Up to $300k in penalties with stricter guidelines under Substance Requirements Act

Deputy Prime Minister, Peter Turnquest.

NASSAU, BAHAMAS – The government is ready to crack the whip on non-compliant companies with the release of more stringent guidelines to the Financial Services sector yesterday, detailing penalties up to $300k and the outright removal of entities breaching these new rules.

The new parameters are structured to ensure The Bahamas is removed and stays off any deficient listing by the European Union (EU) or the Organization of Economic Cooperation Development (OECD). Entities incorporated before December 31st, 2018 have up until July 2019 to comply with the Commercial Entities (Substance Requirements) Act to be in line with the global, widely adopted standard on fair taxation.

“We know the industry was anxiously awaiting these guidelines,” Deputy Prime Minister and Minister of Finance Peter Turnquest said in a statement released yesterday evening. “Now that they have been released, all of our core stakeholders will have a clear sense of the framework to fully comply with the legislation. These guidelines were drafted with wide input of industry stakeholders, who we would like to thank for engaging with the Government over the past months “This collaborative effort is critical to our ongoing work to safeguard the industry and to ensure our global competitiveness.”

The rules include these entities having an adequate level of qualified full-time employees in The Bahamas or outsourcing to service providers in The Bahamas, a level of expenditure in The Bahamas commensurate with its business activities, adequate physical premises locally as well as adequate levels of board direction and control.

The guidelines also require these companies to have Core Income Generating Activities (CIGA) that incorporate local banking business, insurance business, fund management business, financing and leasing business, headquarters business, distribution and service centres, shipping regime and the commercial use of Intellectual Property.

“It is the primary responsibility of the included entity to demonstrate that it conducts CIGA in The Bahamas proportionate to its business activities,” read the guidelines. “An entity may undertake or outsource all or part of an activity in The Bahamas provided that the included entity is able to monitor and control the carrying out of CIGA by that outsourcing service provider.

“If that activity is not part of the CIGA this will not affect the included entity’s ability to meet the substance requirement.”

The new standards will not hinder any entity from seeking expert professional advice or engaging the services of specialists in other jurisdictions.

Failure to adhere to the requirement in the Act will lead to sanctions that could ultimately see the entity struck off of the Companies Register. Where the Authority – Ministry of Finance – deems an included entity to have failed to meet the substance requirements, it will have the power to request onsite inspections and an audit at the expense of the company.

“In the event the audit reveals deficiencies, the entity shall be issued a notice of noncompliance from the Authority stating the areas where remedial measures are required and a deadline for compliance,” it read. “Where the entity fails to comply, the Authority has the power to impose an administrative penalty of $150,000, pursuant to Section 16(4), with a possible further administrative penalty of $300,000, or striking-off the Register pursuant to Section 16(6)(a) of the Act.”

Published on February 25, 2019, the guidelines said where an included entity fails to satisfy the substance requirements rules, the Authority has the power to forward to the relevant reportable jurisdiction the findings of any inspection or audit commissioned in accordance with the schedules set out in the Act.

The rules also outlined methods of reporting for compliance purposes, retention of information required, the spontaneous exchange of relevant information as well as the direction and control of included entities.