Offshore financial centres around the world are becoming increasingly popular for wealthy families to invest in. Bob Reynolds highlights some of the more popular offshore centres and how their individual strengths can suit the wealthy business family
The last decade has seen considerable change in the scope of the services and products offered to wealthy families by offshore financial centres. Competition has intensified between leading jurisdictions and the traditional standard bearers have been obliged to up their game to stay in contention.
Instead of relying on relationships built up over decades with a favoured centre, independent financial advisors and family offices can now select from a broad range of products and services supplied by competing centres.
For European markets, Jersey and Guernsey (pictured) have dominated the family trust business for 30 years, but centres such as the British Virgin Islands and Bermuda now provide compelling alternative options. Liechtenstein, whose days as an old school banking secrecy centre may now be limited after the German tax authority's purchase of stolen customer account details from the LGT Bank, has pioneered the use of foundations.
Since World War II, small European states have created family wealth havens. Typical of this is San Marino for Italy, Monaco for France and Andorra for Spain. Classically, Switzerland has been the gold standard for all jurisdictions. During the early part of this century, 39% of all expatriated European family wealth was located in Switzerland. Banking secrecy is a tenet of faith for the Swiss government and, even in 2008, negotiations with the EU to provide greater transparency have failed to break the Swiss resolve.
Banking consolidation has created two super-giants of world private banking in UBS and Credit Suisse. The era of the discrete smaller private bank is on the wane. Some have merged, others have been taken over. High performing private Swiss banks still operate but their hour has passed. It is telling that the head of wealth management for Credit Suisse has followed the money and is now based in Singapore.
Switzerland has faced increasing pressure from international agencies. For the last half decade, there has been a dance between Switzerland and the European Union over tax transparency. Germany and Italy have conducted tax amnesties for their citizens with Swiss-based assets. The Swiss are keen to keep as much of the personal banking business that they can muster.
Sebastian Krown, senior vice president of private banking at Philippe de LaCroix Associés, argues, however, that one major benefit of Swiss banks in terms of offshore investment is that Swiss banking is renowned not only for its professionalism and investment performance but also for its discretion and jealously guarded confidentiality. He says: "In 1999 the Swiss finance minister Kaspar Villiger famously told a conference of financial professionals in Frankfurt that 'Swiss bank-client confidentiality is not up for discussion'. That remains the case today; some things will never change."
As the political environment has become much tougher for those jurisdictions with advanced banking secrecy, the better regulated centres are moving ahead. Jersey is a classic example.
Jersey is leading the way
Geoff Cook, chief executive of Jersey Finance, argues that Jersey has advanced from services for largely UK and Middle Eastern clients to wealth management services to private clients across the world. The centre – as a result of greater compliance and transparency requirements – has developed new product ranges for global wealth management clients and their advisors.
"We have made key changes to the trust law which is central to what we offer to family businesses," he says. "Some came onto the statute in 2006 following extensive consultation and more are in the pipeline for 2008. The trust law amendments implemented in 2006 included enhancements that strengthened the protection given to Jersey trusts against claims arising in foreign proceedings. Changes have also made it possible to form a Jersey trust of unlimited duration. The concept is popular with clients who place business into trust and want to prevent fragmentation of the ownership indefinitely."
Jersey recently enhanced its regulation of private trust companies, which have proved popular for high net worth clients requiring a bespoke vehicle. A wider reform of the trust regime is being debated by a working party of finance professionals under the Jersey Financial Services Commission which will result in further changes later in 2008.
Jersey has also reviewed other legislation that has an impact on the business of wealth professionals. Recent amendments to Jersey's Companies Law have delivered a number of important features, not least the option of being able to re-domicile companies both in and out of Jersey, subject to regulatory approval. This allows the continuance of existence from one jurisdiction to another.
As a result of other legislative changes, protected cell company and incorporated cell company structures are now readily available and these structures have proved to be a springboard for growth in captive business as well as the funds and private client sectors.
There are further new features on the horizon. For example, Jersey is looking to introduce incorporated limited partnerships. These are limited partnerships with a separate legal entity. There are also plans for a revised limited liability partnership law that will closely mirror the UK law.
The banking industry works alongside more than 175 licensed trust and company service providers, over 100 investment managers, stockbrokers, advisors, fund administrators, leading international accountancy and legal firms.
The international scope of the island's finance industry has changed dramatically over the last decade. For example, 10 years ago law firms in Jersey each had one office. Today, following numerous mergers and acquisitions and general expansion to meet global demand from international investors, Jersey law firms have representative offices across the world's finance centres from the Cayman Islands and Hong Kong to Geneva, London and New York.
In a year in which the net asset value of funds under administration has overtaken the level of bank deposits held in Jersey for the first time, private equity fund administration has remained a significant area of growth for the jurisdiction.
Guernsey has been competing head to head with Jersey, especially in the area of trust regulation. Peter Niven, chief executive of Guernsey Finance, says that it is home to 140 licensed fiduciary providers, ranging from large organisations to independent, boutique operations, with more than €256.5 billion of assets in trust. There are nearly 60 licensed individuals who can act as directors, co-trustees or trust protectors.
At the end of September 2007 deposits with Guernsey banks had reached more than €144 billion – a rise of €5 billion (4%) during the quarter and €29.5 billion (26%) over the year.
These figures have also been swelled by flows from the island's booming funds industry. The value of funds under administration and management reached a new record high of more than €210 billion at the end of September 2007 – an increase of €11.5 billion (6%) over the quarter and €56bn (36%) year on year. On the back of such success, fiduciaries are increasingly looking to develop a funds presence in terms of providing administration and company secretarial services.
The protected cell company, which was introduced by Guernsey for the insurance sector, has now been adapted by financial services businesses on the island. "Both the protected cell company (PCC) and now the incorporated cell company (ICC) are being increasingly used within the funds and fiduciary spheres as wealth management tools," says Niven.
He points to recent revisions to regulation as being key developments in presenting the island as a leading edge wealth management jurisdiction.
"A series of amendments to Guernsey's trust law, including the introduction of purpose trusts and abolishing the personal liability of directors in private trust companies (PTCs), became effective on 17 March.
"The final proposals from a review of the Guernsey Companies Law were passed by the island's parliament, the States of Guernsey, at the end of January this year. The changes will place the fiduciaries as the gatekeepers to a more streamlined company incorporation process that from the summer of 2008 will be facilitated by a modernised, including automated, Company Registry and where annual returns will be replaced by annual validations."
The BVI gains popularity
The British Virgin Islands (BVI) is another centre that has assumed increasing popularity with family investors. It is particularly popular with East Asian investors. At a time when other offshore financial centres were cautious, the BVI government launched a charm offence in Beijing.
There are more than 700,000 companies domiciled in the BVI. Somewhere close to half of those are owned by East Asian interests. A major spur to East Asian family investment was the recent change in BVI companies' legislation affecting both existing BVI companies and new incorporations. From January 2007, the International Business Companies Act, the BVI statute that previously regulated the operation of the majority of BVI companies, ceased to exist and was superseded by the BVI Business Companies Act 2004. All companies previously incorporated under the IBC Act were automatically re-registered under the new law.
Leading BVI law firm Harneys says: "The aim of the BVI government in introducing the new Act was to update and improve BVI corporate law while retaining those key elements of the IBC Act which have proved popular to the consumers of BVI companies over the past 23 years."
The Isle of Man, once the least outgoing of the jurisdictions, has taken to fighting its corner on the key business areas of wealth management and business taxation.
Isle of Man Finance says: "Discretionary trusts are a traditional common law asset protection vehicle and offer good flexibility. Purpose trusts can have both private wealth management and commercial applications. As a private wealth management tool, they can be used to remove something from family ownership temporarily, permanently or conditionally. In commerce, they can hold off balance sheet items.
"The importance of trusts in wealth management is evident and requires a jurisdiction to have a robust and proven legal system. Also of importance is the provision for corporate entities that can be used for bona fide trading purposes or asset holding purposes."
The focus in the coming years will be Middle East and East Asian markets. The opening of the Dubai International Financial Centre, in particular, but also the revitalisation of Bahrain and the emergence of Qatar have established new centres for family wealth.
Major international banks, eager to tap the market for new billionaires, have committed extensive resources to investment in the Gulf centres and also in Singapore and Hong Kong, where much of Asia's family money has found a home.