Bermuda: how a quiet island became an offshore financial paradise
HAMILTON, Bermuda - Collecting seaweed on the beach early one recent morning, Omer Velassa, 78, recalled his childhood when Bermuda was a quiet farming community.
That was before the luxury hotels and the offshore financial industry arrived.
He still tends his garden, growing potatoes. “Progress comes with a curse,” he said with a hint of melancholy. “Don’t get me wrong, the offshore industry has created some jobs. But it could be done more equitably.”
Sitting about 700 miles off the Atlantic shore of the United States, the tiny British island appears on maps as a blip in the ocean.
Only 20 square miles in size and with 65,000 inhabitants, it’s known to most people for the colorful Bermuda shorts, and of course the mythical Bermuda triangle where airplanes and ships disappear.
But, behind its laid-back veneer, it’s also where money comes to disappear – at least from the reach of the tax man.
“We have a simple economy here,” said former finance minister Bob Richards. “We've never had the need for income tax … therefore somebody got the bright idea that, if you set up a company in Bermuda you won't have to pay this income tax, it might be beneficial.”
Cross-border wealth-management was dominated for many years by Switzerland, but since the 1980s many new players have entered the market, from the Bahamas to Hong Kong. Today, Bermuda is one of the most successful economies in the world with a per capita GDP (Gross domestic product) of $96,000.
Its role in offshore finance has come under scrutiny after documents from one of its top law firms, Appleby, were leaked to the International Consortium of Investigative Journalists (ICIJ). The documents reveal how Bermuda’s tax exemptions are exploited by wealthy individuals and multi-national corporations, such as Apple and Nike, to avoid paying billions in taxes.
The United States loses $100 billion each year due to tax dodges, both legal and illegal, according to a 2015 report by the Congressional Research Service.
One recent study showed that the top 500 U.S. companies hold $2.6 trillion in profits offshore, thereby avoiding $752 billion in U.S. taxes. Another study found that the equivalent of at least 10 percent of the world's GDP is in offshore banks.
Rich history
Named after the Spanish sea captain Juan de Bermúdez who landed there in 1503, Bermuda has a proud democratic tradition boasting the oldest parliament in the Western hemisphere. During the American Revolution, Bermuda helped General Washington supplying him with gunpowder. Later on, Bermuda helped the British sack Washington D.C. in 1814, burning down the White House in the process.
During both World Wars, it served as important military base for the U.S. Air Force, protecting vital British shipping lanes across the Atlantic from German attack.
Its insurance industry took off after Hurricane Andrew struck Florida in 1992, wiping out a number of U.S. companies. “All of a sudden, there was no capacity to insure major hurricane damage in the United States. None. And we filled the need,” said Richards.
The 9/11 attacks in New York created even more stress in the insurance markets. Bermuda is now home to 13 of the world’s top 40 reinsurers making it the second largest reinsurance market in the world. No other country, has a higher percentage of actuaries, accountants or underwriters among its population.
As much as 25 percent of the estimated $100 billion in insured losses from the 2017 hurricanes - Harvey, Irma, Maria – will be covered by Bermuda companies, according to the Association of Bermuda Insurers and re-insurers (ABIR).
Tax haven, or not?
Bermuda vehemently rejects the pejorative label of ‘tax haven’ and instead likes to think of itself as a blue chip financial market with high regulatory standards, offering clients legitimate solutions to reduce their tax burden.
While Bermuda does indeed enjoy one of the best reputations in the offshore industry, it’s claim not to be a tax haven is “absurd,” says David Marchant, publisher of Offshore Alert, an independent industry watchdog.
“Foreign owned companies in Bermuda are known as exempted companies. And the word exempted literally means they're exempted from tax. Well if you're exempted from tax, of course you're a tax haven,” he said.
Marchant spent five years working in Bermuda in the 1990s exposing flaws in its offshore regime. He left after his work permit was not renewed. He likens the efforts to regulate the offshore industry to a game of cat and mouse. "Over the last 10 to 15 years the cat has become more determined to catch the mouse, but it's like a Tom and Jerry cartoon. The offshore world is the mouse, the cat is the onshore world, and as we all know from Tom and Jerry the cat normally gets slapped around the head and blown up, and generally made you look ridiculous."
Regulation, with a soft touch
The island’s chief regulatory body, the Bermuda Monetary Authority, oversees the offshore business sector. “Our regulator is recognized as a leader in compliance,” BMA spokeswoman Rosemary Jones, told Univision News in a statement. “Secrecy is not a word associated with Bermuda by those who know this market well; in short, it's not a place folks come to hide money, and tax authorities overseas know Bermuda willingly cooperates and is very different from many other offshore centers in this respect.”
It may look good on paper, but Marchant questions how effective it is in practice. “They are regulated, but one of the reasons to go offshore in the first place is, the regulation is with a very light touch. That's one of the main benefits of going offshore,” he said.
For example, Bermuda keeps a registry of all the real “beneficiary” owners of companies, but it’s not public. “The information that we have is private information. If there is a legitimate inquiry from another government we will share it with them. But we're not going to share it with any Tom Dick and Harry who just … want to find out about a Lord so-and-so's business,” said Richards.
Bill Zuill, the former editor of the Royal Gazette newspaper says he is confident in the compliance efforts of Bermuda’s offshore sector. “We understand very well how important reputation is. It's the only thing we really have to trade on, it's a hard thing to get and it's a much harder thing to get back if you lose it,” he said.
But, he recognizes there is room for improvement. “There's no question at all that compliance is one of the world's growth industries. But there's no doubt at all that there's more coming all the time and you have to keep improving it,” he said.
Zuill argues that the offshore companies have been good for the island, noting their generosity to local charities, including the Bermuda National Trust, an environmental and historical group, which he heads.
But, a survey last month found that less than half of Bermuda’s residents felt the island was “inclusive” and complained about the cost of housing.
Bermuda’s tax system is producing poverty on the island, according to local economist Robert Stubbs, the former head of research at the Bank of Bermuda. “Unfortunately, we really need to raise our taxes for those who can afford it and are paid more to give tax relief to those who are in difficult circumstances,” Stubbs told a gathering in September.
But don’t expect Bermuda to change its secrecy laws anytime soon.
“I don't believe that we're going to have personal or corporate income tax in Bermuda,” said Richards. “But if the UK or France want to tax them. Knock yourself out.”
Back on the beach at Horseshoe Bay, Velassa explains that the seaweed helps keep the weeds down in his garden, and the snails out. He says he’s not convinced that the offshore companies are good for the island’s image, and its residents.
“It’s no secret, they come for the money. That’s why they’re here, to take advantage of the tax system. And it keeps getting more expensive for the rest of us.”