10:17 am - Tuesday 21 October 2014

Should OFSA be established to regulate Offshore activities in Sri Lanka ?

By RSL - Sun Sep 16, 10:52 pm

By Rohan Wickremasinghe

The provision of well regulated offshore financial activities is put forward as a strategy for development of many small island states in the world, i.e.: Caribbean Islands, Jersey Islands, Ireland and many island nations in Mediterranean, Pacific and Indian ocean.

Offshore Financial Centres (OFCs)

OFC is a place which operates within a country but separate from financial and corporate legislation in the country. In short OFC is a separate legal regime established to provide financial services on attractive terms such as low rates of taxes or zero taxes and innovative products and services subject to less rigid laws.

Traditionally it is the manufacturing sector which was provided with tax and other benefits with the intention of attracting such manufacturing concerns, to Sri Lanka. This is promoted and regulated by Board of Investment of Sri Lanka. In this regard there are several Export Processing Zones (EPZs) and Free Trade Zones (FTZs)operating in Sri Lanka.

In the same way an Offshore Financial Centre (OFC) for financial services need to be established to promote financial services in the fields of offshore Banking, Insurance, Money Broking and even Trading Companies and Shipping Companies, by providing low tax benefits and flexible corporate environment and less rigid legal regime.

An Offshore Financial Centre provides such financial, trading and shipping companies attractive tax benefits, corporate and legal flexibility to operate from the country and open services of such institutions exclusively to non residents of High Net Worth and Rich Corporate Clients (RCCs) in the rest of the world.

Sri Lanka lacks a regulatory framework in this regard although the Part 8 of the Companies Act No 17 of 1982 makes provisions for incorporating such offshore companies in Sri Lanka. It is vital, for further development of offshore activities in Sri Lanka that the government establish an Offshore Financial Services Authority (OFSA) in Sri Lanka (i.e. If the geographic location of such an Offshore Financial Centre is Trincomalee it can be established by an act of parliament enacted as Trincomalee Offshore Financial Services Authority Act). In 1996 the Malaysian government established the Labuan Offshore Financial Services Authority (LOFSA) to regulate the offshore business carried out in Malaysia mainly within the geographic limits of Labuan Islands.

Such an Offshore Financial Services Authority (OFSA) should be separated from the rest of the financial & corporate legislation in Sri Lanka and be subject to separate financial and corporate legislation/legal regime which could be done by enacting separate acts such as Offshore Companies Act, Offshore Banking Act, Offshore Insurance Act, Offshore Shipping Act, Offshore Money Broking Act, Offshore Trading Act etc.

At present the sections 241 to 246 of Part 8 of the Companies Act No. 17 of 1982 and Banking Act No 30 of 1988 are the only legal regime available to regulate offshore business activities in Sri Lanka. This is highly inadequate and retrogressive.

Offshore Banking Act

Offshore banking companies that are in operations in major Offshore Centres in the world such as Caribbean, Channel Islands, Mediterranean and Asia Pacific absorbed trillions of US dollars as deposits during the last few financial years. Such huge amounts invested in these small island nations enhanced the quality of life of people living there while boosting their economies by stimulating infrastructure development, more government revenue as license fees, more white colour jobs which are highly paid and more demand from allied sectors of the economy such as law firms, accounting firms, corporate services, printing etc.

Captive Insurance

Captive insurance and Captive banking are two innovative ways of handling insurance and banking business relatively not known to Sri Lanka. However this is a highly profitable business strategy for large conglomerates and holding companies and generate high income to governments in other Offshore Financial Centres. Such industries are subjected to supervision by offshore regulatory authorities in such OFCs. Lack of regulatory framework may be the reason why such innovative business did not develop in Sri Lanka.

The main strategy behind Captive Insurance is to direct large Insurance transactions generated by a Conglomerate or a Holding company through a Captive Insurance company formed by the same conglomerate. Such subsidiary in turn reinsure their insurance portfolio with major re-insurers in the world thus passing the risk to the re-insurers. By this operation profits generating out of such insurance transactions of the conglomerates are retained with the group while enjoying the high liquidity of cash rich
captive insurance company.

Captive Banking

Offshore captive banking is similar to offshore captive insurance and large groups retain benefits of profits arising form large banking transactions by retaining the banking transactions within the group, otherwise absorbed by banks outside the group.

Offshore Trust Companies Act for Sri Lanka

Under the Part 8, Sections 241-246 of the Companies Act No 17 of No 1982 the Registrar of Companies may accept registration of an Offshore Trust Company (OTC) in Sri Lanka provided duly applied to him an such Offshore Trust Company promotes economic interests of Sri Lanka. The seven sections, section 241 to 246 in the Companies Act are highly inadequate as it does not lay down express provisions as regard the registration, operation and administrative procedure to be followed by an Offshore Trust Company so incorporated. So far these sections failed to attract a single Offshore Trust Company to Sri Lanka. The aforesaid sections even do not mention any
provisions as regards government fee structure and tax benefits that an Offshore Trust Company will be entitled to. Under such circumstances it is no wonder that no Offshore Trust Company was set up in Sri Lanka since Companies Act came in to force in 1982.

On the other hand entry of Offshore Trust Companies under above sections of the Companies Act swithout any supervision or regulatory control may damage the country’s financial reputation if such Offshore Trust Companies take investors for a ride.

The present fee structure for offshore companies which was adopted under Companies Act of 1982 is also inadequate and is flawed. Under such regulations the annual government fee charged from an Offshore Shipping Company operating in Sri Lanka is USD 250/- while the fee for an Offshore Non Shipping Company it is Rs. 15,000/-. Additionally an Offshore Shipping Company is subject to a deposit of USD 250/- in a bank to defray any office expenditure. An Offshore Non Shipping Company is subject to a deposit of USD 33,000/- charged in order to defray office expenses.

There is no special fee structure for Offshore Trust Companies in Sri Lanka though this could be a major government revenue source. On the other hand a specially structured ad valorem fee structure linked to investor funds in Offshore Trust Companies, Banking Companies would increase government revenue considerably.

Attracting High Net Worth Individuals (HNWIs) and Rich Corporate Clients (RCC) from India to an Offshore Financial Centre (OFC) established in Sri Lanka

Sri Lanka’s proximity to India is another advantage and a good reason why the government should develop a major tourist attraction in Sri Lanka as an Offshore Financial Centre. Billions of USDollars were invested in offshore companies in Seyschells and Mauritus Islands by Indian investors during the last few years. If Sri Lanka fails to establish an Offshore Financial Centre in the near future such funds will soon flow to Maldive Islands which is the emerging Offshore Financial Centre in the Indian Ocean according to Offshore directory published in Lodon last year.

On the other hand if Sri Lanka succeeds in attracting offshore funds from Indian investors to the country as deposits such money could be invested in Indian Stock Exchanges resulting in a ‘win-win’ situation for the economies of the both countries. In such situation India will look at Sri Lanka from a different angle as American sees the oil rich middle east countries. This will probably end many of our other non financial problems too.

Offshore Shipping Act

It was Mr. Lalith Athulathmudali the former Minister of Trade and Shipping who first introduced the concept of offshore shipping to Sri Lanka way back in 1978. He while introducing the Companies Bill of 1981 in Parliament said that one of the purposes of Part 8 of the Companies Bill is to attract offshore shipping business to Sri Lanka by providing such Offshore shipping Companies with Sri Lankan flag of convenience. In his maiden speech Mr. Lalith Athulathmudali referred to such Sri Lankan Flag of Convenience as the Flag of Opportunity which could attract billions of funds to Sri Lanka and provide jobs to thousands of unemployed youth in the country in major shipping lines around the world. The strategy then was to offer tax incentives to shipping lines to incorporate Offshore Shipping Companies and require such companies to compensate such incentives by providing job opportunities for jobless youth. It was envisaged to develop a niche market for offshore shipping industry in Sri Lanka. These concepts did not gain foothold in Sri Lanka as during that time there were very little professional awareness of such offshore business among business community, lawyers, accountants etc. in Sri Lanka. Also during that period Sri Lanka lacked proper institutional infrastructure to support such Offshore Shipping Industry. But today with more Sri Lankan companies taking in to marine engineering such as providing bunkering facilities, shipping berths and also with the establishment of Marine Training College for Sailors definitely today we are ready to provide support services to such Offshore Shipping Industry.

Today Sri Lanka is placed in a very much better position to develop it self as an Offshore Financial Centre. It only needs the initial government intervention in establishing a proper legal regime through an Offshore Financial Services Authority (OFSA) similar to Labuan Offshore Financial Services Authority (LOFSA) in Malaysia.

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