the TIEA
between Bermuda and the United Kingdom, the Financial Secretary
to Her Majesty's Treasury, the Right Honourable Jane Kennedy,
MP, hailed the new arrangement, and stated: "|I commend the
Government of Bermuda for its willingness to implement the high
standards of transparency and exchange of information to which
it is committed and for its continuing leadership in this important
global tax policy area."
51. Bermuda is presently in negotiation
with a number of other countries (including EU members) and with
the European Commission. Under these agreements Bermuda has upheld
the OECD standards for transparency and has adopted wide parameters
for sharing information. Also, Bermuda has been an active participant
in the OECD working group on tax information exchange.
52. Accounting and Auditing Principles:
The auditing profession is overseen by the Institute of Chartered
Accountants of Bermuda (ICAB). ICAB is an affiliate of the Canadian
Institute of Chartered Accountants (CICA). An agreement originally
signed in August 1973, and restated in July 1998, formalises the
relationship between CICA and ICAB.
53. The Minister of Finance has the power
to mandate generally accepted accounting and auditing principles
in Bermuda under the Companies Act 1981. The following accounting
and auditing principles are permitted in Bermuda:
International Accounting Standards.
International Financial Reporting
International Standards on Auditing.
54. Ratings: The External Validation
Country credit ratings are valuable tools for
assessing risk and for determining the cost of debt, but they
provide benefits on a number of other levels as well:
they can lend credibility and can
enhance the reputation of a country;
they help address misconceptions;
they have the ability to highlight
consistency of performance; and
they are important in helping to
build investor confidence.
55. Since its first rating in 1994 by Moody's
Investors Servicea sovereign credit rating of Aa1Bermuda
consistently has maintained high investment grade ratings by Moody's,
Standard and Poor's, and Fitch Ratings.
56. Bermuda has matured as a market and
a developed service centre for financial services with a global
platform. It is a jurisdiction of choice for the insurance sector
and has developed a strong market in the investment field. Bermuda
is politically stable and has a track record of superior economic
57. To be successful in the competitive
global arena, an international financial centre must be efficient,
flexible, and ready to adapt to international developments and
opportunities. At the same time, it must commit the resources
to provide good governance, proper regulation and effective oversight.
Together these factors characterise a sound financial centre.
Businesses seek to do business in a jurisdiction that is sound
and credible, and known internationally for probity, endurance,
and market-driven solutions. Bermuda signifies this brand.
58. As the global market becomes more interdependent,
there is no question that jurisdictions must cooperate and inter-act.
The challenge is how jurisdictions may work together to ensure
that businesses are properly regulated and minimise risks. Bermuda's
strategy has been to adopt international standards and practices
using the prism of a risk-based approach and to monitor business
trends and practices.
59. Bermuda authorities have entered into
MOUs for the purpose of information sharing. This underscores
the jurisdiction's approach towards transparency and international
60. The breadth of "blue chip"
companies that have chosen to do business through Bermuda, including
those with strong links to Lloyds of London, is testament to that
reputation. Bermuda neither has ignored nor shirked its international
61. In summary, the Government of Bermuda
is proud that the jurisdiction has made a positive contribution
to transparency. This was done through strengthening international
cooperation with overseas regulators, tax authorities and law
enforcement officials. In addition, global financial stability
has been enhanced by Bermuda's international role as an effective
reinsurance market for the spread and diversification of insurance
risk and the efficient allocation of capital.
18 June 2008
336 Bermuda dollar is pegged at par with US dollar. Back
Ministry of Finance, National Economic Report of Bermuda 2007,
Table 1, page 15. Back
Ibid, Table 2, page 16. Back
American International was the first international insurance company
incorporated in Bermuda in 1947. Back
Ministry of Finance, National Economic Report of Bermuda 2007,
Table 23, page 46. Back
Bermuda Monetary Authority Report and Accounts 2007, page 42. Back
Bermuda Monetary Authority Report and Accounts 2007, page 33. Back
Revenue Act 1898, Revised Bermuda Laws, Volume 5. Back
Government of Bermuda, Budget Statement 2008-09, Table II, page
Total receipts includes $929 million in taxes, licences and fees
booked to the Government Consolidated Fund plus about $98 million
of social insurance contributions that goes into the Contributory
Pension Fund for payment of pensions and allowances to senior
Report of the Bermuda Independence Commission, August 2005, page
J. David Cummins, The Bermuda Insurance Market, An Economic Analysis,
2008, page 34. Back
Bermuda Monetary Authority Report and Accounts 2007, page 62. Back