In The Press

Background

Port City and the Colombo International Financial Centre (CIFC) has been a topic of discussion at various conferences. Out of these conferences, the 18th Economic Summit of the Chamber of Commerce 2018, Ambassadors Forum 2018 and the Bar Association (BASL) National law Conference 2020 shed some light on the topic which can be of value.

It is proposed in this article to evaluate the present status of the Port City and the CIFC in the context of COVID-19 and thereafter propose a proper legislative design to attract investors to Sri Lanka. In my experience, it is an absolutely important project.

At the outset, it is useful to give a description of the Port City and also a description of other offshore financial centres. And thereafter I will provide a legislative design taking into account the financial constraints created by COVID-19 with a view to creating confidence in high net worth individuals, banks and offshore companies with a clear legislative mandate.

Description of the Port City

As described by Liang Thaw Ming at the Economic Summit 2018, the design of the Port City in Sri Lanka is unique. The Master Plan of the Port City was released to the public in April 2018. It has 266 hectares to build offices for offshore banks, trusts and international companies, condominiums with time-shares, parks, international hospital and recreational facilities.

At the end of Liang’s presentation, there was a heated discussion between the moderator Peter de Almeida and Dr. Harsha de Silva regarding the viability of the Port City as a development strategy. Peter de Almeida said that the Port City is likely to end as a “ghost city”, as Sri Lankans do not have the capacity and the knowhow to deal with such a financial centre. Dr. Harsha reiterated with equal force and said that it will not be so, as there is a prime need for a financial centre in the Indian Ocean to serve the Indian cities in South Asia and other high net worth persons and corporate clients belonging to ASEAN countries. I do not agree with Peter de Almeida nor with Dr. Harsha de Silva, as there is room for a new strategic player in this region with modern facilities and technology to provide financial services, investments, logistic planning and loan facilities by reputed offshore banks and offshore trusts, not only to Indian enterprises but also to many other enterprises beyond Asia.

Comparison with other Port Cities and offshore financial centres

At the outset, it is useful to compare the proposed Port City and the Colombo International Financial Centre with other port cities and offshore financial centres in the world, although the Colombo International Financial Centre is not yet operational and the proposed legislation of the financial centre is not yet made public. In Latin America and the Caribbean, there are many Port Cities and offshore financial centres. These centres are in the Panama, Antigua and Barbuda, St. Kitts and Nevis, Cayman Islands, Aruba, St. Maarten, St. Vincent and the Grenadines, The Bahamas and the British Virgin Islands. I was privileged to visit these centres and draft laws relating to registration of ships, marine pollution and various offshore products and services.

The Bahamas, the Panama, Cayman Islands and the British Virgin Islands (BVI) stand out as successful offshore financial centres. In the Bahamas, the Offshore Banking and Trusts Act of 1996 has attracted several international investment banks and trust companies to their shores. In the BVI, the International Companies Act of 1993, described as a mini-Delaware, has been instrumental in incorporating over one million companies from all over the world.

Panama has many ships registered under the Panamanian Flag and she has the highest ship weightage in the world and many Sri Lankans work as seafarers in such ships. This was the dream of the late Lalith Athulathmudali, who was willing to provide registration of ships with the Sri Lankan flag and encouraged young Sri Lankans to become seafarers. Unfortunately, this dream was not realised. In the Cayman Islands, deposit of funds by high net worth individuals is used for syndicated loans and some of them are also invested in Stock Exchanges in the developed world.

In Europe, the outstanding Port Cities are Dublin, Channel Islands, Isle of Man, Cyprus, etc. in relation to offshore banks and trusts which have played a catalytic role in the development of their economies.

In the Middle East, Dubai with her Atlantic Port City stands out as a Port City offshore financial centre, although their legislation may not be suitable for us. Qatar is also an important player in this region. These financial centres are well organised and they do enter into contracts with the prospective investors to abide by their rules and regulations (Law No. (9) Of 2004 In respect of The Dubai International Financial Centre). Indian Ocean state Mauritius is likely to be a strong competitor, as she has the blessings of India for high net worth Indian investments.

In East Asia, Labuan stands out as a successful offshore financial centre with an 18-hole golf course, several parks, and recreational activities within the Port City facilities. In Labuan, offshore products and services are dealt exhaustively by legislation and some legislative innovations constitute good legislative precedents.

At present, Sri Lanka has offshore financial services in a limited manner to serve non-citizens and non-resident Sri Lankans, although Sri Lanka is not recognised as an offshore financial centre by the Offshore Directory. In Sri Lanka, offshore banking is regulated by the Banking Act 1988 and Offshore Companies legislation in Chapter VII of the Companies Act 2007.

It must be noted that London, New York, Delaware, Singapore, Hong Kong and Tokyo are international financial centres where the dichotomy between offshore and inshore do not exist. Hence, they stand on a different pedestal as International Financial Centres.

Design of the legislation relating to the Colombo International Financial Centre

Design of the legislation relating to the Colombo International Offshore Financial Centre (CIFC) is of paramount importance to attract investors, high net worth persons and corporate clients who may consider establishing offices, hospitals and condominiums in Sri Lanka for the rich and the famous. At times, legislative infrastructure is more important than the physical infrastructure. Justice Frankfurter also said that those who draft such legislation must have an intimate knowledge of the subject matter and skills equal to the policymakers.

Designing such legislation must be done very carefully to attract the international business companies, banks and trusts. Many high net worth investors read such legislation very carefully before investing in a particular State. In my view, it is appropriate to offer a few offshore products and services with a shorter Parliamentary Act and longer executive regulations, as Sri Lanka is starting on a clean slate. Hence such legislation may take the following form and structure into consideration

- Part I of the draft legislation should deal with the establishment of the Colombo International Financial Services Authority with wide powers and functions to deal with the management of the offshore financial centre. It must safeguard the reputation of the Centre and take measures to prevent money laundering, fraud and proceeds of crime in an effective and efficient manner. The Members of the Authority should be absolutely honest and knowledgeable in offshore financial services. Regulations must fill any gaps in the legislation, in order to make the financial centre more competitive. The Staff of the Authority should be trained to deal with best practices adopted in other offshore financial centres.
- Part II of the draft legislation must deal with licensing and registration of banks and trusts. In most offshore centres, such banks are classified as Class A Banks and Class B banks. In the Bahamas, Class A banks are allowed to invest their clients’ money around the world without any restrictions. Class B banks have restrictions. This activity should be handled by the Central Bank under a Special Provisions Act and such legislation should include provisions relating to bank secrecy, and also the regulation and supervision of these banks and trusts by the Central Bank in accordance with FATA recommendations. It must be noted that asset protection trusts has been very popular investment vehicle with high net worth persons who wish to protect their wealth within their families with no time bar. These investments could also be overseen by the Central Bank, in order to prevent any fraud or irregularities.
- Part III of the draft legislation should provide for incorporation and re-domiciliation of offshore companies in Sri Lanka. The provisions relating to incorporation of offshore companies under the Companies Act of 2007 are totally inadequate. We need to add ancillary provisions suitable for the functioning of international business companies as provided in the BVI Act, which is considered the benchmark in most offshore financial centres. The Registrar of Companies should be made responsible and should be present physically at the Financial Centre to incorporate these companies. Registrar’s Secretariat should work beyond office hours to meet the requests for information from all time zones in a digitalised world.
- Part IV of the draft legislation may deal with entrepôt trade which can be of value for development of our commerce. The BOI and Customs should overlook such operations and the Regulations must be made under this Act as provided in the Finance Act 2013.
- Part V of the draft legislation should deal with the tax regime. Tax avoidance as opposed to tax evasion has been recognised as legal by Lord Tomlin in LRC vs. Westminster (1936). “Every person is entitled, if he can, order his affairs so that tax attaching under the appropriate Acts is less than otherwise would be.” The Government of Sri Lanka needs to decide whether the Colombo Financial Centre should be a no-tax or low-tax regime. Even if the Government provides tax exemptions, the developed countries will tax the beneficiaries unless it is shown that “the management and control” of such companies are handled through an office established at the Colombo International Financial Centre. In De Beer’s Case (1960), the management and control was done in London and therefore they had to pay tax on profits made through the sale of diamonds in South Africa.
- Part VI of the draft legislation should deal with settlement of legal disputes between the Authority and the investors, and between the clients and their banks and offshore companies by the Regulatory Authority. Arbitration should be preferred to legal action in the High Court of Sri Lanka. Parties to a syndicated loan or any other commercial transaction could apply the English Law if parties are agreeable. However, the institutional law in regard to regulation and supervision must be undertaken in accordance with Sri Lankan Law.
- Part VII of the draft legislation should provide adequate Finances to the Regulatory Authority and such finances should deal with promotional and investigative activities.
- Part VIII of the draft legislation should provide General Provisions. The General Provisions should deal with effective and efficient implementation of this Act and the Regulations made thereunder. It must also provide confidentiality provisions to protect investors and also mechanism to deal diplomatically the requests made by other countries.

Concluding remarks and recommendations

In concluding, it must be said that the proposed Colombo International Financial Services Authority should operate closely with the Central Bank, the Registrar of Companies, and the Director General of Customs, so that institutional infrastructure at the Regulatory Authority is not bloated with unnecessary staff and unwanted expenditure. Foreign direct investments into the Port City for infrastructure investments and tax exemptions for product and services need to be marketed as soon possible as it has been delayed due to Yahapalanaya government.

Unfortunately, at the BASL National Law Conference on Port City (2020), the emphasis was placed on FDI for infrastructure and not on offshore products and services. It is unlikely that international banks, trusts and international business companies will come to Sri Lanka unless they are provided with attractive tax regime to do offshore business with India, China and the rest of the world.

In concluding, it must be said that operating an offshore financial centre is a very competitive business. The lease of land in the Port City for international business companies and banks is a very difficult task without a fully-fledged legislation dealing with offshore products and services. In addition, there is severe competition among offshore financial centres. Furthermore, the developed countries have opposed and placed impediments on offshore financial centres as they impact on their tax revenue.

However, the geographical location of the Port City in the maritime Silk Route of China is certainly a comparative advantage for Sri Lanka as compared with other offshore financial centres emerging in the Indian Ocean. We need thank China for this grant.

It is recommended that Sri Lanka should train our financial intermediaries, accountants and lawyers and equip them to deal with offshore financial services. Most officials in Latin America and the Caribbean follow various courses organised by universities in Florida. The Bankers’ Training Institute should revive its courses on Offshore Practice and Administration.

It is also recommended to use Sri Lanka’s Foreign Service personnel with communication skills to entice international banks, high net worth persons and other investors to the offshore financial centre in the Port City. Excellent brochures must be developed as in other offshore centres to assist them in their endeavour.

Port City and the Colombo International Financial Centre are likely to be a game-changer for Sri Lanka in the 21st century, despite the impact of COVID-19. In this context, Sri Lanka must outline the tax regime for offshore banks, trusts and international companies with clarity, so that investors will be attracted to Sri Lanka. As a Chinese proverb says, a journey of 1000 miles starts with the first step. Hence, the enactment of a good piece of legislation is the first step in the right direction.