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Offshore Guide


International Finance Under the Microscope

Compliance • Specialisation • Asia-Pacific Growth Eurozone Crisis & Arab Spring Impacts • IFC Profiles 1


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Offshore Guide 2012/13

International Finance Under the Microscope International Finance Centres (IFCs) have been placed under unprecedented scrutiny of late by fiscally challenged developed countries. This new state of affairs has compelled them to address how they strategically position themselves and to consider their fundamental assets beyond tax competitiveness and the allure of light regulation, so as to stay relevant and vital. It is a debate that has led to some vigorous defences of IFCs’ ‘agent for good’ credentials that sees them as invaluable conduits for investment capital into the developing world, as providing essential government revenues and as a tangible route to well paid, skilled employment for citizens who risk otherwise suffering due to their countries’ physical size and distance from markets. Whatever the merits or otherwise are of international politics that sees many small IFCs bound by strict new rules for the alleged international greater good, those jurisdictions most impacted by the prevailing winds of compliance must, in the main, be applauded for the spirit in which they have entered into a process which has not been uniformly applied and over which they have had very little say. IFCs’ detractors would do well to realise that having responded to calls to ‘put their houses in order’, subsequently moving the goalposts is not merely unjust, but risks visiting ruin on many small states possessing all the necessary ingredients to be international centres of global financial and regulatory expertise.

Editor: Richard Smith Business Development: Dominic Hale, James Wilson Production Manager: Claire Turner Designer: Wallace Wainhouse Editorial: Joanna Gray, Ken Shaw, Erik Herbert, Frances Law All enquiries:


Disclaimer::The information contained in this publication has been obtained from sources the proprietors believe to be correct. However, the publishers cannot be held responsible for any errors or omissions. In no way does any of the content constitute legal advice and the publishers and staff accept no responsibility nor legal liability for any loss or damage caused by or arising from reliance on it. Persons are reminded that independent professional advice should be sought before any investment decisions are made. Copyright: No part of this publication may be reproduced without the prior consent of the publisher. © Business Annual Offshore Guide. Unless otherwise stated photographic content is licensed under the Creative Commons (cc) attribution license. To view a copy of this license visit http://creativecommons. org/licenses/by/3.0/



Comment 6 8

The Future of Offshore Financial Centres: Survival Traits in a New Era By Paul Byles China: Shanghai Financial Centre: Detailed Development Targets Released

10 AIMA’s Assessment of the European Commission’s Proposed Financial Transactions Tax Provided by the Alternative Investment Management Association (AIMA) 12 Swiss Bank-Client Confidentiality By the Swiss Bankers Association

21 Effects of the Financial and Economic Crisis on Foreign Direct Investment (FDI) in the European Union (EU) By Eurostat, the statistical office of the European Union

42 Cayman Islands Insurance Law By the Walkers Group

22 One Year on from Arab Spring: Prospects for the Region By the Association of Investment Companies (AIC)

45 Turks and Caicos Islands: Evolving TCI

43 Captive Advantages By the Insurance Managers Association of Cayman (IMAC)

24 The IFC Forum Inaugural Conference By the International Financial Centres Forum 25 PwC 15th Annual Global CEO Survey

14 The Future of Asian Trust and Estate Practice By the Society of Trust and Estate Practitioners (STEP) 15 Foreign Account Tax Compliance Act (FATCA): The Operational Challenge By Deloitte

Bond Funds Most Popular Asset Class Worldwide in Q3 2011 By the European Fund and Asset Management Association (EFAMA)


46 The Future of the Barbados International Financial Centre A presentation by Prof. Avinash D. Persaud given as the keynote address at the 2011 International Business Week Discussion Forum 50 All Change at Seychelles

28 Asset Protection and More in the Cook Islands 29 Samoa: A New Day, A New Dawn 16 Responses to Attack on the Crown Dependencies Statement from Jersey Finance

Isle of Man Chief Minister Refutes Attack Supplied by

30 Labuan 34 Botswana: African Queen

Ambitious Anguilla

38 British Virgin Islands: Global BVI

17 Offshore Financial Centres By Mark Field, UK MP for Cities of London & Westminster 18 European Securities and Markets Authority (ESMA) Details Future Rules for Alternative Investment Fund Managers 20 A Brave New World of Sustainable Growth From Ernst & Young World Islamic Banking Competitiveness Report 2011-2012

39 Jamaica Renews Commitment to Join IFC Fraternity 40 IFCs and Latin America: Transparency and Efficiencies By Grant Stein, Chairman, Walkers’ Global Latin America Group 41 Cayman Islands: CIMA: After Strong Year of Cayman Captive Formations, Good Potential for Growth in 2012 By the Cayman Islands Monetary Authority (CIMA)

Comment 54 The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It Summary from a World Bank report co-authored by Emile van der Does de Willebois, Emily M. Halter, Robert A. Harrison, Ji Won Park and J.C. Sharman 59 OECD Global Forum Chairman’s Message from ‘Tax Transparency 2011: Report on Progress’ By Mike Rawstron, Chair of the Global Forum 60 Global Forum Delivers Concrete Results to the Cannes G20 Summit By the Organisation for Economic Cooperation and Development 64 The Global Competitiveness Report 2011-2012: Top Ten Country Profile Highlights By the World Economic Forum




The Future of Offshore Financial Centres: Survival Traits in a New Era By Paul Byles

The only issue more prominent than the mounting challenges faced by offshore financial centres (increasingly referred to as ‘International Financial Centres/IFCs’), is the question of whether their demise is now imminent. This has led in some quarters to the conclusion that the end of the offshore financial world is here.

These factors include regulatory balance, access to human capital resources, onshore legislative developments, the state of the domestic public sector’s finances, the extent of relations and positioning with multilateral organisations and key G20 governments, the jurisdictions’ international (and domestic) reputation, the extent of confidence and

A group of only slightly less pessimistic observers argue that IFCs may survive in the short term, but it is simply a matter of time before lawmakers in the major source markets such as North America and Europe either make significant changes to their onshore regimes or become effective in political strategies to end the attraction of IFCs once and for all. There is a third group of optimists, though the reasons for their positive outlook are not entirely clear.

the past decade of international regulatory and tax developments, and others expected in the future, is unlikely to impact all IFCs in the same manner

But the past decade of international regulatory and tax developments, and others expected in the future, is unlikely to impact all IFCs in the same manner. The same goes for any criticism levelled at IFCs; not all jurisdictions deserve the inadequate regulation charge, and some are more transparent than others, to mention just a few of the criticisms.

political will to negotiate with the G20 and related bodies and the jurisdiction’s approach towards policy development for the financial services industry. IFCs have an opportunity to influence virtually every one of these areas though they have limited ability to influence onshore legislative developments.

It is therefore unsurprising that the factors which will determine survival of the fittest in this new era, are the same ones that warrant the use of a ‘thinner brush’ when being critical of these centres.

The first of these factors to be dealt with is the nature of the regulatory framework in the jurisdiction. In theory, IFCs that are more in line with so styled global standards would receive far less pressure and informal (but very effective) economic sanctions from the governments of their major source markets than those that choose to operate in a wild west format.

There are several core features that, in my opinion, will make the difference between whether the financial services industry in jurisdictions such as the Cayman Islands, will continue to be a successful and sustainable contributor to employment and government revenues for another two decades (and hopefully beyond that).


Regulatory balance matters

Further, countries that have either recently entered the IFC world or are considering it as a path to development, will find that

the upfront cost of regulation alone can be a significant deterrent. And yet, while the regulatory factor is an obvious one, to conclude the analysis with this view of its role in determining the future would be overly simplistic. What will likely matter far more is not just whether global regulatory standards are met, but how individual jurisdictions balance enhancing their regulatory frameworks against the need to maintain a viable economic sector. As an example, some jurisdictions may decide to ignore or delay implementation of Solvency II, a recent capital standard for the insurance sector. Others have taken a strategic decision to sign as many tax information exchange agreements as possible, while some countries have clearly taken a more conservative approach. There are numerous other examples of jurisdictions taking diverse approaches to regulatory and other policy changes. The balancing act is complex, involving the interaction between industry stakeholders, regulators, domestic legislators and discussions with international bodies and onshore governments. The objective itself is straightforward: to maintain a vibrant sustainable industry which maximises employment and government revenues, while meeting (and be seen to meet) reasonable international standards. Confident interaction with the G20 How countries approach the task of meeting such standards and how they interact with the various global stakeholders is a key facet of balancing the regulatory framework. Some countries for example, choose to use


a combination of political strategy and lobbying with onshore bodies to help in explaining their position. Others capitulate at every suggestion by such bodies, without taking any effort to explain or rationalise the position they wish to hold. This last aspect can be the key to whether a country imposes a new rule or policy which can have a disastrous effect on the industry. If an IFC can effectively explain the nature and its treatment of a regulatory risk instead of simply accepting the assessment of the global stakeholders, the jurisdiction may be able to achieve ‘compliance’ in a manner less harmful to industry.

The IFC Forum which was established in 2009 by a number of firms with a presence across a wide group of jurisdictions is a good start but more is definitely needed. Just about every serious multilateral body has access to dedicated teams that produce research/policy papers on a regular basis on IFCs, their role in the global economy and the risks that they pose to global financial stability.

treatment of regulatory matters can play a key role in an IFC’s sustainability

Whiners or informed advocates? Stakeholders in some IFCs complain regularly about the lack of recognition of the standard of regulation in their individual jurisdictions by the multilateral bodies and more directly the G20 governments. But that makes it all the more surprising that these same centres spend almost no time and resources explaining why their regulatory framework is credible. There is of course the now overworked observation that it is harder to open a bank account offshore than onshore, and the explanation of the difference between ‘tax evasion’ and ‘tax avoidance’ (a distinction which no longer matters to G20 treasury officials). But aside from these responses, IFCs have not made any material attempts to explain in a credible manner where regulatory risks lie within offshore structures and how their approach to regulation addresses these risks.

These policy papers, which are treated as a luxury in most IFCs, have an influence on the decision making by such multilateral bodies. But to date there has been no similar coordinated equivalent effort by IFCs to respond to some of the arguments in these papers (many which include erroneous and outdated observations on the role of IFCs). Objective research and analysis has a direct influence ultimately on the extent and nature of regulatory changes proposed and those centres that dedicate serious effort in this area will be in a better position to defend and legitimise their individual frameworks. Taking a confident approach to regulatory matters In the end treatment of regulatory matters can play a key role in an IFC’s sustainability. Those centres that meet international standards while maintaining a vibrant industry have a higher chance of survival.

In achieving this balance which can be complex the political directorate of IFCs must be sufficiently confident in their dealings with external bodies to justify their approach. And this can only be done effectively with some form of technical support to give credibility to their positions, while enlightening, at a minimum, their counterparty technocrats. It is certainly true that international politics and the economic interests of OECD countries plays a key role in the continuing pressures that IFCs face (sometimes more so than legitimate concerns about regulatory risks or the prevention of criminal activity). But that is not a good enough reason to give up on fighting more effectively for survival. Other things being equal those centres that understand this will have a good chance of survival; those that don’t should start planning now to replace their financial services industry as a major source of employment and government revenues. Paul Byles is an experienced economist and finance professional having worked in the financial services industry for 20 years. He formerly served as an external consultant to the Ministry of Finance from 2009 to 2010. He is former director of a big four consulting firm and a former financial services regulator. He is author of the book ‘Inside Offshore’ which will publish its second edition in 2012. He is also currently commissioned by the BVI Financial Services Commission to author an introductory textbook on offshore financial services in the BVI. This article first appeared in Cayman Financial Review (CFR). © CFR




China: Shanghai Financial Centre: Detailed Development Targets Released

Shanghai, China

Summary Shanghai Municipal Government and China’s National Development and Reform Commission have released an ambitious plan for developing the city’s financial sector. The plan’s focus on creating a hub for innovation, transactions, pricing and clearing of RMB denominated products is mainly about growing Shanghai’s overall scale as a financial centre, but the provisions on pricing could also impact on the relationship between the onshore and offshore markets. Implementation details remain sketchy, and many analysts and foreign companies retain a degree of caution – Shanghai has announced ambitious plans before, but ultimately its opening up and growth as a global financial centre depends on policy support from Beijing. Detail On January 30th, Shanghai Municipal Government and China’s National Development and Reform Commission (NDRC) released their plan for developing Shanghai’s Financial Sector during the 12th Five Year Plan period (2011-2015), as a staging post towards the city’s goal of becoming a Global Financial Centre by 2020. The plan has made headlines in China and beyond for its talk of creating a “Global RMB centre.” However, this English translation can be somewhat misleading, as the plan’s detail indicates (and local contacts confirm) that what is being aimed at is a global financial centre in which transactions are conducted in RMB, rather than a global centre for trade of the RMB.


The plan centres around creating a hub for innovation, transactions, pricing and clearing of RMB denominated financial products, and sets out some ambitious and specific targets for achievement by 2015. The city aims at increasing the total transaction volume of the city’s financial markets (excluding FX) to 1000 trillion RMB (£100 trillion), compared with 386 trillion in 2010. Alongside this, they aim to build the financial derivatives market up to become the 5th biggest in the world, to double the amount of RMB assets under management in the city, and to double the size of the insurance market. And they hope that the number of people employed in the financial sector will rise from 245,000 in 2010 to 320,000 by 2015.

bank rate the global benchmark for RMB paper, and for getting the offshore market to adopt the onshore daily rate set by the People’s Bank of China. But the extent to which these can be (or the authorities would wish them to be) a tool for influencing the offshore market remains to be seen.

what is being aimed at is a global financial centre in which transactions are conducted in RMB, rather than a global centre for trade of the RMB

In any case, a big part of Shanghai’s ability to achieve its ambitious targets for financial development will ultimately depend on decisions in Beijing. As long as international capital flow controls are still in place, Shanghai can’t achieve the status of a truly global financial centre. And the new plan does not seem to have increased the prospects of Beijing giving rapid approval for the launch of an International Board allowing foreign companies to list on the Shanghai Stock Exchange, with both Shanghai’s Mayor and the influential Head of its Financial Services Office stating publicly in recent weeks that the time is not currently right.

The plan is more coy on certain more sensitive issues, talking simply of “an increase” in the number of foreign participants in Shanghai’s financial markets and “a rise” in those markets’ influence on the global stage. But some analysts believe that a first step towards such global impact may be the plan’s aims for Shanghai to become a centre for RMB price-setting. They note references to making Shanghai’s inter-

In the case of some of the subjects covered – for example on innovating financial products – new policies would appear to have been prepared, and this high level document gives the political support for them to be implemented. In other areas, we understand follow up conferences are likely to be held in the coming months to turn high-level aims into specific policy recommendations. But this process of implementation could clearly be protracted.

© Crown copyright, 2012 This information is provided by UK Trade & Investment and used as permitted by the Open Government Licence v1.0

The Marshall Islands Corporate Registry


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Sergej Khakimullin/

AIMA’s Assessment of the European Commission’s Proposed Financial Transaction Tax

The European Commission (the Commission) proposed in September 2011 plans for an EU-wide Financial Transaction Tax (FTT) to take effect from 1st January 2014. This tax would be payable on all transactions of equities and bonds at 0.1% of value and on all derivatives transactions (both exchangetraded and OTC) at 0.01% of value calculated on the basis of the derivative’s notional underlying value. The Commission estimates that the proposed tax will raise approximately €25-43bn in revenue annually (depending upon whether derivatives trading reduces by 70% or 90%) while its estimates of the potential impact of the tax (at a rate of only 0.1% on securities, but excluding the derivatives markets) on the EU GDP range from a possible reduction in future GDP growth by 1.76% (€286bn1) to 0.53% (€86bn2) depending on whether mitigating effects from the FTT’s design are factored into the calculations or not. The midpoint (average) of this range is approximately -1.15% (i.e. a reduction of approximately €186bn3). In other words, the Commission is proposing a tax that it expects will reduce GDP growth. If this is so, overall tax revenues could also be significantly reduced. The Commission has two broad objectives that it seeks to achieve through the implementation of the FTT;


1. Referring to the recent financial crisis and the costs borne by EU taxpayers in the form of state bailouts, the Commission views the proposed FTT as a viable revenue-raising tool in its endeavour to recoup part of these costs. 2. The financial sector, unlike other sectors of the EU economy, is currently subject to a VAT (Value Added Tax) exemption. The Commission believes that the FTT would facilitate ‘levelling the playing field’ with respect to the tax contributions made by the different sectors of the EU economy.

The Commission estimates that the proposed tax will raise approximately €25-43bn in revenue annually Closer examination of tax incidence, however, indicates that the FTT is likely to affect EU taxpayers and pensioners the most, by reducing their savings and retirement income at a crucial point when Europe’s savers, pensioners and households are still recovering from the financial crisis. In fact, the Commission’s own impact assessment admits that the burden of the proposed FTT would likely be passed on to consumers.

Studies show that the burden of the proposed tax would in reality be much more severe than intended due to the noted ‘cascading’ effect of transactions taxes. The proposed FTT, as designed, could lead to a significant decrease of cross border trading in the EU, undermining the Single Market. The Commission’s own studies show that simple equity transactions usually require a much longer transaction chain with one or more intermediaries being interposed between a client and a trading venue in another Member State. These chains are unlikely to be reduced by changes in business models as, often, there are only a limited number of ways one is able to execute transactions on a cross border basis. Furthermore, the Commission impact assessment does not contemplate the differences in financial market liquidity in the various Member States. Indeed, the impact of the FTT on a smaller, less liquid market could be much more severe, creating an uneven impact, draining of liquidity and raising the cost of capital from certain Member States in a disproportionate manner. The Commission also aims to discourage speculative trading activities and to curb undesirable market behaviour through the FTT. More importantly, in light of the recent financial crisis, it is felt there is an increased need to take adequate measures to ensure


that risky financial decisions that led to the crisis are discouraged. An analysis of the academic research available demonstrates that the proposed FTT is likely to lengthen holding periods appreciably. Traders that operate on a high turnover strategy and extremely thin profit margins could find that the tax adversely undermines the viability of their operations. While the proposed tax would certainly affect the profit margins of almost all investors, the impact on the EU fund industry as a whole would be detrimental. Our analysis concludes that a tax that reduces or eliminates such trading activities would reduce liquidity, impede price discovery and increase the price impact of trades. The proposed FTT would also create unintended investment incentives, undermining sound asset management practices such as diversification, proper hedging and efficient execution. The incentivisation of investment in ‘riskier’ alternatives such as derivative instruments (forcing asset managers to undertake greater levels of risk to deliver the same level of return to investors as they had done previously) could negatively impact portfolio performance for pension funds and more conservative fixed income portfolios. There would, therefore, be the potential for such risk management procedures to leave market-makers with higher risk, increasing spreads in the markets and declining liquidity, all of which would undermine the FTT’s ability to raise revenue sufficient to compensate for other lost taxes.

Mikael Damkier/

Studies indicate that an FTT could also lead to a reduction in the level of investment in the real economy and discourage corporate governance and long term engagement because investment managers would invest

less in equities and more in derivatives as a result of the bias4 in the proposed rates. Again, as a result, the investment performance of pension funds could suffer considerably. Academic and empirical evidence also strongly suggests that implementing the proposed FTT could cause a significant reduction in asset prices, widen spreads, hinder efficient price discovery, increase market volatility and, most importantly, lead to transaction migration away from Europe.

a tax that reduces or eliminates such trading activities would reduce liquidity, impede price discovery and increase the price impact of trades The effect on the foreign exchange market would also be dramatic; due to the widening of spreads, even a very small tax would significantly alter the manner in which participants operate in the foreign exchange market. Trading strategies necessitating frequent trades would be significantly affected by the proposed transaction tax, leading banks to deal with the market in an entirely different way instead. It is also highly likely that the proposed FTT would cause both the migration of business away from EU as well as its transformation into less transparent (and arguably more systemically ‘dangerous’) forms. Studies examining similar tax levies introduced in the past in various jurisdictions reveal significant and irreversible trade migration

away from the countries implementing the tax and to more favourable tax jurisdictions. Introducing an FTT on a unilateral, EU-wide basis5 appears to carry very substantial risks from which the EU financial sector and the EU economy may find it difficult to recover. Based on Eurostat’s GDP figures for 2010 ($16,242,256 million in 2010 according to the IMF). 2 Impact Assessment (pg 51-52); Barclays Capital “FTT: A Taxing problem” (October 2011); Based on Eurostat’s GDP figures for 2010 ($16,242,256 million in 2010 according to the IMF). 3 Based on Eurostat’s GDP figures for 2010 ($16,242,256 million in 2010 according to the IMF). 4 The proposed FTT rate on equities is 10 times that on derivatives. 5 The proposed tax is EU wide only 1

About AIMA As the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 6,000 individual contacts) worldwide, based in over 40 countries. Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors. They all benefit from AIMA’s active influence in policy development, its leadership in industry initiatives, including education and sound practice manuals and its excellent reputation with regulators worldwide. AIMA is a dynamic organisation that reflects its members’ interests and provides them with a vibrant global network. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists. Further information:


Swiss Bank-Client Confidentiality

Matterhorn, Switzerland

Supplied by the Swiss Bankers Association Bank-client confidentiality protects privacy in accordance with the constitution and laws of Switzerland. Article 13 of the Swiss Federal Constitution confers on every person “the right to receive respect for his/ her private and family life”. This includes privacy in relation to financial income and assets. However, this does not cover abuses, particularly of a criminal nature. Bank-client confidentiality has always been waived for criminal investigators, to whom banks are required to pass client information. The addition of new crimes to the statute books has led to the creation of new duties of disclosure, for example regarding insider trading (1988) and money laundering (1990). This also applies to foreign prosecuting authorities, through the medium of international administrative and judicial assistance. The old double taxation agreement between Switzerland and the US from 1997 extended administrative assistance, which had been restricted to tax fraud, to “tax fraud and the like”. In 2009 the Swiss Federal Government decided to adopt the standards of the OECD (Organisation for Economic Cooperation and Development) and, when conducting new negotiations with major financial centres, to offer administrative assistance in respect of tax evasion (Article 26 of the OECD Model Tax Convention). Switzerland has concluded corresponding new agreements with various countries, including the US, Germany and the UK. This does not, however, imply the automatic exchange of information, and there are conditions on administrative assistance (e.g. well-founded suspicion of a tax offence). Otherwise, bank-client confidentiality remains in place. Legal basis The Swiss banker’s professional duty of client confidentiality is codified in Article 47 of the Federal Act on Banks and Savings Banks, which came into force on 8 November 1934. The article stipulates that anyone acting in his/her capacity as member of a


banking body, as a bank employee, agent or liquidator, or as a member of a body or an employee belonging to an accredited auditing institution, is not permitted to divulge information entrusted to him/ her or of which he/she has been apprised because of his/her position. The same is true for stock exchanges and securities dealers pursuant to Article 43 of the Federal Act on Stock Exchanges and Securities Trading of 24 March 1995.

Limits of Swiss bank-client confidentiality

Although people traditionally speak of ‘banking secrecy’, it is important to note that this duty of discretion is not intended to protect the bank but the client. In that sense, the term ‘bank-client confidentiality’ is much more appropriate.

• debt recovery and bankruptcy

Although a desire for privacy can play an important part in an investor’s decision to deposit his/her assets in a Swiss bank, it is not the sole or most important factor in the decision Swiss legislation also guarantees respect for privacy in other areas of professional activity, e.g. for doctors and lawyers. This is a question of protecting personal privacy, a basic right established under Article 13 of the Federal Constitution. Although a desire for privacy can play an important part in an investor’s decision to deposit his/her assets in a Swiss bank, it is not the sole or most important factor in the decision. One should not forget that Switzerland’s political and monetary stability, its excellent banking infrastructure and the professional know-how and experience of its bankers are also attractive factors.

A banker’s obligation to respect his/her clients’ privacy is not absolute, and no protection is afforded to criminals. In particular, there is a duty for banks to provide information under the following circumstances:

• civil proceedings (inheritance or divorce, for example); proceedings;

• criminal proceedings (money laundering, association with a criminal organisation, theft, tax fraud, blackmail, etc.). If circumstantial evidence gives rise to a suspicion that the financial assets are the proceeds of a crime, then financial institutions may inform the authorities without thereby breaching bank-client confidentiality; if the suspicion is wellfounded, they must inform the Money Laundering Reporting Office;

• international administrative and judicial assistance proceedings (see below). Bank-client confidentiality and tax law The Swiss tax system is based on the principle of self-declaration by the taxpayer. Information and documents that a client requires from a bank for the tax authorities may only be passed from the bank to the client, not directly from the bank to the tax authorities. It is not the responsibility of the bank to oversee their clients’ tax affairs. However, they may not assist in tax evasion by issuing misleading or incomplete attestations, as is expressly stated in the Due Diligence Agreement. Swiss withholding tax is an effective means of fighting tax evasion. Most income (interest and dividends) from Swiss capital investments is subject to this 35% tax, deducted at source. The existence of a withholding tax is a strong incentive to declare taxable gains honestly, as investors


(bank clients) can only demand a refund of the tax on making the corresponding declaration. This also applies to taxpayers resident or domiciled abroad, where a double taxation agreement makes provisions for partial or total reimbursement of withholding tax. A comparable solution exists with the European Union through the agreement on the taxation of savings income (tax withheld by banks in favour of the European Union). The flat-rate tax negotiated with individual states – Germany and the UK for now – goes even further. Upon the relevant agreements entering into force, Swiss banks will collect and deliver a tax for the contracting partners and in doing so settle their tax liability abroad. This will also lead to the legalisation of untaxed existing holdings, complies with Switzerland’s strategy to focus on taxed assets and protects bank-client confidentiality, as the flat-rate tax will be transferred to the foreign tax authorities without naming the client. Where tax fraud is involved, offences are dealt with by the competent authorities, towards which banks have a duty of cooperation, information and disclosure. Tax fraud occurs in particular when a taxpayer deliberately uses forged or falsified documents in order to deceive the tax authorities. In such cases Switzerland extends international administrative assistance on the basis of its double taxation agreements or the second package of bilateral treaties with the European Union; it also extends international judicial assistance in criminal matters. In the case of the US, the Swiss Federal Administrative Court ruled on 5 March 2009 that fraud could also exist where the US tax authorities did not intend to conduct an investigation due to the situation and that the taxpayer had anticipated this. In the specific case in question, a company controlled by the taxpayer (rather than the taxpayer himself) was the client of the bank, and the tax authorities were given inaccurate information about the control arrangements.

Since 2009 the Federal Council has, when negotiating double taxation agreements, offered administrative assistance in individual cases of well-founded suspicion of tax evasion, bringing the country into line with international standards (Article 26 of OECD Model Tax Convention). Switzerland, however, continues to rule out an automatic exchange of information in line with the EU model.

Violation of bankclient confidentiality remains a punishable offence even after the relationship with the client has come to an end or the banker has ceased his/her professional activity International judicial assistance in criminal matters Switzerland assists the authorities of foreign states in criminal matters in accordance with the Federal Act on International Mutual Assistance in Criminal Matters of 20 March 1981 and supplementary international treaties. The arrangements allow assets to be frozen and if necessary handed over to the foreign authorities concerned. International mutual assistance in criminal matters is based on the principles of dual criminality, specificity and proportionality. Under the dual criminality rule, Swiss courts do not use coercive measures – lifting the requirement of bank-client confidentiality for example – unless the act being investigated is punishable under the law of both the requesting state and Switzerland. Under the specificity rule, information obtained through the mutual assistance arrangement can only be used for the purposes of the criminal proceedings for which the assistance is provided. According to the proportionality rule, coercive

measures such as waiving bank-client confidentiality are not granted in the case of minor offences or where there is a risk that the proceedings may adversely affect the interests of persons not directly involved. International administrative assistance between supervisory authorities FINMA may communicate information not available to the public to the supervisory authorities in foreign countries. However, the communication of such information is subject to these statutory conditions:

• The information given by Switzerland

may not be used for a purpose other than the direct supervision of banks or other financial intermediaries who are subject to official authorisation. No information may be passed on to tax authorities.

• The requesting foreign authority

must itself be bound by official or professional confidentiality and be the intended recipient of the information. In administrative assistance of stock exchange supervisors, provisions on the public nature of the foreign proceedings take precedence.

• The requesting foreign authority may

not pass the information received from Switzerland to other supervisory authorities without the prior agreement of FINMA or the general authorisation of an international treaty. Such information cannot be passed to criminal investigation authorities in foreign countries if mutual judicial assistance in criminal matters between the states involved would be excluded. This policy is designed to prevent states from bypassing the rules governing mutual judicial assistance in criminal matters. It applies only to administrative assistance between bank supervisory authorities, and not stock exchange supervisory authorities.

If the information to be communicated to a foreign supervisory authority concerns specific clients, any decision of FINMA can be appealed against before the Swiss Federal Administrative Court. Both FINMA and the Federal Administrative Court must guarantee the client’s right to be heard and to examine the case file. Consequences of violating bank-client confidentiality Any violation of bank-client confidentiality, whether through negligence or intentionally, is punishable by a prison sentence of up to three years or by a fine (up to CHF 250,000 in the case of negligence). Violation of bankclient confidentiality remains a punishable offence even after the relationship with the client has come to an end or the banker has ceased his/her professional activity. The same applies to stock exchanges and securities dealers.



The Future of Asian Trust and Estate Practice In respect of the South East Asian market for trust and estate planning services a picture emerges of an industry confidently taking its own path of development into a future that is both similar to, and quite different from, the route followed by more established International Financial Centres. The findings that emerge both confirm and contradict many of our perceptions about trust and estate practice in East Asia. As the newest and fastest growing region in the world for wealth planning, we get useful insight into differences with more established IFCs as well as fresh input into the long running debate on Hong Kong vs Singapore as rival centres of private client wealth management. The impact of China as a force for change remains hotly debated. In terms of similarities, trust practitioners from around the world will no doubt sympathise with the STEP East Asian prediction that increasing regulatory initiatives – especially tax compliance – will make their lives more difficult. East Asia also suffers from the same lack of fiduciary and legal talent that threatens growth across the wider STEP universe. Finally, and perhaps most importantly, the findings contradict the perception that East Asia is the low cost centre that many in Europe believe it to be. Where differences emerge, these are to be found in client and provider behaviour. For example, the Asian cultural background means that wealthy families are often reluctant to relinquish control over their assets to third parties. At the same time, they are particularly sensitive to fees for wealth planning services. This combination is one of the main drivers behind the popularity of private trust companies, the future of which practitioners in East Asia are overwhelmingly positive about. In terms of providers, the big difference is the dominance of banks in the wealth planning industry. Their importance across the spectrum of services – from advice to administration - is unlikely to diminish so long as the absence of onerous tax legislation keeps the need for advice relatively simple. However, there is one bright ray of hope for asset managers in terms of the prediction


that independent boutiques will increase their share of the market. This collaboration between STEP Hong Kong & Singapore and STEP Worldwide is part of the on-going STEP Worldwide Council ‘Five Futures’ initiative for the continual development of the Society’s knowledge base about members and private client markets around the globe.

It is predicted that both Hong Kong and Singapore will remain primarily offshore focused in wealth planning and that trusts in Asia will continue to be used primarily for asset protection purposes

clients will both remain very sensitive to fees, and are unique in seeking very strong control over their assets. There is also firm acknowledgement that clients are becoming increasingly aware of the need for tax compliance. Business Management While practitioners agreed that new wealth planning business in Asia will continue to be private banker driven they also said that external perceptions of Asia as a low cost financial centre are inaccurate. Our members feel that the lack of fiduciary and legal talent is, and will continue to be, a major constraint on the growth of the trust and estate industry in Asia. It is agreed that banks will continue to be the primary providers of investment services and will continue to have major competitive advantages in Asian wealth planning. Independent asset management boutiques are predicted to increase their share of the investment services market. Products and Services

Regulation and Macro-Impacts Our members strongly support the prediction that the number of regulatory initiatives to increase tax compliance in Asia will rise. However, it was accepted by the membership that tax is not the major driver of demand for trust structures in Asia. Members are less certain that Hong Kong and Singapore will continue to take divergent paths in wealth planning and that their regulatory regimes will converge. The prediction that China is several decades away from making an impact on the wealth planning industry prompted strong disagreement, however this was inconsistent with most of the comments about China’s immediate impact from the thought leaders. Clients Our predictions in the Clients section of the report are among the most highly supported predictions in our survey. Members in Asia overwhelmingly concur that their

It is predicted that both Hong Kong and Singapore will remain primarily offshore focused in wealth planning and that trusts in Asia will continue to be used primarily for asset protection purposes. The prediction that Singapore will be the dominant centre for private client trust services in Asia was supported overall, but there was a big difference in support when the answers were filtered for the jurisdiction the respondent practised in. Perhaps not surprisingly, those from Singapore agreed strongly whereas those from Hong Kong disagreed strongly. A similar jurisdictional split occurred with the prediction that private wealth management in Hong Kong will remain focused on corporate structures. There was generally positive support for the notion that the widespread use of private trust companies is consistent with a healthy wealth planning industry. Source: STEP (Society of Trust and Estate Practitioners) 2011

Foreign Account Tax Compliance Act (FATCA): The Operational Challenge

Chepko Danil Vitalevich/


The draft FATCA regulations have recently been released by the US Internal Revenue Service (IRS). Relief provisions have been included in certain areas to ease the administrative burden of FATCA which are likely to be welcomed by many affected companies. Despite these allowances businesses should not sit back: given that foreign financial institutions (FFIs) will want to submit their FATCA application to the IRS by 30 June 2013, institutions need to act now. Updated regulations The regulations released by US regulators on 8 February 2012 provided 388 pages of detailed guidance on the FATCA rules. As widely anticipated, IRS has responded to representations received during previous rounds of consultation by including relief provisions for certain aspects of FATCA. Below are some of the key changes introduced by the updated regulations:

• New categories of FFIs that are to be ‘deemed compliant’ and subject to reduced FATCA obligations

• Introduction of new de minimis

thresholds for account identification in some areas

• Changes to the timings of certain

provisions such as reporting of income and gross proceeds

• Amendments to the transfer of

information to the IRS using existing information exchange treaties

• Modification to the rules on pass-

through payments allow greater time for institutions to work through identified issues and provide scope for the IRS to agree alternative approaches with governments that enter into agreements to facilitate FATCA implementation

FATCA overview FATCA will require foreign financial institutions (FFIs) that enter into an agreement with the IRS to identify their US account holders and report them annually to the IRS. The definition of an FFI is very broad and includes banks, custodians, brokers, many types of funds and insurance companies.

If FFIs choose not to enter into such an agreement with the IRS they will suffer a 30% withholding tax on payments of US source income or capital into the institution, irrespective of whether payments are made to the FFI itself or on behalf of the FFI’s clients.

FATCA will require foreign financial institutions (FFIs) that enter into an agreement with the IRS to identify their US account holders and report them annually to the IRS FATCA is a tax measure but its impact on FFIs stretches far beyond the obvious tax and reporting obligations to require major changes in technology, operations and customer contact. The challenge of compliance is magnified by the number of jurisdictions in which FFIs operate and the variety of products they offer. Compliance will be a complex and costly process for many FFIs and institutions should act now to ensure that they are ready to submit their FATCA applications by the 30 June 2013 deadline. Priorities and challenges Faced with evolving requirements that span the business, FFIs preparing for FATCA should:

• Prioritise compliance requirements, analyse the likelihood of change and assess resources required

• Ensure consistency in implementation across the group

• Identify synergies with other programmes to accelerate implementation and reduce costs. A key challenge will be sourcing and updating all know-your-customer processes to identify clients who could potentially be classed as US persons. Specific systems and process changes will likely include:

• Upgrading customer take-on procedures to gain additional information on US status and search information obtained when the account is opened

• Performing searches on existing client accounts, sometimes including paper reviews, to determine account holders’ US status

• Building reporting processes to aggregate information across businesses and enable annual reporting to the IRS

• Implementing procedures to collect withholding taxes on all US-sourced and pass-through payments

• Analysing US and non-US assets held by the FFI to calculate a quarterly passthrough payment percentage. FFIs will also need to educate customerfacing staff and customers on how FATCA will affect them. Source: Deloitte Deloitte has built a global cross-functional FATCA team comprising advisory and implementation skills that is already helping clients to become FATCA compliant with this complex, high-impact change to their businesses.


Responses to Attack on the Crown Dependencies We note with disappointment the comments made by UK leader of the opposition, Ed Miliband in which he urges action by the EU against British Crown Dependencies, including Jersey. It is disappointing when political leaders choose to make inaccurate accusations about Jersey which do not reflect the positive contribution that Jersey and the other Crown Dependencies make to the broader UK economy. Once again the confusion between the terms ‘tax avoidance’ and ‘tax evasion’ creates a false impression of Jersey’s co-operative, well-regulated offshore financial centre. Tax evasion is illegal in Jersey and it is a criminal offence – not a civil one –to facilitate or engage in tax evasion. The majority of Jersey’s activities are focussed on the pooling of and structuring of international funds that have already been taxed.

Isle of Man Chief Minister Refutes Attack Chief Minister Allan Bell has refuted comments made by Labour Party leader Ed Miliband concerning the Isle of Man. Mr Bell dismissed Mr Miliband’s remarks in the UK media about the Crown Dependencies as “ill informed” and pointed to the substantial weight of evidence which demonstrates the Island’s proactive approach on tax regulation issues. He said, “The Isle of Man has a long established protocol with the UK for tax information exchange. In addition we have a network of Tax Information Exchange Agreements, the agreed OECD standard measure, in place with our international partners. We also automatically exchange information with EU countries, making the Isle of Man one of the first non-EU countries to do this.” The Isle of Man is on the OECD ‘White List’ of countries which have ‘substantially implemented the internationally agreed tax standard.’ Numerous international assessments have found the Isle of Man to be at the forefront of standards of best practice in tax regulation.


The last Labour Government commissioned the Foot Review in December 2008. The report highlighted the value that Jersey provided to the UK during the banking crisis in the form of hundreds of billions of pounds of liquidity. That contribution continues to this day. Furthermore, the report concluded that the amount of tax avoided by UK corporates using British Crown Dependencies and Overseas Territories was “significantly lower than estimates produced by previous studies have suggested.” Therefore, the Foot report and most recent analysis from the HMRC (September, 2011), both suggest that tax avoidance is considerably lower than the wildly inflated figures produced by self-appointed lobby groups such as the Tax Justice Network. The characterisation of Jersey as a ‘tax haven’ fails to recognise the regular endorsements that the island has received from the OECD and IMF. Moreover the accusation made today that Jersey is not co-operative with the HMRC is quite simply wrong: Jersey has signed both a Tax Information Exchange Agreement (TIEA) and a Double Taxation

In a recent report to the G20, the OECD concluded that the Isle of Man is one of only eight reviewed jurisdictions found to have all elements of effective information exchange in place. This places the Isle of Man alongside Australia, France, India, Ireland, Italy, Japan and Norway. In its review of adherence to international standards, the Financial Stability Board placed the Isle of Man in the highest category of co-operative jurisdictions, concluding that the Island demonstrates sufficiently strong adherence to international standards. The Chief Minister said, “I am disappointed that the Isle of Man’s work in leading the field in international tax standards and in contributing to their ongoing development has not been recognised by the Leader of the Opposition, as it has been by others. It is not for any politician to dictate who should be on an OECD black list. It is for the OECD to make this decision based on a ‘cool headed’ evaluation of the facts.” “The Isle of Man is supportive of the UK Government’s crackdown on tax evasion and their approach to strengthening the UK’s anti-avoidance framework. We have a positive working relationship with our counterparts in the UK Government, which makes these comments all the more surprising.”

Agreement (DTA) with the United Kingdom. Jersey has very clear, open and transparent lines of communication with HMRC and is fully co-operative on tax matters. We also work alongside the UK in fighting financial crime and tax evasion. Ian Gorst, the Chief Minister of Jersey has today extended an invitation to Mr Miliband to visit the island to learn first hand how Jersey actually operates as a stable, reliable and responsible international financial centre.

Geoff Cook, Chief Executive, Jersey Finance

Mark Field, MP for Cities of London and Westminster, said, “Ed Miliband’s comments are behind the curve here and the evidence paints a very different picture. In July last year the Isle of Man moved to automatic exchange of information under the EU Savings Directive putting it at the forefront of best practice in transparency and regulation. “International bodies such as the OECD have repeatedly recognised the Isle of Man’s record of compliance. It should also be noted that the Isle of Man takes a proactive approach to its international responsibilities and has a positive working relationship with the government.’” Content provided by

Port Erin, Isle of Man

Photo CC by James Qualtrough

Statement from Jersey Finance

Photo CC by Amanda Slater


Offshore Financial Centres By Mark Field, UK MP for Cities of London & Westminster As the world has sought to understand the cause of the global financial crisis, international financial centres (IFCs) have naturally found themselves under fire. Taking many of the bullets have been smaller IFCs whose offshore jurisdictions have raised the eyebrow of suspicion. Described as tax havens for avaricious bankers and secrecy jurisdictions for shady figures in the international business community, many believe they should shoulder part of the blame for shortcomings in the financial markets. That the debate over the role of small IFCs has been so one-sided is unfortunate as it would be unwise to write-off such jurisdictions before any commensurate attempt has been made to understand their role in the wider economy. Indeed it is in the UK’s vital interest that we take a dispassionate view of such centres in light of the benefits they can offer our nation. There seem to be four distinct myths that have gone unchallenged. The first is that IFCs have a negative impact on growth in the global economy. In reality, many small IFCs have stable, well-regulated and neutral jurisdictions that can facilitate international business. Investment channelled into small IFCs can in turn provide much needed liquidity, further investment opportunities, competitiveness and access to capital markets. The second myth is that IFCs engage in harmful tax practices. The Foot Review, an examination of the UK’s relationship with IFCs, suggested that the potential for tax leakage from full tax jurisdictions towards low-tax or zero-tax regimes is relatively limited.

A third myth suggests that small IFCs have a negative impact on transparency, regulation and information exchange. There is a huge difference between cooperative and uncooperative jurisdictions, between transparent and well-regulated centres, and between the opaque and less well-regulated. In the fight against money laundering and terrorist funding, offshore centres such as the Isle of Man are currently among the highest rated jurisdictions globally for complying with international standards.

That the debate over the role of small IFCs has been so one-sided is unfortunate as it would be unwise to write-off such jurisdictions before any commensurate attempt has been made to understand their role in the wider economy

Jersey, along with Guernsey and the Isle of Man provide high levels of liquidity to the UK market.

aid market liquidity and investment, and our legal and constitutional similarities allow the transfer of skilled professionals. To put some perspective on this, in the second quarter of 2009, Guernsey, Jersey and the Isle of Man alone provided $332.5bn of liquidity to the UK market. With ever darker clouds gathering in the Eurozone, many anticipate a second credit crunch as 2012 dawns. The UK’s access to offshore money will undoubtedly prove vital in weathering the storms to come. Put simply, when it comes to our naked selfinterest, it would be foolish of the UK to ignore the proven benefits provided by small international financial centres as part of the City of London’s world class operation. Reasoned debate on their role is valid but let it not descend into myopic criticism that conveniently ignores those benefits.

Finally, it is often thought that small IFCs support capital flight from developing countries. But in fact the Commonwealth Secretariat has suggested that small IFCs often play an important role in boosting development by enabling such nations effectively to ‘rent’ financial expertise from other countries while developing financial centres of their own. This whole debate matters to the UK. Through our Crown Dependencies and Overseas Territories, we have a constitutional relationship with half of the top thirty offshore financial centres. Acting on a hub and spoke basis, the massive capital flows between these IFCs and mainland UK

Mark Field, UK MP for Cities of London & Westminster


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European Securities and Markets Authority (ESMA) Details Future Rules for Alternative Investment Fund Managers On 16 November 2011 ESMA published its final advice on the detailed rules underlying the Alternative Investment Fund Managers Directive (AIFMD). The rules proposed by ESMA will establish a comprehensive framework for alternative investment funds, their managers and depositaries. They are also designed to help achieve the AIFMD’s objective of increased transparency and tackling systemic risk, ultimately contributing to a more sound protection of investors. ESMA’s advice follows a 2010 request by the Commission, originally sent to ESMA’s predecessor, CESR, asking ESMA to deliver its final advice by 16 November 2011. Steven Maijoor, Chair of ESMA, said: “The AIFMD was a major piece of legislation designed to implement lessons learned from issues behind the financial crisis. By increasing transparency for both investors and supervisors and helping tackle the potential build-up of systemic risk, the new rules will put in place a comprehensive and balanced regime for the alternative fund sector. ESMA’s advice is a crucial element in the establishment of that new framework and was one of our top priorities for 2011.” The rules will also bring greater clarity on the application of the thresholds that determine the scope of the AIFMD. The provisions foreseen on operating conditions, meanwhile, will ensure stronger organisational requirements and rules of conduct for alternative investment fund managers (AIFMs). These are complemented


by proposed reporting requirements to investors and regulators and the rules applicable on leverage. For depositaries of alternative investment funds (AIFs), the advice sets out clear duties on such issues as monitoring the cash flows of the AIF and the consequences when an asset held in custody is lost. In addition, the advice establishes the framework under which third country firms and managers will be able to operate.

the advice establishes the framework under which third country firms and managers will be able to operate ESMA’s advice covers four broad areas: General provisions for managers, authorisation and operating conditions The first part of the advice clarifies the operation of the thresholds that determine whether a manager is subject to the Directive. ESMA proposes to require AIFMs to have additional own funds and/or professional indemnity insurance to cover risks arising from professional negligence. Many of the rules in this section, such as on conflicts of interest, record keeping and organisational requirements are based on the equivalent provisions of the MiFID and UCITS frameworks.

Governance of AIFs’ depositaries This part of the advice sets out the framework governing depositaries of AIFs. Key issues include the criteria for assessing whether the prudential regulation and supervision applicable to a depositary established in a third country has the same effect as the provisions of the AIFMD. ESMA has identified a number of criteria for this purpose, such as the independence of the relevant authority, the requirements on eligibility of entities wishing to act as depositary and the existence of sanctions in the case of violations. Another crucial point is the liability of depositaries, the first element of which relates to the circumstances in which a financial instrument held in custody should be considered as ‘lost’. This assessment is crucial in determining whether a depositary must subsequently return an asset. ESMA’s advice proposes three conditions, at least one of which would have to be fulfilled in order for an asset to be considered lost. These are that a stated right of ownership of the AIF is uncovered to be unfounded because it either ceases to exist or never existed; the AIF has been permanently deprived of its right of ownership over the financial instruments; or the AIF is permanently unable to directly or indirectly dispose of the financial instruments. Another important concept which ESMA’s advice aims to clarify relates to which events would constitute external events beyond the reasonable control of the depositary. Finally, the advice clarifies the objective reasons that would allow a depositary to contractually discharge its liability.

Transparency requirements and leverage One of the key objectives of the AIFMD is to help prevent the build-up of systemic risk. To help achieve this aim, ESMA’s advice clarifies the definition of leverage, how it should be calculated and in what circumstances a competent authority should be able to impose limits on the leverage a particular AIFM may employ. ESMA considers it appropriate to prescribe two different calculation methodologies for the leverage (commitment and gross methods) as well as a further option (the advanced method) that can be used by managers on request and subject to certain criteria. The AIFMD also aims to increase transparency of AIFs and their managers. In this context, ESMA’s advice specifies the form and content of information to be reported to competent authorities and investors, as well as of the information to be included in the annual report. Third countries With a view to ensuring the smooth functioning of the new requirements with respect to third countries, the AIFMD puts in place an extensive framework regarding supervisory co-operation and exchange of information. ESMA’s advice envisages that the arrangements between EU and non-EU authorities should take the form of written agreements allowing for exchange of information for both supervisory and enforcement purposes. Next steps ESMA was asked to submit its advice to the Commission by 16 November 2011. It is now for the Commission to prepare the implementing measures on the basis of this advice. Background In April 2009, the European Commission adopted a proposal for a Directive on Alternative Investment Fund Managers (AIFMD) with the objective of creating a comprehensive and effective regulatory and supervisory framework for alternative investment fund managers (AIFMs) at European level. On 11 November 2010, a political agreement was reached by the European Parliament and the Council of Ministers on the legislative text. Following this political agreement, on 2 December 2010 the Commission sent a provisional request for technical advice on Level 2 measures concerning the future Directive to the Committee of European Securities Regulators (CESR). The provisional character of this mandate arose from the fact that at that time, the AIFMD was still awaiting its final adoption. The final Directive was published in the Official Journal of the European Union on 1 July 2011.

Due to the significant number of implementing measures foreseen by the Directive, the provisional request was divided into four parts: Part I covers general provisions, authorisation and operating conditions; Part II relates to implementing measures regarding the depositary; Part III covers transparency requirements and leverage; and Part IV concerns implementing measures on supervision. The final report sets out ESMA’s advice on all four parts of the Commission’s request.

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ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence both amongst securities regulators, and across financial sectors by working closely with the other European Supervisory Authorities competent in the field of banking (EBA), and insurance and occupational pensions (EIOPA).

One of the key objectives of the AIFMD is to help prevent the build-up of systemic risk ESMA’s work on securities legislation contributes to the development of a single rule book in Europe. This serves two purposes; firstly, it ensures the consistent treatment of investors across the Union, enabling an adequate level of protection of investors through effective regulation and supervision. Secondly, it promotes equal conditions of competition for financial service providers, as well as ensuring the effectiveness and cost efficiency of supervision for supervised companies. As part of its role in standard setting and reducing the scope of regulatory arbitrage, ESMA strengthens international supervisory co-operation. Where requested in European law, ESMA undertakes the supervision of certain entities with pan European reach. ESMA also contributes to the financial stability of the European Union, in the short, medium and long-term, through its contribution to the work of the European Systemic Risk Board, which identifies potential risks to the financial system and provides advice to diminish possible threats to the financial stability of the Union. ESMA is also responsible for coordinating actions of securities supervisors or adopting emergency measures when a crisis situation arises. ESMA replaced the Committee of European Securities Regulators (CESR), an advisory body comprised of EU securities regulators that advised the European Commission from 2001 to 2010 on policy issues around securities legislation.


A Brave New World of Sustainable Growth

Dhanaji Wadakar/


A worrying concern though is the absence of an enabling legislative, regulatory, tax and legal environment in most OIC markets, which adds to the cost and complexity of Islamic banking operations. Where there are guidelines and standards issued by industry infrastructure institutions, their reach and enforceability remains a concern. These must be addressed as a priority.

A worrying concern... is the absence of an enabling legislative, regulatory, tax and legal environment in most OIC markets, which adds to the cost and complexity of Islamic banking operations Ernst & Young’s award-winning global Islamic Finance Center of Excellence continues to work with a diverse range of financial institutions helping them realise the true potential of their business.

The global economy and the financial markets are at a turning point. Fast growth economies in Asia, Middle East, Africa, Latin America and Eastern Europe now form almost half of global GDP and in 2010 they contributed 70% to overall global growth. These trends are accelerating.

As new geographies open up to Islamic banking, the MENA Islamic banking industry is expected to more than double to $990bn by 2015 The dramatic developments over the past twelve months – including Arab Spring, Eurozone crises and the Occupy Wall Street movement – provide further impetus for the growth of Islamic banking. Industry forecasts suggest Islamic banking assets with commercial banks globally, will reach $1.1 trillion in 2012 (2010: $826bn). Now would be the opportune time to consider establishing Islamic Sovereign Wealth Funds (ISWF) to champion the growing internationalisation of the industry. The ISWF will further facilitate businesses across

Organisation of Islamic Cooperation (OIC) markets seeking to transform to a Shari’a compliant system and also help deepen the Islamic capital market, in our view. As for MENA, Islamic banking assets increased to $416bn in 2010, representing a five year CAGR of 20% compared to less than 9% for leading conventional banks. As new geographies open up to Islamic banking, the MENA Islamic banking industry is expected to more than double to $990bn by 2015. However, there are significant performance variations across markets. In 2010, average ROE of leading Islamic banks declined to 10%. Also, market valuations appear to be converging to that of regional conventional peers.

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From Ernst & Young World Islamic Banking Competitiveness Report 2011-2012

Ashar M. Nazim, Islamic Financial Services Leader, Ernst and Young and Imtiaz Ibrahim, Senior Director, Islamic Financial Services, Ernst and Young.

Our clients agree that business models needed to shape and sustain success in this new landscape are evolving in a fundamental way. Ensuring sustainable growth will require brave, meaningful and decisive performance improvement initiatives. Two key themes are starting to emerge: 1. Excellence in banking operations – by transforming to a customer centric, efficient and scalable operating model, driven by an enhanced risk and technology orientation. 2. Product innovation – to strengthen the Shari’a differentiation and provide greater integration with the real economy. Al Amin Mosque, Beirut, Lebanon


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Effects of the Financial and Economic Crisis on Foreign Direct Investment (FDI) in the European Union (EU) There was a considerable increase in the level of inward flows from Brazil in 2010.

Flows of FDI fluctuate considerably from one year to the next, partly as a function of economic fortunes. FDI flows generally increase during times of rapid economic growth, while disinvestment is more likely during periods of recession as businesses are more likely to focus on core activities in their domestic market. In 2008, total EU-27 FDI outflows dropped by 30%, mainly due to a sharp decline in equity capital and reinvested earnings. A similar trend was observed in 2009, as all types of FDI flows contributed to a negative development, with outflows falling by a further 28%. Following a sharp decrease of 60% in 2008, EU-27 FDI inflows recovered in 2009 (up 26%) largely as a result of growth in equity capital and reinvested earnings. Provisional figures for 2010 show a sharp drop in EU-27 FDI, for both outward and inward flows of investment, thereby confirming the continued impact of the global financial and economic crisis. EU-27 outward flows of FDI decreased for the third consecutive year, falling by 62% in 2010 when compared with the year before. At the same time, EU-27 inward flows of FDI decreased by 75%. FDI flows channelled through special-purpose entities (SPEs) played a significant role in the results for 2010. EU-27 FDI flows by partner country EU-27 FDI flows with a range of economic partners have been considerably affected by the global financial and economic crisis. The decline in EU-27 outflows in 2009 could be largely attributed to a fall in investment to the United States —

from EUR 148,200 million in 2008 to EUR 79,200 million in 2009. During the same period, investment from the United States in the EU-27 recovered, rising to EUR 97,300 million, which was more than twice the figure recorded in 2008 (EUR 44,400 million). Provisional figures for 2010 show a considerable decrease in both flows with respect to the United States. EU-27 outward FDI to Canada fell to such a degree that there was disinvestment in both 2009 and 2010. Incoming FDI from Canada, after decreasing by 14% in 2009, seems to have recovered in 2010, rising to EUR 27,700 million.

There was a wide variation from one year to the next as regards the development of FDI for offshore financial centres EU-27 investment flows to emerging economies, such as China, were generally less affected than flows to other economic partners. Having fallen to EUR 5,200 million in 2008, EU-27 outward FDI flows to China rose by 11% in 2009. Preliminary results for 2010 suggest that FDI flows from the EU27 to China fell by 16%. Outward flows of FDI from the EU-27 to Brazil decreased for three successive years after peaking in 2007; however, the pace of decline was less marked than the average reduction in outflows for all EU-27 partners. There was some evidence of an increase in inward investment into the EU-27 from Asia in 2010, as inward FDI flows from

China (EUR 900 million) and Hong Kong (EUR 11,300 million) rose in relation to 2009. In a similar manner, there was a considerable increase in the level of inward flows from Brazil in 2010. EU-27 outward investment in Russia dropped considerably in 2009 and then fell again in 2010, such that there was slight disinvestment in 2010. There was a similar pattern as regards Russian investment in the EU-27: having peaked in 2007 (EUR 10,500 million) much lower levels were recorded during the period 2008 to 2010, with a modest degree of disinvestment in 2010 (EUR 400 million). EU-27 FDI outflows to Africa remained relatively unchanged during the period from 2007 to 2009, averaging EUR 20,707 million; this pattern was in stark contrast to that recorded for the other continents, where EU-27 outflows of FDI were considerably reduced. There was a wide variation from one year to the next as regards the development of FDI for offshore financial centres. These played a considerable role in FDI flows in 2007 both with respect to outward and inward flows – accounting for around one quarter of the total flows to and from extra-EU partners. The financial and economic crisis saw the role played by offshore financial centres being reduced considerably, such that in 2008 they accounted for around one tenth of EU-27 inward and outward FDI flows. Although there was an increase in FDI flows to offshore financial centres in 2009, this was immediately reversed in 2010. Statistics from May 2011. Provided by Eurostat, the statistical office of the European Union.


Dan Breckwoldt/


One Year on from Arab Spring: Prospects for the Region Great Pyramids, Giza, Egypt

In early 2011 the world watched as Egyptians camped out in Tahrir Square, demanding democratic reform. One year on from the Arab Spring, when civilian protestors ousted unpopular rulers in Tunisia, Egypt and Libya, the Association of Investment Companies (AIC) asked Global Emerging Markets investment company managers what they think are the prospects for investing in the region. Although the Global Emerging Markets sector has slightly underperformed the average investment company over one year (to end December 2011), it has outperformed over three, five and ten years with the average company in the sector up 417% over ten years. Has the ‘Arab spring’ changed investment prospects for the region? Mark Mobius, Manager of Templeton Emerging markets and Executive Chairman of Templeton Emerging Markets Group commented: “Yes, there have been fundamental changes. We believe that the political unrest, uncertainty and the subsequent government spending drives have created compelling investment opportunities in the region. In the shortterm, of course it won’t be an easy road and we can expect turmoil, but over the longterm it’s a very positive development because the move towards more open societies in the region creates an excellent environment for economic freedom and capital market development.  You can never miss the boat if you buy when things are most negative, when people are the most concerned about the political viability of a country or region. We were investing before the Arab Spring and we continue to invest.”


Slim Feriani, Manager of Advance Frontier Markets and Advance Developing Markets and Managing Director, Advance Emerging Capital commented: “We believe that the Arab Spring has changed investment prospects for the Middle East & North Africa (MENA) region dramatically and for the better in the long-term. However, in the short-term we believe we should adopt a wait and see attitude on North Africa. Indeed, we need to see how things work out at the political, social and economic level in Tunisia, Libya and Egypt this year before deciding whether it’s the right time to invest there. Yet, we believe the outlook for some of the Gulf countries such as Qatar is extremely attractive in the short and long-term.”

the Global Emerging Markets sector... has outperformed over three, five and ten years Sam Vecht, Manager of BlackRock Frontiers is more balanced: “Post the Arab Spring we have seen divergent responses from different countries within the Middle East. For those countries such as Saudi Arabia and Qatar with strong economic fundamentals, the Arab Spring may have actually improved the market outlook as their governments accelerated spending on necessary physical and human infrastructure. We are positive on the longterm outlook for companies operating in the fields of education, healthcare, retailing and water infrastructure.

“However, in other countries, such as Egypt, the Arab Spring has led to economic fundamentals deteriorating. Egypt has seen its foreign currency reserves fall from above $35bn at the end of 2010 to $18bn at the end of 2011, raising questions as to how Egypt will meet its external financing requirements for 2012. In this context, we would highlight that while the Middle East is geographically conjoined, its politics and economic policies are divergent and therefore it is important to understand the relative investment merits of each individual country.” Richard Titherington, Manager of the JPMorgan Global Emerging Markets Income Trust and CIO of Emerging Market Equities, J.P. Morgan Asset Management observes: “The consequences of the 2011 Arab Spring appear positive, with reallocation at the margin of oil exporter sovereign wealth back into the region, greater inclusion in political society of moderate Islamist groups and increased solidarity between the region’s monarchies. From an African perspective, growth in most African countries is on an accelerating trend, in contrast with many emerging economies elsewhere, although rising inflation is a growing concern, particularly in East Africa. Will frontier markets benefit from a slow-down in other emerging economies? Many Global Emerging Markets funds are heavily invested in the BRIC nations, some of which have seen a slow-down in economic growth in the past year. Could this lead to further diversification into rapidly growing frontier markets?  Although the area is not immune from global financial events, Oriel


Securities have predicted that “With overleverage still a major global issue, commodity rich frontier economies like Qatar look well placed and we see scope for Frontier markets funds to outperform in 2012.” Mark Mobius, Executive Chairman of Templeton Emerging Markets Group commented: “In the short-term, at critical global moments, markets all over the world tend to react at the same time but such events are rather short-lived.  If you look at the longer term historical correlation of frontier markets with emerging markets and with developed markets, it’s actually very low. And also the historical correlation in between the different markets is very low. If you look at what is happening in Argentina, it appears to have no impact on what is happening in Nigeria or what is happening in Vietnam. So it’s really an asset class where we think there is diversification potential.” Sam Vecht, Manager of BlackRock Frontiers said that: “Whilst it is unlikely that Frontier Markets will be immune to a global slowdown, we would highlight that relative to Emerging Markets, many Frontier Market economies are less connected into the global cycle and hence more able to determine their own destiny.  In 2008/9 we saw that, as a result of carrying lower debt burdens, some frontier governments were able to use counter cyclical fiscal policies to protect their countries from the worst vagaries of the financial crisis in a way that was not available to more indebted, more developed nations.  Within frontier markets, we do see countries that will benefit from a limited slow-down in other emerging economies. In this regard we would highlight those countries which are currently struggling with high inflation due to high commodity prices. In the event of an emerging market slow-down, demand would fall, lessening commodity based inflation.” What are the prospects for frontier markets in the coming years? Richard Titherington, Manager of the JPMorgan Global Emerging Markets Income Trust said: “Looking to the future, there remains a compelling story within frontier markets. Many trade on reasonable valuations and continue to look attractive within a broader emerging markets context

based on the global liquidity cycle and the compelling longer-term growth outlook. More broadly, markets will remain sceptical over the coming months though, as inflation is more persistent in markets like India and Turkey, the cyclical outlook for real estate in China is uncertain and Europe casts a long shadow. As these issues are gradually resolved we think investors will refocus on attractive valuations with robust earnings growth.  For the JPMorgan Global Emerging Markets Income Trust, the bottom-up, stock specific decisions taken will continue to be the driver behind delivering consistent strong returns.”

Many Global Emerging Markets funds are heavily invested in the BRIC nations, some of which have seen a slowdown in economic growth in the past year Sam Vecht, Manager of BlackRock Frontiers said that: “Frontier Markets offer exposure to fast growing companies at inexpensive valuations without the burden of high leverage or excessive ‘hot’ money. If one is positive on the developing market consumer and the emergence of the middle class driving consumption, then it is impossible to ignore the 30% of the world’s population who live in frontier markets.  Adding to this the benefits of vast, untapped commodity endowments and markets which offer one of the few remaining opportunities to gain exposure to uncorrelated investment returns gives an investment opportunity which is extremely compelling.” Mark Mobius, Executive Chairman of Templeton Emerging Markets Group commented: “Economic growth in many frontier-market countries remains high, even faster than some emerging markets, and exceeds the growth in developed markets by a wide margin. These countries are going through rapid reform and development, and while investment in these nations is clearly more risky than in their more established

emerging market cousins and can be volatile, therein lies the opportunity for greater returns.” Slim Feriani, Managing Director, Advance Emerging Capital commented: “We launched the pioneering Advance Frontier Markets Fund nearly five years ago and are very strong believers in this asset class. What is not to like? They have among the strongest economic fundamentals in the world, including by very far the lowest debt to GDP and the highest foreign exchange reserves to GDP ratios. They have been and will continue to be among the fastest growing economies because they’re starting off from a low base and are benefitting from their demographic dividend. Their equity markets are trading at or near all-time lows in terms of valuations and the ongoing structural change there is mind boggling. Yet, foreign investors are barely taking note. This perception versus reality gap offers a huge opportunity in itself. We believe frontier markets are likely to be the best performing asset class over the next five-ten years.” Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “It’s been a difficult year for the Global Emerging Markets sector, but over the longer-term the performance figures are exceptional. However, this is a diverse sector, with some companies focussing on frontier markets, whilst others take a broader emerging markets approach where exposure to frontier markets may be relatively low. Investors need to do their homework and if necessary, seek financial advice.

Source: The Association of Investment Companies (AIC) The Association of Investment Companies (AIC) was established in 1932 and is the trade body for the closed-ended investment company industry. It represents a broad range of closed-ended investment companies, including investment trusts, offshore closed-ended investment companies and venture capital trusts (VCTs). Its Members are traded on the London Stock Exchange, AIM, SFM, Euronext and the Channel Islands Stock Exchange.

Doha, Qatar

Paul Cowan/


The IFC Forum welcomes the adoption of a more constructive approach to small International Financial Centres at its inaugural conference in London The International Financial Centres Forum (IFC Forum) took the opportunity to use its first major international conference to seek a more constructive partnership with the OECD and G20 governments. This includes securing a commitment to work more collaboratively and the adoption of a more balanced tone which recognises the strong economic benefits of small international financial centres (IFCs) to the wider global economy. The one-day conference – International Financial Centres: Sharing Perspectives and Meeting the Challenges – was co-hosted by The Commonwealth Secretariat1 and the IFC Forum on 20th October 2011 in London. Keynote speakers included Pascal Saint-Amans, Head of the OECD’s Centre for Tax Policy and Administration, who acknowledged that efforts are being made to change the tone of the debate and to ensure a more inclusive approach to policymaking in which small IFCs have a voice at the table. The conference was attended by over 120 delegates. This included representatives from the private sector as well as a number of small-state IFC governments including Anguilla, The Bahamas, The British Virgin Islands, Barbados, Bermuda, The Cayman Islands, The Cook Islands, Grenada, Guernsey, The Isle of Man, Jersey, Samoa, The Seychelles and St Lucia. The conference examined the role of small IFCs as major intermediaries in crossborder finance, thus facilitating trade and fostering greater investment. Speakers at the conference also highlighted the important role played by tax competition, which was acknowledged to be a key driver of growth, in particular at times of economy recovery. Pascal Saint-Amans acknowledged the high degree of compliance with international standards on transparency and tax information exchange exhibited by small IFCs. This was supported by findings presented by Professor Jason Sharman, contained in a new World Bank report which was published on 24 October 2011. The



IFC Forum Inaugural Conference

conference also provided a major impetus towards closer cooperation and partnership between IFC governments and the private sector in working to promote the interests of IFCs with international bodies such as the OECD, the G20 and their constituent members.

Member firms include Appleby, AttrideStirling & Woloniecki, Bedell Group, Conyers Dill & Pearman, Maples and Calder, Mourant Ozannes, Ogier, Old Mutual, Rawlinson & Hunter, and Walkers, advised by Stikeman Elliott LLP and Cicero Consulting Ltd. More information can be found at

Nick Kershaw, Group Chief Executive of Ogier, and current chair of the IFC Forum, said:

The Forum produces a weekly press report to keep stakeholders abreast of key global tax and regulatory developments shaping the offshore world. Readers are welcome to sign up to this weekly report at

“The IFC Forum welcomes the OECD’s acknowledgement of the need to develop a more constructive dialogue. We will continue to work with the OECD and other multilateral organisations like the Commonwealth to make sure that a more balanced view prevails which acknowledges the benefits of small IFCs. The forthcoming G20 Leaders’ Summit in Cannes offers a first major test”

The conference examined the role of small IFCs as major intermediaries in cross-border finance “The IFC Forum will continue to provide balanced information on the role of IFCs in the global economy as facilitators of international trade, economic growth and prosperity. At the current time of economic and financial uncertainty, it is important that the world’s major economies do not adopt measures that reduce market liquidity and investment. As the IFC Forum’s conference in London clearly demonstrated, there is a growing consensus emerging across the private and public sector towards greater partnership and cooperation in addressing these issues” Supplied by the IFC Forum About the IFC Forum The International Financial Centres Forum is a non-profit organisation committed to informing global policymakers and the wider public debate on the role of IFCs. The founding members of the IFC Forum are law firms in several of the leading small international financial centres.

The Forum has worked closely with Professor Andrew Morriss and Professor Jason Sharman, two leading academics in the areas of tax and regulatory competition and the economic importance of IFCs for developing countries respectively. Readers may find their research and publications of interest. Professor Morriss’ most recent book is titled “Offshore Centres and Regulatory Competition” which assembles a panel of US experts to examine how tax and regulatory competition from IFCs helps the world to reach optimal regulatory standards and promotes efficient government in the major economies. In his book ‘The Money Laundry: Regulating Criminal Finance in the Global Economy’ Professor Sharman concludes that there are few benefits and high costs which fall especially heavily on poor countries. Professor Sharman offers a critical account of why the major FATF member states have resisted subjecting the FATF program to cost-benefit assessments. The IFC also submitted a response in December 2011 to the UK Foreign and Commonwealth Office’s public consultation on the UK’s strategic relationship with the British Overseas Territories in advance of a White Paper on this subject. The response is available at: to_FCO_Consultation_on_OTs.pdf The Commonwealth Secretariat, based in London, carries out programmes of work based on mandates set by Commonwealth Heads of Government at their biennial summit (CHOGM). The Secretariat’s mission is to work as a trusted partner for all Commonwealth people as a force for peace, democracy, equality and good governance; global consensus-building; and assisting in sustainable development and poverty eradication. 1


PwC 15th Annual Global CEO Survey Worldwide, the financial services industry is facing a severe shortage of talent. Nearly half of the industry leaders taking part in the latest PwC CEO survey believe that the limited availability of key skills is a serious threat to their growth prospects. Only around a third are convinced that they have access to the talent they need to execute their company’s strategy over the next three years.

Many organisations are relying on recruiting the people they need from their competitors and by using expatriates from other parts of the business. Yet, the scale of the talent demand and shortfall they face means that such responses are no longer likely to be a sustainable strategy. Delivering on growth

agendas depends on being able to institute well-informed and proactive strategic workforce planning. To be effective, these plans must be able to address the fundamental questions of: “What skills do we require to deliver our strategic objectives and how do we ensure that we have the right people in the right places at the right time?” Content provided by PwC. Visit


These talent constraints are already impeding or even derailing, growth plans. Around a quarter of the financial services CEOs have had to delay or cancel a key strategic

initiative over the past 12 months because the right people were not available to execute it. As financial services businesses reach into new markets and seek to keep pace with a rapidly evolving competitive environment, the debilitating strategic impact of the talent gaps is likely to intensify.

Bond Funds Most Popular Asset Class Worldwide in Q3 2011 According to the latest quarterly international statistical release published today by the European Fund and Asset Management Association (EFAMA), the worldwide asset management industry had the following highlights to report for Q3 2011:

• Bond funds continued to enjoy net inflows,

• Investment fund assets worldwide

• Equity funds experienced a swing in net

declined by 4.7 percent during the third quarter to stand at EUR 18.58 trillion at end September 2011. In U.S. dollar terms, worldwide investment fund assets decreased 10.9 percent to US$ 25.09 trillion. The appreciation of the US dollar vis-à-vis the euro during the quarter explains this result.

• Worldwide net cash flows into investment funds turned negative during the third quarter, registering net outflows of EUR 104 billion, compared to net inflows of EUR 147 billion in the previous quarter. This turnaround came on the back of strong net withdrawals from long-term funds.

• Long-term funds (all funds excluding

money market funds) experienced net outflows during the quarter of EUR 58

billion, compared to net inflows of EUR 206 billion in the second quarter.

albeit at a reduced level, during the quarter (EUR 7 billion compared to EUR 70 billion in the previous quarter).

flows to register net outflows of EUR 79 billion during the third quarter, compared to net inflows of EUR 16 billion in the previous quarter.

EUR 32 billion in the previous quarter. On the other hand, Europe experienced reduced net outflows from money market funds totalling EUR 5 billion, compared to net outflows of EUR 30 billion in the second quarter.

• At the end of the third quarter of 2011,

assets of equity funds represented 36 percent and bond funds represented 22 percent of all investment fund assets worldwide. The asset share of money market funds was 19 percent and the asset share of balanced/mixed funds was 11 percent.

• Balanced/mixed funds also experienced a

turnaround in net sales during the quarter to register net outflows of EUR 14 billion.

• Net outflows from long-term funds

amounted to EUR 78 billion in Europe and EUR 13 billion in the United States during the quarter.

• The market share of the ten largest domiciles in the world market (excluding non-UCITS) were the United States (47.9%), Luxembourg (9.2%), France (5.8%), Brazil (5.7%), Australia (5.4%), Ireland (4.1%), Japan (4.0%), Canada (3.5%), United Kingdom (3.2%) and China (1.3%).

• Money market funds experienced reduced net outflows during the third quarter of EUR 46 billion, compared to EUR 59 billion in the second quarter of 2011. The United States registered increased net withdrawals of EUR 42 billion, up from

EFAMA is the representative association for the European investment management industry.

T he Co ok I s l a nd s

CEO of the Cooks Islands Financial Services Development Authority (FSDA), Jenner Davis brings the spotlight onto the many merits of this South Pacific IFC

A leading international finance centre for thirty years, the Cook Islands is ideally suited for today’s wealth management and corporate planning. Located in the South Pacific, northeast of New Zealand, east of Tahiti, and south of Hawaii, the country comprised of fifteen islands and 17,000 people boasts an ideal location and a global client reach for its legal and financial services. Part of the British Commonwealth, the Cook Islands has a stable Parliamentary system of democratic government. Popular with clients of countries with a Common Law legal system, the jurisdiction also attracts an increasing number of clients from Civil Law jurisdictions due to the country’s strong legislation related to international financial services. Close ties with New Zealand allow the Cook Islands access to the New Zealand judiciary from which it draws its judges in the High Court. This ensures a sophisticated and fair justice system providing confidence to the corporate entities and individuals who use the international financial services of the jurisdiction.


The first country to create legislation allowing for modern asset protection trusts, the Cook Islands is known for its innovative services and ability to respond quickly to changes in and demands from the global

the Cook Islands is known for its innovative services and ability to respond quickly to changes in and demands from the global market market. The International Trusts Act was amended in the late 1980s to allow clients a stronger platform for their estate planning. It allows clients to avoid both probate and forced heirship rules. The legislation also allows for a variety of trust arrangements such as dynasty, purpose, and charitable trusts.

Asset protection features have long been the norm for United States and European clients. As wealth levels increase in other countries, such as China, the level of regulatory oversight increases and many countries are adopting US-style legislation to cope with the newly acquired wealth of its citizens. This has resulted in increased demand for wealth protection and preservation offered through Cook Islands entities. Cook Islands advisors work closely with clients’ existing advisors to create a structure that meets the regulations of the home country while at the same time providing clients with the means to grow, protect, and enjoy the results of their successes for many generations to come. Key provisions related to asset protection include a two year statute of limitation in which a creditor may bring an action of fraudulent transfer against a trust. Cook Islands courts do not enforce foreign judgments and creditors must prove they have exhausted their possibilities for relief elsewhere. Creditors must prove fraud using the higher burden of proof standard of “beyond a reasonable doubt”. Settlors may retain certain controls and foreign bankruptcy is specifically excluded. The Cook

The professionals in the Cook Islands are highly regarded within the global industry. As a result, clients tend to use the Cook Islands for services beyond their trusts. A Cook Islands Trust is typically one part of a client’s overall wealth and estate plan. While traditionally thought to be ideal for physicians and other professionals, trusts are largely used by closely held business owners who are combining their personal planning with corporate and succession planning for their business. This has led to demand for limited liability companies.

In 2008 the Cook Islands enacted the Limited Liability Companies Act. Drawing on the strong features of jurisdictions like Delaware, the Cook Islands strengthened its LLC Act by limiting a creditor’s remedy to a charging order. As with trusts the Cook Islands does not enforce foreign judgments against the LLC or its members. In addition to trusts and LLCs the Cook Islands offers International Companies and International Partnerships. Legislation also allows for various insurance services and the jurisdiction maintains access to premium banking services through relationships with international banks. Trust companies also provide a wide array of administrative services to allow centralised and efficient operation of client structures. The jurisdiction also has a strong Maritime Registry with representatives in countries all over the world, including China. As the client composition of the jurisdiction continues to diversify, the integration of multinational wealth and corporate services in an international best practices framework strengthens the quality of industry work. Market diversification and increasingly global clients have moved the Cook Islands to increase its service offerings to better capture client work. Known for its innovative and swift response to market demand, the Cook Islands will in 2012 create new legislation allowing for Foundations, Captive Insurance, Mutual Funds, and Segregated Companies. Foundations are geared towards clients in Civil Law jurisdictions who are not as comfortable or as familiar with a Trust. The legislation seeks to avoid deficiencies in similar legislation in other jurisdictions while at the same time incorporating the

asset protection benefits of the International Trusts Act. Unlike a trust, a foundation is a distinct legal entity, managed by a council of members. Assets are administered through contractual principles. The legislation includes clear provision for termination and dissolution of foundations, whilst the transfer of existing foundations into and out of the Cook Islands is also allowed for in the legislation. Such provisions will allow clients both flexibility and stability in their wealth planning.

Captive Insurance legislation is born out of the need to fill a gap in the AsiaPacific region for a world-leading full service captive domicile. The legislation will allow for the full suite of captive insurance options: Pure Captives, Group Captives, Captive Associations, Incorporated Cell Captives, Protected Cell Captives. Existing client markets are comfortable with insurance services and the Cook Islands becomes a new option for their captive work. New client markets are not as comfortable with insurance but are finding themselves in need of the services.

the Cook Islands will in 2012 create new legislation allowing for Foundations, Captive Insurance, Mutual Funds, and Segregated Companies These clients are looking to the Cook Islands to assist in educating about options as well as providing the level of service clients have come to depend on from the Cook Islands service providers. With the recent changes in the global banking environment, the Cook Islands finds itself ranked very highly for its regulations and oversight of the financial industry. 2012 will see continued amendments to

legislation that ensure the Cook Islands remains a leader in regulatory benchmarks while at the same time encouraging growth of sophisticated client services. Long recognised as a leader in financial services, the Cook Islands has remained relatively small in terms of service providers with operations there. With an increased profile in Asia, the Cook Islands welcomes reputable service providers to expand their operations. To encourage this expansion, the Cook Islands allows for Managed Trustee Companies whereby global providers can

have the benefits of the Cook Islands legislation by partnering with local expertise. With a supportive government and proactive industry, the jurisdiction has been able to maintain its sophisticated legal and financial services at competitive prices and, most importantly, with an outstanding level of service. With its strong history of innovative legislation, responsiveness to client needs, and sophisticated service expertise, the Cook Islands is positioning itself as a stronger player in the ever-evolving global financial services industry. Committed to a best practices regulatory framework, the Cook Islands will continue to expand its service offerings. Conveniently located between the world’s two superpowers the Cook Islands provides a full range of corporate, trust and financial planning services in a globally advantageous business environment. Whether you represent large corporations, closely held businesses, family offices, or individuals, you will find everything you need in the Cook Islands. Stability. Innovation. Service.

Photo - kwest/

Islands is regarded as having the strongest asset protection features in its trust legislation.


Photo - kwest/


Asset Protection and More in the Cook Islands When it comes to wealth planning and corporate management the Cook Islands can point not only to political and economic stability, but also to a strong pedigree of the public and private sectors working closely and efficiently together towards a common goal. In addition, it can boast a geographical location offering ready access to the world’s prime emerging market of China which is now driving global growth as the international power base shifts. Moreover, it adopts a proactive position on the compliance front and has a legal system based on English law, a well respected regulatory framework manifested in the form of the FSC, an extensive skilled labour pool of qualified professionals, as well as forward thinking and business-enabling legislation. Yet, the Cook Islands is perhaps most widely associated with offering the strongest form of asset protection worldwide via its asset protection trusts, the origins of which can be traced back to pioneering 1980s legislation. The globalisation of people’s businesses and families ensures these are relevant to both emerging markets where wealth levels are rising rapidly and citizens are naturally looking to preserve and protect their new wealth, as well as to traditional US markets. Key aspects of asset protection trusts include the shortened two year statute of limitations


on fraudulent transfers, the bar on claims against a trust that is funded while the settlor is solvent, the heightened burden of proof ‘beyond a reasonable doubt’ on the part of the creditor, the prohibition on recovery in respect of exemplary or punitive damages and the non-recognition of foreign judgements pertaining to transfers to the trust. Moreover, legislation such as the LLC Act 2008 acts to provide additional certainty to the use of LLCs in asset protection planning.

The Cook Islands is a jurisdiction with clear distinguishing characteristics that nonetheless manages to comply with the prevailing winds of the day The Cook Islands is a jurisdiction with clear distinguishing characteristics that nonetheless manages to comply with the prevailing winds of the day. For a small IFC it punches far above its weight and is constantly expanding is service offering, as evidenced by recent

and imminent legislative changes in respect of foundations and captive insurance, the latter of which is designed to address a gap in the market for a full service captive domicile in the Asia-Pacific region, as well as ongoing developments centred round managed trustee companies, QROPS/ QNUPS, mutual funds and segregated cell companies. In respect of foundations specifically, which are managed by a council of members and considered a distinct legal entity, the Cook Islands has endeavoured to address the needs of those principally based in Civil Law jurisdictions who are seeking a flexible alternative to a trust, yet with comparable asset protection elements. The legislation reflects this, allowing as it does for transfer into and out of the jurisdiction, dissolution and termination. The Financial Services Development Authority (FSDA) has a vision for the sustained growth of the financial services sector in the Cook Islands that encompasses both a diverse service and product offering as well as client base, so ensuring social and economic benefits for the jurisdiction long into the future. Consequently, though not perhaps as well known as some other jurisdictions it certainly deserves to be at the forefront of investors’ minds, constituting as it does one of the world’s premium IFCs.



Zeljko Radojko/

A New Day, A New Dawn

As 29th December 2011 drew to a close Samoa leapt westwards across the international date line in a move expected to amplify further its already enviable IFC credentials. Not only will this enhance business and trade with all of its chief trading partners in the Asia-Pacific region, but in the case of China and Hong Kong the working week has now become much more closely aligned to that of the many HNWIs based there whose fortunes have continued to flourish, whilst others’ have floundered elsewhere across the globe against the challenging economic climate of recent years. The move, after 119 years of Samoa being the last country to see in the day, is widely welcomed by the Samoan business community who have been losing out on two working days a week in their commercial relationships with the likes of China, Singapore, Australia and New Zealand where many Samoan expatriates reside. As an interesting aside, on the tourism front visitors will be able to celebrate the same special day twice by hopping across the date line to American Samoa which is one hour’s flying time away, a move that’s sure to appeal. Although a relatively late entrant into the global IFC fraternity, Samoa has more than made up for time in the intervening period. It has carved out for itself a niche in the thriving banking and trust management sectors, as well as offering a wide range of corporate vehicles encompassing companies,

insurance products, segregated funds and a public, private or professional mutual fund offering. In addition, it enjoys a sound reputation on the compliance front, as evidenced by its region leading white listing from the OECD back in 2009 and its proactive role in a number of international regulatory initiatives.

Samoa leapt westwards across the international date line in a move expected to amplify further its already enviable IFC credentials The International Company arguably constitutes Samoa’s flagship product offering. Its key features are that it can be set up within 24 hours, has a fixed cost of just US$300 regardless of share capital and requires just one director who need not be resident, but may be corporate. In addition, legislation also allows for companies limited by shares, by guarantee or hybrids, and also limited life companies. Regulation and promotion is in the capable hands of the Samoa International Finance Authority (SIFA) headed up by CEO Erna Vaai-Aiono who has overseen the drive to capitalise on excellent pre-existing

diplomatic relations with the regional powerhouse that is China, as evidenced by the opening of a Samoan embassy in Beijing in 2010 allowing for straightforward registration and notarisation of documents, as well as the permitting of incorporation in Chinese. In addition, Samoa has utilised the consistent success of its rugby sevens side at the world-renowned Hong Kong Sevens tournament to leverage relations with the international financial community and investors based in the Special Administrative Region. It is recognised within the jurisdiction that constant innovation in legislation, service provision and the suite of products is essential to maintain Samoa’s status as a competitive player in the global IFC community. Testament to this proactive spirit comes in the form of developments such as the Electronic Transactions Bill allowing for the electronic registration of companies, as well as the recent introduction of a 4G network to meet the expected increase in demand for mobile broadband services, thereby enhancing Samoa’s international credentials in the process. 2012 marks 50 years since Samoa’s independence with celebrations planned throughout the year. Now, Samoa is leading by example, just as back then it constituted the first Pacific island nation to become independent by way of a popular referendum.



Labuan Labuan constitutes Malaysia’s dedicated international financial services centre and has carved out for itself the status as the global hub for Islamic finance, having identified some time ago the rich seam of opportunity in this area. This has been reflected in the levels of activity in the sector during recent turbulent global economic times. In this respect Labuan offers much to interested parties, not least the fact that all Shariah-compliant structures, be they trusts, foundations or funds are able to be applied Islamically. Activity in the sector is governed by the trailblazing LIFSSA 2010 legislation with the jurisdiction set to consolidate its global lead with the introduction of more complex products. To this end a Sharia-compliant captive is expected to be launched in the near future. These noteworthy credentials are further enhanced by investors having access to Labuan International Business and Finance Centre (IBFC’s) own Shariah Advisory Council for endorsement and advice on the likes of Sukuk issuance and listing, takaful and re-takaful, syariah compliant captive structures and Islamic Trusts. Recent legislation and regulation has seen Labuan successfully white listed and brought to the market a host of new products in the trust, captives and estate management sectors such as the groundbreaking Labuan Special Trust. Moreover, the jurisdiction can point to a region-leading DTA network, whilst its location affords it natural status as an investment conduit into China and India.


Labuan is then supremely well placed to take advantage of the explosion in volume of HNWIs in the Asia-Pacific region, having as it does intimate knowledge of the investment requirements of those geographically close at hand and a raft of asset protection, estate planning, legal, investment management, banking and taxation instruments to ensure the jurisdiction represents both a comprehensive and cost-effective option for the sustenance and growth of long-term wealth. Yet, it should be stated that Labuan is not solely focusing its attentions on its own backyard with European wealth managers and advisers also being targeted with a message that outlines the many merits of this truly international jurisdiction.

Labuan is supremely well placed to take advantage of the explosion in volume of HNWIs in the Asia-Pacific region Captive insurance represents one area that Labuan has earmarked for growth during challenging times, and while offered since 1996, new legislation in 2010 both made the administrative aspect more efficient and brought in improved structures to enable captives to be formed via Protected Cell Companies (PCCs). The ongoing boom across many Asian economies, led by the private

sector, has seen the region become the driver of global growth with the result that many Asian corporations are now discovering the benefits of captives. In yet another business-friendly development Labuan licensed entities such as holding companies, banks, investment banks and insurance entities are now entitled to blend the benefits of Labuan domiciliation with a physical presence elsewhere in Malaysia, so affording access to a much wider infrastructure. On the fiscal side of things Labuan is able to point to an immediately tangible tax framework offering the choice to be taxed at either 3% on audited net profits, or alternatively at a flat rate of US$6,500 p.a. for Labuan business activity, while Labuan non-trading activity is not subject to tax at all. Moreover, advance tax rulings on any transaction or arrangement involving a Labuan entity allows for fine-tuning in respect of tax planning. In terms of Labuan’s Progress towards the OECD’s Standard of Transparency and Exchange of Information, Phase 1 of the OECD Peer Review’s assessment on Malaysia, including Labuan, has confirmed that the availability and access of information, including mechanisms for exchange of information for tax purposes are largely in place. This has allowed the jurisdiction to move on to preparing for Phase 2 of the OECD Assessment set to be conducted in the first half of 2013.

DISCOVER OUR TREASURES Labuan - Asia’s Most Complete Financial Centre

Colourful and charismatic, the Rhinocerous Hornbill is among the largest hornbills, and has long been revered by Sarawak’s indigenous Dayak people as the “God of War”. Its long tail feathers still adorn the Dayaks today.

Like the majestic Rhinoceros Hornbill, Labuan is yet another of Malaysia's treasures; known as a safe, business-friendly and well-regulated financial destination, Labuan International Business and Financial Centre is home to a multitude of banks, insurance entities, wealth management structures, partnerships and leasing companies.

business activities which fall within the scope of the domestic Malaysia Income Tax Act pay the headline tax rate of 25%. If these are the kinds of treasure you seek, be assured our range of innovative products and the robust regulatory environment make Labuan IBFC an attractive proposition.

Labuan IBFC leads the way among Asia’s financial centres with innovative products supported by a simple fiscal system and an extensive double taxation treaty network spanning more than 60 comprehensive agreements, making it one of the widest treaty networks in the region.

Labuan IBFC leads in Islamic financial services. The passing of the Labuan Islamic Financial Services and Securities Act 2010, the world’s first omnibus legislation covering all aspects of Islamic financial services, entrenches our position as a global hub for Sharia compliant business.

Our comprehensive and modern legal framework allows for a wide range of products to be offered from Labuan, such as Captive Insurance, Protected Cell Companies for both insurance and fund management, Limited Liability Partnerships, Special Trusts, Purpose Trusts, Foundations and Private Trust Companies.

Labuan IBFC is the only common law jurisdiction in Asia Pacific to offer both trust structures and foundations, recognised in both common law and civil law jurisdictions.

In addition, Labuan now offers an international Shipping Registry which, combined with our banking, leasing and insurance structures makes for a practical one stop centre for international shipping operations. Businesses and investors enjoy a simple tax framework within which Labuan entities carrying on a Labuan Business Activity of a trading nature can opt to pay either 3% on net profits or US$6,500. Non-trading activities are not subject to tax, and other non-Labuan

Banks, Insurance and Takaful entities may locate anywhere in Malaysia, including our vibrant capital, Kuala Lumpur. Certainty and clarity is provided by the availability of advanced tax rulings. Come and discover our treasures for yourself!

LABUAN INTERNATIONAL BUSINESS AND FINANCIAL CENTRE INC. Suite 3A-2 Plaza Sentral, Jalan Stesen Sentral, KL Sentral, 50470 Kuala Lumpur, Malaysia Tel: +603 2773 8977 Fax: +603 2780 2077


Hong Kong Representative Office Suite 1102 11/F, Malaysia Building No. 50 Gloucester Road, Hong Kong, SAR Tel: +852 2527 2318 Fax: +852 2520 2938



Labuan’s Captive Sector David Kinloch, CEO of Labuan IBFC details the jurisdiction’s captive insurance credentials and prospects for the future

Q: How can Labuan’s credentials as a captive insurance domicile best be summarised? A: Setting up a captive is not a complex task, and Labuan International Business and Financial Centre (Labuan IBFC) prides itself on being a business friendly environment for these risk management entities. The jurisdiction has been offering captives since 1996 and has developed a robust fiscal and regulatory environment surrounding them. This coupled with available expertise, competitive costing and sophisticated regulation has attracted numerous captives to establish their risk financing entity in Labuan IBFC.

New legislation introduced in 2010 has greatly streamlined the administrative procedures for captive insurers and introduced improved structures to enable the formation of captives via protected cell companies (PCCs). In addition, Malaysia has long been regarded as the world leader in Islamic finance; to that end Takaful captive vehicles are also on offer in Labuan IBFC.

Q: Asia has been slow to embrace captive insurance compared to other parts of the world. What do you put this down to? What prompted Labuan to enter the captive insurance market when it did? A: Clearly, the growth of captives in Asia is directly related to the growth in the Asian corporations which have blossomed in

tandem with the Asian economies. Asia is now the engine of the world’s growth and Asian corporations have, in the last two decades or so discovered the benefits of setting up captives. Labuan IBFC entered the captive market 16 years ago as we anticipated demand for a regional captive offering then. The current challenging operating environment is the best time to explore the strategy and benefits of a captive insurance structure.

“The industrial sectors the captives represent are tremendously varied owing to the diverse nature of the risk being written” Q: Do you anticipate that future captive business will principally come from the public or private sector in the short and long term? Which industrial sectors are likely to constitute the lion’s share of private business and why? A: The private sector has been Labuan IBFC’s largest participant base and we expect this to continue in line with the private sector led growth in the Asian economies. The industrial sectors the captives represent are tremendously varied owing to the diverse nature of the risk being written, however, it would be safe to assume that petrochemical and airlines are the leading sectors within Labuan’s captive industry.

Q: How does Labuan stand to benefit from the increasing regionalisation of captive insurance? A: Clearly we hope that with the regionalisation of captive insurance more business will be written in Asia directly, providing Labuan IBFC a larger market base. After all it might be more effective and efficient to set up a captive domiciled in Asia for a large Asian based company or a Multinational Company with extensive operations in Asia Pacific.

Q: What is the strategy for competing with established captive hubs such as Singapore and Hong Kong particularly in respect of cost, capitalisation requirements and tax burdens? A: Labuan offers a competitive tax rate which sees captives having the option of paying either 3% on audited net profits or a flat rate of RM20,000 or US$6,500. This option is available at the beginning of every fiscal year, allowing the captive more flexibility in mitigating its tax burden. In addition, the cost of setting up a captive in Labuan IBFC is competitive compared to our regional counterparts and this is true in terms of operational cost, initial set up cost and regulatory costs.

Malaysia has long been regarded as the world leader in Islamic finance, and in the Labuan Islamic Financial Services and Securities Act (LIFSSA), 2010, the world’s first comprehensive piece of Islamic Financial Services legislation. We have

set the framework for Sharia-compliant captives to be established in Labuan IBFC in order to take advantage of the Island’s pre-eminent position in the global retakaful market.

In addition, the Labuan Financial Services Authority now permits Labuan licensed insurers (including captives) to co-locate to Kuala Lumpur and have full service operations there, subject to the concomitant availability of information in Labuan, which may be satisfied via the services of a licensed insurance manager.

Q: Do you see a correlation between current global economic woes and the rise of the captive insurance sector where companies are being afforded a clear opportunity to address cost pressures? A: Definitely. Setting up a captive provides cost savings for the corporation in question so clearly the industry has been and will continue to enjoy respectable growth. Some of the savings a corporation can look forward to include: •

Quantifiable savings generated from the use of sound risk management techniques within the corporation. Insurance premiums saved by the selfinsured retention of risk at operating levels within the corporation, thus avoiding ‘dollar swapping’.

The creation of profit by reduction of insurance or reinsurance costs via the captive.

The self-insured retention of esoteric risks by the captive.

The use of the captive to retain earnings for use within the corporation.

The creation of profit by investment of the assets of the captive.

Savings generated by the use of the captive for more effective tax planning.

Q: Where do you perceive the principal challenges to the continued growth of Labuan’s captive sector will come from? A: The principle challenge is creating enough awareness in the region with regards to the benefit of captives and the unique advantages a Labuan captive has to offer. Towards this, last year alone we participated in 11 events globally with the aim of reinforcing this message. Our in-house corporate insurance advisor also attends one-on-one meetings detailing the benefits of a Labuan captive and assisting in technical issues which might arise in the process of setting up the captive or other insurance related entities.

“Generally, if the total amount of premiums paid by a company exceed USD$1 million a year then that organisation would do well to set up a captive” Q: In respect of identifying innovative new lines of business, Labuan recently enhanced its already noteworthy Islamic finance credentials by announcing plans to launch a Sharia-compliant captive. Has interest shown matched expectations? A: It is still early days and I believe Sharia lawyers are in the midst of drafting the terms of reference and the parameters towards setting up Labuan’s first sharia captive. Clearly, this particular form of captive is nascent, however I am confident that Labuan’s first Sharia compliant captive will be licensed in the not too distant future.

Q: Is there a ‘right time’ for an organisation to establish a captive? A: The establishment of a captive requires a business to consider firstly what their risks are, then to determine what risks are tolerable, what risks are transferable, what risks need treatment and potentially there may be some risks that should be terminated. Once this has been determined a captive can be structured to deal with the risk financing strategy the organisation has evaluated to best deliver the right outcome for them.

Clearly the organisation must have a sizeable and varied insurance requirement across its subsidiaries in order to justify setting up a captive. Generally, if the total amount of premiums paid by a company exceed USD$1 million a year then that organisation would do well to set up a captive.

Q: Are you satisfied with Labuan’s performance to date in the captive sector? Have you set a yardstick for ‘success’ in terms of volume of business? A: Yes, we are pleased with the growth in captives and continue to market actively; highlighting our low fee base, ease of administration, in-depth technical knowledge and geographic proximity in Asia. In addition, the introduction of Protected Cell Company legislation within the Labuan Companies Act 1990 places Labuan on a par with leading captive jurisdictions in terms of its offering.

Labuan IBFC is already home to nearly 200 captive, insurance and reinsurance companies registered in Labuan including a number of Lloyd’s syndicates and we are confident that we shall continue to enjoy growth in this sector.

Profiles Pal Teravagimov/

African Queen

Botswana is one of the world’s fastest growing tax efficient hubs. It enjoys political stability with strong and proven anticorruption measures, and can point to expert fiscal administration and a sound regulatory environment. It has significant natural resources and a market-oriented economy that lends itself to private enterprise. Botswana has embraced international regulations and frameworks, not only by being a signatory to such pillars as the Basel Statement of Principles, the IMF Financial Action Task Force (FATF) and the UN Geneva Convention, but also through the Botswana IFSC, which describes its framework as providing for ‘full transparency, applying a complete information exchange programme through a double taxation treaty network and requiring the establishment of genuine and substantive economic activity in the country.’

Achim Baque/

The double taxation treaty network referenced encompasses not only its near African neighbours, but also the likes of India, Russia, the UK and France.

facts go a long way to explaining Botswana’s status as a popular tax-efficient conduit into the wider African region and beyond.

The country can point to one of the world’s highest economic growth rates over recent years

In international financial services terms Botswana’s specialities include an exhaustive range of banking services and the establishment, domiciliation, and management of Pan-African investment funds. International insurance is another key area, having been identified as a strategic growth sector. Here, the International Insurance Act and Regulations allow for many cross-border activities including re-insurance, life assurance and captive insurance. Meanwhile, Botswana’s flagbearing business entity is the International Business Company (IBC) which is often structured in the form of an investment holding company or regional headquarter operation.

In Botswana there are no prohibitions on foreign ownership of companies, while being registered with the IFSC affords access to a reduced corporate tax rate of 15 percent and exemptions from VAT, capital gains tax, withholding tax and foreign exchange controls. In addition, there is a choice of currency denomination affording protection against exchange rate linked losses. These

The country can point to one of the world’s highest economic growth rates over recent years with government predictions for growth at 4.4% for 2012 against still challenging global economic conditions.

Ambitious Anguilla Anguilla boasts an extensive portfolio of products and services in the mutual funds, trusts and company formation arenas. Of particular note is the jurisdiction’s status as the 5th largest and fastest growing captive domicile in the world, as well as its recent move into the foundations arena. Ongoing administrative changes to the Registry (which themselves reflect the strong continuing government support for the financial services sector) have brought in additional resources thereby enhancing efficiency, yet have not affected its reputation for keen pricing, nor its separate commercial status from the FSC. This has resulted in the maintenance of Anguilla’s competitive advantage, which when combined with the firm yet flexible prevailing regulatory environment allows it to continue to woo the private sector


The US think tank Heritage Foundation’s 2012 Index of Economic Freedom saw fit to rank Botswana as the 33rd freest economy in the world. In credit terms, S&P ranks Botswana as ‘A-’ and ‘stable’, and this against a background of public spending due to falling mineral revenues caused by the global recession, thanks to a still strong public sector external balance sheet.

Anguilla is set to diversify into areas ranging from aircraft and yacht registration to business name registration aided by its ratification of the Berne convention.

Anguilla is set to diversify into areas ranging from aircraft and yacht registration to business name registration aided by its ratification of the Berne convention Furthermore, it is successfully courting emerging markets through its pool of

worldwide agents with particularly high volumes of trade with areas of South America and Taiwan, while increased promotional activity is affording the jurisdiction the opportunity to properly target the key BRIC marketplace, assisted by the offer of multilingual companies. Ongoing upgrades to the Acorn online registry have seen it re-written and streamlined so as to provide compatibility with all principal browsers, to offer the ability to conduct transactions on iPhone and Android, and to register foundations. There are plans to license the software to other jurisdictions, and this is likely to consolidate Anguilla’s status as an industry leader in the provision of 24 hour online company registration and associated services.

Anguilla British West Indies

British Overseas Territories: Same Regulatory Oversight



� Accessible � Efficient

Turks and Caicos

� Competitive


British Virgin Islands Anguilla Montserrat

More Accessible:

Contact the Registrar or Director of Financial Services directly Financial Service:

More Efficient:

ACORN online Corporate Registry Electronic Filing 24 hours / 7 days per week / 365 days per year

More Competitive:

Free continuance into the jurisdiction and one low fee for incorporation and annual returns regardless of share capital.

Anguilla Commercial Online Registration Network “The future is online” For more information please visit or contact: Commercial Registry - PO Box 60 - The Secretariat The Valley - Anguilla BWI. Tel.: 1 (264) 497-3881/5478 - Fax: 1 (264) 497-8053 - email:

British Virgin Islands (BVI) The British Virgin Islands International Finance Centre (BVI IFC) outlines key developments and flagship initiatives pertaining to the jurisdiction and explains why it has become a global hub for trust formation.

Q: The BVI IFC now undertakes regular tours to the Asia/Pacific region taking in locations including Singapore, Hong Kong, Shanghai and Mumbai, yet also recently undertook a European tour to the likes of Zurich and Luxembourg to discuss the advantages of conducting business in the Territory and focusing specifically on succession and planning opportunities using BVI trusts. How important are traditional markets such as Europe and the US when considered against the very clear opportunities evident in booming emerging markets? A: Due to BVI vehicles being used worldwide our business originates from financial centres around the world, with emerging markets a particular growth area for us. However, though we work with professional intermediaries in Hong Kong, Singapore, India and Brazil, traditional markets such as Europe and the US remain a key focus for us due to their importance as centres for global wealth. Q: In respect of trust formation can you outline why VISTA trusts, as legislated for by the VISTA Act 2003 are held in such high regard by trust and estate practitioners worldwide, which applications they are particularly suitable for and how they have helped to consolidate the BVI’s position as the location of choice for international trusts and operations? A: VISTA has consolidated the BVI’s position as the location of choice for international trusts and a substantial number of VISTA trusts have been set up by settlers from all over the world to hold assets worth many billions of dollars. VISTA has been acknowledged by trust and estate practitioners and other international experts to provide one of the most modern and coherent pieces of trust legislation globally.

VISTA allows owners of BVI company shares to create a trust of their shares under which detailed corporate governance rules may be provided, and this has proven particularly popular with wealthy families that wish to structure ownership and

The BVI Commercial Court

control of companies for business succession planning purposes.

showing sufficiently strong adherence to new global regulatory and supervisory standards on international cooperation and information exchange, whilst there has been recognition from the OECD that the BVI is ready to move to the next phase of its Peer Review Programme. Have the actions undertaken to ensure such positive results come at a cost in terms of lost business. If not, what do you put this down to?

The Territory’s Private Trust Company (PTC) legislation, together with the continued popularity of VISTA ensures that the BVI is able to provide a full suite of trust structures to suit international demand.

Q: What was the motivation behind the BVI introducing legislation permitting the establishment of private trust companies in August 2007 which exempted private trust companies fulfilling the requirements of the new legislation from requiring a licence to act as trustee? A: The implementation of the Financial Services (Exemptions) Regulations in August 2007 clarified the circumstances under which a BVI private trust company (or PTC) must be licensed, and further enhanced the BVI’s international reputation for trusts and estate planning products - with VISTA purpose or charitable trusts being ideally suited to holding shares in PTCs. The PTC legislation, together with the continued popularity of VISTA ensures that the BVI is able to provide a full suite of trust structures to cater for international demand. Q: The Financial Stability Board recently included the BVI on its list of jurisdictions

A: The BVI has a reputation for high standards of transparency and excellence in regulatory affairs, and it is that combination which has ensured that funds, trusts, company formations, captive insurance, shipping and other areas in which the territory excels continue to confirm the Jurisdiction as an attractive place in which to do business.

The BVI’s financial landscape is built on the premise that jurisdictions that are committed to working to ensure businesses have the maximum opportunity to thrive within the correct legislative framework will be the ones that will help lead the world into a new era. The BVI’s International Finance Centre is committed to keeping the Jurisdiction at the forefront of the world’s financial centres. The Jurisdiction has always set the highest standards of transparency, regulation, collaboration, enforcement and cooperation, as this has always been a key part

of our strategy for retaining our competitive edge.

The BVI will continue to strike the right balance between meeting the business needs of the international financial community, and maintaining sound regulatory policies. With such a commitment, the BVI will ensure that it is playing its part in ensuring that the world’s recovery from the recent downturn continues to gather pace.

financial centres is keener than ever, but the British Virgin Islands has many strong arguments to attract clients from all over the world. Alongside the strengthening and deepening of relationships with existing clients, our aim at the BVI International Financial Centre is to reach out, in partnership with members of the private sector, to new markets that could benefit from access to BVI services.

Q: What benefits does British Overseas Territory status bring to the BVI in respect of courting investors? A: The importance of the BVI as a British Overseas Territory is maintained by the fact that our language is English and our business is based predominantly on English law. English law is well known worldwide and in fact, it is this basis in law which has allowed the popularity of our financial services offering to grow so far and so fast.

The BVI has a reputation for high standards of transparency and excellence in regulatory affairs

We have a diversified financial services sector with BVI vehicles well known worldwide, easy to use and supported by robust and fair regulations, an efficient and effective regulatory environment, stable government and quality infrastructure. We have seen strong growth in the areas of trust and estate planning, mutual funds and captive insurance. As a result we have continued to see constant and healthy levels of business in the BVI and this is due to the strength of our product and our adherence to international regulatory standards.

Q: Recent statistics point to an increase in the number of new funds registering in the BVI whilst trends show an increase in new fund activity by start-up fund managers. How has the BVI found it possible to continue to attract business and maintain the fundamental health of its financial institutions against the backdrop of the global financial crisis when some other jurisdictions have been left floundering? A: The BVI is the second largest jurisdiction in the funds space with over 3,000 open ended funds recognised or registered with the BVI’s Financial Services Commission (“FSC”). The BVI has a nimble approach to providing fund services as confirmed by the amendments made to its funds regime by the recently enacted Securities and Investment Business Act, 2010 (“SIBA”) and it is this that has helped it maintain its competitive edge.

Competition between international

In our efforts to develop and extend contacts across the world, it has been gratifying to observe increasing interest in the BVI, as exemplified by the Jurisdiction’s position as the world’s foremost incorporation domicile as well as a leading centre for fund services. Our global appeal is down to a combination of a sound and business friendly platform of legislation with flexibility and user friendliness.

Finance Centre had begun to attract top English litigators to be admitted to the BVI Bar and the establishment of the Court has enhanced the appeal of practicing here. Several renowned English silks have been admitted to practice, appearing in matters ranging from heavily contested insolvency applications to aggressively defending shareholder disputes. The Court is generally accepted to be a significant adjunct to what is marketed as the BVI Advantage in that it provides a solid underpinning for the Jurisdiction’s financial services sector, providing an additional pillar on which the reputation of the BVI as a premier International Financial Centre can proudly stand. Q: It has been argued that the BVI has been a pivotal factor in the successful development of the modern Chinese economy. Is this a fair assessment? A: The BVI is currently the second largest inbound investor into the People’s Republic of China behind Hong Kong. The BVI is used for inbound and outbound investment by Chinese investors. The composition of Chinese investors utilising the BVI is particularly important with Chinese state owned enterprises and sovereign wealth funds using BVI vehicles for investment purposes, along with domestic investors who simply wish to use BVI vehicles for personal holding company purposes.

Besides competitive pricing, flexible legal structures, market understanding and knowledge of the BVI and its products, the BVI has a lot to offer Chinese investors in particular. BVI private trust companies continue to grow in popularity as wealthy Asian families begin to address the need to structure control and ownership of their family wealth for business and succession planning purposes and VISTA has been particularly useful in facilitating this. This trend is likely to continue for some years to come as first, second and in some cases third generation family wealth is transferred to succeeding generations.

Finally, since 2009 BVI companies have been able to list on the Hong Kong Stock Exchange and as a result we have seen interest amongst Asian investors who have utilised BVI corporate structures. There is now no reason for such structures to use holding companies from other jurisdictions simply to enable them to come to the market in Hong Kong.

This is the product of a close and long standing relationship between the private sector and public bodies, including the regulator, the BVI Financial Services Commission, that has helped build a reputation for innovation that is a key competitive advantage in the global marketplace and enabled the financial industry to thrive even under adverse global economic conditions.

Q: How has the establishment of a commercial court helped enhance the reputation of the BVI as a leading IFC? A: In the two years since the Commercial Court’s establishment, it has proven to be an exceedingly attractive feature of the BVI’s profile as a premier International Financial Centre and since its inauguration it has presided over more than 350 applications.

Even before the advent of the Commercial Court, the importance of the BVI as an International

Andrea Haase/


Global BVI

These developments clearly illustrate international recognition of the BVI as a well regulated and business friendly international finance centre, and one that is proactive in complying with international regulations, manifested through its extensive number of TIEAs where it has also ensured that the appropriate legislative framework is in place to be able to fulfil its obligations in this regard. On the funds front the BVI is the second largest jurisdiction with over 3,000 open ended funds recognised or registered with the BVI FSC. It is enlightening to note that there has been an increase in the number of new funds registering in the BVI as the market has begun to regain confidence with investors looking to redeploy some of their investment capital. Trends also point to a further increase in new fund activity by start-up fund managers. The BVI presents itself as a truly global IFC. To this end it proactively engages with both traditional US and European markets, as well


as emerging Asia/Pacific and Latin American markets where it is increasingly popular with the ever-growing volume of HNWIs in these regions, and where it acts as an essential conduit for FDI into locations such as China. This engagement is evidenced in the regular tours to Singapore, Hong Kong, Shanghai and Mumbai, as well as the recent European Tour to the likes of Zurich and Luxembourg to discuss the advantages of conducting business in the Territory and focusing specifically on succession and planning opportunities using BVI trusts.

Pertinent legislation has helped to consolidate the BVI’s position as the domicile of choice in a number of areas Pertinent legislation has helped to consolidate the BVI’s position as the domicile of choice in a number of areas, not least in the field of trust formation where the VISTA Act 2003 is held in high regard by trust and estate practitioners worldwide ensuring it has become a prime location for international trust settlements and operations. In addition, the Anti-Money Laundering Regulations 2008 and the Anti-Money Laundering and Terrorist Financing Code of Practice 2009 both reflect the jurisdiction’s willingness to embrace transparency. It is perhaps the Securities and Investment Business (SIBA) Act 2010, however, that constitutes the most noteworthy recent legislative development, establishing as it does the right legal and regulatory framework for institutions,

managers and investors. Responsibility for reviewing the Act and related legislation falls to the SIBA Advisory Committee which is in a position to recommend any necessary changes to ensure it remains fit for purpose. Factors such as BVI’s political and economic stability, its British Overseas Territory status, its legal system based on English law, the absence of exchange controls, the well respected regulatory framework, extensive skilled labour pool of qualified professionals, forward thinking and business-enabling legislation and strong pedigree of the public and private sectors working closely and efficiently together towards a common goal all act to affirm the jurisdiction’s leading IFC status.

Slavik Krassovsky/

BVI constitutes one of the world’s preeminent IFCs with some 450,000 companies registered. Yet, success has not come at the expense of compliance. The Financial Stability Board recently included the BVI in its list of jurisdictions showing sufficiently strong adherence to new global regulatory and supervisory standards on international cooperation and information exchange. When combined with the OECD’s recognition that BVI is ready to move to the next phase of its Peer Review Programme and the IMF’s assertion that the global financial crisis had not affected the health of BVI financial institutions, it isn’t hard to see why BVI seems to have all bases covered.

Brian A Jackson/


Jamaica Renews Commitment to Join IFC Fraternity

The new Government of Jamaica has re-committed to the development of an international financial services centre. Minister of Industry, Investment and Commerce Anthony Hylton has said he is fully behind the plans given that they represent the opportunity to generate increased business flow for the country, with estimates pointing to potential government revenues from the project coming in at anywhere between US$30 million to US$300 million p.a. Foundations for the project were put in as long ago as 2007 by Former Minister without Portfolio in the Finance Ministry, Senator Don Wehby who identified the Kingston waterfront as the ideal hub of operations for the IFSC. Legislation was originally passed in Parliament in 2010 to establish the Jamaica International Financial Services Authority (JIFSA), the mandate of which is to market and promote Jamaica as a centre for international financial services and to enhance the jurisdiction’s reputation as a centre of excellence for the provision of those services. To this end the JIFSA Act was passed in February 2011 with a committee thereafter focusing on drafting the new laws necessary for the IFSC to begin operations. A change at the top of Jamaican politics late 2011 sees a new committee set to be appointed to

oversee the final stages of the IFSC at time of going to press. After much analysis Jamaica is set to pitch itself as a mid-value IFC meaning it won’t restrict its offering to company incorporation, rather committing to provide sophisticated high value services. Existing strengths include a can-do international business culture and pedigree, advanced telecoms and IT infrastructure and deep pool of highly-trained bankers, accountants, lawyers and other professionals well versed in international finance. From an employment perspective, whilst creating several economic opportunities for these Jamaican professionals the IFSC will also likely create linkages with other domestic sectors such as tourism.

While Jamaica may be ‘the new kid on the block’ in IFC terms, this could work to its advantage Senator Wehby had previously offered reassurance to regional interests by clarifying that Jamaica, being the signatory of a 1986 Tax Information Exchange Agreement with the U.S., has no intention of setting up a tax

haven or any facility for money laundering. Rather, the aim is to service niche markets such as international ship registration, regional headquartering of financial institutions, services in sports, entertainment and copyright financing and treasury management. Other services being considered relate to captive insurance, international holding companies, shipping and aviation registry, and international trusts and partnerships. Moreover, in the medium to long term international banking services and private equity and mutualfund products are likely to be included in Jamaica’s portfolio. While Jamaica may be ‘the new kid on the block’ in IFC terms, this could work to its advantage since it arrives on the scene with no baggage. Its more mature counterparts meanwhile, have to deal with constant, and some would argue over-zealous surveillance pertaining to their activities and likely look enviously upon Jamaica’s blank canvas. The jurisdiction has the capacity to start as it means to go on, distanced from any lists and well placed to pick up business that has fallen off from other jurisdictions pressured into amending existing preferential legislation to comply with new international rulings. Jamaica has the added dual benefit of being in close proximity to key North American markets, as well as being able to point to strong historical ties with the UK.


Kassia Halteman/


IFCs and Latin America: Transparency and Efficiencies

By Grant Stein, Chairman, Walkers’ Global Latin America Group It is clear from recent visits to Latin America that a growing appreciation is building of the many benefits that International Financial Centres (IFCs) such as the Cayman Islands can bring to cross-border financial transactions, such as private equity investments, capital markets deals and securitisations. The flexibility and efficiencies that IFC structures from jurisdictions such as Cayman, the British Virgin Islands, Jersey and Ireland bring to transactions can make a crucial difference, particularly where international investors are sizing up opportunities from growth markets all around the world. The capacity to establish companies quickly at low cost are important factors to take into account. These advantages sit alongside the ability to create an enhanced bespoke corporate governance structure, giving effect to agreements reached between joint venture partners, with sophisticated creditor protections built in. While market participants in Latin America are unsurprisingly keen to understand further how they can profit from IFC structures, international policymakers are also becoming increasingly aware of the benefits that IFCs, both small and large, provide to emerging market economies. Despite the many misconceptions which exist regarding IFCs, there is a rich body of


academic research which highlights how IFCs have enhanced economic growth and reduced poverty in developing nations.

international policymakers are becoming increasingly aware of the benefits that IFCs, both small and large, provide to emerging market economies For Brazil in particular, the use of a blacklist of IFCs which charge lower rates of corporation tax, creates a significant barrier to entry and greater inefficiencies when constructing transactions. This threatens to constrain the domestic rate of growth and increase unemployment, just at the time when Brazil is firmly at the front of global investors’ attention. In late 2009, along with my counterparts at some of the other major offshore law firms in the principal IFCs, I helped to establish the International Financial Centres Forum (IFC Forum), in order to provide a central resource for balanced and authoritative

information about IFCs. A website has been established (, where you will find many examples of the academic research referred to above. The group has also held meetings with a number of G20 government representatives with a view to informing them of the benefits capital flows through IFCs can bring to their domestic economies. The issue of transparency regarding tax information is critical to the Cayman Islands and the other major IFCs – and has been for many years. The Cayman Islands currently has 27 Tax Information Exchange Agreements in place, including the recently signed agreement with Argentina, while discussions continue with a view to establishing an agreement between the Cayman government and Brazil. Greater communication and cooperation between the leading IFCs and financial regulators in Latin America, as well as a greater understanding of the activities of IFCs such as the Cayman Islands and the BVI, will undoubtedly result in benefits for all participating in these markets. If these benefits can be realised in terms of higher growth rates, more employment and increased investment into Latin America, the region will be better placed to make the most from its current position in the international spotlight.

CIMA: After Strong Year of Cayman Captive Formations, Good Potential for Growth in 2012

“While conditions in the international marketplace have been challenging to the formation of captives over the past several years, there continues to be solid interest in the Cayman Islands that translated into a 52% increase in captive formations in this jurisdiction in 2011,” said CIMA’s Managing Director, Mrs. Cindy Scotland. CIMA ended 2011 with 739 captives and 632 segregated portfolios. Cayman continued as the leading jurisdiction for health care captives. This was the primary line of business for 256 companies (35% of the total). Workers’ compensation remained the second largest line of business with 161 companies (22%) providing this as their primary type of risk insured. The 739 active captives as at 31 December comprise the following: 419 pure captives (57%), 124 segregated portfolio companies (17%), 75 group captives (10%), 52 association captives (7%), 36 special purpose vehicles (5%), 32 open market insurers (4%) and one rent-acaptive. This year has begun with promise. For the first month of 2012 CIMA’s Insurance Division processed five new captive licence applications and in the first week of February another four applications were in initial stages of processing.

Globally, the captive market has been soft. Among the factors that have placed a downward pressure on captive formation across jurisdictions since the credit crisis have been the generally low investment returns for all types of investments and fears of another recession, coupled with the availability of commercial insurance at very low rates.

CIMA ended 2011 with 739 captives and 632 segregated portfolios Mr. Gordon Rowell, Head of Insurance at CIMA, commented: “In some cases this has dampened corporate sponsors’ motivation to take on the expense of setting up a captive in order to self-insure. Nevertheless, industry

players know the value of captives as a major part of organisations’ risk management strategy. The industry has established a track record for robust risk management and in recent years captives and insurance managers have been quite efficient at maximising value despite the soft market. “Given these factors, captive sponsors are seeking the greatest efficiencies and the choice of domicile for a captive becomes critical in achieving this value,” Mrs. Scotland added. “The Cayman Islands has fared well because of a number of advantages. Captive participants have told us that in addition to the expertise of local service providers who have built up specialisation, especially in the area of health care captive structuring, the jurisdiction is very cost competitive, the process for establishment of the captive is efficient, and the legislative and regulatory framework is stable and robust.” Huebi/

Following the licensing of 38 new captive insurance companies during 2011 and a good start in 2012, the Cayman Islands Monetary Authority (CIMA) anticipates net growth in the sector this year.

Holger W./


Cayman Islands national flag



Jayne Chapman/

Cayman Islands Insurance Law

1 March 2012 The process to update the Insurance legislation of the Cayman Islands has been ongoing for some time now. The Insurance Law 2010 has long been published but has not yet been brought into force. The delay has been due to ongoing work preparing the supporting regulations that will be the ‘nuts and bolts’ of the new insurance regulatory regime (the ‘New Law’). The New Law encompasses recommendations from international organisations together with those of the local insurance industry. It is expected that additional clarity, predictability and proportionality will be the result of this legislative initiative once enacted.

Licensing One key change to be brought about by the New Law is to allow greater differentiation between the various activities that are characterised as insurance business and which are subject to licensing by the Cayman Islands Monetary Authority (CIMA). The objective is to enable more proportionate, realistic and sensibly calibrated regulation of each relevant activity, accounting for the nature of the business-market expectations as well as relevant structural considerations.


Accordingly, two new classes of licensee are created under the New Law: cat-bond issuers or special-purpose reinsurers (SPRs) will hold a Class C licence and reinsurers will hold a Class D licence. These are additions to the existing Class A (domestic insurers) and Class B (captive insurers) licences.

The driving idea behind the New Law is regulating entities proportionately having regard for the nature and complexity of the business being underwritten Captives The current Class B licence, which is now dedicated to captives, has been split into three further sub-categories, each distinguished by the proportion of netpremiums written which originate from the insurer’s related business (Class B(i) 95%+ related business, Class B(ii) 50%+ related business and Class B(iii) 50%related business). Capital requirements will vary depending on the sub-class of the

Class B licensee. This sub-division brings more clarity to this category and provides flexibility as regards the type of business a Class B licensee can underwrite. Proportionality (in its widest sense of ‘being in proportion with’) is a key shaping force behind the landscape to be created by the New Law. Captives have long been the back-bone of the insurance industry in the Cayman Islands and the New Law, which reflects the commercial and systemic realities of captive business, caters to existing licensed captives undertaking more traditional captive business but is also designed to accommodate new and more diverse captive arrangements. The driving idea behind the New Law is regulating entities proportionately having regard for the nature and complexity of the business being underwritten.

Special Purpose Insurers The new and bespoke Class C licence has been specifically created for SPRs together with a prescribed form of application. To date applications for authorisation by SPRs have been for restricted Class B licences which were designed for captives, the law however being sufficiently flexible to allow CIMA to license and regulate SPRs. The New Law recognises the structured nature

of such arrangements, and has an inbuilt understanding of how they function in practice and what all participants – sponsor and investor – expect from such transactions. The description of the Class C insurer in the New Law, for instance, specifically references such essential concepts as limited recourse and funding through the issuance of bonds or other instruments or arrangements. This will be the first time that ILS vehicles have been specifically catered for in domestic legislation and shows the Government’s ambition to create more clarity and certainty vis-à-vis the authorisation and supervision of SPRs, to enable the swifter processing of applications, all of which will safeguard the Cayman Islands’ reputation as the main jurisdiction of choice for the location of SPRs.

also allow reinsurance activity under, for example, a Class B(iii) licence, if this were an applicant’s preference. It is hoped that legislative flexibility of this type, and the considered approach of our regulator should support the jurisdiction’s objective of attracting additional reinsurers to the islands. Acknowledging that there is increased interest in the Cayman Islands as a reinsurance domicile, the Government is also committed to facilitating reinsurance set-ups in many respects and is actively engaging with industry in this regard.

Conclusion It is hoped and expected that the New Law will be of benefit to the captive sector, enhance Cayman’s attractiveness and userfriendliness as a jurisdiction for cat-bond structures and will generally facilitate the expansion of the reinsurance sector. Information supplied by Walkers. For more information visit

Reinsurers The new Class D licence is specifically designed for those entities conducting reinsurance business “and such other business as may be approved in respect of any individual licence”. Clearly this definition is broad enough to allow CIMA to consider different types of structures. It should be noted that the New Law would

George Town, Cayman Islands

Captive Advantages

Reduction of government regulations and restrictions - domiciling in a professional, yet flexible regulatory environment, widening investment opportunities and the facilitation of legitimate international movement of funds.


Insuring the uninsurable - provision of coverage either not readily available in the commercial market or priced prohibitively. Cost reductions - reducing expenses such as administration and settlement of claims, loss control expenses, various state and federal taxes, brokerage commissions, and other acquisition costs and consulting fees.

by its conventional insurer, such as separating risk control and claim handling services from the actual purchase of insurance cover.

payment plans. Access to the reinsurance market - accessing directly the reinsurance market which can be less expensive than conventional direct excess and umbrella coverage; there is also the opportunity to reduce costs by combining two or more lines of risk.

Risk retention, risk management and loss control - achieving lower premium by retaining its own risk when a company has a better loss history than its industry average.

Diversification into a profit centre diversifying into open market insurance operations and operating as a separate commercial profit centre, including any profits generated from third party unrelated business.

Cash flow benefits - earning investment income and using more flexible premium

‘Unbundling’ of services unbundling technical services provided

Tax minimisation or deferral - creating the potential to minimise or defer tax payments through properly structured and adequately capitalised captive insurance arrangements. Information supplied by The Insurance Managers Association of Cayman (IMAC). For more information visit IMAC is a non-profit organisation run by the insurance managers of the Cayman Islands. IMAC’s membership includes Associate and Overseas members, comprising not only the Captive Insurance Companies in the Cayman Islands but also the service providers that support the industry both here and in other jurisdictions. The aim of IMAC is to act both as regulatory liaison with the Cayman Islands Government and to promote the Cayman Islands as the domicile of choice for Captive Insurance Companies.


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In Nevis, you can take comfort in knowing that your business will be conducted with the highest degree of efficacy. There are over 60 qualified Registered Agents with expertise in law, banking, finance, tax planning and asset management. To complement this sophisticated professional infrastructure, we are committed to providing a strong regulatory framework, 24-hour incorporations, innovative laws and competitive fees.

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Nevis Financial Services Development & Marketing Department P.O. Box 882, Rams Complex Stoney Grove, Nevis. Phone: (869) 469-0038 Fax: (869) 469-0039 Email: 44



Evolving TCI

(TCI) leads the world for Producer Owned Reinsurance Companies (PORCs) It leads the world for Producer Owned Reinsurance Companies (PORCs), while it is renowned for initiatives such as the Trusts Ordinance which sets out the law relating to trusts, and is marked by allowing for perpetual trusts, as well as legislation which permits individuals to be licensed as fund managers, investment advisers or dealers. Although not enjoying universal support from the jurisdiction’s population, there’s no arguing that the UK governor controlled administration has seen the return of a culture of fiscal discipline where revenues are

rising, public spending has been reduced and where collection is being enforced, such that with unique financial assistance from the UK, TCI has found itself less exposed to the worst ravages of the global economic downturn.   The TCI economic framework has for some time been marked by an absence of exchange controls, as well as personal, inheritance or corporate tax. This prevailing state of affairs has recently received renewed commitment from the government, and is balanced by a parallel proactive and responsive legislative environment. A cornerstone to achieving this is perceived to be the ongoing modernisation of the tax system with VAT likely to be set at 10% when introduced in 2013/14. The TCI government subscribes to the principles of ‘Transparency’, ‘Accountability’ and ‘Responsibility’ and it’s interesting to note that all developments seem to route back to this mantra e.g. ensuring service providers subscribe to exacting professional standards and that a ‘KYC’ philosophy prevails with regard to investors. This tonic to a quick buck culture is one that is winning TCI new friends internationally and ties in with the prevailing international winds of the day.

Controversy has, however, surrounded the recent announcement by the UK Governor Ric Todd to wind down the jurisdiction’s investment agency TCInvest, this constituting the first in a long line of proposed reforms to the country’s 37 statutory bodies to make them more fit for purpose and less of a drain on the public coffers. Its former role in respect of financial services will now be directly assumed by the Government.

the TCI government has recently confirmed its support for the financial services sector There is no suggestion, however, that this development should in any way take away from TCI’s IFC credentials, and in fact all stakeholders in the industry are currently in the process of identifying risks and opportunities for the future and identifying the legislative initiatives that will be required to successfully expand the sector. To this end, the TCI government has recently confirmed its support for the financial services sector and the adoption of a more proactive approach to compliance.


The Turks and Caicos Islands (TCI) is able to point to a long-standing pedigree in the banking, captives, mutual funds and trust management sectors, and offers various pertinent products and services, an extensive infrastructure, skilled labour pool and innovative legislation that has cemented TCI’s reputation in this area.


The Future of the Barbados International Financial Centre

A presentation by Prof. Avinash D. Persaud given as the keynote address at the 2011 International Business Week Discussion Forum on October 26, 2011, at the Errol Barrow Centre for Creative Imagination, UWI, Cave Hill, Barbados looking at the future of the Barbados IFC and small state IFCs in general. “Barbados must passionately defend and develop its international financial centre; not because it benefits overseas financial institutions, but because there is a compelling economic case for the country to do so. Where overseas markets are large and local markets are small, there are few alternatives to an outwardly oriented economy, with exportdriven growth and falling protectionism. Autarky does not work for small states. Where overseas markets are distant and countries are physically small and water and energy short, there is little alternative to the export of ‘weightless’ products. The best examples of weightless products are professional services, and the most highly paid professional services are those that surround financial centres: asset managers, family offices, lawyers, accountants, asset-valuers, risk managers, financial educators and software developers. Finance can be scaled up, without extra land and labour. The amount of labour and land required to manage a US$1 billion investment strategy is almost identical to


the amount required to manage a US$100 billion investment with a similar strategy. The same does not hold true for agriculture, manufacturing or many of the labourintensive professional services such as medical diagnostics or architecture.

our tourism sector.

In economic terms, international finance has a flat supply curve – revenues can expand almost without limit. This makes international finance ideal for small states and, allows these jurisdictions to charge low marginal tax rates for financial businesses, without these taxes representing a subsidy.

It also makes seemingly economic sense for large economies to let international finance migrate to specialist small states. A large financial sector in a large economy has a similar effect to the Dutch disease. It bids talent away from other sectors and pushes up wages across the economy to levels in which few other sectors remain internationally competitive. A large financial sector is more able to capture regulators and policy makers, to persuade governments of the need for bank bailouts and for preferences or concessions as occurred in the run-up to and during the last financial crisis in the United States, the United Kingdom, Spain and other large developed economies.

“Finance can be scaled up, without extra land and labour” It is no surprise then that almost every successful small state, be it Hong Kong, Singapore, Mauritius, Luxembourg, Switzerland, Bermuda, Bahamas and Cayman, has at its core a disproportionately large financial sector. Our international financial sector is not the only avenue, but it is the main avenue for diversifying our economy into a sector that will pay our people well, will support highvalue training and professionalisation of our work force, that will secure them the best possible opportunities and wage power in a global economy, and does this with a modest environmental footprint and compliments

Hopefully you would have heard of some of those arguments before in defence of our international financial centre. Here is an argument you have not heard before.

In short, a large financial sector in a large economy distorts manufacturing, agricultural or other real economy sectors. It is, therefore, better located and exported from places around the world where these sectors are small, and where the importers of international finance can freely apply local regulation on its consumption by vulnerable consumers, or where there are systemic risk implications. Rather than trying to close down IFCs, large states should focus on domestic finance and encourage IFCs in small states to be the critical points of expertise and global regulation of global finance.

Dim Dimich/



The Challenge to Caribbean IFCs But that will not happen, because large financial centres do exist in large states, are significant sources of employment, revenue and patronage, and are not going to roll over and make way for us. The path of IFCs will be determined more by international politics than international economics. Blaming “foreigners” for taking “our” jobs or evading taxes makes for good national politics, everywhere and not just in Barbados. Large states argue that IFCs “beggar thy neighbour” with permissive tax rates and regulation; they then demand that small states harmonise tax and regulation in a way that would squeeze the breath out of them. This is not a game for innocents. There is no denying that there are some jurisdictions that are more cooperative than others and we must not side with all other small state IFCs. But the general attack on small state IFCs is without justification, especially given the poor management and regulation of finance in the large country hubs. These attacks amount to a non-tariff barrier against competition from small states. Evidence for this comes from the observation that the attacks are highly discriminatory. The largest ‘tax havens’, such as the US states of Delaware, Nevada and Wyoming, are quietly left alone. The

Photo - CC by Gemtech1

attacks on small states for low tax rates ignore the subsidies provided by large states across a range of sectors which cannot be matched by smaller states. For example, not a single large scale car assembly plant has been built in recent years without State support, and while this is readily acceptable in large countries it is unaffordable in small countries.

There is, on the other hand, no escaping that 20 years ago, the drivers of IFCs were competitive taxes and light regulation, in the same way that the City of London captured the Eurobond market from New York through low taxes 40 years ago, and the hedge fund and private equity market 10 years ago. Light touch regulation was London’s boast for over 10 years.

“a large financial sector in a large economy distorts manufacturing, agricultural or other real economy sectors”

Whether or not the attacks on small-state IFCs are justified, and in my view they are not, they will continue given the fiscal challenges in developed countries and can no longer be averted by a few nicks and tucks here and there or trying not to be noticed. The realpolitik is that low taxes and light regulation can no longer be the basis for growth or even the survival of IFCs. Any IFC resting on these props will die. Period.

There is also a serious lapse of natural justice when conclaves of large countries, such as the Group of Twenty (G20) or the OECD, appoint themselves as both judge and jury on the activities of non-members and proceed to apply strictures to others while simultaneously resisting broad application of the same rules to themselves. The new global forum has proven no insulation from these pressures. The G20 of course provides no sanctions if one of their own members does not meet G20 commitments on agreed policies.

Going forward, the quality of regulation and of people will be the critical drivers of IFCs. To argue that a high standard of regulation and a highly qualified workforce will be key going forward, is similar to arguing for peace and love. No one will object, but the reality is more subtle, more complex and more critical than first appears. Large countries will argue that the IFCs must meet their standards, notwithstanding the monumental failure of their previous standards. This does not


seem so unreasonable, but the critical factor that militates against the incorporation of these standards is that they are deliberately not risk or size tolerant. Jurisdictions where the likelihood of money laundering, for example, is slight due to exchange controls or illiquidity, are already required to invest heavily in anti-money laundering (AML) institutions, staff and training in order for their banks to have correspondent arrangements with other international banks, and without which trade finance would be virtually impossible. Conveniently ignored is the fact that the largest incidents of money laundering have been uncovered in large metropolitan centres and not in small-state IFCs. However, it is small-state IFCs that are required to make the largest proportional investment in AML. Through these non-tariff barriers the size advantage offered by finance’s scalability is neutered by the disproportionate cost small states pay to match the regulatory standards required by large states. This is not to say that Caribbean countries should not invest in AML, especially those where drug lords are well established, but that in a just world, the efforts made to limit an activity would be proportional to its risk. In the year before the financial crisis, the UK’s Financial Services Authority spent US$2 billion on financial regulation annually and employed over 2,000 people, to little avail.

Florence McGinn/

Substantial expenditures on compliance and ‘ticked boxes’ do not guarantee effective

regulation, but they do represent an effective barrier to entry for small, developing countries to the IFC playing field. The path currently being offered by large countries with large financial centres to small-state IFCs is disingenuous. Even if an IFC in a small jurisdiction had the resources to spend on the regulation of risks it is not vulnerable to, trying to imitate IFCs in the large centres will always make these IFCs second best or worse, in a world where customers have the ability and technology to access the best.

them to trade staff and share technologies and practices) and, therefore, they are concentrated in a few financial centres in the world such as New York, London and Singapore, the location of asset management firms is driven by their most important asset; their employees and their lifestyle location choices.

In the new financial landscape the only sustainable strategy for small-state IFCs is a niche strategy.

This is why asset management in the United States, for example, which used to be concentrated in Manhattan, New York, Boston, Massachusetts and Chicago, Illinois, has now branched out to Denver, Colorado, Newport Beach, California and Fort Lauderdale, Florida. It is also why asset management is often located in the secondless-crowded, more liveable city of many countries, such as Edinburgh in the UK, Munich in Germany, Geneva in Switzerland and Melbourne in Australia. Arguably, many Caribbean countries could be a destination of choice for asset managers if they had the appropriate regulation, especially those that have extensive air connections to key markets and good broadband connectivity as a result of tourism. The revealed preference is that many wealthy, private investors already physically manage their funds from their second homes in the Caribbean.

IFCs should identify those sectors where there is a clear and credible advantage, and focus on being world-class in those areas. There are more opportunities in this space for the bold than might be imagined. While trading operations of investment banks need to be located next door to the trading operations of their competitors (allowing

There are opportunities for Caribbean IFCs in regulatory fields as well. The primary purpose of financial regulation is to avoid systemic risk and to protect vulnerable consumers. However, in an attempt to limit regulatory arbitrage within large and complex financial systems or because regulators have been given many

“The path currently being offered by large countries with large financial centres to small-state IFCs is disingenuous” A Viable Growth Strategy for Caribbean IFCs

Sergej Khakimullin/


legitimate, but not strictly financial risk objectives, many of the activities that do not pose systemic or consumer risks are inappropriately regulated in large countries. IFCs in small states can identify these areas and offer specialist regulation that is neither light nor heavy, but rightsized for the systemic risks involved in a particular activity. For example, Bermuda is a contender as the leading innovator in the world of captive insurance. Cayman, with stiff competition from Hong Kong and Singapore, is a contender for the leading specialist regulator of hedge funds. Trinidad and Tobago could be a world-class specialist regulator of energy investment funds, since risks in the energy-related sectors are sufficiently different to warrant a distinct type of risk management. Barbados, in competition with Singapore, could be the specialist regulator of wealth management by family offices, dove-tailing well with our high-end tourism. Caribbean IFCs and their regulators, will however, have to view regulation differently, as it is no longer a game of pale imitation, but a game of sharp innovation. This is a vital lesson for the newly minted Financial Services Commission to embrace, and will require investment, especially in people and advocacy. Let me end with some thoughts on the critical role of education. If the Caribbean, and if Barbados, is to be a leader in some areas of financial regulation it will need world-class training capacity in financial risk and in training people to an internationally recognised standard of excellence. The region also needs to be a

centre for globally renowned thinking, to help governments and regulators articulate and advocate their specialised regulatory regimes to the Financial Stability Board, the Basel Committee, the International Organisation of Securities Commissions and other international regulatory bodies. Hiring senior people from large centres, who have been passed over for the top job at home, is unlikely to make the region an innovator in regulation. Training local people will play a critical role in deepening the development of international financial sectors.

“Barbados, in competition with Singapore, could be the specialist regulator of wealth management by family offices” Research, innovation, education and training initiatives on a scale that is world-class are best done by a regional institution. Given the practitioner orientation of the work and the international credibility and standards required, this should be a new institution with a collaborative relationship with the University of the West Indies (UWI) or the Caribbean Centre for Money and Finance (CCMF), which also has a connection to UWI. After initial assistance to establish such an institution and its reputation the institute should be able to move quickly to being selfsufficient, as both regulators and the industry have made substantial budget commitments to training. I call upon the Government to accelerate its efforts in this area. Our international financial centre is viewed in terms of tax revenues and the

legal and other services that come from assisting these businesses and their expatriate employees, rather than in terms of creating career-advancing opportunities for local citizens. Yes, we have some senior professionals, but walk into Citibank Singapore, and you would be hard pressed to find a single American, and if you do, he is more likely to be in the mail room than the board room. Locals who became heads of Singapore offices have gone on to be on the Board of the head office. When the significant charity work is put aside, when all the commitments are made and best efforts promised, the developmental impact of the international business sector in Barbados, outside of needed revenues, is still too small. That must change.” © Professor Avinash Persaud Professor Persaud is Chairman, Elara Capital PLC; Chairman, PBL; Chairman, Intelligence Capital Limited and Board Director of RBC Latin America & the Caribbean. Chairman, Warwick Commission; Chairman, Regulatory Sub-committee of the UN High Level Task Force on Financial Reform; Member, UK Treasury’s Audit Committee; Member, Intergovernmental Task Force on Financial Taxes and Member, Pew Task Force to the US Senate Banking Committee; 2010 President, British Association for the Advancement of Science (Section F); and Governor, London School of Economics. Emeritus Professor, Gresham College; Fellow, London Business School; Visiting Fellow, CFAP, Judge Institute, Cambridge University This article can also be downloaded from the Barbados International Business Association website at




All Change at Seychelles

Strong support for Seychelles at IMF and government level sustained the international finance sector in recent years and led to a bold series of reforms and liberalisations. These have ensured this IFC continues to go from strength to strength, even during these challenging times, such that it now constitutes the third pillar of the economy alongside tourism and fisheries. The jurisdiction has made the most of this state of affairs and, ably represented by the Seychelles international Business Authority (SIBA) with its high levels of expertise, has been tireless in promoting its attributes and in ensuring it is acknowledged as an IFC force to be reckoned with. The jurisdiction’s offer includes companies operating under a special license (CSLs). These are able to avail themselves of a 1.5% business tax rate on their global income and have liberty to conduct business in any other country, as well as allowing investment into companies based in countries where a reciprocal treaty is in place. Also noteworthy are Seychelles’ IBCs, limited partnerships, insurance, securities, banking, trusts and ship registration credentials, with further diversification in the offing. In addition, prevailing factors such as low fees, straightforward incorporation procedures, a highly skilled and specialised workforce, an absence of exchange restrictions and a know your customer philosophy, alongside strong and well respected legislation such as the


Seychelles International Corporate Providers Act, which regulates service providers and ensures they subscribe to exacting professional standards where licenses are issued or renewed only after thorough due diligence, have cemented Seychelles’ reputation internationally.

(Seychelles) has been tireless in promoting its attributes and in ensuring it is acknowledged as an IFC force to be reckoned with The facts speak for themselves in that there are now over 100,000 companies on SIBA’s books. Furthermore, as detailed in the 2012 national budget, the year ahead is likely to see the revamping of current legislations, such as a new Companies Act, whilst going forwards mutual bonds and hedge funds are set to feature in the Seychelles portfolio. Also, the Seychelles stock exchange is likely to play a key role in the development of these markets with a steep growth curve anticipated over the next five years. Not only this, but Seychelles is also currently fine-tuning its plans to enter the booming

Islamic Finance market by offering Islamic bonds, and in the process making the most of its prime geographical location which affords access to the Middle East, Asian and African markets with their large Muslim populations. This process currently involves bringing in the necessary specialist expertise to realise the development of the sector and thus afford the opportunity to transact in a Sharia-compliant fashion. There is also an ongoing drive within Seychelles to consolidate its economic relationship with regional markets in Africa and the Indian Ocean Rim, and to this end a number of DTAs such as those with South Africa and UAE are already in place, with more in the pipeline, so affording investors a viable platform into the region.  In respect of compliance, Seychelles has without a doubt been proactive. It has positively embraced the need for openness and transparency, and it is hoped that this will not only further enhance the IFCs credibility, but also lead to acknowledgement, in the form of the OECD review, of the great efforts undertaken in this regard. Yet, one of the key attractions of the IFC is that growth is not retarded by oppressive regulation, and so it is essential that future developments result in the maintenance of this balance, whilst at the same time advancing transparency.


BlueOrange Studio/

Republic of Seychelles

Q: Seychelles’ economy has remained, to date, in a state of growth and resilient despite numerous external pressures. Please could you give me the three top line reasons for this? A: Firstly, and this is really the essence of doing business in the Seychelles: we have a very good regulatory framework. This balances well the business aspect with necessary regulation ensuring that the Seychelles is not overregulated and therefore encourages growth. I am very proud to say that we have struck the right balance between good regulation and a good business environment. Secondly, the Seychelles is very efficient. For example an International Business Company (IBC) can be incorporated in the same day, so everything from the service provider, regulator and due diligence – everything can be completed in the same day making the Seychelles attractive to fast moving business. Finally there is a general increased confidence in the regulatory framework of the Seychelles. We have always been a jurisdiction that has complied with the international laws and best rule of practice and this consistent attention to detail is paying dividends.

Q: That there are now 100,000 companies on SIBA’s books represents something of a milestone. How do you measure success? Is it purely about statistics?

Outgoing CEO of the Seychelles International Business Authority (SIBA), Steve Fanny talks to Joanna Gray about how SIBA and the Seychelles at large are confidently marketing themselves to the outside business world and why international financial markets are taking note.

A: Yes this is definitely a milestone – indeed the Seychelles is now second or at least third in terms of IBC incorporation. However, whilst we are very proud of this achievement the Seychelles still wants to diversify and make sure we are still successful in other avenues such as mutual funds and hedge funds for example. We want to keep widening our portfolio and to be successful with all these different products.

Q: Which other sections of the economy are showing healthy signs of growth? A: The financial services industry as a whole is growing very well, in fact at an exponential rate. The banks and insurances sectors have also been showing steady growth and this I can put down to the fact that to some extent they have been immune to the external shocks of recent years; the ongoing Eurozone crisis hasn’t affected them yet. However, there are some elements of the economy that do react to the outside world, such as tourism. A lot of our tourists come from Germany, France and Italy, so when things aren’t going so well for Europe the Seychelles tourism sector is affected which demonstrates why further diversification is necessary.

Q: Do such plans involve mutual bonds, hedge funds and interactive gambling? Where on the agenda are these placed?

Mr. Steve Fanny, CEO, Seychelles International Business Authority (SIBA).

A: We do not yet have the legislation for interactive gambling, so we are not actively involved. In relation to mutual funds and hedge funds these were trialled three years ago at the Central Bank and we are therefore still at the early stages. We are currently recruiting the right personnel to ensure we’ve got the knowledge to go forward competently. We are also re-jigging our legislation so that we are on a par with all the leading jurisdictions. Progress is encouraging and there is a lot of interest from Europe at what we are offering.

Q: How will the Seychelles stock exchange contribute? A: The fact that the Seychelles is going to have a stock exchange is going to be pivotal in the development of the mutual fund and hedge fund market. We envisage significant growth within that sector in the next five years.

Q: Will the amendments to the IBC (International Business Company) Act and other revamped legislation set for 2012 be an asset to the jurisdiction? A: These amendments will certainly not be a hindrance to the jurisdiction. They will simply bring us even closer to other OECD countries. Again the financial services industry in the Seychelles is successful

because it is open and transparent. Every other offshore jurisdiction has to apply to the same rules and we would like there to be a level playing field between all the offshore jurisdictions.

Q: Seychelles has been very proactive on the compliance front, particularly in respect of bilateral treaties on information exchange to ensure the international credibility of the jurisdiction is maintained and enhanced. Do you feel Seychelles’ efforts in this regard are being sufficiently acknowledged? A: I have been very candid in the past that offshore jurisdictions have been used in rhetoric by politicians to get political mileage. We have a lot of Eurozone countries that are heavily involved in the offshore industry and yet they are pointing fingers at the small island nations. We aspire to have a level playing field and we are transparent. Everyone is so intelligent these days you can only succeed if you are open and transparent.

Tatiana Popova/

Q: Which offshore jurisdictions to do see as your immediate competitors? Where do you see Seychelles’ chief competition coming from, now and into the future? What is the strategy to ensure Seychelles

remains the first port of call for interested parties? A: When you look at international business we see everyone involved in similar industries as a competitor. We have to view them as a competitor because if the IBC became affiliated elsewhere and the Seychelles had missed out, from an economic and accounting point of view that is vital revenue lost. We have the mindset that we must go out there and market ourselves, and do so aggressively and sell our jurisdiction.

Q: With Seychelles’ geographical location affording access to the Middle East, Asian and African markets with their large Muslim populations, it is perfectly placed to serve the booming Islamic Finance market. What specific plans does Seychelles have in this respect? A: The Seychelles Central Bank is sending out a tendering document to all our embassies and lots of universities. We are specifically going to Malaysia and into the Middle East to seek somebody to come into the Seychelles to give technical assistance to secure the framework and train the people so that we have the right knowledge to secure the future development of that industry. And then once we have got the right product we will be marketing it vigorously to the whole world saying

that the Seychelles is now ready to accept business and to transact within the Sharia compliance structure.

Q: And what time frame are you planning for the roll out of this development? A: We are talking in the next two years. We don’t want to develop the whole structure in the cut and paste manner, we want to do it properly and have the right regulation and the right personnel on the ground.

Q: Now that you are about to leave SIBA what do you view as your greatest successes? A: One of the things we’ve been able to do at SIBA within the last five years is bring together a high level of expertise within the Authority. We’ve recruited a lot of young graduates and trained them with professional qualifications such as the STEP and ICSA qualifications and in tax planning. In doing so, the whole business environment of the Seychelles has improved. We are certainly more on top of our game now and have built capacity within the Authority to work effectively. This has been our biggest achievement. Mr Fanny has recently been appointed Principal Secretary at the Seychelles Ministry of Finance.

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The Puppet Masters How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It Summary from a World Bank report co-authored by Emile van der Does de Willebois, Emily M. Halter, Robert A. Harrison, Ji Won Park and J.C. Sharman. ‘Puppet Masters’ aims to support countries’ efforts to meet international standards that were developed in recent years to help combat financial crime, including grand corruption, money laundering and terrorist financing. The two key standardsetting agreements are the United Nations Convention against Corruption (UNCAC), adopted in 2003 and ratified by 100 countries (as of October 2011), and the 2003 recommendations of the Financial Action Task Force (FATF), endorsed by more than 170 jurisdictions.


As highlighted by these two documents, there is international consensus on the need to improve the transparency of legal persons and arrangements, and many jurisdictions have already taken steps in that direction.

evidence to show:

As the study shows, however, significant hurdles to implementing these standards remain. To support countries as they work to overcome those challenges, the report offers recommendations on how to ensure adequate transparency of corporate vehicles.

• which laws and standards are effective in

There is no lack of theoretical discussion on transparency in the ownership and control of companies, legal arrangements and foundations. Taking a more practical approach, this report draws on an unprecedented depth and breadth of

• where the challenges of the misuse of corporate vehicles lie;

practice and which are not;

• how the shortcomings that currently allow most corrupt officials to successfully launder illicit funds through corporate vehicles can be addressed. Three types of evidence were collected for this research:

• a database of more than 150 actual cases

• extensive interviews with practitioners (both service providers and investigators) on the difficulties they encounter when trying to determine beneficial ownership;

• evidence from a solicitation exercise, whereby researchers posed as would-be customers soliciting shell companies and trusts to hide their financial affairs.

Service providers...need to go beyond their basic obligations and find out whether others are really in control or derive benefit Through analysis of these varied sources of evidence, the report identifies a number of ways in which the misuse of corporate vehicles can be curbed. Specifically, the report-

• makes recommendations regarding the minimum information that corporate registries should collect and make publicly available about the legal and beneficial owners of legal entities seeking registration;

• explores the role that service providers should be required to play in conducting greater due diligence of the persons who exercise effective control over the corporate vehicles (that is, the beneficial owners);

• calls for investigative capacities to be strengthened (through better training and greater resources) so that investigators will be better equipped to undertake the increasingly complex crossborder investigations required in the 21st century. The Elusive Beneficial Owner: A Call for a Substantive Approach Uncertainty and variation exist among jurisdictions about the meaning of beneficial ownership. This report argues that beneficial ownership should be understood as a material, substantive concept—referring to the de facto control over a corporate vehicle—and not a purely legal definition. To be effective and meaningful, beneficial ownership must not be reduced to a legally defined position, such as a director of a company or foundation or a shareholder who owns more than a certain percentage of shares or legal entitlement/benefit of a trust.

In identifying the beneficial owner, the focus should be on two factors: the control exercised and the benefit derived. Control of a corporate vehicle will always depend on context, as control can be exercised in many different ways, including through ownership, contractually or informally. A formal approach to beneficial ownership, based on percentage thresholds of ownership or designated beneficiary of a corporate vehicle under investigation, may yield useful information providing clues to the corporate vehicle’s ultimate ownership or control. More generally, it may lead to the identification of people of interest who possess information regarding the beneficial owners. Service providers, however, should be aware of the limitations of such an approach. In suspicious cases, they need to go beyond their basic obligations and find out whether others are really in control or derive benefit. Wanted: A Government Strategy Governments have recognised the importance of curbing the misuse of corporate vehicles to conceal beneficial ownership, and in response, they have adopted certain international standards. We have only to look at the evaluations undertaken by the Financial Action Task Force on Money Laundering (FATF) and similar international organisations, however, to see that compliance with these international standards is poor. The evidence collected for the present study provides—for the first time—direct insight into the substantial gap between the rules on paper and the rules as applied in practice when it comes to corporate vehicles. On this basis, we argue that a more ambitious approach is needed, one that involves adopting a detailed set of policies specifically aimed at improving transparency in the ownership and control and benefit of corporate vehicles. Photo CC by - John Althouse Cohen

of grand corruption from a wide range of jurisdictions;

In our view, an effective policy regime will need to address at least five key issues. Issue 1. The information available at company registries should be improved and made more easily accessible. The first source of information mentioned by both investigators and service providers when seeking information about an incorporated entity (that is, any corporate vehicle, excluding trusts or similar arrangements) is the company registry.

Through analysis of these varied sources of evidence, the report identifies a number of ways in which the misuse of corporate vehicles can be curbed The vast majority of registries contain information about legal entities that is of some use to investigators, such as the name of the entity, its address, its articles of incorporation (or charter), and details of its directors. This information should be publicly available in all company registries. In cases in which a director is acting as a nominee for another person, that fact should be noted in the registry, along with the name of that ‘shadow director’. Many registries also hold information on the owners, shareholders, and members of a legal entity. All registries should collect and maintain this information, which should cover anyone whose ownership stake is sufficiently large to be deemed a controlling interest. This information should be updated and made accessible in a timely manner to (at least) law enforcement members in the course of their investigations. Finally, company registries in some jurisdictions—typically held by a securities supervisor, regulatory commission, or some other agency with a comparably proactive approach—are more inclined toward enforcing and supervising legal or regulatory obligations and have sufficient expertise and resources to do so. In such cases, countries could consider requiring their corporate registry to also maintain information on beneficial ownership. Currently, however, few countries have sufficient expertise and resources to be able to do this adequately. In addition to improving the data content in company registries, countries should strive to make it freely available. Ideally, this would mean providing free online access (without pre-registration requirements or subscription fees), complete with search functions that allow for extensive crossreferencing of the data. Access to historical



records on the legal entities entered in the register also should be included. The report, however, recognises that company registries have serious limitations—in both how they are set up and how they work in practice. Registries are almost invariably archival in nature; they rarely conduct independent verification; and in many cases, they are already stretched for resources. They clearly are not a panacea for the misuse of legal entities. For this reason, although the information supplied by a company registry may be a useful starting point, it needs to be complemented by other sources. Issue 2. Steps should be taken to ensure that service providers collect beneficial ownership information and allow access to it. The Advantages of Service Providers The most important among these other sources are TCSPs and banks. These providers have unique insight into the dayto-day operations and the real ‘financial life’ of the corporate vehicle, that is, the financial flows of funds—which are harder to manipulate and disguise. As a result, banks and service providers are an essential source of information on control and beneficial ownership of a corporate vehicle. The international standards already call on these institutions to be under an obligation to conduct customer due diligence (CDD)


of the corporate vehicle to which they are providing a service. Implementation is significantly lagging however. This obligation should extend to establishing the identity of the beneficial owners, both when the business relationship is initially established and during its subsequent life cycle. Ongoing monitoring is important because the true economic reality behind a corporate vehicle becomes more difficult to hide during the course of a longer-term business

The report recognises many cases (registries) are already stretched for resources relationship. In the case of corporate vehicles that are trusts or similar legal arrangements, service providers play an even more important role as source of beneficial ownership information, as few countries have the functional equivalent of a corporate register for trusts. Why Service Providers Should Be Obligated to Conduct Due Diligence The international standard on antimoney laundering, laid down in the FATF 40 Recommendations against Money Laundering, requires the collection of information about beneficial ownership.

The review, however, carried out as part of this study on what information TCSPs collect in practice, coupled with country evaluations carried out in more than 159 countries, shows that banks (to some extent) and TCSPs (more generally) still do not adequately identify the beneficial owner when establishing a business relationship. For example, U.S. banks are not generally obligated to collect beneficial ownership information when establishing a business relationship. At the very least, an official declaration by the customer as to beneficial ownership could be useful in improving the situation. More generally, the imposition of due diligence obligations on service providers is important for two reasons. First, it obliges service providers to collect information and conduct due diligence on matters about which they might prefer to remain ignorant. This obligation is important because in the majority of cases in which a corporate vehicle is misused, the intermediary is negligent, wilfully blind, or actively complicit. If a service provider is obligated to gather full due diligence information, it becomes impossible for the intermediary to legitimately plead ignorance regarding the background of a client or the source of his or her funds. Second, having all such information duly gathered by the service provider means that investigators have an adequate source of information at their disposal.


Enforcing Compliance Experience over the past 10 years has shown that imposing due diligence requirements on paper is not enough. Countries need to devote adequate resources to effectively policing compliance, including supervising service providers and imposing civil or criminal penalties for noncompliance. The evidence analysed in this study shows that TCSPs in certain financial centres more typically considered ‘onshore’ actually exercise less strict due diligence than jurisdictions identified as off shore financial centres (OFCs). Attorneys and Claims of Attorney-Client Privilege Policy makers also need to address the problem of gaining access to the information held by service providers and, in particular, the issue of legal privilege. When investigators seek to access information held by attorneys regarding the establishment and operation of a corporate vehicle by one or more of their clients, the attorneys frequently seek to justify their refusal to divulge such information by invoking attorney-client privilege (or ‘legal professional privilege’). Investigators should guard against the unjustified use of this privilege. Although the claim of legal privilege is valid under certain circumstances, a number of jurisdictions around the world have carved out statutory exceptions to legal privilege in cases in which the attorney is acting as a financial intermediary or in some other strictly fiduciary or transactional capacity, rather than as a legal advocate. A Two-Track Approach Substantial debate is ongoing about which entity, person, or institution would be best suited to maintain beneficial ownership information. We believe that service providers and registries both have a vital role to play in enabling law enforcement to access beneficial ownership information, and we acknowledge that this role might differ from jurisdiction to jurisdiction. Having said that, however, we believe the service provider generally will be the more useful source of beneficial ownership information. As noted by one investigator in a country where both the registry and the service providers maintain beneficial ownership information, “When we receive an international request for beneficial ownership information, we always refer them to the service provider. The registry would only be able to give you a name, often (though not always) correct; but the service provider will be able to provide so much more— telephone numbers, family, real estate, and all the other bits of information one gathers over the course of a business relationship.” We realise that some countries, unfortunately, may not (yet) be able to

impose such CDD regulations on the relevant service providers. The political reality is that pressure groups or other lobbies (for example, a bar association) prevent the passage of such legislation.

If a service provider is obligated to gather full due diligence information, it becomes impossible for the intermediary to legitimately plead ignorance regarding the background of a client or the source of his or her funds In countries where intermediaries are not subject to CDD requirements, other ways to ensure beneficial ownership identification, although second best, nonetheless may prove useful and effective. Under such circumstances, the obvious institution to maintain beneficial ownership information is the company registry (under the conditions described above). How policy makers choose to define beneficial ownership for the purposes of company registration will depend on the level of expertise of company registry staff. Disentangling who, in a particularly complicated structure, qualifies as the beneficial owner may require significant corporate legal expertise, which may not always be available. In such cases, a formal definition (for example, a natural person holding more than 25 percent of the shares, or a natural person holding the most shares) may be more practicable. Issue 3. All beneficial ownership information should be available within the same jurisdiction.

Another obstacle to obtaining information about a particular corporate vehicle is that the relevant documentation may be deliberately dispersed across different jurisdictions. Collecting information on a particular legal entity that is incorporated or formed under the laws of Country A but administered from Country B often entails first submitting a request in Country A and then submitting a request in Country B. To avoid having to obtain information from different countries—with all the loss of time and resources that entails—countries should ensure that a resident person maintains beneficial ownership information on any entity incorporated under its laws. That requirement could be achieved in various ways—for example, by imposing the obligation on a resident director or other corporate officer, or on a resident registered agent or a service provider. That person should receive all financial documentation relating to the legal entity. This obligation would not affect the obligation requiring the service provider (who may well be located in another jurisdiction) to also maintain this information. Certainly, if this service provider is undertaking the daily administration or management of the corporate vehicle, he or she is likely to have more current information. Issue 4. Bearer shares should be abolished. Companies that have issued bearer shares and bearer-share warrants continue to be problematic in terms of transparency of ownership and control of corporate vehicles. The person in legal possession of the physical shares is deemed to be their owner and thus the owner of the company. The problem is knowing who owns the shares at any given point in time. Many countries have immobilised these shares—effectively rendering them registered shares—without disrupting legitimate business. No legitimate rationale exists for perpetuating bearer shares and similar bearer instruments. We recommend that all countries immobilise or abolish them.

Issue 5. Investigative capacity should be strengthened. Why Due Diligence Is Not Enough The challenge thrown down by those who wish to deceive ultimately calls for a response by those seeking to unmask that deceit. Efforts to counter the misuse of corporate vehicles have, in recent years, focused on introducing new laws and

Disentangling who, in a particularly complicated structure, qualifies as the beneficial owner may require significant corporate legal expertise, which may not always be available regulations. Although this certainly forms an important part of an effective response to grand corruption, it is by no means enough. Similarly, prevention and information gathering by service providers or company registries, although vital, on their own are insufficient. A company registry, after all, often will not contain the most current information, and a service provider can undertake only so much due diligence. As one compliance officer noted, “Any due diligence system can be beaten.”

Transnational Investigations A concerted effort is required to improve law enforcement’s understanding of corporate vehicles, their function, and their rationale to enable proper investigation. Although investigators generally are familiar with some of the basic legal entities and arrangements available under their domestic laws, they are largely unfamiliar with foreign corporate bodies and the rationale for including them in any corporate structure. It is important that these investigators have some basic understanding of common corporate structures under foreign laws and the (often fiscal) rationale for their existence. In this way, they will be better able to distinguish legitimate from illegitimate uses. Building a Transnational Case Being able to identify a corporate vehicle misuse scheme is only the first step, however. Investigators also need sufficient resources to be able to travel to the jurisdictions involved and coordinate with local investigators in gathering all the documentary, testimonial, and other forensic evidence that is needed to be able to successfully present cases in court. Because many corporate vehicle misuse cases are transnational in nature, investigators need to work together. To facilitate this international cooperation at both formal and informal levels, legal mechanisms and more informal channels are needed. As one investigator put it, solving a transnational corporate vehicle

misuse scheme is like putting together a jigsaw puzzle, with investigators in different jurisdictions each holding separate pieces of the puzzle. To complete the puzzle, an investigator needs to have access to all the pieces. Conducting Risk Analysis and Typologies Countries should undertake a risk analysis and conduct typology studies of the misuse of corporate vehicles in their own jurisdictions to identify what entities (of whatever extraction) and arrangements typically are abused. This analysis would give law enforcement (and service providers) useful information on the types of abuse specific to the country. This information should include a succinct overview of legal requirements of the corporate vehicles that can be established or that operate within the jurisdiction, the rationale for these requirements, and where information may be obtained. The risk analysis should inform the efforts made by service providers when identifying beneficial ownership. Publishing the typologies information and the risk analysis and ensuring accessibility to foreign law enforcement and service providers will be important. © 2011 International Bank for Reconstruction and Development / World Bank: The Puppet Masters – How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It.

In any complex corruption investigation involving the use of corporate vehicles, an imaginative, tenacious, and expert investigator is indispensable. In our research, we have discerned a wide disparity among investigators in different jurisdictions around the world in terms of their knowledge and expertise, as well as the technological and budgetary resources made available to them to conduct investigations into corporate vehicle misuse schemes. Given the transnational nature of such schemes, however, it is imperative that this gap in knowledge and resources be narrowed. Accordingly, we strongly recommend greater education, development, and training of investigators regarding (a) the nature of corporate vehicles around the world and their potential for misuse, and (b) the most effective investigative skills and techniques for ‘piercing the corporate veil’. Moreover, as transnational schemes generally involve more than one jurisdiction, authorities need to make sufficient resources available so that investigators can respond to requests for assistance from other jurisdictions in an adequate and timely manner.


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Enhancing the Skills and Capacity of Investigators


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OECD Global Forum Chairman’s Message from ‘Tax Transparency 2011: Report on Progress’

The Global Forum met in Paris in October 2011

‘Towards a level playing field’ truly catches the spirit of the Global Forum’s work in 2011. The new Global Forum, with all members on an equal footing, has been working at an amazing speed to ensure a high level of transparency and tax cooperation in accordance with the internationally agreed standard on transparency and exchange of information for tax purposes. 2011 Achievements The Global Forum met twice in 2011, in Bermuda in May and in Paris in October. Since the start of the peer reviews in 2010 the Global Forum has delivered the adoption and publication of reports on 59 jurisdictions, covering more than half of the current Global Forum members. Producing reports is not the Global Forum’s only achievement. The Global Forum is producing real change as many of these jurisdictions have already reported on action taken following their assessment. Where changes in legislation are significant, a supplementary report is launched to reflect the progress made. Indeed, the Global Forum has adopted seven supplementary reports. This clearly shows that the peer review process is having an impact and is successful in enhancing Global Forum member compliance with the internationally agreed standard. Change can also be measured by the growth in the number of information exchange agreements including multilateral conventions, and Tax Information Exchange Agreements as well as double tax conventions that jurisdictions have signed. The number of agreements in place that meet the international standard has increased by more than 700 since the G20 put a spotlight on the issue of transparency and international tax cooperation in 2009. These agreements are starting to yield real results

as mechanisms for the proper enforcement of tax laws. This is a concrete result of our work and one which will be of enduring benefit.

countries, increased transparency can help safeguard domestic tax revenues just as much as it can be of assistance to foreign tax authorities.

In the past year Global Forum membership has increased with ten more jurisdictions joining, resulting in the total membership passing the 100-mark to reach 105. This continuing expansion is important to ensure a global level playing field where all jurisdictions can benefit equally from being a Global Forum member. Also, the Global Forum reviews all relevant jurisdictions ensuring that no one jurisdiction can benefit from not being a member by offering a nontransparent environment. We are actively establishing contacts with jurisdictions around the world, particularly in Africa and central Asia.

Since the beginning of 2008, counteracting tax evasion and the implementation of high standards of transparency and exchange of information have been high on the international political agenda. In particular, the G20 has supported the Global Forum’s work and asked for two reports to be submitted to the Cannes Summit in November 2011.

The work of the Global Forum has already contributed greatly to increased transparency and tax cooperation The Global Forum reaches out to existing and potential members so they can benefit from assistance in preparing for their peer reviews and in improving their legal framework and practice in respect of transparency and tax information exchange. Regional seminars in the Pacific, the Caribbean and in Africa were held to make jurisdictions aware of the work of the Global Forum and to start mapping the needs for assistance in the area of tax transparency. Such assistance is primarily targeted to developing countries to ensure they have the opportunity to benefit from the new transparent environment. For developing

2012 Challenges The work of the Global Forum has already contributed greatly to increased transparency and tax cooperation, but the future will bring new challenges. Most reviews adopted to date are Phase 1 reviews assessing the legal and regulatory framework against the standard. In 2012 a series of Phase 2 reviews assessing the practical implementation of that framework will commence. These will be the real test for the new transparent environment: is the information available and accessible by the authorities in practice, and is that information actually exchanged in a timely manner? Concluding remarks The Global Forum has found a rhythm of work resulting in the publication of many reports. Its efforts will ensure that all jurisdictions benefit from the new transparent environment. The key is to maintain focus and build on the momentum that has been carefully built up over many years. By working together Global Forum members will ensure that we are well on our way ‘towards a level playing field’. Mike Rawstron, Chair of the Global Forum


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Hong Kong

Global Forum Delivers Concrete Results to the Cannes G20 Summit This meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes brought together delegates from 85 jurisdictions and 7 international organisations. They adopted a Progress Report (delivered to the G20 on 3 November 2011) based on 59 completed peer reviews, agreed on guidelines for the co-ordination of technical assistance and decided to convene a meeting of countries to focus on the effectiveness of exchange of information. Opening the Forum, OECD SecretaryGeneral Angel Gurria congratulated the delegates, “At a time of stalled economies and a crisis of politics, your collective tax work is a tangible example of countries moving together in a mutually beneficial direction that will help those trying to extricate themselves from the crisis. Governments have signed more than 700 agreements to exchange tax information. We know that 20 countries have taken advantage of this more transparent environment, putting in compliance initiatives which have already yielded €14 billion in additional revenues from more than 100,000 wealthy tax payers who had hidden assets offshore and that there’s more in the pipeline.”


The Global Forum delivers to Heads of Government at the G20 Cannes Summit A year and a half ago, leaders at the Seoul Summit asked the Global Forum to report on the status of the international standard on

This meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes brought together delegates from 85 jurisdictions and 7 international organisations tax transparency at their Summit in Cannes on 3-4 November 2011. To meet this request, the Global Forum has adopted another 18 reports, bringing to 59 the total number

of peer reviews completed: an average of 3 a month. These identify deficiencies, make recommendations on how to address them, and where the deficiencies are sufficiently serious prevent a jurisdiction from moving on to the next stage in the review process. Overall, these reports show that the level of compliance is high and that cooperation has been good. Many of the reports’ 370 recommendations to improve the exchange of information have already been acted upon. A small number of jurisdictions will not pass to the next stage of the review process because the deficiencies were sufficiently serious. 18 Peer Review Reports Adopted Members of the Global Forum also adopted and published a new set of 18 peer review reports, including 7 supplementary reports, bringing to 66 the number of reports completed since March 2010. Reports on Brunei Darussalam, the Former Yugoslav Republic of Macedonia, Gibraltar, Hong Kong (China), Indonesia, Macao (China), Malaysia, Uruguay and Vanuatu focus on their legal frameworks which allow for transparency and international exchange of information.


The five supplementary reports – for Mauritius, Monaco, San Marino, the Turks and Caicos Islands, and the Virgin Islands (British) – assess the changes to legislation that these jurisdictions have made to address recommendations made by the Global Forum in previous reviews. The reports describe each jurisdiction’s rules for ensuring that information is available to the tax authorities, how it can be accessed by authorities and the mechanisms in place to exchange information with foreign tax authorities. They also identify deficiencies and make recommendations on how to address them. In the 13 new reviews, the most common deficiencies relate to: the lack of available ownership information as regards trusts and bearer shares; incomplete accounting information for some forms of trusts, companies and partnerships (including foreign entities); and limitations in the authorities’ powers to access information requested by foreign authorities. The supplementary reviews show that jurisdictions’ compliance with the international standards is advancing swiftly. Mauritius, San Marino and the Turks and Caicos Islands introduced new legislation improving their requirements related to accounting information; San Marino, the Turks and Caicos Islands and the Virgin

Islands (British) removed limitations by the competent authority to access information; San Marino resolved all its legal deficiencies relating to the availability of ownership information; and Monaco proceeded to expand its network of international agreements and brought 14 existing agreements into force. The Phase 2 reviews of Monaco, San Marino and the Virgin Islands (British) – assessing their exchange of information in practice – will take place in the second half of 2012, while the Phase 2 review of the Turks and Caicos Islands is scheduled for the first half of 2013. The Chair of the Peer Review Group, François D’Aubert, commented on the outcomes: “We have seen remarkable progress in the Peer Review Group and a real willingness on the part of jurisdictions to address problems identified by their peers. Of course, there is more work to ensure that in the long term, we achieve a comprehensive and effective exchange of information.” Membership of the Global Forum continues to expand The Global Forum welcomed El Salvador, Mauritania, Morocco, and Trinidad and Tobago as new members, increasing the Global Forum to 105 member jurisdictions. Reaffirming its commitment to ensure that all jurisdictions benefit from the peer review process and from greater tax transparency, the Global Forum adopted guidelines on the best way to conduct technical assistance

to ensure that all jurisdictions are in a position to implement and benefit from the standards. Responding to the call from the G20 Development Working Group, the Global Forum will serve as a platform to facilitate coordination of assistance provided to developing jurisdictions to aid capacity building and to reinforce legal infrastructures necessary for tax transparency and international cooperation. Two pilot projects – with Ghana and Kenya – will lead the way. Mike Rawstron, Chair of the Global Forum, noted that “we are a club that countries want to join”. The Peer Review Reports at a Glance Report on the legal framework and on its application (Phase 1 and 2) Japan: This combined (Phase 1 and Phase 2) review of Japan found that it has a comprehensive legal and regulatory framework ensuring the availability of ownership, accounting and bank information for all relevant entities and arrangements. Its network of 54 agreements allowing it to exchange information with foreign counterparts, as well as its tax authorities’ powers to access information, ensure effective exchange of information with a large number of jurisdictions. The report recommends that Japan should reduce the time it takes to respond to counterparts’ requests.

Tokyo, Japan

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The reviews of Japan, Jersey, the Netherlands and Spain consider in addition these jurisdictions’ exchange of information in practice.


Jersey: Jersey’s combined Phase 1 and 2 report recognises the significant progress made by Jersey since 2006, to put in place domestic legislation and a broad network of EOI agreements to allow effective EOI. In addition, Jersey has created internal processes for its competent authority to respond to and make requests. Although some potential impediments have been identified in its domestic access legislation, this framework, whilst fairly new, has been generally effective and expeditious. Jersey has demonstrated an ongoing commitment to continue to work with its EOI partners, and is in the process of considering amendments to address the recommendations made in the report. Netherlands: The Netherlands has an extensive network of agreements allowing for the exchange of information and its tax authorities have powers to access all relevant information. The legal and regulatory framework ensures the availability of bank information and ownership and accounting information for relevant entities, though some small gaps exist with respect to information on owners of bearer shares, partnerships, foundations and foreign trusts. The report recommends that the Netherlands expeditiously ratify its signed agreements and ensure more timely responses to requests. The report also reviewed the legal and regulatory framework of the Caribbean part of the Netherlands. Spain: Spain has a very comprehensive legal and regulatory framework ensuring the availability of all types of ownership, accounting and bank information, and the Spanish competent authority is already in possession of a large portion of the information that is requested, thanks to its large databases. Spain’s network of exchange of information mechanisms and access powers ensure effective exchange with a large number of jurisdictions, although the negotiation of some mechanisms is lagging behind. Reports on the legal framework (Phase 1) Brunei Darussalam: Brunei is party to a number of bilateral treaties; nonetheless, it is unable to exchange information to the international standard since these

agreements currently have restrictions on access to information by Brunei’s tax authorities. In addition, the peer review identified important deficiencies relating to entities that may be formed pursuant to Brunei’s International Financial Centre legislation. Amendments to its legal and regulatory system are therefore necessary in order for Brunei to qualify for the next phase of the evaluation. Brunei has been assessed as not being ready to move to the next phase of its evaluation. Brunei will report back on the steps taken to address the deficiencies identified in the peer review report within 6 months.

Spain’s network of exchange of information mechanisms and access powers ensure effective exchange with a large number of jurisdictions, although the negotiation of some mechanisms is lagging behind The Former Yugoslav Republic of Macedonia: The review of the Former Yugoslav Republic of Macedonia showed that its legal and regulatory framework is largely in place to ensure effective exchange of information. Notably, banking, ownership and accounting information is generally available and there is a good network of bilateral agreements allowing for international information sharing. Improvements to the rights and safeguards that apply to persons in the requested jurisdiction should nevertheless be made so these do not unduly prevent or delay the effective exchange of information in urgent cases. The Phase 2 Peer Review is scheduled for the second half of 2013. Gibraltar: Gibraltar‘s legal and regulatory framework, providing its tax authorities with access to information and the ability to exchange information with foreign counterparts, is mostly in place. It has also built up a network of 18 agreements allowing

for exchange of information with relevant partners. There are however important deficiencies relating to the availability of reliable accounting information for companies, partnerships and trusts. In addition, ownership information may not be available for some professionally managed trusts and where companies have issued share warrants to bearer. Gibraltar will report back on the steps taken to address the deficiencies identified in the report within 6 months. The Phase 2 Peer Review of Gibraltar is scheduled to take place in the first half of 2014. Hong Kong, China: The legal and regulatory framework for the exchange of information is in place in Hong Kong, China but there are some gaps in the availability of ownership and accounting information. The report indicates that Hong Kong, China’s competent authority should have the power to obtain all relevant information for all of its foreign counterparts and regardless of whether Hong Kong, China needs the information for its own tax purposes. The report also recommends improvements in the EOI network to ensure agreements to the standard are in place with all relevant partners. Hong Kong’s Phase 2 review is scheduled for the second half of 2012. Indonesia: Indonesia has an extensive network of international exchange of information agreements. It has a good legal and regulatory framework for EOI, though there is a restrictive condition to its statutory information gathering powers. Recommendations are also included in respect of enforcement provisions and accounting records for foreign trusts which have Indonesian trustees. The phase 2 review of Indonesia is scheduled for the first half of 2013. Macao, China: The legal and regulatory framework for the exchange of information is largely in place in Macao, China, but some areas need improvement. The report recommends that Macao, China clarify its legislation concerning ownership and accounting information of foreign companies and the need for entities to keep underlying documentation related to accounting records. With reference to bearer

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Marbella, Spain

photo CC by - Phillip Capper


Port Vila waterfront, Vanuatu

shares, Macao, China should either ensure that robust mechanisms are in place to identify the owners of such bearer shares or abolish them. The report also recommends improvements in the EOI network to ensure agreements to the standard are in place with all relevant partners. Macao, China’s Phase 2 review is scheduled for the first half of 2013. Malaysia: The legal and regulatory framework for the availability and exchange of information is largely in place in Malaysia, though some areas need improvement. The report recommends that Malaysia’s competent authority should have the power to obtain all relevant information, including bank information, to respond to requests made pursuant to any double tax convention or taxation information exchange agreement. The report also identified small gaps concerning availability of accounting information in the Labuan International Business Financial Centre and availability of ownership and accounting information with respect to certain nominee arrangements and trusts in Malaysia. Malaysia’s Phase 2 review is scheduled for the first half of 2013. Uruguay: Uruguay has made progress in improving its legal and regulatory framework in order to be able to effectively exchange tax information, and recently signed its 10th EOI agreement. However, some deficiencies have been identified in its domestic laws, particularly with regards to bearer shares, and identity information relating to certain trusts. Possible impediments to effective access to information were also identified as a result of a notification right allowed to taxpayers, and the duty of confidentiality imposed on trustees. Uruguay also needs to continue to expand its network of EOI agreements, particularly with its most important economic partners. Uruguay has been assessed as not being ready to move to the next phase of its evaluation.  Uruguay’s position will be reviewed in six months time. Vanuatu: The peer review of Vanuatu identified significant deficiencies in the availability of information in Vanuatu as well as its access powers.  Although Vanuatu has

signed 12 treaties to the standard, it does not have any powers to access information, and therefore its treaties cannot be considered to be effective. In addition, accounting requirements are not in place to the international standard for all relevant entities. Vanuatu has been assessed as not being ready to move to the next phase of its evaluation.  Vanuatu’s position will be reviewed again in six months.

Although Vanuatu has signed 12 treaties to the standard, it does not have any powers to access information, and therefore its treaties cannot be considered to be effective Supplementary reports Mauritius: Mauritius has introduced legislation that addresses the gap regarding accounting requirements for GBC2s (non-tax resident Global Business Licence companies). Mauritius also continues to upgrade its network of agreements and recently signed its first Tax Information Exchange Agreement. The original peer review report identified some doubts regarding Mauritius’ ability to exchange certain types of information in practice, and Mauritius has now shown that it has gained experience in exchanging this type of information. Mauritius should now address the remaining recommendations in its review report. Monaco: A follow-up procedure was launched to ensure that Monaco was maintaining its efforts to establish agreements allowing for the exchange of information. The supplementary report shows that Monaco’s efforts are continuing and its commitment to the standard has remained steadfast. Monaco is willing to expand its network of

double tax conventions and also taxation information exchange agreements. The phase 2 review of Monaco is scheduled for the second half of 2012. San Marino: San Marino has swiftly introduced legal and regulatory changes to address all deficiencies identified in its 2010 phase 1 review concerning the availability of ownership and accounting information. The tax authority’s powers to access information have also been strengthened and they can now access all relevant information requested by foreign partners. San Marino also passed a law which enables it to provide information on a unilateral basis to any jurisdiction where there is an initialled or signed agreement for the exchange of information in tax matters. The Phase 2 review of San Marino will take place in the second half of 2012. The Turks and Caicos Islands: The Turks and Caicos Islands has amended key legislation to address the deficiencies identified in its August 2011 review relating to the availability of accounting information and the competent authority’s powers to obtain and exchange information. These changes significantly improve its legal framework for exchange of information. The Turks and Caicos Islands’ progress on the remaining recommendations will be assessed in its Phase 2 review which is scheduled to take place in the first half of 2013. The Virgin Islands (British): The Virgin Islands has moved very quickly to address the shortcomings identified in its 2011 review in respect of the access to information. Their amended law now provides for powers to access and exchange all foreseeably relevant information. In addition, the Virgin Islands has taken all necessary steps to ratify the TIEAs it concluded. A number of other recommendations concerning the availability of ownership and identity information as well as accounting records remain and these will be considered in the phase 2 review of the Virgin Islands, to take place in the second half of 2012. © OECD 2011


Christian Lindner/


The Global Competitiveness Report 2011-2012: Top Ten Country Profile Highlights Davos, Switzerland

As in previous years, this year’s top ten remain dominated by a number of European countries, with Sweden, Finland, Denmark, Germany, and the Netherlands confirming their place among the most competitive economies. Singapore continues its upward trend to become the secondmost competitive economy in the world, overtaking Sweden, while the United Kingdom returns to the top ten as it recovers from the crisis. Switzerland retains its 1st place position again this year as a result of its continuing strong performance across the board. The country’s most notable strengths are related to innovation, technological readiness, and labour market efficiency, where it tops the GCI rankings. Switzerland’s scientific research institutions are among the world’s best, and the strong collaboration between its academic and business sectors, combined with high company spending on R&D, ensures that much of this research is translated into marketable products and processes that are reinforced by strong intellectual property protection. This robust innovative capacity is captured by its high rate of patenting, for which Switzerland ranks 7th worldwide. Productivity is further enhanced by a business sector and a population that are proactive at adapting latest technologies, as well as by labour markets that balance employee protection with the interests of employers. Moreover, public institutions in Switzerland are among the most effective and transparent in the


world (7th). Governance structures ensure a level playing field, enhancing business confidence; these include an independent judiciary, a strong rule of law, and a highly accountable public sector.

Switzerland retains its 1st place position again this year as a result of its continuing strong performance across the board Competitiveness is also buttressed by excellent infrastructure (5th), wellfunctioning goods markets (5th), and highly developed financial markets (7th), which benefit from a sounder banking sector than seen in last year’s assessment. Finally, Switzerland’s macroeconomic environment is among the most stable in the world (11th) at a time when many neighbouring economies continue to struggle in this area. While Switzerland demonstrates many competitive strengths, maintaining its innovative capacity will require boosting the university enrolment rate of 49.4 percent, which continues to lag behind that of many other high-innovation countries. Singapore moves up by one place to 2nd position, maintaining the lead among Asian economies. The country’s institutions

continue to be assessed as the best in the world, ranked 1st for both their lack of corruption and government efficiency. Singapore places 1st and 2nd, respectively, for the efficiency of its goods and labour markets and leads the world in terms of financial market development, ensuring the proper allocation of these factors to their best use. Singapore also has worldclass infrastructure (3rd), with excellent roads, ports, and air transport facilities. In addition, the country’s competitiveness is reinforced by a strong focus on education, providing individuals with the skills needed for a rapidly changing global economy. In order to strengthen its competitiveness further, Singapore could encourage even stronger adoption of the latest technologies (10th) as well as measures that support the sophistication of its companies (15th). Sweden, overtaken by Singapore, falls one place to 3rd position. Like Switzerland, the country has been placing significant emphasis on creating the conditions for innovation-led growth. The quality of its public institutions is first-rate, with a very high degree of efficiency, trust, and transparency. Private institutions also receive excellent marks (3rd), with firms that demonstrate the highest ethical behaviour (3rd), supported by strong auditing and reporting standards (2nd) and wellfunctioning corporate boards (1st). Goods and financial markets are also very efficient, although the labour market could be more flexible (25th). Combined with a strong focus


on education over the years (2nd for higher education and training) and a high level of technological adoption (2nd), Sweden has developed a very sophisticated business culture (2nd) and is one of the world’s leading innovators (2nd). Last but not least, the country boasts a stable macroeconomic environment (13th), with an almost balanced budget and manageable public debt levels. These characteristics come together to make Sweden one of the most productive and competitive economies in the world.

Marc Pinter/

Finland moves up three places since last year to reach 4th position. Similar to other countries in the region, the country boasts well-functioning and highly transparent public institutions (3rd), topping several indicators included in this category. It also occupies the top position in the higher education and training pillar, the result of a strong focus on education over recent decades. This has provided the workforce with the skills needed to adapt rapidly to a changing environment and has laid the groundwork for high levels of technological adoption and innovation. Finland is one of the innovation powerhouses in Europe, ranking 3rd, behind only Switzerland and Singapore, on the related pillar. Finland’s macroeconomic environment remains fairly healthy, despite a small increase in the government’s budget deficit.

The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labour markets and the scale opportunities afforded by the sheer size of its domestic economy— the largest in the world by far—these qualities continue to make the United States very competitive. On the other hand, there are some weaknesses in particular areas that have deepened since past assessments. The business community continues to be critical toward public and private institutions (39th). In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the

government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th). A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar. Germany is ranked 6th this year, a decline of one place but with a slight increase in score. Since our last assessment, the quality of its public institutions as well as the efficiency of its goods markets have deteriorated slightly; in other areas, Germany either improves or maintains its performance. The country is ranked an excellent 2nd for the quality of its infrastructure, boasting in particular firstrate facilities across all modes of transport. Despite the slight drop in rankings, the goods market is quite efficient, characterized by intense local competition (9th) and low market dominance by large companies (3rd). Germany’s business sector is highly

German Parliament Building, Berlin, Germany


sophisticated, especially when it comes place. Similar to its Nordic neighbors, the to production processes and distribution country benefits from what is one of the channels, and German companies are among best-functioning and most transparent the most innovative in the world, spending institutional frameworks in the world heavily on R&D (5th) and displaying a (5th) and an excellent infrastructure for strong capacity for innovation (3rd)—traits transport as well as electricity and telephony. that are complemented by the country’s Denmark also continues to receive a firstwell-developed ability to absorb the latest rate assessment for its higher education technologies at the firm level (14th). These attributes allow Germany to benefit The United Kingdom greatly from its significant market size (5th), which is based on both its large continues to have domestic market and its strong exports. sophisticated and On a less positive note and despite some efforts, Germany’s labor market remains innovative businesses rigid (125th for the labour market that are highly adept flexibility subpillar), where a lack of flexibility in wage determination and the at harnessing the high cost of firing present a hindrance to job creation. At the same time, the latest technologies for deteriorating availability of scientists productivity improvements and engineers (down from 27th to 41st this year) may erode the country’s major and operating in a very competitive advantage in innovation if it large market remains unaddressed.

Photo by Hager

The Netherlands improves one rank to 7th this year, reflecting a modest strengthening of its institutional framework as well as the efficiency and stability of its financial markets. Overall, Dutch businesses are highly sophisticated (5th) and innovative (12th), and the country is rapidly and aggressively harnessing new technologies for productivity improvements (5th). Its excellent educational system (8th in the two related categories) and efficient markets— especially its goods market (9th)—are highly supportive of business activity. And although the country registered a fiscal deficit in 2010 (5.18 percent of GDP), its macroeconomic environment is more stable than that of a number of other advanced economies (36th). Last but not least, the quality of its infrastructure is among the best in the world, reflecting excellent facilities for maritime, railroad, and air transport, ranked 2nd, 6th, and 5th, respectively. Denmark moves up one position to 8th

and training system, the positive result of a strong focus on education over recent decades. This has provided the Danish workforce with the skills needed to reach high levels of technological adoption and innovation. A marked difference with regard to the other Nordic countries relates to labour market flexibility, where Denmark (6th) continues to distinguish itself as having one of the most efficient labour markets internationally, with more flexibility in setting wages, firing, and therefore hiring workers than in the other Nordics and in most countries more generally. Japan falls three places to rank 9th, with a performance similar to last year’s. The country continues to enjoy a major competitive edge in business sophistication and innovation, ranking 1st and 4th, respectively, in these two pillars. Company spending on R&D remains high and Japan benefits from the availability of many

scientists and engineers, buttressing a strong capacity for innovation. Indeed, in terms of innovation output, this pays off with the second-highest number of patents per capita. Further, companies operate at the highest end of the value chain, producing high-value-added goods and services. The country’s overall competitive performance, however, continues to be dragged down by severe macroeconomic weaknesses (113th), with high budget deficits over several years (135th), which have led to the highest public debt levels in the entire sample by far (over 220 percent of GDP in 2010). The United Kingdom (10th) continues to make up lost ground in the rankings this year, rising by two more places and now moving back to the top 10 for the first time since 2007. The country improves its performance across the board, benefitting from clear strengths such as the efficiency of its labour market (7th), in sharp contrast to the rigidity of those of many other European countries. The United Kingdom continues to have sophisticated (8th) and innovative (13th) businesses that are highly adept at harnessing the latest technologies for productivity improvements and operating in a very large market (it is ranked 6th for market size). All these characteristics are important for spurring productivity enhancements. On the other hand, although improved since last year, the country’s macroeconomic environment (85th) represents the greatest drag on its competitiveness, with a double-digit fiscal deficit in 2010 (placing the country 138th) that must be reined in to provide a more sustainable economic footing going into the future. The situation is made worse by the mounting public debt (77 percent of GDP in 2010, 120th) and a comparatively low national savings rate (12.3 percent of GDP in 2010, 119th). Global Competitiveness Report 2011-2012, World Economic Forum, Switzerland.

Helle-Thorning Schmidt, Prime Minister of Denmark at the World Economic Forum 2012 Annual Meeting.



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