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A GENERAL OVERVIEW OF THE CURRENT STANDING OF LABUAN AS AN INTERNATIONAL OFFSHORE FINANCIAL CENTRE
Introduction The year 2000 marks the tenth anniversary as an international offshore financial centre for Labuan. Since its inception in 1990, Labuan has developed rapidly and has emerged from the economic crisis that hit Asia unscathed. As a result of the revival in the regional economies, there has been a significant increase in the numbers of offshore companies incorporated and foreign offshore companies registered in Labuan.
By International standards, Labuan is a relatively small player of the Offshore Industry, however it has become the jurisdiction of choice around the South East Asian region. More and more investors and bankers have begun to utilise Labuan because of its strategic location and convenient time zone.
The success of the Labuan International Offshore Financial Centre is reflected in the announcement by the Sultan of neighbouring Brunei on the 15th July, 2000 declaring Brunei as an International Financial Centre. Still recovering from the asian economic crisis, Brunei has began to follow in the footsteps of Labuan in a move to kick start its economy.
With the development of Brunei into an International Financial Centre, Labuan, being an established offshore player, is likely to be encouraged to develop new products and provide even better services to maintain its edge over Brunei.
Competition however should be perceived as a good thing as it would only spur the development of the industry and ultimately benefit the investors who utilise the jurisdiction. It is anticipated the region will become a hub for the Offshore Industry in Asia.
A recent report which ranked offshore financial centres into three groups according to their adherence to internationally accepted standards for supervision, co-operation and information sharing. Group 1 being jurisdictions perceived has having high levels of supervision and co-operation, while Group 3 were assumed to be jurisdictions with low levels of supervision and co-operation. Labuan was classified in group 2 which is perceived as having legal infrastructures and good supervisory practices.
To prepare Labuan IOFC for the challenges of the 21st century, LOFSA has introduce the following measures for the further promotion and development of Labuan as an integrated international financial centre:
i. Liberalisation of Entry Criteria for Offshore banking To encourage more offshore bankers to Labuan, LOFSA has relaxed the entry criteria for offshore bankers to set up operations in Labuan. Prior to the liberalisation, the entry of offshore banks to Labuan has been restricted to the top 200 banks in the world with minimum tier 1 capital of USD1 billion. As a result of this stringent entry requirement, Labuan today, has the critical mass of large and reputable banks.
Having successfully attracted the core players, Labuan is expanding the range and diversity of players as well as the range of financial products and services to cater for different targets and niche markets. Targeting specific areas such as private banking, fixed income activities, investment advisory, Islamic banking and other "boutique" style institutions. ii. Policy changes to Captive Insurance Business Several policies have been introduced to attract more captive operators to Labuan. For instance, Malaysian residents are now allowed to establish a captive in Labuan. Previously many large Malaysian risk owners had to source their captive services from other offshore centres in the world.
Another policy change is the reduction in capital requirement of a captive insurance company in Labuan from USD300,000 to USD79,000 and an exemption from a physical presence in Labuan
iii .Regulatory Amendment to the Fund Management Industry Fund management activities in Labuan are governed by the Labuan Offshore Securities Industry Act 1998 and two guidelines that outline the requirements on operational matters.
These amendments have been implemented to remove some impediments in the regulatory requirements while simultaneously encourage the development of the industry. At present, the Fund Management Industry in Labuan is still relatively small, however it anticipated to be a major aspect of Labuan in the future.
iv. Proposed Implementation of Anti-Money Laundering Bill In line with the global focus on the establishment of effective anti-money laundering regimes, the supervisory authority, Labuan Offshore Financial Services Authority (LOFSA), has proposed to pass an anti-money laundering bill specifically governing offshore activities in Labuan. Malaysia is a party to the 1988 UN Drug Convention and is also an observer at the Asia/Pacific Group on Money Laundering. Malaysia also recently became a member of the OGBS.
v. Development of the International Islamic Money Market The proposed establishment of International Islamic Money Market (IIMM) is a joint development between LOFSA, the Islamic Development Bank and the Bahrain Monetary Agency. Since October 1999, this partnership membership has been enlarged to include Bank Indonesia, Finance Ministry of Brunei, Finance Ministry of Saudi Arabia and the Finance Ministry of Iran and the Central Bank of Sudan. IIMM is proposed to be launched by next year.
IIMM is designed to be a network of Islamic money markets to meet the liquidity needs of Islamic financial institutions worldwide engaged in international finance. The establishment of IIMM will spur expansion of business and dealings between Islamic nations and generate spin-offs for the overall development of the Islamic capital market. The successful implementation of IIMM depends entirely on the concerted efforts between the Governments of Islamic countries and the private Islamic bankers.
vi. Development of the Labuan Financial Exchange One significant development is the establishment of the Labuan International Financial Exchange ("LFX"). This financial exchange was launched in April this year and it is expected to be operational by 23rd November 2000.
LFX, being the first offshore exchange in Asia, has the intention of being a full-fledge exchange with facilities for the listing and trading of Financial Instruments. LFX will not be limited in terms of the type of financial instruments, which can be listed and aims to cater to the needs of the region and participants worldwide.
Initially, concentration will be placed on the listing of Financial Instruments like investment funds, equities, structured debt instruments with expansion of listing to include insurance-related instruments and other kinds of financial instruments subject to the requirements and demand of issuers and investors. These financial instruments can be listed based on both Islamic and conventional principles. The financial instruments will initial be denominated in USD. Other foreign currencies like the Euro and Japanese Yen will be allowed at a later date.
LFX will be operated by Labuan International Financial Exchange Inc. (the Exchange), (a company incorporated in Malaysia under the Offshore Companies Act 1990). The offshore exchange is wholly owned by the Kuala Lumpur Stock Exchange (KLSE) is governed by Labuan Offshore Securities Industry Act 1998. As it is based in an offshore jurisdiction, participants will benefit from various tax incentives and exemptions.
The effects of the Malaysia’s Exchange Control Measures will not affect the LFX since dealings will be in foreign currencies. Notwithstanding this, there will be no restriction on foreign investors holding securities listed on LFX as it is envisaged that the issuers will most probably be from various countries. LFX will no doubt complement the wide range of services already available in Labuan.
vii. Development of the E-Commerce Gateway With the new opportunities created by the Internet, Labuan has considered the potential of e-commerce in regards to the promotion and marketing opportunities for the Labuan IFC. With this in mind, LOFSA has undertaken steps for the establishment of an E-commerce Gateway. It is anticipated that the web portal would become the offshore financial services hub for Labuan IFC. It is envisaged that the ECG will be ready for operation by year 2001.
viii. Introduction of an On-line company registration system to promote a paperless administration Along with the development of the E-commerce Gateway, the on-line registry is envisaged to be operational in year 2001 and is designed to provide efficient and orderly services to the offshore players.
With the implementation of on-line registry, trust companies would be allowed to make payments electronically and submit documents for filing to LOFSA at the click of a button.
Conclusion After a decade being an International offshore financial centre, Labuan is forging along with the development of new policies, financial products and services to enhance its role and cement its place in the Global Financial Market. As the world embraces new technologies and new methods of doing business, Labuan IFC, likewise, through the changes and developments discussed, is adapting to the rapid changes in the World in its quest to becoming a leading provider of Offshore Financial Services.
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