Offshore jurisdictions developed historically to reduce or contain challenges to wealth holdings and creations. The challenges or threats could be political, family, fiscal or even economic. For example, Switzerland and London have long been havens for flight capital from politically unstable parts of the world. While the Bermudan or Jersey trust has often been used to provide for family members who either do not wish or are unable to manage assets, similarly sophisticated vehicles have always been available to the high net worth individual, from the developed world, who wishes to legitimately minimise his taxation liabilities.
More modern uses for offshore centres include playing a role, and often a key role, in multinational financial transactions, which arise as a result of the continuing integration/globalisation of the world’s economy. For example, to set up an insurance company to carry special types of commercial risk is much more feasible in an offshore centre in terms of regulatory costs than in many major onshore locations. Conceivably without the insurance cover at relatively modest cost the transactions would not be undertaken. Hence the existence of the offshore centre in question has served to facilitate world trade.
Similarly, some major trans-national institutions are restructuring or re-engineering their balance sheets by using securitisation techniques to remove certain classes of assets or liabilities from their own ownership to trustee structures set up in tax neutral jurisdictions.
The point of these opening remarks has been to illustrate how the range of services provided in offshore centres is expanding but, more significantly, how important some of the services are to the global economy.
The main issue for this article however is how these globalisation trends will impact on everyday professional life. In my view the main effects will be:
Article 12 of the Universal Declaration of Human Rights states:
"No one shall be subject to arbitrary interference with this privacy … everyone has the right to protection of the law against such interference…"
Similar sentiments are expressed in Article 17 of the International Covenant on Civil and Political Rights, Article 11 of the American Convention on Human Rights, and Article 8 of the European Convention for the Protection of Human Rights. Privacy is therefore a fundamental human right. Therefore, no individual should be required to explain why they wish their affairs to remain confidential. Similarly, no one has to explain or justify why he should not be subject to arbitrary arrest or detainment.
However, the international adviser may feel he is under some compulsion to breech the right to privacy under the terms of an applicable anti-money laundering statute. The big challenge is to establish if the disclosure required by the relevant act is actually called for or indeed permitted. At first reading, most anti-money laundering legislation is quite clear that the banker must:
- Know his client
- Keep adequate records
- Monitor banking and investment activity, and
- Report "suspicious" transactions or proposals to the relevant authority in his jurisdiction.
The difficulty is to balance the fundamental human right to privacy against the need to report suspicious transactions. What constitutes "suspicion"? Mere lack of knowledge about a customer’s lifestyle or business activities may trigger suspicion. It will perhaps behove the international adviser in the future to know much more about his customer’s affairs on a day to day basis, so that he fully understands the business cycle and other aspects of the customer’s lifestyle. In this way transactions which may superficially appear suspicious may in fact be recognised as not being so and hence the customer’s fundamental human right to privacy may be better protected.
I suspect that eventually certain financial institutions will become tainted with a reputation for a "scattergun" approach (ie reporting anything and everything out of the ordinary), and hence their business will suffer. While other more sophisticated operations with a much better "know your customer" ethos will correspondingly prosper.
Other major developments affecting offshore financial services will be the launch of global (ie Internet) full banking and asset management services. Every six months the Internet gains fifty million new users. The projected users by 2005 is 1 billion or 1/5th of the world’s population. The fibre optic backbone of the Internet increases in capacity tenfold every year. This vast projected increase in capacity will enable offshore advisers to deliver their products to every affluent home in the world at extremely low cost.
Another piece of extremely bad news for traditional bankers is that many non-banking financial service intermediaries will be able to deliver virtual banking products soon (ie Cashfac). These products allow the local area network of the lawyer, accountant or investment adviser to connect directly to a bank’s mainframe. Even more worryingly they allow the intermediary to brand the virtual banking transactions in their own name (rather than just in the name of the bank) via the automatic production of statements and advices that identify with the intermediary as well as the bank. Indeed the latest PricewaterhouseCoopers’ European Banking Survey reported, amongst other matters, that 60% of those surveyed viewed competition as intensive, while 80% expect to respond to increased competitiveness by significant changes in their business.
One of the biggest areas of expected change identified is in the type and level of expenditure on information systems. Winners in 21st century offshore world will have spent significant sums on systems which deliver much better front office (or customer interface) support. This will free customer service staff up from such issues as report formatting and generation and allow the individual customer to specify:
- The information in reports
- Frequency of delivery
- Amount of research required
- Method of delivery (ie e-mail or conventional)
Marketing (Traditional Products)
PricewaterhouseCoopers’ report indicates that there is an expectation that the consumers of offshore banking services are going to radically change in the future. Customers are going to evolve towards active new money clients. These clients are going to need to be much more actively managed and consulted. They are also going to be much more aggressive in their expectations in terms of tax planning and investment return. In time these new clients will develop needs for complex products such as derivatives, insurance and pensions offerings as well as lifetime estate planning through trustee and other fiduciary structures.
In short customers will be less loyal and relations are going to be more volatile and results orientated. They will need to be attracted through sophisticated offerings to intermediaries and possibly electronic publishing media. Part of the product package will be excellent service delivered electronically as well as conventionally. Finally, bankers will have to be highly trained in understanding their clients’ lifestyle and business requirements in order to adequately protect the confidentiality aspect of the banker customer relationships which customers are still entitled to expect.
Marketing (New Products)
Securitisation is the art and science of disintermediation. In this technique, receivables of various shapes and forms are removed from the balance sheet of the principle company and transferred to the balance sheet of a company owned by a trustee. The trustee then creates a special purpose vehicle (SPV) which issues its own loan notes or debentures to the capital markets. The receivables are attached or securitised on the loan notes in such a way that the holders of the notes rank in preference to any other creditor of the SPV. Since the SPV has been formed solely for the purpose of the transaction and carries out no other activities, then in practice conventional creditor risk is small. However, many cross border securitisations are heavily dependent on being able to predict taxation changes. Clearly in many onshore jurisdictions this prediction is extremely difficult and, as a consequence, more and more securitisations are taking place offshore in a fiscally neutral environment.
Particularly with the advent of the Euro more and more private enterprises are raising their working capital direct from the capital markets rather than through a banking intermediary. For example, credit card receivables, auto leases, tax refunds, and aircraft leases are all now being extensively securitised.
The future of the offshore world is bright. It is probably securitisation and Internet shaped and these two particular trends will be facilitated by the increase in the selling of traditional services and products to such emerging markets as Central Europe, Latin America and the Indian sub-continent via the world-wide web.
In my view, the position of the offshore services sector in the world economy is, therefore, secure and will continue to act as one of the "fingers" on the unseen hand that Adam Smith, the world’s first economist who wrote the Wealth of Nations, saw as guiding the world economy.
Edmund (Ben) Bendelow received his BSc from the University of Wales and his MBA from the University of Exeter. He is a member of the International Tax Planning Association and the Society of Trust and Estate Practitioners. He is a Fellow of the Institute of Financial Accounts, and a Fellow of The Offshore Institute, as well as being the current President of that Institute. He is a former member of the States of Jersey Public Services Department Audit Committee. He is Deputy Chairman and Chief Executive of the Basel Trust Corporation Group, a Director of Hapoalim Trustees (Channel Islands) Limited and a Director of Royal Exchange Trust Company (Jersey) Limited.
His previous appointments include Managing Director of ANZ Grindlays Trust Corporation (Jersey) Limited, and a consultant to Ogier & Le Cornu (Advocates and Notaries Public).
Edmund Bendelow is on the Editorial Advisory Board of Offshore Finance USA and is also a contributor to the American Bar Association Litigation Review and an Honorary Member of the International Academy of Matrimonial Lawyers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.