Regulatory Compliance: Bermuda Economic Substance and AML/ATF Regimes

Regulators in Bermuda face on-going scrutiny from international organisations – such as the Organization for Economic Cooperation and Development (OCED) and Caribbean Financial Action Task Force (CFATF) – regarding compliance with international regulatory standards. As a result, Bermuda regulators have been increasingly active in pursuing enforcement action under the various regulatory regimes. Of the various regulatory regimes, we highlight the following two areas as issues that entities should be particularly mindful of due to the current enforcement trends (primarily the Bermuda Monetary Authority (BMA) and the Registrar of Companies (Registrar)):

Economic substance for entities registered in Bermuda

The Economic Substance Act 2018 (ESA 2018) came into force in December 2019. Since then, Bermuda registered entities that carry out certain ‘relevant activities’ (e.g. financing and leasing, shipping, serving as a pure holding company, etc.) are required to meet certain requirements under the ESA 2018 (ES Requirements), which include demonstrating to the Registrar that:

• the entity is managed and directed in Bermuda;
• core income generating activities (CIGA) 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. A number of entities are able to comply with the ES Requirements by implementing alternative measures that include (but is not limited to)
outsourcing elements of management to third parties based in Bermuda. For example, this may involve engaging Bermuda accountants or Bermuda corporate service providers to manage the relevant activity on the entity’s behalf, and/or having key personnel/board members attend meetings in Bermuda for the purpose of making formal decisions about the relevant activity.

The Registrar has been actively enforcing the ES Requirements since early 2022 and continues to take steps to promote compliance with the ESA 2018 by issuing requests for information and imposing penalties against entities pursuant to the statutory warning notice/decision notice process.

It will be difficult for entities to mitigate the risk of receiving a civil penalty if the Registrar determines that they are non-compliant with either 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 compliance

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 Bermuda regulatory framework may differ from other jurisdictions where that entity carries out business.

The general requirement is that entities that are part of multi-jurisdictional operations have to ensure that the Bermuda registered/licensed entity complies with the AML/ATF regulatory framework, and also that other group entities have equivalent or better policies in place.

The BMA has been active over the years with enforcing the relevant AML/ATF statutory requirements and civil penalties have been significant.

AML/ATF compliance is often connected with the ES Requirements where the entity is licensed by the BMA because some entities that have a limited physical presence in Bermuda implement and adopt group policies that may contradict with and/or fail to satisfy the Bermuda regulatory requirements.

As with economic substance, entities should ensure that they are seeking Bermuda advice concerning their AML/ATF policies to mitigate the risk of enforcement action being taken by the BMA. Examples of recent enforcement action related to AML/ATF non-compliance that have been published by the BMA are:

• Trust Company (2022): $1,118,500 penalty.
• Corporate Services Company A (2022):
  $981,000 penalty.
• Life Insurer A (2021): $1,700,000 penalty.
• Life Insurer B (2020): $400,000 penalty.
• Corporate Services Company B (2019):
  $500,000

These enforcement outcomes may all have been determined on the basis of their own facts, but it appears that the size of civil penalties for AML/ATF non-compliance is trending upwards.

Conclusion

Regulatory compliance forms an increasingly important part of doing business in Bermuda. 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.

First published in Corporate Live Wire, Litigation & Dispute Resolution – Expert Guide, November 2023