The recent greylisting of South Africa by the Financial Action Task Force (FATF) underscores the need for diversification and the exploration of offshore jurisdictions for investments.
South Africa's recent greylisting by the Financial Action Task Force (FATF) came as a harsh blow to the country's reputation in an ever-changing global financial landscape. This development, combined with ongoing economic struggles and a complex regulatory environment, has cast a long shadow over the local financial services sector.
However, in the face of adversity, astute fund managers are considering offshore jurisdictions to assuage investor fears and leverage the synergies offered by robust and adaptable regulatory frameworks. Among these offshore jurisdictions, the international finance centre (IFC) on the Island of Jersey stands out as a beacon of stability and promise.
This was the focus of an exclusive roundtable event led by Jersey Finance on 16 May in Stellenbosch. The roundtable brought together local and international industry experts ahead of the SAVCA Private Equity Conference that same week.
The panel deduced that while South Africa's greylisting is concerning, it offers a distinct opportunity for introspection and strategic alignment. It necessitates the reassessment of investment portfolios, redirecting focus towards robust regulatory jurisdictions that provide assurance of stability and transparency.
"Being greylisted may increase due diligence requirements from investors, who may perceive a higher risk. Fund managers need to consider their agreements and relationships with limited partners, particularly regarding drawdown notices and fundraising. This is especially pertinent for Development Finance Institution (DFI) investors, where greylisting may pose specific challenges."
Head of Regulatory Affairs at SAVCA
The Transformation of Global IFCs
South Africa's greylisting is not a unique phenomenon; it is yet another reflection of the metamorphosis of IFCs over the last two decades. Take Jersey, for instance, previously viewed as over-regulated, inflexible, and expensive. Today, the Island is seen as innovatively regulated, competitively priced, and forward-thinking: not because Jersey has significantly altered its course, but rather due to shifts in global regulatory standards and expectations.
In a world growing increasingly conscious of financial transparency and governance, jurisdictions like Jersey that chose early adoption of stringent regulations are faring well. In contrast, other jurisdictions, notably in the Caribbean, initially known for their lenient regulations to attract business, now face an uphill battle as prevailing global standards, particularly concerning substance and beneficial ownership, have proven challenging.
For example, over 130 Collateralised Debt Obligations (CDOs) and Collateralised Loan Obligations (CLOs) have moved from the Cayman Islands to Jersey or have been created from scratch in Jersey because European investors have difficulty obtaining banking services for Cayman-based structures or are barred from investing in greylisted jurisdictions.
In this context, South Africa, which was traditionally seen as highly regulated, now finds itself in the same category as other African jurisdictions, like Nigeria and Tanzania. This regulatory increase, coupled with South Africa's institutional and capacity issues, is causing a flight of capital from the country and many fund managers are dealing with a shrinking pool of domestic funds, leading to a growing need to explore offshore investment opportunities.
"There is a herd instinct in the movement of funds and structures from one jurisdiction to another based on regulatory attractiveness and cost-effectiveness. Jurisdictions need to evolve in line with global regulations and industry trends to maintain the trust and business of fund managers."
Senior Associate at Carey Olsen
The Jersey Option
The easing of South Africa's historically strict exchange control regulations, announced by then-Finance Minister, Tito Mboweni, is also worth considering. Citizens can now own their local assets from abroad, potentially reducing estate duties, capital gains tax, and dividend taxes. Such benefits, when channelled through a well-regulated offshore jurisdiction like Jersey, are magnified.
However, this new landscape is not devoid of challenges. The South African Reserve Bank's tentative approach towards endorsing share certificates of local companies owned by foreign trusts with South African beneficiaries illustrates the volatility of the current financial ecosystem.
A jurisdiction like Jersey offers an environment conducive to these parameters.
Its robust regulatory framework and the Manager of a Managed Entity (MoME) regime provide flexibility for fund managers while keeping investor protection intact. The MoME regime, an opt-in system, allows the appointment of a manager to oversee the fund's management, reducing the need for boots on the ground in Jersey and saving costs. Working with the fund manager, Jersey-based fund administrators provide daily oversight, ensuring compliance with relevant regulatory and legal rules.
The Jersey Financial Services Commission (JFSC) regulates the managed entity, addressing concerns around effective management, control and economic substance. This reassurance of regulatory compliance, without compromising on cost-efficiency, provides a win-win situation for fund managers and can be dialled up or down symbiotic with the manager's presence on the Island.
Furthermore, Jersey's tax neutrality facilitates tax-efficient cross-border investments, thereby contributing positively to the bottom line of investments managed through Jersey. For the astute investor, the potential of tax efficiency coupled with the stability of a well-regulated jurisdiction like Jersey provides an attractive proposition.
The choice of an offshore jurisdiction such as Jersey doesn't suggest a departure from South Africa, but rather a strategic diversification. South African assets retain their value, and the progressive loosening of exchange controls suggests potential for even more robust domestic markets in the future. The diversification towards offshore jurisdictions like Jersey can therefore provide a protective buffer against regulatory unpredictability and offer an avenue for portfolio growth.
"Fund managers should consider a broader range of factors when choosing the optimal jurisdiction for their funds, including regulatory environment, political stability, ease of doing business, and reputation of the jurisdiction. Regulatory authorities are also demanding more substance from companies. That is, it's no longer enough to just have a registered address in a certain jurisdiction, but the management and decision-making of a company must actually take place there. Aspects like good schools, lifestyle, and connections to the rest of the world are now coming into play when deciding on a jurisdiction."
Director and Co-Head of Investment Funds & Private Equity Practice at Werksmans Attorneys
South Africa's regulatory changes and the global shift towards stringent anti-money laundering and counter terrorist financing measures necessitate a proactive approach to offshore fund management. The dynamic landscape calls for adaptability, with an emphasis on jurisdictions offering transparency, compliance and fiscal advantages.
The greylisting is indeed a hurdle, but not an insurmountable one. The key lies in understanding the new environment, adapting strategies, and realigning portfolios. Offshore jurisdictions like Jersey, with their optimal balance of regulatory oversight and managerial flexibility, offer a promising solution for South African fund managers looking to navigate the challenging landscape of global finance. And as the financial sector continues to evolve, the strategic importance of such jurisdictions will only continue to grow.
This article was first published in the Sunday Times.
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