The global, double dip, recession has now been with us since 2008 and over the last 5 years the environment seems to have simply got harder and harder. Law firms, accountancy firms, trustees, banks and investment houses have all been affected equally. There have been failures in virtually all these spaces with long-established business shutting shop, being forced to merge and/or reduce head count. These actions have often felt drastic, but perhaps they realistically reflect the reduction of business available for everyone?
What new business there is is also highly fought after, with professional intermediaries fiercely competing on price and service levels. There is talk amongst professional service providers of pricing being 50% of what was charged in 2008, raising the question of whether there was extensive over charging back in 2008, or perhaps more simply intermediaries are now so keen for business, that they are prepared to take on new clients with a massive hit or even unprofitably.
Whilst the picture painted is fairly bleak, there are more than a few glimmers of light trying to break through the prevailing storm clouds.
A number of firms have been looking further afield to the emerging markets. All of whom regard the CIS, GCC, Asia, Latin America and Africa as key centres for growth opportunity. Clients from these regions often require 'old school' wealth management solutions with tax being a lower priority for many families, compared to asset protection, privacy and succession planning benefits that may be gained from proper planning and structuring. However, many clients are driven by commercial realities and are seeking to grow their businesses, or undertake capital market activity with the West. For these clients, intermediaries now need to be versed in a wide variety of skills to maximise these client opportunities.
Understanding a client's source of wealth and funds One of the first issues to consider for any provider is the ubiquitous source of wealth or source of funds information that is needed. This is often a rigorous process that intermediaries need to undertake, checking and double checking a client's story. As often as not, a client's story is hard or impossible to verify in totality, with gaps appearing through a lack of historical data.
In real terms this is understandable. In the intermediary world, who amongst us keeps personal records dating back 20 or 30 years? Very few of us I suspect. However, we expect this information of our clients and find it hard to take a view on them without it being available.
Luckily third party sources exist that are able to provide in market analysis quickly and cheaply to help intermediaries 'take a view' on each client. These firms are often based upon the skills and connections of ex-intelligence services people in multiple jurisdictions, and provide an added layer of confidence when making client take-on decisions.
One jurisdiction is rarely enough to meet all a client's requirements Although most jurisdictions would like to claim that they can legitimately offer one-stop-shop solutions to their prospective clients, nowadays, one jurisdiction is seldom the only solu tion for clients.
A jurisdiction that offers extensive double taxation treaty benefits may well be a less proven asset protection jurisdiction and of course proven asset protection jurisdiction may well be no good for double taxation treaties. For instance, in the case of Russian clients, it is inconceivable that structuring wouldn't involve either Cyprus or Luxembourg as the benefits of the withholding tax being reduced to 5% are too considerable to ignore. In a jurisdiction like Jersey, where international clients are taxed at 0% rate, double taxation treaties are almost impossible to negotiate. However, Jersey has an extensive set of precedents through the Royal Court, that have been proven over a 30+ year history to demonstrate the integrity of the jurisdiction's structures as asset protection vehicles. Not many jurisdictions have this pedigree by way of comparison.
Taking on commercial projects
It seems that emerging market clients are more or less inextricably linked to the operating companies that they have usually derived their wealth from. It is becoming increasingly rare for a private client to look like or have the requirements of a classic private client. Instead, many private clients wish for sophisticated corporate or funds work to be undertaken on their behalf. Taking on capital market projects of this nature now requires private client practitioners to have skills beyond tax planning, structuring and wealth management. Many teams are combining their personnel into hybrid teams to meet the needs of these emerging market clients.
By way of example, Vistra Jersey is working with two different CIS clients to help them prepare for an AIM listing. One company is owned by single shareholder, whilst the other company has three principals behind it. Whilst the short-term work is entirely listings oriented, the real value to the clients behind these companies is in the preparation of their personal structuring using trusts and foundations, and of course in implementing the proper tax advice around this liquidity event. The skills required for this entire scope of work are hybrid in nature and much of the success of managing this situation depends on balancing the team, and discussing the client needs pragmatically at the outset of the relationship. And of course as the clients' requirements evolve, the team needs to naturally evolve too to best meet their needs.
In addition, many clients from emerging markets are actively seeking to diversify their risk and asset base across other emerging market jurisdictions. It is common knowledge that the Chinese are actively interested in acquiring mineral, natural resources and commodities from areas such as Africa. To facilitate such acquisition, structures need to be established that take advantage of double taxation treaties and allow for the easy inward investment of capital. Mauritius currently has 37 double taxation treaties in place both with numerous African states but also with multiple other countries such as China, UK and France that facilitate the capital investment into these type of projects.
There are increasing trends for investment into Africa and the typical structure uses Mauritius as a double taxation treaty jurisdiction, alongside a Jersey trust or foundation which offer asset protection benefits.
Jersey's track record for listings
Jersey has a strong track record for listed companies on worldwide stock exchanges. As of writing, 92 Jersey companies have been listed on various exchanges with a market capitalisation of c.£135bn. Leading examples of the listings include Glencore (the world's largest commodities trader), China New Energy Limited (an alternative fuel company), and Yatra Capital Limited (real estate investments in India) amongst many others. The key advantages of using a Jersey company include; 0% corporation tax, free withholding tax on dividends, interest and royalties, and no stamp duty in Jersey. Of course there is a wealth of expertise that lies with local Jersey professional intermediaries that make the process smooth and easy going for clients.
For an individual or small number of individuals owning a Jersey company preparing for listing these are considerable advantages. Particularly when the initial ownership of the listed vehicle is through a trust, which is an excellent way of protecting any monies received into trust following the completion of the listing process.
Jersey's private fund regime
The use of funds is becoming increasingly important for private clients. Families often find that a fund is an effective way of controlling multiple investors from the same family.
In Jersey, the private funds regime offers a number of close ended funds, which are unregulated, simple and easy to run, and offer privacy for families. Perhaps the most popular is the Very Private Fund ("VPF") which can be established using a company, trust or limited partnership arrangement. As it is a close ended fund, the maximum number of investors is restricted to 15 participants, however in the case of a family, this would either be sufficient to cover off family units or individual family members. And as such, the VPF is not regulated as it falls outside of the regulated Collective Investment Funds space.
A consent is required under the Control of Borrowings (Jersey) Order 1958 ("COBO") for the fund to issue its securities to investors. The Jersey regulator - the Jersey Financial Services Commission have pledged a five day turn around for the issue of COBO consent.
Finally, where a VPF is structured as a professional investor regulated scheme, there is a minimum of £250,000 that each investor must invest as a qualifying amount into the fund. This is very achievable given that most families that establish this type of structure place much higher amounts into the fund.
The funds can be administered through a traditional trust licence held by local trust companies. Of course, many of the functionaries such as investment managers/advisor roles can be held by family members giving them control over the fund's investment process and strategy. In the event that the vehicle selected for the fund is a company, it is of course possible for shares in the company to be held in a trust. This allows family members an added layer of protection and privacy.
Private Trust Companies ("PTCs") and Foundations Another trend that has come into play for clients from emerging markets is the need to retain a degree of influence over their structure. Many clients may be nervous about the concept of 'giving away' their hard earned wealth that they have spent a life time accumulating. Careful explanation and advice may be needed to explain the differences between legal and beneficial ownership, and even when this concept is fully understood, clients may remain uncomfortable with this idea.
As a result structures such as the PTC and Jersey Foundation have become increasingly important. At the heart of both structures are the PTC's board and the Foundation's council which are the decision making units for both structures. The key to both the PTC's and Foundation's success is that family members, trusted professional advisors, industry experts, as well as new fiduciaries are able to comprise the PTC board or the Foundation council. This is important, as the client is able to influence decision making on the board and council. This is potentially a big point of difference to a standard discretionary trust run by an offshore trustee.
In addition, if the client wants another layer of control. It is possible to appoint either a Protector (for a trust administered by the PTC) or Guardian (for the Foundation). In fact in Jersey, the Guardian is a mandatory role as part a Foundation's requirements. These two roles can have a number of powers appointed to them, not least amongst which might be the power to veto any decision made by the PTC's board or Foundation's council. For clients who find the PTC or Foundation a new and perhaps difficult concept this is a very useful way of protecting their interests, not least as the Protector/Guardian role can be filled by the underlying client themselves.
Generating new business in 2013 is tough for those in the private client space. However, Vistra believes that emerging market clients who seek non-traditional private client work offer plenty of scope. The core issue is that the work often is quasi private client/corporate/funds in nature and to be able to undertake this level of work effectively requires people and teams who are working collaboratively who have those prerequisite skills. Vistra has those skills and with 28 offices across 20 jurisdictions is able to offer emerging market clients a massive choice of double taxation treaty jurisdictions and asset protection jurisdictions to meet their needs.
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.
