Guernsey's booming Islamic finance sector seems to be bucking the Brexit trend. Despite this being a period of relative economic uncertainty, projects for Muslim clients who use the island's service have been progressing apace. Angela Calnan, a group partner at the law firm of Collas Crill in Guernsey, reports from the front line.
For decades now, the Channel Islands have been a collection of key offshore financial centres. Before 2006, a significant proportion of private client work in Guernsey was for 'UK-centric' clients, but the wide-ranging Finance Act of that year led to a shrinkage in that market and the need for diversification and a sharp change of focus. In the words of Charles Darwin: "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change."
In many aspects of life, Guernsey has resisted change quite deliberately. There is no Starbucks, there is no McDonalds and there is no easyJet. However, in the world of professional services, law and regulation, Guernsey is quite the opposite. The "adapt or die" mentality prevails. Since 2006, Guernsey's lawyers, accountants, private bankers and trustees have been trying to divert the island's efforts at development away from structures with tax mitigation as the primary attraction and towards structures for clients whose main virtue was "succession planning" (whereby a high-net-worth individual gives his descendants a measure of control of the family fortune during his lifetime) and business continuity.
This quest has prompted Guernsey's advisors to explore new opportunities in low-tax and no tax jurisdictions in places such as the Middle East and the Far East, where Islamic (or Sharia) law often prevails. Now, more than a decade on, Guernsey has a booming industry that looks after Muslim families with family businesses, helping those families with succession planning, structuring and Sharia-compliant investments – work that has felt little or none of the turmoil that 'Brexit' has caused. How has it managed it?
First, Guernsey had the good sense to identify and target a growing market. The Muslim population growth rate is 1.8% per annum, compared with the world population growth rate of 1.1%. It is predicted that the Muslim population will grow twice as quickly as the rest over the next 20 years and, by 2030, Muslims will make up more than one-quarter of the globe's population. Islam is also the fastest-growing religion all over the world, making converts everywhere.
The world is changing and it is important for Western advisors to adapt to it and broaden their expertise if they are to continue to remain relevant. Guernsey advisors have been leading the charge in this direction and this has been a prime cause of the jurisdiction's success.
Guernsey has managed to attract clients and deals of considerable scale and complexity despite being a relatively small island of only 60,000 people. The International Stock Exchange (TISE, formerly known as the Channel Islands Securities Exchange) is now home to a number of debt securities and investment vehicles which are Islamic finance structures. Guernsey's Salam III, Wakalah Programme was the first ever securitisation of takaful – a Sharia-compliant insurance policy – an agreement that was judged to be the best deal in Europe at the Islamic Finance News Awards.
The World Shariah Funds PCC, an open-ended protected cell company listed on TISE and distributed globally, is also administered in Guernsey.
On the private wealth side of operations, numerous trust and foundation structures have been established to hold family businesses for Muslim clients with the private trust company (PTC) and private trust foundation (PTF) still proving ever-popular. Guernsey was one of the first offshore jurisdictions - perhaps even the first - to pioneer and register a foundation acting as a private trustee; yet another example of the Darwinian "adapt or die" mentality.
Islamic law and private wealth
Buy structuring family businesses for Muslim clients, Guernsey has been able to open two new and significant business lines: Islamic finance and Islamic succession planning. Some jurisdictions have shied away from this work on the basis that it is too specialised or too difficult.
On the subject of Islamic Finance, Islamic law (Sharia) prohibits certain types of lending or interest-charging, so Guernsey's banks have departed from their normal ways of doing things to offer products and services that do not do these prohibited things. This means that the names of the documents they use to perform banking transactions are different from those of the documents they use for mainstream banking. They also use certain bespoke clauses and language. As a result of this, pockets of expertise with these documents have developed at banks and law firms that deal with Muslim clients. Their finesse, however, tends to be transactional rather than based on a deep understanding of Sharia scripture.
Where complex questions of interpretation arise, Guernsey's banks and law firms will seek the opinion of a specialist expert – a Sharia scholar. Some banks in fact have their own resident scholars or boards of scholars. Many Western advisors have misunderstood, and indeed still misunderstand, the quantity of knowledge that they ought to possess if they are going to penetrate the world of Islamic finance. They often think that they require a detailed knowledge of the Quran, the Sunnah, the Ijmaa and the Qiyaas; this is absolutely not the case.
Knowledge of what is and is not permissible in the context of specific financial transactions is important and this knowledge can be passed on relatively easily to both Muslims and non-Muslims. If they encounter grey areas or new types of transaction, they can always consult scholars then.
The important thing to ask oneself, as on any project for a client, is: what is the client trying to achieve? For Muslim clients, there is the added dimension and subtlety of the client's attitude to Sharia. For some clients it is best to hard-wire the rules and principles of Sharia into the transactional documents. Others prefer something more fluid and flexible.
The same is true with succession planning. Sharia law contains very prescriptive rules about who inherits what (and in what proportions) after the death of the testator. In this area, firms advise clients about setting up wealth-planning structures to either adhere to or "plan around" these rules. My firm has encountered more and more families that want to depart from these rules in the last two or three years in Guernsey. A lot of Middle Eastern Muslim families are headed up by founders of businesses. Some of these men are now in their eighties, their children are usually working within their businesses and the grandchildren (often educated somewhere in the Western world) are about to enter the business.
A lot of families (but by no means all) want to benefit all heirs equally and irrespective of gender. In the past in Guernsey, law firms used to 'circumvent' the Sharia inheritance rules by setting up discretionary trusts so that male and female heirs might benefit more equally (or female heirs could even benefit more). The female heirs could then rely on Guernsey's 'firewall' legislation to shield their trusts from attacks by aggrieved male heirs through foreign Islamic courts. This 'circumvention' approach was perfectly legal and commonplace under Guernsey law and was even stress tested and endorsed by the Guernsey courts in the case of Rothschild Trust Guernsey Ltd v Pateras Ltd in 2011.
That said, Guernsey advisors then tried to find an approach that did not necessitate circumvention. In recent years, Sharia experts such as Shaykh Haytham Tamim and Reshmi Manekporia have come to Guernsey and promoted succession planning for Muslim clients which permits a departure from the strict Sharia inheritance laws while still remaining Sharia-compliant.
This modern approach takes as its starting point the overarching Sharia maxims of justice and fairness. My firm takes this approach to certain clients. They meet us and explain to us that some of their female heirs have more of an aptitude for the family business or have worked harder than the male heirs. They sometimes wish to benefit the female heirs more than the men. This is achievable within the Sharia as it is fair and just for the female heirs to receive more if they have made more efforts.
It is therefore possible to draft a valid succession planning structure that does not contradict Sharia law and which benefits female heirs equally or more without the need for 'circumvention.' For larger structures or families where future conflict between relatives is possible, we advise the families to take the extra step of obtaining a scholar's opinion to confirm that the structure in question is Sharia compliant.
So there has been a subtle shift in Guernsey's succession planning work for Muslim clients in recent years – a shift which, again, demonstrates Guernsey's adaptability.
What about ex-pats?
Guernsey has also been a very popular place to bank and establish structures for non-Muslim clients who are resident in Muslim countries. This is often because the inheritance laws in Muslim countries are unclear in their application to non-Muslims and there is often no system of precedent (and, therefore, little 'certainty') as to how the assets and affairs of a non-Muslim should be dealt with there.
This problem has also diminished slightly in recent years with the introduction of specialist courts and authorities in Muslim countries to deal with the affairs of ex-pats in accordance with common-law principles (such as the Wills and Probate Registry in the DIFC in Dubai and the planned Wills and Probate Registry in Abu Dhabi). However, there is still a tendency for expatriates to restrict their exposure to Sharia law by limiting the value of their assets in the region and keeping the bulk of their wealth offshore. The same is true of pension arrangements for ex-pats in Muslim countries where there is no formal pension regime. Employers often ringfence assets to fund end-of-service gratuity payments offshore in Guernsey.
In terms of Muslim non-domiciled 'ex-pats' living in the UK, the anticipated introduction of the non-dom changes in the UK have been something of a rollercoaster over the last year or so! The non-dom changes were withdrawn from the Finance Bill at the last minute earlier this year and are now expected to be introduced shortly, taking retrospective effect from a starting date of 6 April 2017.
Again, Guernsey has been stealing a march in contacting these clients to ask them whether they would like to establish protected trusts and to begin to audit mixed funds. We are still waiting until the final legislation is published but it is thought that there will be a further steady stream of new Guernsey trusts (and probably multiple trusts in order to avoid contamination) and that these will continue as clients approach the "deemed domicile" threshold.
Over the previous decade, Guernsey has adapted to changes in market conditions and looked beyond Europe for new markets. This has helped it to grow and succeed despite a period of economic uncertainty closer to home. The key, as always, is to innovate, adapt and never shrink from pioneering. The next developments in Guernsey include the introduction of pensions regulation and a possible update to the trusts law.
An original version of this article was first published by Offshore Red, October 2017.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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