BERMUDA: An Introduction to Corporate & Finance
In Bermuda, 2022 was a year of growth and optimism following the uncertainty of 2020. This being said, there were a number of new challenges, which caused a pause for thought this year and for the outlook for the year ahead.
Russia’s invasion of Ukraine has led to a period of much uncertainty as governments, professionals and multinationals distanced themselves from Russia, its regime and its businesses. In February 2022, the United Kingdom passed The Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 which amended its sanctions against Russia. As a British Overseas Territory, Bermuda typically implements the same international sanctions as the UK and relies on the UK’s framework for sanction implementation. These Regulations impose financial, trade, aircraft, shipping and immigration sanctions for the purpose of encouraging Russia to cease actions which destabilise Ukraine, or undermine or threaten the territorial integrity, sovereignty or independence of Ukraine. The largest sectors affected in Bermuda are aircraft and shipping.
Over the course of 2022, we have seen central banks around the world moving to increase interest rates to tackle inflation. As the United States is one of Bermuda’s largest trade partners, Bermuda is exposed to any volatility in the US economy. Global trends inevitably affect Bermuda, and the effects of the war in Ukraine, rising energy, food and commodity prices and soaring inflation worldwide have been felt in Bermuda.
Current Economic Conditions
There have not been any significant legislative or regulatory changes affecting the rights of lenders or secured creditors over the past year, nor any that would affect Bermuda’s status as a leading creditor-friendly jurisdiction.
While Bermuda is a major international financial centre and Bermuda entities are used in a variety of cross-border structures and transactions, there is no real loan market to speak of in Bermuda, because such deals are mostly originated in one of the major onshore jurisdictions. As such, deals featuring Bermuda entities are inevitably susceptible to market trends and developments in such jurisdictions.
As a leading fintech and digital assets sector jurisdiction, Bermuda continues to enhance its associated regulatory framework. The Bermuda Monetary Authority (BMA) continues to ensure that the digital asset legislative framework is fit for purpose and keeps pace with the digital asset business environment, which continues to evolve rapidly. Proposed changes to the Digital Asset Business Act 2018 seek to provide further clarity to applicants and to facilitate more effective administration of the legislative framework.
The combination of flexible corporate structuring options, tax neutrality, compliance with international standards including the Foreign Account Tax Compliance Act/Common Reporting Standard, and the EU Securitisation Regulation, has ensured that Bermuda is not only the global market leader in insurance-linked securities but also the “blue-chip” jurisdiction of choice for corporate entities entering into secured finance transactions.
New Legislation
Bermuda has seen legislative and regulatory developments in the following sectors: anti-money laundering (AML) and anti-terrorist financing (ATF), banking, digital assets, investment business, privacy and intellectual property.
AML and ATF
The Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008 provide that certain regulated sectors and persons must apply enhanced customer due diligence to customers in high-risk jurisdictions. These Regulations impose a significantly detailed set of obligations on affected AML/ATF-regulated financial institutions relating to customer due diligence, record keeping, systems and staff training. They also cover obligations in relation to internal reporting procedures. In October 2022, the Financial Action Task Force amended its list of “Jurisdictions under Increased Monitoring”, removing Nicaragua and Pakistan as jurisdictions under increased monitoring.
Banking
Banks and Deposit Companies Amendment Act 2022
In July 2022, the Bermuda government announced that the Banks and Deposit Companies Amendment Act 2022 had been tabled for the primary purpose of providing the BMA with an express power to issue codes of conduct in relation to the manner in which an institution conducts deposit-taking business and charges banking fees. The amendment will allow the BMA to ensure banking institutions are complying with consumer protection requirements in an appropriate manner and promoting better and fairer treatment of customers.
Revised Banking Code of Conduct
In August 2022, the BMA published a revised banking code of conduct. The revised code is in line with amendments to the Bermuda Monetary Authority Act 1969, which expands the BMA’s regulatory remit to encompass the oversight of the conduct of business by financial institutions with the aim of promoting fair outcomes for customers.
Operational Cyber Risk Management Code of Conduct
In September 2022, the BMA published a notice with respect to the Operational Cyber Risk Management Code of Conduct: Banks and Deposit Companies. Banks and deposit companies are required to comply with the code by 15 February 2023.
Digital assets
In July 2022, the BMA published guidance notes for entities seeking exemption from dual licensing due to the ancillary nature of their activities. The guidance notes provide information for entities seeking an exemption from the requirement to be licensed under the Investment Business Act 2003, pursuant to the Investment Business (Non-Registrable Persons) Order 2022, on the basis that the otherwise licensable activities are carried on in an ancillary manner to activities conducted and licensed under the Digital Asset Business Act 2018 (DABA). The guidance notes pertain to entities licensed to conduct digital asset business which carry on investment business in an ancillary manner. It is expected that a comparable exemption in respect of licensed investment providers will be provided for under the DABA regime.
Investment business
The Investment Business Amendment Act 2022 took effect on 27 July 2022 which introduced changes to the Investment Business Act 2003 (IBA). The changes introduced by the amendment will affect all entities conducting investment business, including some of those entities which previously fell outside of the scope of the IBA. The IBA is now broadened beyond those persons with a place of business maintained in Bermuda such that “in or from Bermuda” now includes persons (i) carrying on investment business and incorporated or formed in Bermuda and (ii) formed or incorporated outside Bermuda and carrying on investment business in or from Bermuda.
The amendment has effectively removed the “maintain a place of business” exclusion and all persons conducting investment business in or from within Bermuda must either be licensed, registered or exempted. The amendment introduces the concept of a Class A and Class B registered person. It does not make material amendments to the exclusions such that persons that were previously excluded will remain excluded after the amendment.
The amendment introduces a new relevant activity of promoting investments to the public and introduces a concept similar to the existing (re)insurance and digital asset sandbox facility whereby a “test licence” may be issued to carry out certain investment business for a defined period and subject to any restrictions imposed by the BMA and enhances reporting requirements for entities that fall within the scope of the IBA.
Personal Information Protection Act 2016
The Bermuda Privacy Commissioner has been active in developing guidance notes and training platforms to assist entities in Bermuda to meet their obligations under the Personal Information Protection Act 2016 (PIPA). There is still no confirmed date for the substantive provisions of PIPA to be operative, however, we anticipate that PIPA will be introduced shortly with a phased approach for entities to be compliant. It will be important for entities in Bermuda to begin to review their current handling of personal information and ensure that they are ready to satisfy the obligations of PIPA when it comes into force.
Bermuda trade mark legislation
It is expected that Bermuda’s trade mark legislation will be revised in the near future so that it is fully aligned with global standards and best practices. The new legislation is to be modelled after the United Kingdom’s current trade mark legislation. This will strengthen Bermuda’s IP framework by modernising the law to reflect updated rights, protections and procedures that are aligned with current market demands and global best practices. Bermuda will be positioned to implement certain international treaties which are necessary to accommodate IP protections for global business.
Outlook
There may be new challenges on the horizon, such as higher interest rates, rising inflation, increased regulation as well as the ever-present possibility of new strains of COVID-19. However, Bermuda remains one of the pre-eminent offshore jurisdictions for cross-border structures and fund products, with a reputation for quality clients and innovative structures and is emerging as a popular jurisdiction for digital asset and crypto funds given Bermuda’s highly regarded fintech regulatory framework.