Regulatory compliance continues to be an area of significant development in Bermuda. While anti-money laundering (AML), anti-terrorist financing (ATF) and global financial sanctions have been in focus for some time, the regulatory compliance landscape has grown in recent years due to the implementation of economic substance requirements, the introduction of the Global Minimum Tax and the impending full implementation of Personal Information and Protection Act (PIPA).
Bermuda's ever evolving financial environment requires the regulated sectors to implement effective measures, policies and procedure to fulfill regulatory requirements, failing which entities are at risk of significant consequences (both civil and criminal). A number of regulatory regimes are actively enforced in Bermuda by regulators, including: the Bermuda Monetary Authority (BMA), Registrar of Companies (ROC) and the Financial Sanctions Implementation Unit (FSIU), all of whom have statutory mandates.
It is important to keep abreast of key regulatory compliance developments, including those concerning economic substance, AML/ATF compliance and Financial Sanctions compliance and some of the trends concerning enforcement by regulators in those areas.
ECONOMIC SUBSTANCE
Since coming into force in December 2019, the Economic Substance Act 2018 (ESA 2018) requires Bermuda registered entities that carry on certain 'relevant activities' (e.g. financing and leasing, shipping and serving as a pure holding company) to meet certain requirements under the ESA 2018 (ES Requirements), such as demonstrating to the ROC that:
- the entity is managed and directed in Bermuda
- core income generating activities are undertaken in Bermuda concerning the relevant activity
- the entity has an adequate physical presence in Bermuda
- the entity engages adequate numbers of suitably qualified employees in Bermuda and
- there is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.
Satisfying the ES Requirements will not always require an entity to establish a 'brick and mortar' physical presence in Bermuda. Depending on the relevant activity, some entities are able to comply with the ES Requirements by implementing certain alternative measures.
The ROC has been actively enforcing the ES requirements since early 2022 and continues to take steps to promote compliance by issuing requests for information and by imposing penalties against non-compliant entities.
It will be difficult for entities to mitigate the risk of receiving a civil penalty if the ROC determines they are non-compliant with the ES Requirements or any other part of the ESA 2018. While the Registrar has issued statutory guidance, complying with the ES Requirements is a subjective exercise and entities should obtain advice on the basis of each entity's unique facts to ensure adequate measures have been undertaken.
AML/ATF
Regulation aimed at preventing money laundering and terrorist financing is not a new concept and entities should be well aware of the global importance attributed to it. One difficulty a number of entities face when their business operation involves a regulated entity that is registered and/or licensed in Bermuda, is that the Island's regulatory framework may differ from other jurisdictions where that entity carries on business.
The general requirement is that entities that are part of multijurisdictional operations have to ensure that the Bermuda registered/licensed entity complies with the AML/ATF regulatory framework and that other group entities have equivalent or better policies in place.
As with economic substance, entities should ensure they are seeking Bermuda advice concerning their AML/ATF policies to mitigate the risk of enforcement action being taken by the BMA. While each case is determined by its own facts, civil penalties appear to be trending higher in recent years.
FINANCIAL SANCTIONS COMPLIANCE
Financial sanctions are used by countries, regions and international organisations to achieve, maintain or restore international peace and security in a specified regime. Unlike AML/ATF Regulations, financial sanctions in Bermuda applies to every individual and legal entity.
Bermuda's sanctions legislation is primarily codified in Bermuda's International Sanctions Act 2003 and The International Sanctions Regulations 2013 (Bermuda Sanctions Regime), with the Sanctions Regime giving force to international sanctions that impact Bermuda as an Overseas British Territory through the UK.
The enforcement of Bermuda's Sanctions Regime is taken very seriously by the authorities and a breach may result in the entity being referred for criminal prosecution as assessed by the Financial Sanctions Implementation Unit (FSIU).
The regulatory landscape has seen a steady growth in enforcement measures by the BMA, even though financial sanctions breaches are assessed by the FSIU, the BMA by virtue of their supervisory regime, has the power to take effective measures to ensure compliance of regulated entities with financial sanctions. This includes the imposition of civil penalties or other measures.
There are frequent updates concerning sanctions compliance, especially concerning Russia related sanctions developments. Entities have to be especially vigilant when dealing in multijurisdictional transactions and be sure to apply the correct sanctions regime relative to any relevant jurisdictions (e.g. the UK's sanctions position may differ from the EU's position on certain matters).
ENFORCEMENT TRENDS
We anticipate the various regulators to remain active in enforcing against regulatory non-compliance. The following are examples of enforcement trends we have seen in the Bermuda market:
- Higher civil penalties.
- Increased use of investigatory powers, i.e. regulators utilising statutory powers to investigate the affairs of an entity either itself or by appointing a third-party investigator.
- Increased use of Court relief, e.g. regulator application for the winding-up of an entity and the appointment of joint provisional liquidators, sometimes in aid of investigations being conducted by the regulator.
SUMMARY
As with many offshore jurisdictions, regulatory compliance will form an important part of doing business in Bermuda. The BMA and other regulators play a pivotal role in setting the relevant standard for regulatory compliance and enforcing against non-compliance. Through industry specific working groups and consultation initiatives, the regulators consider the various markets and implement the regulatory standards, while bearing in mind the international scrutiny faced by the Government of Bermuda.
As with any new statutory regime, the implementation of the
Global Minimum Tax and of PIPA will result in a period of
uncertainty and (possibly) disputes between entities and regulators
concerning issues of interpretation and application of the relevant
statutory provisions. The evolving standards, active regulators and
the potential risk of significant adverse outcomes (if found to be
non-compliant)
make it critical that entities:
- implement appropriate measures to ensure compliance and
- seek advice at the earliest stage possible when any potential non-compliance has been identified.
First Published In the Bermuda Business Review 2024-2025 – July 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.