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Offshore Guide www.offshoreguide.biz

2013/14

A New Era of Transparency

Regulatory Effectiveness • Global Prospects • Islamic Finance • IFC Profiles


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Turks & Caicos Islands Open for Business

The TCIG Investment Unit Butterfield Square Providenciales, Turks & Caicos Islands investmentunit@gov.tc (649) 946-4804


Offshore Guide 2013/14

A New Era of Transparency There is no doubt that the more stringent regulatory landscape governing the international financial sector has begun to effect change. Yet, what may be coming as something of a surprise to the collective of big hitting onshore communities looking to get their hands on what they perceive to be uncollected revenue, is that this call to arms has found many IFCs exceeding expectations and stepping up to the plate in no uncertain terms. Successive studies have shown that despite onshore regimes’ assertions to the contrary, most offshore financial centres are far from lax on the regulatory front. In fact, the most high profile fraud cases have tended to be concentrated onshore. Moreover, against conventional wisdom, supposed tax havens have been found to be more diligent in complying with ‘Know Your Customer’ guidelines than their onshore counterparts. The new requirements are, however, an opportunity to demonstrate to the world that such IFCs offer much more than tax mitigation opportunities, being at the same time; integral cogs in the process of channelling FDI to where it’s most needed; global hubs of specialised expertise and; jurisdictions keen to embrace an enhanced culture of compliance to ensure that reputations unfairly sullied, are rightfully restored. The articles contained herein attest to this and include profiles of the current shining stars of the global IFC arena. Amongst other things, these jurisdictions play a pivotal role in joint venture structuring, afford easy access to regulators and key financial markets and are marked by low cost products and services and a lack of burdensome administration. Those jurisdictions unable or unwilling to meet the new criteria, or to diversify as necessary, will naturally fall by the wayside. Yet, most IFCs do not fall into this bracket and if allowed to do so, can play an invaluable role in the drive to restore healthy global financial markets.

Editor: Richard Smith Business Development: Dominic Hale, James Wilson Designer: Wallace Wainhouse Production Manager: Claire Turner Production Assistants: Charlotte Lewis, George Dart All enquiries: info@offshoreguide.biz

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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/


CONTENTS 14 Growing Beyond: DNA of Successful Transformation From the Ernst & Young World Islamic Banking Competitiveness Report 2012-2013

20 Jersey Finance Announces Plans for 2013

6 Regulatory Effectiveness in Onshore and Offshore Financial Centres Prof. Andrew Morriss and Clifford Chad Henson

22 Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies Michael Findley, University of Texas, Austin; Daniel Nielson, Brigham Young University; Jason Sharman, Griffith University

10 The World Economic Forum The Global Economy in 2013: “Fragile and Timid Recovery”

China’s Currency Unlikely to Topple US Dollar as World’s Reserve Currency 16 The Growing Pains of Islamic Finance By Dawood Ahmedji, Islamic Financial Advisory Services leader, Deloitte in the Middle East 18 Regulation Designed to Fit Islamic Finance Supplied by Business Bermuda

26 The FATF Programme for 20122013 Address by Mr. Bjørn S. Aamo, Financial Action Task Force (FATF) President

12 IOSCO Suitability Requirements with Respect to the Distribution of Complex Financial Products

19 The Value of the Hedge Fund Industry to Investors, Markets, and the Broader Economy By the Centre for Hedge Fund Research, Imperial College, London


30 Cayman Islands’ New Arbitration Law By Mac Imrie and Luke Stockdale, Maples and Calder, Cayman Islands

51 World Bank Global Economic Prospects Assuring Growth over the Medium Term 54 Tax Developments in Hong Kong During 2012

40 Proactive Seychelles takes Regulation Seriously 44 Botswana

32 Banner Year for Cayman Captives The captive insurance industry in the Cayman Islands is booming

56 Asset Management: A New Pillar of the Swiss Financial Centre Supplied by the Swiss Bankers Association

34 Turks and Caicos Islands

57 A New Global Economy for a New Generation Speech by Christine Lagarde, Managing Director, International Monetary Fund, Davos, Switzerland 46 Mauritius 48 Liberia 49 Cook Islands 50 Walkers 2013 Global Hedge Fund Outlook

62 5th Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes Statement of Outcomes - Cape Town, South Africa, October 2012 36 Anguilla: Prudent Pioneer 37 British Virgin Islands

66 IFC Forum Discusses Role of Global Financial Centres


Photo by Konstantin L

Politically motivated regulators often only succeed in driving undesirable activity elsewhere.

Regulatory Effectiveness in Onshore and Offshore Financial Centres Prof. Andrew Morriss and Clifford Chad Henson.

Conclusion of Findings Onshore jurisdictions, such as the United States, United Kingdom, France and Germany, are critical of offshore financial centres (OFCs), such as Bermuda, the Cayman Islands, and the Channel Islands. Arguments against OFCs include claims that their regulatory oversight is lax. However, the authors reject the onshore critique of OFCs as bastions of laxity. The debate within onshore jurisdictions over the role of offshore financial centres is once again heating up, fuelled by disclosures to a variety of national tax authorities of internal documents stolen from a Liechtenstein bank and by dodgy estimates of the amount of revenue that tax authorities could collect if only the offshore jurisdictions would cooperate more. The debate is likely to be particularly shrill among onshore jurisdictions like the U.K. and the U.S., which are anxious to prevent attention being paid to their own significant offshore financial industries. While the UK’s post-financial crisis report, The Turner Review, acknowledged that OFCs were not responsible for the recent global financial downturn, it did express particular concern that the incentives for regulatory arbitrage were likely to increase and that, “Global agreement on regulatory priorities should therefore include the principle that offshore centres must be brought within the ambit of internationally agreed financial regulation

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(whether relating to banking, insurance or any other financial sector).” The Tax Justice Network provides lists of dozens of articles blaming OFCs for contributing to the global financial crisis. Even academic researchers are piling in, claiming against the empirical evidence that OFCs eschew cooperation and promote money laundering through strict secrecy laws and that the competitiveness of OFCs depends on lax regulation.

Ideally, any discussion of regulatory effectiveness in different jurisdictions would focus on outcomes rather than inputs. International discussions of financial regulation often mix tax and other regulatory concerns. But tax issues are far more complex than OFC critics suggest and this mixture sometimes serves to mask the real matters in dispute between jurisdictions. Every jurisdiction is free to set its tax policy to serve its own objectives, but that freedom is limited by the reciprocal freedom of other jurisdictions to set their own policies as well. As a result, some policy choices are costly when a government has also chosen to participate in global capital markets. When governments are reluctant to pay the price for the benefits they receive from global capital markets, they sometimes seek to use indirect means to “have their cake and eat it too.” We think the appropriate measure

to address such questions is through the normal interactions among jurisdictions in international fora where all are represented or through bilateral negotiations in the context of settled international law principles, not by pretending the issue is something else than what it is. Ideally, any discussion of regulatory effectiveness in different jurisdictions would focus on outcomes rather than inputs. In particular, it seems logical that the focus would be on how regulation in jurisdictions with known inadequacies could be improved. As most of the highest profile financial problems of recent years have occurred in onshore jurisdictions (e.g. Enron, Parmalat, AIG, Bear Stearns, Madoff), this is an unlikely framework for a debate that onshore politicians wish to focus elsewhere. Nonetheless, it is a crucial debate. As a Goldman Sachs study concluded in 2009, simply focusing on creating new rules after a crisis is a recipe for failure: “Rules that force activity to flee often have the unfortunate effect of reducing oversight without reducing risk, leaving regulators to clean up a mess that originated elsewhere, often with limited ability to address the root problem directly.” Instead, regulators need to focus on measures such as “transparency; legal clarity (especially regarding bankruptcy and financial counterparties); reliable accounting standards; and regulators with the desire to help markets succeed” while avoiding “legal uncertainty, politically motivated regulators or courts, and harsh tax treatment [which] tend to drive activity away.” International efforts need to focus on systemic risks that


Photo by JONG KIAM SOON


are shared across jurisdictions, not efforts to coerce one jurisdiction to facilitate another’s policy preferences. Given the seeming inevitability of an inputsbased debate over regulatory adequacy, there is a need for development of standards of comparison independent of the particular interests of competitors. Allowing special interest coalitions of onshore economies like the OECD to define the parameters of debate is thus particularly inappropriate. Consider, for example, the IMF’s conclusion about Bermuda’s anti-terror financing efforts. The assessment concluded that Bermuda’s efforts to combat money laundering and financing of terrorism seem to be “generally adequate” and “relatively well-developed” but nonetheless insisted that more legislation, more resources, and more personnel were necessary. Similarly, anti-money-laundering efforts have grown to include “considerable emphasis … on the practical benefits to be derived from asset sharing among states which have contributed to a successful confiscation.” Far better is reliance on emerging best practices from organisations such as the International Organisation of Securities Commissions

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(IOSCO), which helps develop standards for regulators out of its members’ best practices. Numbers of staff, of course, are merely a crude proxy for regulatory resources and comparisons should adjust for the experience and technical expertise of regulatory staff. Moreover, any comparison of inputs must take into account the significant differences among regulators’ missions.

International efforts need to focus on systemic risks that are shared across jurisdictions, not efforts to coerce one jurisdiction to facilitate another’s policy preferences. There is a legitimate place for discussion of relative regulatory effectiveness in discussions of the global financial system. But it is critical that the discussion be

in the context of the relative success of jurisdictions in achieving the goals of regulation, not the means they use to do so. As the UK’s 1998 review of financial regulation in the Crown dependencies noted, “[a]ll financial centres, onshore and offshore, have problems. All have their critics.” The sooner the onshore/offshore distinction is abandoned and there is an even-handed approach to understanding different regulatory regimes, the sooner there will be improvements in both onshore and offshore regulatory efforts. It is important to remember that regulation of financial activity is not an end in itself, but merely a means to the end of a system of vibrant world-wide financial markets that facilitate the creation of wealth. Once that is recognised, the experience of the mature offshore financial centres may well hold lessons for onshore regulators on how to improve their efforts to avoid the next Enron, Bear Stearns, Madoff, or Parmalat. Reorienting the discussion to focus on the best means for accomplishing the common goal of healthy financial markets is a necessary step.


The Marshall Islands Corporate Registry

The Republic of the Marshall Islands is the leading jurisdiction for Asset Management, Vessel Ownership, Real/Intellectual Property Holdings and Initial Public Offerings/Publicly Traded Companies.

ŠCorbis

A significant number of Republic of the Marshall Islands companies are publicly traded on exchanges in New York and London.

IRI Corporate & Maritime Services (Switzerland) AG in affiliation with the Marshall Islands Maritime & Corporate Administrators

tel: +41 44 268 22 11 | zurich@register-iri.com

www.register-iri.com


Photo by Anton Prado PHOTO

What happens in the United States will affect China, Asia, Africa and other economies.

The World Economic Forum Davos-Klosters, Switzerland, January 2013

The Global Economy in 2013: “Fragile and Timid Recovery” The global economy faces fewer headwinds in 2013 compared with last year and will likely grow a modest 3.5%, participants at the 43rd World Economic Annual Meeting were told in Davos, Switzerland. But Christine Lagarde, Managing Director, International Monetary Fund (IMF), described the recovery as “fragile and timid” because the Eurozone is prone to political crisis and slow decision-making processes. “Some good policy decisions have been made in the various corners of the world, including by central banks,” said Lagarde. “In 2013, they have to keep the momentum.” She called on Europe to operationalise the new tools policymakers have recently devised, including Europe’s banking union. Lagarde also credited the United States with making significant progress on fiscal consolidation, an achievement that she said tended to be overlooked.

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Mark J. Carney, Governor of the Bank of Canada, echoed Lagarde’s caution. “There are still tail risks out there,” he warned, refuting some claims made in Davos that these risks have been reduced or totally eliminated. While central bank action is crucial, said Carney, this needs to be reinforced at the national level on the fiscal and structural sides, “and neither of those agendas are anywhere near being finished.”

The outlook for emerging markets and low-income countries is much higher, at 5.5%, than for the developed nations, at 1.5%. Still, there is a glimmer of hope in Japan, where the new government of Prime Minister Shinzo Abe has just unveiled a new economic policy that has been quickly dubbed “Abe-nomics”. Akira Amari, Minister for Economic Revitalisation and Minister for Economic and Fiscal Policy of Japan, described the new tack as “a

clear commitment to pro-growth policies”, designed to reverse Japan’s prolonged deflation and accelerate GDP growth. China provides another bright spot. “After seven quarters of slowing growth, the economy headed up in the last quarter,” said Yi Gang, Deputy Governor, People’s Bank of China. The economy will grow about 8% in 2013, he added. Domestic consumption is becoming a more important driver of growth, as evidenced by the steady shrinking in the current account surplus, a trend encouraged by China’s macroeconomic policies. Africa is the third bright spot. “The IMF has revised its outlook for the continent upwards to 5.7%,” noted Trevor Manuel, Minister of the National Planning Commission (NPC) of South Africa. The outlook for emerging markets and lowincome countries is much higher, at 5.5%, than for the developed nations, at 1.5%. But any notion of a decoupling is misguided. “We now live in a globalised world,” said Yi. What happens in Europe and the United States will affect China, Asia, Africa and other economies.


China’s currency, the renminbi (RMB), will probably not supplant the US dollar as the world’s reserve currency, except possibly “in the very long term”, said Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University, and a former US Treasury Secretary, in a televised session at the World Economic Forum Annual Meeting. While the RMB will continue to internationalise, “the centrality of the dollar is unlikely to change in a major way,” Summers said, adding, “just as there is a basic inertia in languages of communication, there’s a basic inertia in mediums of exchange.” John Zhao, the Chief Executive Officer, Hony Capital, however, expects freer exchange of the RMB “will come much sooner than most of us expect.” He cited the Chairman of China’s Communist

Party Xi Jinping’s recent trip to Shenzhen, during which he visited Qianhai, a special zone set up for experimentation in RMB internationalisation, as a sign of China’s intent to globalise its currency. Summers also spoke of “the reality that China holds some trillions of dollars of liquid financial assets around the world, on which it is earning an extremely low rate of return, while at the same time there are important shortages of investments in key sectors of the world”. Huge amounts of capital flowing from poorer countries to richer countries is “unprecedented territory”, he said, and will require important deliberations.

The panellists discussed how an ascendant China needs to communicate its intentions to the world. The panellists discussed how an ascendant China needs to communicate its intentions to the world. China’s world power status arrived decades earlier than expected. “It has been a bigger surprise to China than probably to the rest of the world,” said Kevin Rudd, Member of Parliament, Australia, and

a former prime minister of that country. He cited a speech given by Xi, in which he spoke of China’s “rejuvenation”, and the lack of clarity of what that means. China has benefitted from an international rules-based order; the international community “would like to know soon if [China] would like to make changes to the rules,” he said. Gordon Brown, the UN Special Envoy for Global Education, and Prime Minister of the United Kingdom (2007-2010), said that the rise of China is taking place in an interconnected world, a “totally different context than any other power in any other century”. He urged international communication among China and other countries. China needs to develop a global agenda, said Zhao, “and learn very quickly how to play a good citizenship role in the new order which is being formed.” He cited two “certainties” in the world: politics is national and economics is global; the challenge countries face is to reconcile the two. Communication and a redirection of focus are key. “We spent the last half-century trying to understand Washington,” said Rudd. Now it’s time to study and learn “how Beijing sees the world.”

China’s National Grand Theatre, Beijing.

Photo by ctpaul / Shutterstock.com

China’s Currency Unlikely to Topple US Dollar as World’s Reserve Currency


IOSCO Suitability Requirements with Respect to the Distribution of Complex Financial Products Executive Summary In February 2012, the International Organisation of Securities Commissions (IOSCO) Technical Committee published a Consultation Report, entitled Suitability Requirements with respect to the Distribution of Complex Financial Products (the Consultation Report). The purpose of the Consultation Report was to discuss possible principles focusing on customer protections, including suitability and disclosure requirements, relating to the distribution by intermediaries of complex financial products to retail and non-retail customers based on a review of members’ existing regulatory frameworks, as well as the lessons learned from the financial crisis and relevant actions taken in response. The Final Report included the following key principles relating to suitability requirements with respect to the distribution of complex financial products, taking into account the public comments to the Consultation report: Classification of customers Principle 1: Intermediaries should be required to adopt and apply appropriate policies and procedures to distinguish between retail and non-retail customers

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when distributing complex financial products. The classification of customers should be based on a reasonable assessment of the customer concerned, taking into account the complexity and riskiness of different products. The regulator should consider providing guidance to intermediaries in relation to customer classification.

Customers should receive or have access to material information to evaluate the features, costs and risks of the complex financial product. General duties irrespective of customer classification Principle 2: Irrespective of the classification of a customer as retail or non-retail, intermediaries should be required to act honestly, fairly and professionally and take reasonable steps to manage or mitigate conflicts of interest through implementing appropriate procedures in the distribution of complex financial products, and where

there exists a potential risk of damage to the customer’s interest, the intermediaries should, where appropriate, be required to clearly disclose the risk. Disclosure requirements Principle 3: Customers should receive or have access to material information to evaluate the features, costs and risks of the complex financial product. Any information communicated by intermediaries to their customers regarding a complex financial product should be communicated in a fair, comprehensible and balanced manner. Protection of customers for non-advisory services Principle 4: When an intermediary sells a complex financial product on an unsolicited basis (no management, advice or recommendation), the regulatory system should provide for adequate means to protect customers from associated risks. Suitability protections for advisory services (including portfolio management) Principle 5: Whenever an intermediary recommends the purchase of a particular complex financial product, including where


Principle 6: An intermediary should have sufficient information in order to have a reasonable basis for any recommendation, advice or exercise of investment discretion made to a customer in connection with the distribution of a complex financial product. Compliance function and internal suitability policies and procedures Principle 7: Intermediaries should establish a compliance function and develop appropriate internal policies and procedures that support compliance with suitability requirements, including when developing or selecting new complex financial products for customers.

Incentives Principle 8: Intermediaries should be required to develop and apply appropriate incentive policies designed to ensure that only suitable complex financial products are recommended to customers.

When an intermediary sells a complex financial product on an unsolicited basis...the regulatory system should provide for adequate means to protect customers from associated risks. Enforcement Principle 9: Regulators should supervise and examine intermediaries on a regular and ongoing basis to help ensure firm compliance with suitability and other customer protection requirements relating to the distribution of

complex financial products. The competent authority should take enforcement actions, as appropriate. Regulators should consider the value of making enforcement actions public in order to protect customers and enhance market integrity. The member agencies currently assembled together in the International Organisation of Securities Commissions have resolved, through its permanent structures:

• to cooperate in developing, implementing

and promoting adherence to internationally recognised and consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks;

• to enhance investor protection and promote

investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries; and

• to exchange information at both global and

regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation.

photo by r.nagy

the intermediary advises or otherwise exercises investment management discretion, the intermediary should be required to take reasonable steps to ensure that recommendations, advice or decisions to trade on behalf of such customer are based upon a reasonable assessment that the structure and risk-reward profile of the financial product is consistent with such customer’s experience, knowledge, investment objectives, risk appetite and capacity for loss.


Photo CC by Mrs Logic

Growing Beyond: DNA of Successful Transformation

The coming up of diverse and populous markets such as Egypt is set to impact the Islamic finance sector.

From the Ernst & Young World Islamic Banking Competitiveness Report 2012-2013 Islamic banking assets with commercial banks globally grew to $1.3 trillion in 2011, suggesting an average annual growth of 19% over the past four years (2011: 24%). The top four markets account for 84% of industry assets. The Islamic banking growth story continues to be positive, growing 50% faster than the overall banking sector. High potential international markets – each in different stages of development and therefore requiring different penetration strategies - include Saudi Arabia, Malaysia, Qatar, Turkey and Indonesia.

Islamic banking assets are forecast to grow beyond the milestone of $2 trillion by 2014. This year, Ernst & Young launched the EY Islamic Banking Universe that tracks industry performance across core Islamic finance markets with a combined GDP of $5 trillion in 2011. Islamic banking assets are forecast to grow beyond the milestone of $2 trillion by 2014.

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It is, however, a different story when it comes to profitability. The industry’s average ROE was 12% compared to 15% for conventional in 2011. Islamic banks continue to grapple with multiple challenges relating to sub-scale operation, asset quality, negative operating income from core activities and a weak risk culture. The severity of performance challenge has prompted several institutions to initiate wide-ranging transformation programmes. We call it the new 3 R’s for the industry: • Regulatory transformation – involving compliance risk, capital optimisation, integrated balance sheet management and liquidity management • Risk transformation – around Shari’a governance, single data management framework, segment specific risk models and fund transfer pricing capabilities • Retail banking transformation – strengthening customer centric operating model, channel integration and technology enablement The turnaround could take 2-3 years and shareholders and management need to be making commitments now to capitalise on the positive outlook. Successful

transformation around the 3 R’s could potentially increase the profit pool of Islamic banks by 25% by 2015.

Sukuk is developing to be an effective instrument for capital management and growth. Beyond numbers, Shari’a governance and responsible innovation require urgent attention, and sukuk is developing to be an effective instrument for capital management and growth. The industry is still in transitory stage and a lot more needs to be done to demonstrate the impact of Shari’a compliant systems on businesses and economies. The coming up of populous and diverse markets like Indonesia, Egypt and Pakistan would help, and regulatory authorities and multilateral institutions will need to play a more central role to facilitate this transition. Ashar Nazim, Partner, Islamic Banking Excellence Center, Ernst & Young, MENA. Gordon Bennie, Partner, Financial Services Leader Ernst & Young, MENA.


Photo CC by Larry Johnson


The Growing Pains of Islamic Finance By Dawood Ahmedji, Islamic Financial Advisory Services leader, Deloitte in the Middle East. Does nature trump nurture? As the Islamic Finance industry moves beyond the infancy stage of the last decade, we consider the neighbourhood in which the industry has grown up to date and reflect on whether it may have contributed to the challenges, or ‘growing pains,’ namely lack of development and innovation, that the industry is experiencing today.

A Child Star The Islamic Finance industry arguably receives a disproportionate amount of media attention relative to its size and activity, so it is often easy to forget that the advent of Islamic Finance as we know it today is a relatively new phenomenon dating back just a few decades. The principles of Islamic Finance – its DNA so to speak – have remained unchanged since the dawn of Islam. The modern incarnation of Islamic Finance, however, has gone through a significant amount of ‘growing up’ and has done so, to a significant extent, within the environment of the financial sectors of developing economies, most notably in the Middle East. In 2010 the Middle East North Africa (MENA) region accounted for almost

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80% of total Sharia’a-compliant invested assets, with just over half of these in the Gulf Cooperation Council (GCC) countries. Consequently, the development of Islamic Finance has been impacted by the general state and stage of development of the financial sector in the Middle East.

Growing up in the GCC The development, in recent years, of the financial sector in the GCC has been unprecedented, with the development of financial centres that have attracted global financial institutions. Despite this quantum leap in progress, there are still environmental factors that have affected development and constrained innovation and progress, of which three are highlighted below.

1. Non-diversified economies – “Where can we play?” The economies of the GCC region clearly have a strong leaning towards the hydrocarbon sector, resulting in nondiversified regional economies. Hydrocarbon dependence, coupled with a large public sector, leads to a limitation of the areas investors and financiers can seek exposure to. When the region was awash with liquidity in the pre-financial crisis days, the Islamic Finance industry followed the general trend of participating in the asset

price bubble that manifested itself in the real estate markets of the region. With the financial crisis ending that chapter, the call for Islamic financial institutions to diversify away from real estate is not one that has an easy solution. As other sectors and industries, though present locally, lack depth and are relatively crowded out by the state and the energy sector, investors cannot help but question ‘diversify into what?’

2. Underdeveloped legislative framework – “Do we have the kit?” The regulatory frameworks of many GCC countries continue to pose considerable impediments to the development of the Islamic Finance industry. If regulatory outcomes are uncertain or if there is an absence of essential legal frameworks, such as bankruptcy laws and the ability to enforce contracts, market participants will be hindered in their ability to innovate. This void is increased when considering the additional features that Sharia’a-compliant contracts and arrangements require and that are different to conventional financial arrangements. Of the 183 countries ranked in the “Doing Business” index conducted by the World Bank in 2011, only Qatar from the GCC was


ranked within the top 100 as regards the enforcing of contracts. Only in the recent past have institutions such as credit bureaus begun to emerge. Such institutions are vital for the finance sector as they enable increased operational sophistication and help companies to adequately assess risk. Encouragingly, the situation is continuing to improve year on year with increased coverage throughout the region and more countries enhancing their frameworks, such as the Qatari Central Bank that launched the “Qatar Credit Bureau” in March 2011.

3. Underdeveloped capital markets – “What is there to do?!” The under-development of regional debt capital markets relative to other sources of finance has had a profound ripple effect on the Islamic Finance industry, with debt securities in the MENA region accounting for approximately 6% of total capital funding sources compared to a world average of approximately 35%. In the absence of meaningful market activity in debt capital markets, the banking sector clearly rules. The banking sector, stifled by the environmental factors illustrated, has adopted a relatively conservative approach to banking, with collateralised lending featuring heavily.

Amongst the resultant outcomes is that the human capital within the financial sector of the region adopts a particular mindset and approach, not generally conducive to innovation, which the Islamic Finance industry badly needs. Furthermore, corporate entities have limited opportunities to explore different funding sources. For example, despite all the hype surrounding Sukuk (Sharia’a-compliant bonds), there has been relatively little in the way of nonsovereign related entities issuing fixed income securities in the region. Equity capital markets continue to dominate in the MENA region, even if they lack the scale and maturity of other stock markets around the world. The World Bank estimated that at the end of 2009, the combined market capitalisation of all the companies listed on all the stock exchanges in the GCC, at USD 640 billon, was just one quarter of the size of the combined capitalisation of companies listed on the UK stock exchange alone (USD 2,796 billion).

Impact on the Islamic Finance Industry – “The company they keep” Some of the consequences on the Islamic Finance industry being nurtured in such an environment have already been described. One of the biggest challenges facing the

industry today continues to be the lack of suitable asset classes that truly meet the needs of industry participants, such as Takaful companies and fund managers. It is reasonable to conclude that a factor of why a large proportion of Sharia’acompliant funds are currently invested on a Murabaha/Tawarruq basis between financial institutions is also due to the combination of factors highlighted. The inference is that the lack of product innovation within the industry is significantly attributable to the environment in which it has evolved, which has limited the potential for the creation of viable Sharia’a compliant alternatives.

Lessons from Abroad – An (overseas) education The Islamic Finance industry has already benefited from taking lessons from outside the region, with London and Luxembourg being two key conventional financial centres where much activity has taken place. Within its own fraternity, Islamic Finance has also achieved much progress in Malaysia. In the same way that students studying abroad deepen their experience and skill sets, the Islamic Finance industry has flourished in more conducive financial and regulatory environments that have helped foster innovation and development. However, like all students, there is a time to return home and transfer newly acquired skills to the local market.

Neighbourhood Regeneration The Islamic Finance industry will benefit from reform in its home territories that address general environmental challenges. The panacea for structural challenges will differ and have different lead times to achieve. The positive outlook is that the GCC countries have acknowledged the issues hindering progress and are, encouragingly, seeking to implement measures in this regard. The Islamic Finance industry will undoubtedly benefit as the neighbourhood in which it predominantly resides experiences the fruits of such measures.

This article was originally published in Deloitte’s ‘Middle East Point of View’ periodical magazine.

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Regulation Designed to Fit Islamic Finance

Supplied by Business Bermuda Islamic finance is based on fairness and honest dealings. That is why trustworthy regulation is even more crucial to Islamic finance than to conventional finance. Bermuda was the first offshore financial centre to issue Guidance Notes for its financial services sector on Islamic finance and is careful to keep up to date with developments in the sector. Bermuda’s great advantage is that over the past century it has developed a robust, transparent yet flexible regulatory system for traditional financial services. Its regulations work well because the regulators take good care to maintain a constant dialogue with the industry in order to maintain relevance and practicality. As a result, what Bermuda has been achieving with the conventional industry for a hundred years has easily transposed to Islamic finance, making Bermuda one of the most Shari’ah friendly jurisdictions among the traditional financial centres. At the centre of its financial regulation today is the Bermuda Monetary Authority, which was established by law in 1969. The BMA is able to take a broad overview because its remit includes supervision, regulation and

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inspection of financial institutions operating in and from within the jurisdiction as well as being the national mint, the watchdog for financial crime and a key advisor to the government on banking and other financial and monetary matters.

All Islamic finance contracts are considered on an equal-footing basis with conventional contracts. One of its main roles is to approve newly incorporated Bermuda exempted companies, supervising the “fit and proper persons” test of the company’s directors. The BMA also oversees the implementation of international codes of conduct for financial transactions and it works closely with the Ministry of Finance to draft and implement new international financial regulations. Bermuda has not needed to change any of its regulations to accommodate Islamic finance. But it recognises that one of the biggest challenges confronting any nonIslamic domicile is to manage Shari’ah compliance risk. Fortunately, some of the best and biggest global financial institutions

and lawyers are based in Bermuda, all of whom have well-established practices based in the Muslim world. Their knowledge and experience are leveraged so that Bermuda is able to deal confidently and competently with any Shari’ah compliance issues. Gulf finance businesses are unlikely to find a more professionally regulated offshore centre, from an Islamic perspective. All Islamic finance contracts are considered on an equal-footing basis with conventional contracts. Bermuda’s Companies Act 1981, which is the cornerstone of the country’s corporate law, is regularly updated to keep abreast of all international commercial developments, Shari’ah developments included. Bermuda is always mindful that the international business environment is dynamic, with rapid changes and immense competition between countries and jurisdictions to capture capital, deliver innovative new products and services, and create jobs and sustainable growth. That is why its longstanding regulations, as well as business practices and traditional cross-border relationships, are continually evolving as new players emerge with new ideas and open new markets.


The Value of the Hedge Fund Industry to Investors, Markets, and the Broader Economy

By the Centre for Hedge Fund Research, Imperial College, London.

benefits, even during the most difficult macroeconomic environment.

Executive Summary

We also show explicitly that the equal weighted portfolio policy in hedge funds, global stocks, and bonds outperforms the conventional 60/40 allocation to stocks and bonds with significantly higher Sharpe ratio and lower tail risk.

A recent report examined and summarised the value provided by the hedge fund industry to investors, to markets, and to the broader economy. The analysis was divided into two parts: A quantitative analysis of hedge fund performance and a literature review. The Centre for Hedge Fund Research at Imperial College London has created a unique aggregate hedge fund and benchmark index database. The database represents a careful aggregation of all the current information from multiple leading sources about hedge fund performance globally. Survivorship bias is not a factor because both active and inactive funds are included. Using HFR (Hedge Fund Research) hedge fund index data from 1994 to 2011, our performance analysis shows that hedge funds have significantly outperformed equities, bonds and commodities on a risk adjusted basis. The research found that hedge funds achieved an average return of 9.07 percent in the period 1994–2011 after fees compared to 7.18 percent for stocks, 6.25 percent for bonds and 7.27 percent for commodities. Hedge funds achieved these returns with considerably lower volatility and Value-atRisk (VaR) than stocks and commodities, close to bonds in both categories. The research also demonstrated that hedge funds were significant generators of “alpha”, creating an average of 4.19 percent per year from 1994–2011. An equal-weighted hedge fund index returned five times the initial investment after fees, over the period 1994–2011. We find that hedge funds provide economically important, risk-adjusted performance that provides investors with diversification

Specifically, we show that an institutional investor, who adds hedge funds to the conventional 60/40 portfolio policy, can gain economically important benefits of diversification.

We find that hedge funds provide economically important, riskadjusted performance that provides investors with diversification benefits, even during the most difficult macroeconomic environment. The research also finds that investors received approximately 72 percent of all investment profits over this period, compared to 28 percent for hedge fund managers. Importantly, hedge funds’ ability to generate superior performance is not associated with significant risk-taking as measured by volatility or Value-at- Risk. Indeed, we document that hedge fund volatility is reasonably low across investment strategies, compared to conventional asset classes.

We find that correlations between hedge funds and main asset classes are only slightly higher during recessions, suggesting that hedge funds are unlikely to threaten the stability of the financial system. Our review of the literature on the value of the industry to investors, to markets, and to the broader economy shows that hedge funds are important liquidity providers in the markets that they are active in. Moreover, hedge fund activity has beneficial effects for price discovery, the efficient allocation of capital, financial stability, shareholder value, diversification and the broader economy.

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: www.aima.org.

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Jersey Finance Announces Plans for 2013

St.Helier harbour, Jersey.

Jersey Finance has ambitious plans to develop new business for the Island’s finance industry which it outlined at a recent presentation to politicians and finance industry members. Building on the platform in place through the opening of offices and representation in Abu Dhabi in the Gulf, Mumbai and Delhi in India and Hong Kong in the Far East and supported by the formation of new community groups for these regions and for Russia, Jersey Finance intends to further develop its activities in 2013. The agenda for the year ahead includes: • Looking at ways in which Jersey can accelerate its ability to innovate with the possibility of creating a ‘J-Lab’ structure under the auspices of Jersey Finance to fast track ideas. • Encouraging further business in complementary sectors including capital markets, insurance and international pensions. • Considering and implementing recommendations of a report by a leading international consultancy which is pinpointing new initiatives for the industry.

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• Highlighting the conclusions of the study commissioned into the impact of Jersey’s Finance Industry on the UK economy which it is believed will demonstrate the value of the Industry’s relationship to Britain. • Extending Jersey’s global reach through first time visits to Saudi Arabia and further visits to other Gulf States, Hong Kong, China, India and Russia.

Jersey Finance has published a Review of its activity in 2012 which details the Industry’s performance during 2012 and the work of Jersey Finance. Among the key developments were the arrival of five new businesses in the funds sector with a further four hedge fund firms in the pipeline; a record level of bank deposits from the Gulf and the granting of two new banking licences to State Street and Abu Dhabi Commercial Bank; the continuing

London will not be neglected as it remains a core location for Jersey’s finance industry. Alongside international visits, London will not be neglected as it remains a core location for Jersey’s finance industry. Two conferences, one on funds and one covering private wealth, are planned within the first half of the year, sponsorship of key City of London events are included in the programme and London activity will be reinforced by the work of Jersey Finance’s representative in London and the recently appointed global head of business development.

Jersey is confident of complying with the EU’s AIFMD.


progress in setting up a steady stream of new foundations and the arrival on the statute of enhancements to the highly regarded Jersey Trust Law and the increasing capital markets business which includes close to 100 registered companies listed on global stock exchanges, part of Jersey’s role in providing global companies with a gateway to London’s capital markets.

“The growth of the world’s emerging markets will outpace that of the developed countries for years to come.” – Geoff Cook, CEO, Jersey Finance.

There is also confidence that Jersey will be able to satisfy the criteria necessary to comply with the EU’s Alternative Investment Fund Managers Directive (AIFMD), while ensuring that it will be business as usual in the meantime; overseas there have been hundreds of meetings with intermediaries, trade associations and regulators in Hong Kong and China, India and the Gulf as part of Jersey’s growing presence in these key

markets and the opportunity to build on the double taxation agreements signed with Hong Kong and Qatar.

of Jersey Finance’s activities through our representation in key markets such as China, India and the Gulf.”

Locally, Jersey Finance set up a philanthropic foundation and paid out more than £50,000 to local charities as part of the celebrations of 50 years of the finance industry and developed its ongoing partnerships with Careers Jersey, Highlands College and Government departments to support young people considering a career in the finance industry.

Jersey Finance chairman, Jonathan White, highlighted the value of the co-operation with the authorities in Jersey. He added, “We benefit enormously from the constructive partnership that we have built with both the Government of Jersey and the Island’s financial regulator. These partnerships have unquestionably supported the growth in scope and reputation of the finance industry and I am most grateful for the contribution made by both.”

Geoff Cook, chief executive officer, Jersey Finance, commented, “After four years in which the impact of the global financial crisis has inevitably taken its toll on Jersey’s finance industry, there were signs in 2012 of a corner being turned. Inward investment by a swathe of new arrivals on the Island was matched by encouraging figures of the amount of business done by the firms in our market leading sectors.

Geoff Cook, Chief Executive, Jersey Finance.

“The growth of the world’s emerging markets will outpace that of the developed countries for years to come. There is more to be done in winning a slice of that growth for Jersey, a challenge we continue to focus on, but I am particularly proud of what has been achieved in 2012 in expanding the reach

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Michael Findley, University of Texas, Austin. Daniel Nielson, Brigham Young University. Jason Sharman, Griffith University. Extracts from the forthcoming book, Global Shell Games, Cambridge University Press, 2013.

Summary For criminals moving large sums of dirty money internationally, there is no better device than an untraceable shell company. This paper reports the results of an experiment soliciting offers for these prohibited anonymous shell corporations. Our research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. Evidence is drawn from more than 7,400 email solicitations to more than 3,700 Corporate Service Providers that make and sell shell companies in 182 countries. The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers. Shell companies that cannot be traced back to their real owners are one of the most common means for laundering money, giving and receiving bribes, busting sanctions, evading taxes and financing terrorism. The results provide the most complete and robust test of the effectiveness of

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international rules banning untraceable, anonymous shell companies. Furthermore, because the exercise took the form of a randomised experiment, it also provides unique insight into what causes those who sell shell companies to either comply with or violate international rules requiring them to collect identity documents from customers.

Nearly half of all replies received did not ask for proper identification. Just as the random assignment to control (placebo) and treatment groups in drug trials isolates the effect of a new drug, so too the random assignment of low-risk “placebo” emails and different high-risk “treatment” emails isolated the effects of different kinds of risk on the likelihood of (a) being offered a shell company, and (b) being required to provide proof of identity. Key findings include: 1. Overall, international rules that those forming shell companies must collect proof of customers’ identity are ineffective. Nearly half (48 percent) of all replies received did not ask for proper identification, and 22 percent did not ask for any identity documents at all to form a shell company. 2. Against the conventional policy wisdom, those selling shell companies from tax havens were significantly more likely to comply with the rules than providers in

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Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies

OECD countries like the United States and Britain. Another surprise was that providers in poorer, developing countries were also more compliant with global standards than those in rich, developed nations. 3. Defying the international guidelines of a “risk-based approach,” shell company providers were often remarkably insensitive to even obvious criminal risks. Thus, although providers were less likely to reply to clear corruption risks, those that did respond were also less likely than in the placebo condition to demand certified identity documents of potential customers from high-corruption countries who claim to work in government procurement. 4. Corporate service providers were significantly less likely to reply to potential terrorists and were also significantly less likely to offer anonymous shell companies to customers who are possibly linked to terror. However, compared to the placebo a significantly decreased share of firms replying to the terrorist profile also failed to ask for identity documentation or refused service. 5. Informing providers of the rules they should be following made them no more likely to do so, even when penalties for noncompliance were mentioned. In contrast, when customers offered to pay providers a premium to flout international rules, the rate of demand for certified identity documentation fell precipitously compared to the placebo.


What are Shell Companies, Why do they Matter, and Who Sells Them? At the most basic level, in the eyes of the law all companies are simply a “legal person,” which, like real people, can sue and be sued, hold bank accounts, and own and sell property and other assets. In contrast to operating or trading companies that have employees who make a product or provide a service, however, shell companies are little more than this legal identity, and hence the “shell” moniker. Any country or jurisdiction that allows for the formation of companies almost by definition allows for the creation of shell companies, which take on the nationality of this jurisdiction. Although it varies from place to place, shell companies are often quick and easy to set up, obtainable within a few hours or days and costing between a few hundred and a few thousand dollars. A large majority of shell companies are used for completely legal and legitimate purposes – for instance, as a holding company. However, a significant minority are central to a wide range of criminal enterprises.

Shell companies are a threat when they cannot be traced back to the real person or people in control. Anonymous shell companies are so useful to criminals because they screen or veil illicit conduct. Because the companies themselves are largely expendable, it does little good if law enforcement officials can follow some criminal enterprise or trail of illicit funds back to a company, but no further. The defining metaphor is of shell companies functioning as a “corporate veil”: screening and separating criminals from illicit financial activities. Thus, the crux of the issue is whether authorities can “look through” the

A large majority of shell companies are used for completely legal and legitimate purposes. corporate veil to find the individuals pulling the strings (referred to as the “beneficial owner”). There are many instances of shell companies’ being used in criminal schemes, with some examples presented below. • In December 2009 a plane searched in Bangkok was found to be carrying North Korean arms bound for Iran, in violation of

international sanctions. The plane had been leased by a New Zealand shell company, but there was no information on the individual who controlled the company. • The Iranian government used shell companies from Germany, Malta, and Cyprus to evade international sanctions by concealing the ownership of its oil tankers. • The British arms firm BAE Systems pleaded guilty in 2010 in connection with a case which saw it pass secret funds through a series of middle-men and shell companies incorporated in Britain and the British Virgin Islands to key Saudi officials responsible for approving a massive arms purchase from BAE. • Teodorin Obiang, son and heir-apparent of the president of the oil-rich West African nation of Equatorial Guinea, laundered corruption proceeds in the United States by using a series of Californian shell companies to hold bank accounts and title to his $35 million Malibu mansion. • Corrupt Russian tax officials used shell companies from Cyprus and the British Virgin Islands to steal hundreds of millions of dollars in a case that led to the imprisonment and death of Russian whistleblower Sergei Magnitsky.


Photo -leonello calvetti When customers offered to pay providers a premium to flout international rules, the rate of demand for certified identity documentation fell.

• Recent cases against Swiss banks like UBS and Wegelin have often turned on the tendency of American clients to evade US tax obligations by the ruse of holding their accounts through shell companies controlled by these clients. • Russian arms dealer Viktor Bout was convicted in November 2011 of conspiracy to provide aid to a terrorist organisation. Bout’s illicit activities were crucially dependent on a network of shell companies in Texas, Delaware, Florida, and elsewhere around the globe.

If CSPs do not establish the real owner of shell companies, no one else will. • The Mexican Sinaloa Drug Cartel employed New Zealand and other shell companies to launder tens of millions of dollars of cocaine profits through Latvian banks. As a result of these and many other instances, time and time again international organisations, national governments, and NGOs have emphasised

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that progress in combating these and other financial crimes depends on the effective regulation of shell companies, especially in terms of being able to establish the link back to the beneficial owners. In most of these cases Corporate Service Providers (CSPs) acted as crucial intermediaries supplying individual clients with shell companies. These firms make a living by receiving orders for shell companies from clients, lodging the official paperwork, and paying the government fee necessary to create a company. They also offer various auxiliary services, ranging from virtual office facilities to filling important corporate roles as nominee directors, secretaries, or shareholders. CSPs may be sole traders forming companies on a bespoke basis, or wholesalers responsible for the formation and on-going support of tens of thousands of companies through a network of dozens of associated retailers. These firms may be law or accounting firms creating shell companies on an incidental basis, or specialised concerns that do little else. As described below, CSPs are the crucial point at which regulators may intervene to impose a duty to collect customer identity documents.

What are the Rules Governing Shell Companies and How are they Meant to Work? The international standard governing shell companies is clear-cut. It states: “Countries should take measures to prevent the misuse of legal persons [i.e., companies] for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.” This rule has been set down by the Financial Action Task Force (FATF), the world’s standard-setter and enforcer of antimoney laundering standards. The FATF was founded in 1990 and has been dominated by developed states, more recently augmented by powerful transitional and developing countries like Russia, China, India and Brazil. Over 180 countries have committed to FATF standards, which have also been endorsed by the UN, G20, World Bank and many other bodies.


The first potential option is for law enforcement agencies to have strong investigative powers to track down shell company owners. The difficulty here, however, is that police powers are limited by national jurisdictions, whereas the misuse of shell companies is all too often an international problem. The shell company may be incorporated in a different jurisdiction, or the beneficial owner may be a foreign resident, or the provider may be located in a different jurisdiction, or all three. Furthermore, if the provider who formed the company did not collect any information on the owner (as our results show is common), no amount of police pressure will summon up the missing information. As one provider replied to one of our earlier solicitations: “Regarding

confidentiality, no information is taken, so none can be given. It is that simple!” The second option might seem the most promising: having government company registries collect and file information on the real owners. If companies are creatures of law, they cannot exist without some documentation lodged with some form of company registry. From here it might seem an easy step to simply require these registries to demand and hold owners’ proof of identity. Company registries, however, largely have a passive, archival function of collecting a very limited range of information. Though some registries hold more information on companies than others, currently none hold the information on the beneficial owner. Few if any registries have the capacity or desire to change this state of affairs. By elimination, this leaves the third option, requiring CSPs to collect and hold identity documentation on customers forming shell companies according to the “Know Your

Customer” principle. In practice, this is the only way to reliably establish the real owner of shell companies. This solution depends on licensing and regulating providers (something which many countries, including the United States, do not do), imposing a legal duty on them to collect proof of identification from customers, and auditing providers to make sure they do in fact collect this information, with penalties for non-compliance. Because law enforcement powers are largely limited by national boundaries, and because company registries do not collect beneficial ownership information, in practice, if CSPs do not establish the real owner of shell companies, no one else will. This is why CSPs are at the heart of our study. The major advantage of ensuring the ability to “look through” shell companies by regulating those that sell them is that it actually works. As discussed in the results section below, several countries that regulate CSPs had near-perfect records of asking for identity documents from our fictitious customers.

Photo -Circlephoto

In principle, there are three ways to establish the beneficial owner of shell companies: through strong law enforcement powers, company registries, or Corporate Service Providers, though we argue that only the last provides a realistic solution.


The FATF Programme for 2012-2013 Address by Mr. Bjørn S. Aamo, Financial Action Task Force (FATF) President at the 40th Plenary Meeting of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), Strasbourg, France, 3 December 2012 I would like to outline some of the key elements of work that the FATF is undertaking this year during the Presidency of Norway. The FATF Standards and the Next Round of Mutual Evaluations Since my predecessor addressed you last year, the FATF completed the review of the FATF Recommendations which were adopted and published in February of this year. I know that MONEYVAL has taken a keen interest in following this process. The key role of the risk-based approach is the most important feature of the revision. It

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should help us in using our resources better, with more attention to high risk sectors and activities and less where the risks are low. It should also help in promoting financial inclusion, which should be of high priority in many countries.

It is the mutual evaluation process that gives the FATF Recommendations their force. Implementing the revised Recommendations effectively and efficiently will be a challenge for FATF members as well as for other countries. The changes may, to varying degrees, require countries to amend legislation and rules along with the practical

organisation of their Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) effort. Information and training on the revised standards will be important tasks over the coming year and beyond. The FATF will need to work with the FATF-Style Regional Bodies (FSRBs) to determine types of training needed (for assessed countries, assessors, Secretariats, etc.). I am pleased to hear that MONEYVAL has already held training on the new standards which was organised for MONEYVAL and EAG members this past September. It is the mutual evaluation process that gives the FATF Recommendations their force. We must continue to strengthen our AML/CFT systems through this process, and I expect therefore that all countries in the global network will now be assessed for compliance with the revised Recommendations. The FATF will begin its next round of


July 2012- June 2013 marks the year of the Norwegian Presidency of the FATF.

assessments in the 4th quarter of 2013, and most FSRBs should start their next evaluation rounds then or soon thereafter. The new round of mutual evaluations will place a much stronger emphasis on the assessment of effective implementation of the revised FATF Standards and not only of technical compliance. The new approach for assessing effectiveness is based on objectives and will be fully integrated into the assessment methodology. As one important example, I would like to mention the practical availability of information on legal persons and beneficial ownership. The revised standards go into more detail on what is required by countries in ensuring availability of this information (to the banks, the public and so on), and the evaluation process – from the effectiveness point of view – will look closely at whether this information is indeed available to those that need it. We are currently working to

finish this new methodology, as well as to develop guidance on issues where further advice on implementation may be useful. We are grateful for the active contribution of MONEYVAL.

Implementation of the revised FATF standards will continue to require dialogue and consultation with the private sector As we look forward to the next round of mutual evaluations we must, however, not neglect the very important work of follow-up on earlier evaluations. Indeed, MONEYVAL is in the process of completing its “fourth” round of evaluations with the specific aim of following up on the work

of the previous round. In my view, the MONEYVAL follow-up round will provide a strong foundation on which to base the implementation of the revised FATF Recommendations. Furthermore, the FATF hopes to work with MONEYVAL and other FSRBs to develop a more common approach to assessment and follow-up procedures that will increase the comparability of evaluations and help to further strengthen our processes in the context of the global network. Further Development of the Global Network The global network is under constant development. Our ministers provided us with a mandate this April, strengthening the role of the FSRBs as their right to take part in all FATF activities was made clear. In October last year, we agreed on a new set of high level principles and objectives. It is important to stress that these newly agreed

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objectives apply to all bodies – both the FATF and the FSRBs; it is a mutual process – and thus form a clearer and more balanced foundation for the global AML/CFT network. Based on the new FATF Mandate and these newly agreed objectives, we also created the Global Network Coordination Group, a new FATF working group, which met for the first time in June 2012 and then again in October. The purpose of the group is to serve as a forum for raising – and when necessary resolving – issues of interest to the FSRBs and the FATF. In addition, the group will also serve as a mechanism for sharing good practices and ideas relevant to such bodies. As a demonstration of our commitment to involve FSRBs in this process, for the first time, we have a working group co-chair who comes from an FSRB.  The work of this new group has had a good start, and I am quite confident we shall see concrete results coming from the work of the group. I hope that I can count on the continued and active support of all FSRBs – including in particular MONEYVAL as a more experienced regional body – to ensure that this initiative succeeds. Engagement with the Private Sector and Civil Society Implementation of the revised FATF standards will continue to require dialogue and consultation with the private sector and representatives of civil society. Private institutions have a vital role to play in the fight against money laundering and terrorist financing. It will therefore be important to maintain and improve the mechanisms through which we formulate new guidance and carry out research on money laundering and terrorist financing. The FATF plans during this Presidency to convene another consultative forum meeting to discuss further work relating to the implementation of the new FATF Recommendations. There may also be other forms of dialogue. Our dialogue with non-governmental organisations will naturally also include how Recommendation 8 on non-profit organisations should be followed-up in practice. Continued Work on Identifying and Assessing Threats The FATF continues to study developments in markets and economies, as well as to identify new threats to financial integrity. Of special importance to this effort are general and special typologies projects. Currently, five general type research projects are under way and expect to be completed under the Norwegian Presidency. In addition, since tax crimes have now been included as a predicate offence for money laundering under the revised Recommendations, the FATF has initiated a special research project to compare experiences from countries where tax crimes have been a predicate

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offence for some time. The inclusion of tax crimes as a predicate offence will increase the basis for international co-operation in this area, and it should be of interest to the many governments who need to strengthen their revenues and tax systems.

(with its 34 member countries). The FATF Plenary has thus agreed to undertake careful considerations of a possible expansion of the FATF membership. In these considerations, the further development of the role the FSRBs may play in the global network should also be included.

The FATF has initiated a special research project to compare experiences from countries where tax crimes have been a predicate offence for some time.

Based on the new mandate along with the fact that the FATF will soon begin its 4th round of mutual evaluations according to the new standards, it seems to be the right time for the FATF to examine and, as necessary, refine its internal working methods and structure. I have initiated a process to look at the work of the FATF to try to better prioritise and co-ordinate it and ensure that any unnecessary duplication can be avoided. Though this process has started now, I expect that implementing any new internal structures or working practices will likely continue under my successor.

Refining Organisation and Working Methods In April of this year, the FATF Ministers met and adopted a new 8-year Mandate for the task force. Furthermore, FATF has received applications for membership recently from a couple of countries. There are indications that others may follow. The question of FATF membership is not easy, as a significant expansion may influence the working methods and decision-making procedures which are now based on consensus of FATF

Dear colleagues, the present economic and financial problems in many countries add to our challenges. At the same time, effective implementation of the FATF Recommendations will contribute to the confidence in our financial systems that is required if economic growth and prosperity are to be rebuilt in Europe and elsewhere. Copyright © FATF/OECD.  All rights reserved. 

Bjørn S. Aamo, FATF President.


Photo by DavidCharlesPhotography

Cayman Islands’ New Arbitration Law

By Mac Imrie and Luke Stockdale, Maples and Calder, Cayman Islands. The existing legislation governing arbitration in the Cayman Islands was recently repealed and replaced with the Arbitration Law, 2012 (the “Law”). This article provides a brief overview of the changes and their impact on arbitration as a method for resolving commercial disputes in the Cayman Islands. The Previous Arbitration Regime Before 2 July 2012, arbitration proceedings in the Cayman Islands were governed by the Arbitration Law (2001 Revision). That legislation was based on the English Arbitration Act 1950. The Law replaces that legislation, other than in respect of arbitration proceedings that were in progress on 2 July 2012, which remain governed by the Arbitration Law (2001 Revision). There were a number of perceived weaknesses in the Arbitration Law (2001 Revision). These included: (i) the fact that, where court proceedings had been commenced in breach of an arbitration clause, the court was not required to stay the proceedings in favour of arbitration, but merely had a discretionary power to do so; (ii) the scope for judicial interference

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during arbitration proceedings and the wide powers of the court to review and strike down arbitral awards; and (iii) the lack of any detailed provisions in the legislation providing a framework for how arbitration proceedings were to be conducted in the absence of agreement between the parties.

The Law applies to all arbitrations where the seat of the arbitration is the Cayman Islands, regardless of where the parties are based. The enforcement in the Cayman Islands of: (i) agreements to arbitrate in countries which are parties to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the New York Convention”); and (ii) arbitral awards made in such countries, remain largely governed by the Foreign Arbitral Awards Enforcement Law (1997 Revision). That legislation, which was originally enacted in 1975 and was last revised in 1997, incorporates the provisions of the New York Convention relating to the foregoing matters into Cayman Islands law.

Key Features of the New Arbitration Law, 2012 To date, in the Cayman Islands, arbitration has mainly been used as a mechanism for resolving disputes between parties located in the jurisdiction. The intention behind the Law is to ensure that arbitration remains available to such parties, whilst at the same time attracting more international arbitration proceedings. Modernising Cayman Islands arbitration law and bringing it into line with international standards is seen as a way of making the jurisdiction more attractive for onshore clients who wish to have their disputes resolved by confidential arbitration in a neutral offshore venue, where there are experienced legal advisors and other professional service providers readily available to assist with the proceedings. Section 3 sets out the principles upon which the Law is founded: (i) the fair resolution of disputes by an impartial tribunal without undue delay or expense; (ii) the freedom of the parties to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest; and (iii) limits on the scope for court intervention in arbitration proceedings.


The Law is largely based upon the UNCITRAL Model Law as updated in 2006 and the English Arbitration Act 1996, although it differs from both in some respects. The Law applies to all arbitrations where the seat of the arbitration is the Cayman Islands, regardless of where the parties are based. The Law governs the conduct of arbitrations, as they relate to challenges before the Grand Court of the Cayman Islands (the “Court”) against Cayman Islands arbitral awards. The Law also contains some provisions relating to the enforcement in the Cayman Islands of interim measures and awards made in foreign arbitral proceedings. An arbitral tribunal appointed under the Law has wide powers and is essentially able to award any interim or final remedy that a court could have granted if the dispute in question had been the subject of court proceedings. The Law gives the parties the freedom to tailor the arbitral proceedings according to their needs but also provides a set of default provisions which apply in the absence of agreement. There are certain mandatory provisions of the Law designed to protect the integrity of the arbitration process, for example, by ensuring that the tribunal maintains its impartiality throughout the arbitration and does not have any conflicts of interest. The Law expressly recognises that arbitration proceedings are to be confidential and the limited grounds set out in the Law upon which an arbitral award may be challenged in the Courts reflect the grounds in the New York Convention.

Reactions from Clients and Practitioners and the Expected Impact of the Law The Law has received a positive response from both clients and practitioners since it came into force. Before its implementation, the Law was the subject of extensive consultations with relevant stakeholders and it has been drafted to reflect international best practice in relation to arbitration proceedings. Financial services institutions and professional advisors are now increasingly incorporating Cayman Islands arbitration clauses into their agreements.

The Law has received a positive response from both clients and practitioners since it came into force. It is hoped that the enactment of the Law will lead to more Cayman Islands arbitration clauses being inserted within commercial agreements, which will in turn lead to more international arbitrations taking place in the Cayman Islands. This in turn will provide momentum for the further development of the infrastructure needed to support arbitrations in the Islands and create a pool of practitioners and others who are able to act as arbitrators and represent parties in arbitration proceedings.

Transition to the New Arbitration Regime The transition to the new arbitration regime in the Cayman Islands has proceeded smoothly, given that the Law is largely based upon the UNCITRAL Model Law and the English Arbitration Act 1996. Accordingly, there is an existing body of case law which will be of assistance to the Courts in interpreting the Law and which will provide guidance as to how the Law is likely to be applied in the Cayman Islands. Decisions of the English and other Commonwealth courts are persuasive rather than binding in the Cayman Islands, but where a legislative provision being considered by a Court is the same, or substantially the same, as a provision which has previously been interpreted by an English or Commonwealth court, the Court is likely to follow that interpretation unless there are good reasons not to do so. Some consequential matters have arisen following the implementation of the Law, such as the form in which applications to the Courts are made, the extent to which Judges can decide those applications without the need for a hearing, and whether leave of the Court will be required before such matters can be served on other parties outside of the Cayman Islands. Amendments to the Financial Services Division Guide and the relevant Grand Court Rules may be expected in due course. © Maples and Calder

George Town, Cayman Islands.


Photo by Jo Ann Snover

Banner Year for Cayman Captives The captive insurance industry in the Cayman Islands is booming. The Cayman Islands Monetary Authority (CIMA) has reported that it received 67 applications for new licenses in 2012, with 52 licenses granted and the remainder scheduled for approval in 2013. Since 1 January 2013, one license has been approved and another 11 have been approved in principle. The total number of new licenses accounts for an increase of more than 58% over 2011 and is the biggest year for captives since the hard market of 2004.   Although Cayman may be largely known as being a healthcare captive domicile, the 52 new formations came from various sectors including healthcare, life reinsurance, P&C reinsurance, manufacturing and technology. A number of group captives were also formed as segregated portfolio companies.   Existing Cayman captives also dramatically grew their assets. Total premiums written by captives were reported at US$11.8 billion and total assets under management climbed to US$88.1 billion, their highest ever levels, which grew 24% and 51% respectively.   “Cayman understands the captive insurance business and the role it plays in the risk

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management space, and when I say Cayman, I mean the industry together with the regulator,” said Rob Leadbetter, Chairman of the Insurance Managers Association of Cayman (IMAC). “These statistics are not surprising to us, because we have been building our core competencies over decades to make Cayman the ‘go to’ domicile in the insurance industry.”

With the new Insurance Law now in place, Cayman expects to welcome even more insurance business to its shores. There are some 5,000 captives globally and since 1980, 3,095 captives have been licensed in the Cayman Islands. The Cayman Islands remain a very popular jurisdiction for captive formations, which, including the 780 segregated portfolios, is close to 1,500 entities. This popularity is attributable to a combination of sensible legislative framework, the relationship between IMAC and CIMA, together with a harmonised regulatory environment.

With the new Insurance Law now in place, Cayman expects to welcome even more insurance business to its shores. The new law is designed to clearly differentiate between the domestic and international insurance markets in the Cayman Islands and to regulate each in accordance with its own requirements. It strengthens legislation to protect Cayman entities and brings the law formally into line with international standards. And finally, it sets out a framework to develop the reinsurance market and to create a clearer understanding for the insurance linked securities (ILS) market. Most importantly, it embraces the concept of ‘proportionality’ and addresses entities based on the nature, scale and scope of risk. Insurance Managers Association of Cayman (IMAC) is a non-profit organisation run by the insurance managers of the Cayman Islands. In operation since 1981, IMAC’s aim is to act as both regulatory liaison with the Cayman Islands Government and to promote the Cayman Islands as a domicile of choice for captive insurance companies.   IMAC hosts the world’s largest captive insurance conference, attracting nearly 1,300 captive managers, service providers and directors annually.


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A New Era Dawns for the Turks and Caicos Islands Recent political and administrative changes in the Turks and Caicos Islands (TCI), such as the establishment of the TCIG Investment Unit, have led to an increase in fiscal discipline and have served to enhance further a state of affairs whereby the public, private and regulatory sectors can be seen to be quantifiably working together towards the common goal of making the jurisdiction an essential part of investors’ portfolios. The newly elected Government, headed up by Premier Rufus Ewing, can point to an international financial services sector that is marked by an absence of exchange controls, as well as personal, inheritance, capital gains or corporate tax. It is a sector that specialises in banking, insurance and trust management, as well as laying claim to a popular yacht registry.  The TCI is possibly best known for Producer Owned Reinsurance Companies (PORCs). These are reinsurance companies beneficially owned or controlled by the producers of business which is ultimately reinsured by the PORC and are typically used for service contract and extended warranty business, mortgage guarantee insurance, as well as life, accident and health reinsurance coverage to the US car dealership sector. Captive insurance is an area that TCI sees as exhibiting great potential for growth, something which was evidenced at the Captive Insurance Conference back in November 2012 where it became apparent that TCI has struck the right balance on the regulatory front to attract new business. Risk is mitigated by the fact that captives are established for the specific purpose of insuring risks emanating from their parent

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group, with any losses able to be recouped from that parent company. The parent group, which usually originates in the US, is itself heavily regulated.

benchmarks set by recognised international standard setting bodies, thereby ensuring the TCI has the credibility to attract and retain new business.

In the trust management arena the Trusts Ordinance 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. In addition, there is no requirement to register the trust deed, nor beneficiaries, redomiciliation is permitted, while foreign judgements are excluded.

The culture of compliance is apparent at every turn, with TCI committed to fulfilling its international obligations. It has had, in fact, a framework of Anti-Money Laundering (AML) legislation since 1988, which now includes Combating the Financing of Terrorism (CFT) measures. In addition, TCI is a member of the Caribbean Financial Action Task Force (CFATF).

The culture of compliance is apparent at every turn. Another flagship area is that of mutual funds with the jurisdiction providing for, respectively; Registered; Recognised; Licensed; and Exempt Mutual Funds. The Turks and Caicos Islands Government’s recently formed Investment Unit, which has at its helm an experienced and visionary Director in the form of Rebecca Astwood, is focused on attracting HNWIs and corporate entities to the jurisdiction and recognises the value of the international financial services sector to the national economy and population’s social well-being. It acknowledges that the prevailing winds of change have put IFCs all over the world under much scrutiny and is embracing these to ensure that the financial products and services offered comply with the latest

Responsibility for the administration of the regulatory framework for all financial services in the Territory falls to the Financial Services Commission (FSC). This institution has been significantly strengthened in light of the 2009 Foot Review to ensure it meets international standards in respect of issues such as greater clarity in the Captive Insurance and PORCs arena and more detailed reporting on bank liquidity. Further changes have seen an expanded regulatory team subject to enhanced training. TCI’s positive approach to compliance is evidenced in the Global Forum’s Phase 1 Supplementary Peer Review Report on its Legal and Regulatory Framework which testifies that “the changes rapidly introduced by the Turks and Caicos Islands since the August 2011 report demonstrate its commitment to implementing the international standards for transparency and exchange of information.”


Photo - isak55

Anguilla: Prudent Pioneer Anguilla is a well respected, businessfriendly jurisdiction that can lay claim to truly zero tax, low set up and annual maintenance cost credentials for investors. At the same time, however, it is both well regulated and politically stable, with a highly skilled pool of service providers and a focus on client satisfaction. Its steady growth and unblemished reputation have been recognised by the OECD and CFATF, who have drawn attention to robust and modern qualities, where issues such as money laundering are taken seriously. The jurisdiction proves that ‘offshore’ can be a force for good.

The jurisdiction proves that ‘offshore’ can be a force for good. Anguilla certainly possesses strength in depth, offering a comprehensive suite of IBCs, LLCs, Limited Partnerships, Trust Companies, PCCs, Foundations, Mutual Funds etc. In respect of foundations Anguilla uniquely provides for the founder to be able to specify a dispute resolution procedure to apply to the foundation. Mutual funds, meanwhile, allow for the establishment of public, private

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or professional funds which are exempt from stamp duty, as well as corporate, dividend and withholding tax. Anguilla is a pioneer on the LLC front too. One of the few jurisdictions to have a specific LLC Act, it has provisions enabling the term of an Anguilla LLC to be perpetual or as otherwise provided for in the LLC agreement, as well as the power to structure Anguilla LLCs so that they provide their members with both limited liability in parallel with the rights to and liabilities for income and losses. Anguilla can also point to continued success in the captives arena, from single parents through to multinationals, though with its flat fee pricing structure it is particularly suited to smaller family owned structures, the watchwords for which are “costeffectiveness” and “stability”; characteristics that are synonymous with Anguilla. Regulators conduct rigorous yet efficient application reviews, yet thereafter there are no requirements to appoint local directors, hold annual general meetings in Anguilla, nor any compulsion to establish bank accounts in the jurisdiction, if the proposed captive’s parent has an existing banking relationship elsewhere. A similar approach prevails in respect of auditing,

with applications for “non-admitted overseas auditors” to become approved, permitted. The jurisdiction is looking to consolidate growth in the Latin American and Asian regions, with much of the success in this area to date down to its pool of worldwide agents who have experienced particular success in Taiwan, assisted by the offer of multilingual companies. Going forwards, other new potential rich seams of opportunity set to be explored include aircraft and yacht registration.

The watchwords are ‘cost-effectiveness” and “stability”; characteristics that are synonymous with Anguilla. Meanwhile, on the technical side, ongoing upgrades to the trailblazing Acorn online registry have seen it re-written and streamlined so as to provide compatibility with all principal browsers, with the ability to conduct transactions on iPhone and Android, and to register foundations.


Photo by Achim Baque

BVI Profile The British Virgin Islands (BVI) has become almost synonymous with international financial services for investors, service providers and financial institutions, thanks to its stable economy, well regulated status and proactive stance, as well as its willingness to participate in information exchange. No surprise you might think, when you draw the spotlight on to BVI’s low fees, innovative products, and high volume of professionals working in the industry, in addition to the great flexibility that prevails for investors, not to mention the lack of restrictions when it comes to investment strategy. Furthermore, the BVI can point to over 2400 investment funds – public, private and professional (particularly attractive to start ups), whilst recently it has made great inroads into the burgeoning Chinese market. BVI trusts, for example have for some time dominated in Asia, though arguably as much for insurance against political and social unrest and future creditors and to hold complex assets, as for tax planning purposes. At the same time, however, the jurisdiction has managed to stay relevant to other more traditional markets such as Europe and the US Yet, never one to rest on its laurels, the BVI has been nothing if not proactive of late to ensure it retains its pre-eminent position. Recent legislative amendments have served to reaffirm its reputation as a globally integrated and responsible financial services centre. These have come in the form of the

BVI Business Companies (Amendment) Act 2012, the Mutual Legal Assistance (Tax Matters) (Amendment) Act 2012 and the Partnership (Amendment) Act 2012. These pieces of legislation work to strengthen compliance with global best practice, whilst maintaining the attractiveness of the jurisdiction to investors.

Recent legislative amendments have served to reaffirm its reputation as a globally integrated and responsible financial services centre. Despite being under assault from certain quarters in recent years, when you look at how and why IFCs are actually used in practice beyond tax mitigation, the BVI is a prime example of just why they should be perceived as a force for good. For example, they exercise a pivotal role in joint venture structuring, afford easy access to regulators and key financial markets, as well as being noteworthy for the low cost and the ease with which they can be administered. Moreover, the likes of the BVI act as an essential conduit for FDI into developing countries. In January 2013, BVI IFC Executive Director Ms. Elise Donovan, communicated to industry counterparts the Centre’s renewed commitment to unparalleled accountability,

transparency, prudent financial management and competitiveness, as part of an ongoing campaign to preserve and consolidate the jurisdiction’s good reputation. She affirmed the importance of and intention for the private sector, FSC and Government to continue to sing from the same hymn sheet, as acknowledged by Mark Carney, Chair of the Financial Stability Board in November 2012, who recognised the efforts taken by the BVI to meet the International Monetary Fund standards of international cooperation and transparency. The BVI has some 450,000 companies registered, yet has been quick to recognise the need to engage with emerging Asia/ Pacific and Latin American markets to consolidate the leading IFC status such statistics point to. One way this has manifested itself is in the form of regular successful tours to the likes of Singapore, Hong Kong, Shanghai and Mumbai to spread the word as to the jurisdiction’s unique offer. 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 serve to make it a highly attractive proposition for the new wave of HNWIs coming out of locations such as China.

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British Virgin Islands Elise Donovan, Executive Director of the British Virgin Islands International Finance Centre elaborates on recent and forthcoming developments and achievements.

Q: The BVI has become almost synonymous with international financial services. What do you put this down to? A:  The British Virgin Islands (BVI) is an important global financial centre that has established proven leadership in meeting the needs of international businesses and high net worth individuals that contribute to the management of global wealth and global financial markets. It is one of the safest, most trustworthy and reliable financial centres in the world and is able to attract top quality business based on its model of providing transparent, cooperative and integrated business solutions. 

The BVI is the pre-eminent corporate domicile and its corporate register is the largest of its kind in the world with close to 500,000 active companies registered. Undoubtedly, BVI companies doing a range of business are likely to be found almost anywhere in the world in major transactions.

Evidence points to a strong correlation between successful economic growth and doing business with the BVI. In addition to being the premier corporate domicile, the BVI is a frontrunner in providing a sophisticated array of diverse wealth management solutions in trust and estate planning, funds and investment business, captive insurance and ship registration services. Offering these financial services in the BVI, is a pool of highly qualified expert professionals from the world’s leading trust companies, law firms and accounting firms.

Evidence points to a strong correlation between successful economic growth and doing business with the BVI. We provide advantages and value to businesses,

Elise Donovan, Executive Director, BVI IFC.

individuals and countries to successfully navigate the global landscape and maximise their economic growth and increase their wealth potential. A clear example of this is the Asia/Pacific region and its expanding class of high net worth individuals for whom the BVI is the preferred jurisdiction of choice. AsiaPacific is the fastest growing economic region and, arguably, this may be partly due to the region’s professionals’ business acumen in choosing BVI structures.

Q: BVI trusts continue to dominate in Asia, arguably as much for insurance against political and social unrest, future creditors and to hold complex assets, as for tax planning purposes. Which structures represent the most attractive propositions for wealthy Asian families with long term legacy requirements? A:  A trust is often the best structure for estate planning. The type of trust used is determined by the needs of the client and the assets to be held by the trust. If a family operated trading/holding company is to be an asset of the trust (or of the underlying company of the trust) then a BVI VISTA (Virgin Islands Special Trust Act) is often preferred by Asian clients as it gives them a level of control over the company which they are comfortable with. A VISTA may also be preferred when there are assets that the settlor would prefer to be preserved for future generations and not sold. A traditional discretionary trust may be preferred when the assets are stocks, money, investments and other intangibles. The BVI PTCs (Private Trust Companies) are also increasingly used in Asia for very wealthy families with such legacy requirements. The BVI has an excellent regime for PTCs. 

Q: In focusing on the Asian and other emerging markets, how has the BVI managed to stay relevant to other more traditional markets, such as the US? A: The BVI remains at the heart of the global financial services industry, and the centre’s role in high-profile, high-value transactions continues to be strong. Service firms continue to be involved in significant deals that involve multi-national corporations that work across the globe in Europe, Latin America, North America as well as Asia. Additionally, we have a sophisticated array of quality products and services in financial management for the discerning, high net worth clientele so, of course, we market and promote BVI business solutions worldwide. We keep abreast of global demands and we present innovative services and products in every country in which we identify the existence of business opportunities. 

Q: How do recent legislative amendments in the form of the BVI Business Companies (Amendment) Act 2012, the Mutual Legal Assistance (Tax Matters) (Amendment) Act 2012 and the Partnership (Amendment) Act 2012 work to strengthen compliance with global best practice, whilst maintaining the attractiveness of the jurisdiction to investors? A:  As a key player in the global financial services business, the BVI always strives to ensure that its legal and regulatory framework serves the requirements of the industry and that it meets international best practices and standards in areas of transparency, information exchange and compliance with established standards in relation to preventing money laundering and countering terrorist financing. We


provide a safe, secure and robustly regulated environment that gives financial industry leaders the confidence to do business with the BVI. It is important that the BVI’s legislations are up-to-date and of the highest quality. Our model of providing innovative business solutions, while applying the right touch of regulation, is what has allowed us to be a global leader in the financial services industry and what makes the BVI so attractive to investors worldwide.

Q: What can you tell us about plans for the future in respect of arbitration, insolvency and private jet registration being added as additional services in 2013 and at how

these will act to cement BVI’s status as the pre-eminent jurisdiction in the eyes of the Asian market? A: With the presence of an internationally respected commercial court, the BVI has become a jurisdiction that is most sought after in terms of commercial litigation and has established itself as a sophisticated dispute resolution centre. This will be complemented by the development of an arbitration infrastructure and the BVI International Arbitration Centre, making the BVI even more attractive for global businesses that are domiciled in the jurisdiction and elsewhere.  The BVI’s Insolvency Act is a comprehensive and sophisticated

The BVI Commercial Court

piece of legislation which, amongst other things, provides a mechanism for rescuing companies in distress and winding companies down for the benefit of their creditors and other stakeholders. Naturally, with the number of companies incorporated in the BVI, this business is growing, and the BVI is considering modifications to further enhance its insolvency legislation.

The BVI remains at the heart of the global financial services industry. The BVI has also become a leading jurisdiction for the establishment of vehicles in connection with the acquisition, financing, sale and leasing of private and business-jet aircraft. Several factors contribute to this development, including investor confidence in the BVI, its tax neutrality, modern and flexible legislative framework and competitive pricing. The Asian market is the fastest growing globally and with an ever-increasing class of high net worth individuals, private jets are likely to be in demand. Purchasers and financiers will wish to structure acquisitions in a stable, creditor friendly and tax neutral jurisdiction. The BVI is well-placed to meet this continued demand. With the recent addition of the BVI’s legislative pool of the Mortgaging of Aircraft and Aircraft Engines Act and the BVI’s status as a US Federal Aviation Authority Category One Aircraft Register, the BVI is well-established for private jet registration, complementing its highly regarded wealth management and assetholding tools that are popular in the region.

Q: What other forthcoming developments are set to further reinforce the jurisdiction’s credentials? A:  The BVI is stepping-up its promotional activities in the region through direct marketing to Asia’s international financial services leaders and practitioners and by increased sponsorship of events in the region. This year we will launch the BVI’s first official office in the region in Hong Kong in order to maintain our position as Asia’s preferred jurisdiction and it will also give us closer access to our Asian clients. The Hong Kong office will afford the BVI better opportunities to develop and deepen the relationships that are so critically important to doing business with Asia.


Proactive Seychelles takes Regulation Seriously Seychelles has been on the white list of reputable offshore jurisdictions since 2009 and is highly proactive in fostering an ongoing fruitful working relationship with the OECD, as evidenced by it having successfully passed its Global Forum Phase 1 Peer Review, so ensuring the jurisdiction’s good reputation worldwide is maintained. Moreover, the country is confident in its preparations for Phase 2 and in recognition of the high regard in which it is held, has been invited by the OECD to be an observer on its Peer Review Group meetings.  The Seychelles International Business Authority (SIBA) which experienced a marked increase in revenue in 2012 over the previous year, has to date registered more than 100,000 IBCs. These benefit from zero taxation on income and profits, fixed registration fees and an absence of minimum paid-up capital requirements and exchange restrictions. The jurisdiction also shows strength in depth in respect of other structures too – most notably; trusts, protected cells, limited partnerships, mutual funds, hedge funds, as well as in the yacht/ ship and airline registration arena. Special License Companies (CSLs), meanwhile, enjoy liberty to conduct permitted business both in and outside the Seychelles and allow investment into companies based in countries where a reciprocal treaty is in place. They are subject to a 1.5% business tax rate on their global income and are exempt from withholding taxes on dividends, interest and royalties, as well as stamp duty. The CSL has proved to be very popular with international investors for its tax efficient credentials and is often manifested in the form of an intermediary holding or consultancy services company. Key double taxation agreements include those with China, South Africa and the UAE, Qatar and Bahrain, thereby allowing investors a viable platform into some of the world’s most important economic powerhouses, with more due to come into force soon. Recent developments include amendments to the 1994 IBC Act to ensure continued compliance with global best practice, as well as SIBA’s licensing of Trop-X, Seychelles’ first multi-asset, multi-currency securities exchange, which is set to significantly enhance investment opportunities, while it will also bring with it spin-off benefits for local service providers, not to mention an improved culture of regulation and transparency.

Photo by SueC

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In addition, connectivity issues have been addressed thanks to the welcome completion

of the SEAS high power submarine cable system, which also provides a catalyst for activity in the e-commerce sector. Combined with government stability, financial resources and robust regulation, the cumulative effect of these developments is clear: the Seychelles can recommend itself in no uncertain terms to investors. Furthermore, there is an ongoing investment in specialised training within the sector, with a view to employees in both the state bodies and those working for the service providers being able to provide an unparalleled knowledge of the structures offered to investors.

The jurisdiction…will not hesitate to revoke the licenses to operate of those service providers who do not pass muster in respect of money laundering. The country also has a strong pedigree of the various state institutions working in harmony towards a common goal. This is evidenced in an ongoing commitment to diversification of product offerings on the part of SIBA, the Ministry of Finance, Trade and Investment and the Central Bank of Seychelles. The jurisdiction is also at pains to point out that it takes its due diligence and compliance requirements very seriously indeed and will not hesitate to revoke the licenses to operate of those service providers who do not pass muster in respect of money laundering, as they have done in two recent high profile cases. It’s fair to say that a robust supervisory, legal and regulatory framework prevails in the jurisdiction’s international financial services sector, which includes service providers being required to subscribe to exacting professional standards. Just recently, the Anti-Money Laundering (AML) Act served to strengthen the jurisdiction’s Financial Intelligence Unit (FIU) to further safeguard against illegal activity. In addition, the legislative framework is set to be strengthened on the trusts, foundations, funds and taxation front. 2013 also marks an exciting development whereby SIBA will become the Financial Services Commission (FSC), a change that will see it assuming a greater supervisory and regulatory role, providing greater clarity for investors and service providers in the process.


Republic of Seychelles MD of the Seychelles International Business Authority (SIBA), Mrs. Wendy Pierre talks to the Offshore Guide about recent and forthcoming flagship developments in the jurisdiction.

Q: Having achieved a successful Phase 1 Peer Review Report, are you confident of a similarly successful outcome in respect of Phase 2, where applicability in practice of the legal and regulatory framework is set to be verified? A: The Seychelles is confident that it will demonstrate to its “Peer” assessors that it does in practice have the necessary legal and regulatory framework during the Phase 2 review. A lot of work has gone into the review of the legal and regulatory framework with a wide range of stakeholders including the private sector, and in that regard we believe that the Seychelles is ready for Phase 2.

The Seychelles has always proven itself to be an open and transparent jurisdiction.

Q: How do recent amendments to the 1994 IBC Act act to strengthen compliance with global best practice? A: The Seychelles has always proven itself to be an open and transparent jurisdiction. This is evidenced by the fact that the country has always remained off any lists of un-cooperative jurisdictions. In regard to legislative amendments, the Seychelles is committed to ensuring that should the need exist to amend the current legislative framework to meet international best practice, or improve the ease and appeal of doing business in the Seychelles, the appropriate amendments will be made.

The amendments to the IBC Act are one example of such a commitment. The Seychelles has recently amended a series of laws to ensure that compliance with global best practice is met. With regard to this, it has to be said that the Phase 1 Peer Review has led to a number of these amendments. However, the fact remains that a lot of those amendments made to different laws had been in the pipeline for a number of years, which goes to show that the Seychelles has a dynamic approach and is committed to having a good legal and regulatory framework which attracts the right investors.

Q: What can you tell us about plans for the future in respect of mutual funds, hedge funds and Islamic Finance? A: Mutual Funds and Hedge Funds: The Mutual Fund and Hedge Fund Act, 2008 currently provides for licensing of mutual funds including hedge funds. SIBA has been working to set up the application framework for licensing of mutual funds. Currently, we have a number of mutual funds licensed and wish to increase in volume the applications received.

The Seychelles has recently amended a series of laws to ensure that compliance with global best practice is met.

The next step in the products’ development is for the Seychelles to embark on an awareness programme to ensure that investors gain as much information on the availability of mutual funds including hedge funds as products. This will be an effort made with the respective bodies tasked with the marketing aspect of the jurisdiction.

Islamic Finance: Relevant Authorities including SIBA, the Ministry of Finance, Trade and Investment and the Central Bank of Seychelles remain committed to bringing more diversity in terms of the products offered by the jurisdiction; Islamic finance is seen as a way to achieve this aim.

Q: What are, respectively, the anticipated positive impacts from SIBA’s licensing of Trop-X, Seychelles’ first multi-asset, multi-currency securities exchange, as well as from the SEAS high power submarine cable system? A: The licensing of Seychelles’ first securities exchange Trop-X (Seychelles) Limited will provide many benefits to Seychelles, such as:

The Seychelles has a dynamic approach. • Enhanced investment opportunities for the public, including the Seychellois as well as the international community, into and through Seychelles. • Allowing for an organised, regulated market in the Seychelles, which provides a platform where authorised persons are able to trade with each other. • Improved liquidity of shares of Seychelles companies which take the opportunity to list on the exchange. • Allowing other types of businesses such as accounting/auditing firms, lawyers, company administration businesses etc. to benefit from the increase in demand for local specialists, in view of the fact that businesses such as securities dealers have the option to be located in the Seychelles.


• Raising the overall level of Corporate Governance of Seychelles companies which list on the exchange, as it improves disclosure standards and reinforces transparency.

In the words of President James Michel regarding the arrival of the submarine fibre optic cable: it is “the way forward; the key to the future” and “A much enhanced link to the global village.”

Q: SIBA places ongoing investment in specialised training within its international finance sector high on its agenda. What does this training entail and how is it acting to enhance Seychelles’ reputation?

The fibre optic link is anticipated to provide the Seychelles as a whole with a platform for growth and wealth creation opportunities.

A: It is true that training, specialised or otherwise, within the industry ranks very highly on SIBA’s list of priorities. We are aware that our most important asset has always been our human capital. Increasing the awareness and specialisation of industry participants will have positive effects on the ability to add value to what is currently on offer in the short to medium term and enhance the burgeoning reputation of the Seychelles as a jurisdiction.

Relevant Authorities... remain committed to bringing more diversity in terms of the products offered by the jurisdiction.

services and products offered by the jurisdiction.

The enhanced connectivity heralds new opportunities for businesses in fields such as e-commerce for both domestic and non-domestic companies. It is expected that the cable will further boost innovation, particularly in the technological fields. With regard to the Seychelles international financial services industry, greater connectivity means that the jurisdiction is now on a level footing in relation to many of its competitors. The Seychelles has always had a number of features as a jurisdiction that allows it to be attractive to investors. These have traditionally been its stable social/economic/ political environment and its multilingual society, just to name a few. It has to be said that the fibre optic link only adds to the appeal of the Seychelles as a serious player on the global stage. It is also anticipated that products and services that may not have been possible in the past due to the constraints posed by connectivity issues, will now be explored, with the aim of adding more value to the

It is important to note that SIBA places a lot of emphasis not only on internal training within the supervisory body itself, but also training for the people and entities it supervises and regulates. Qualifications in STEP, ICSA, wealth management, compliance and law are just a few that have been done within the Authority itself.

The fibre optic link is anticipated to provide a platform for growth and wealth creation opportunities.

Within the industry, the training encompasses different levels: There is basic level training which individuals with no prior background wanting to be involved within the industry at any level must follow. This is more introductory in nature and leads on to the more specialised subjects. The next level of training and courses are those offered by the Institute of Chartered Secretaries and Administrators (ICSA).

Qualifications with bodies such as STEP, CISI, and the International Compliance Association are just a few of those that are encouraged industry-wide.

Q: What forthcoming legislative and other developments at SIBA are set to further reinforce Seychelles’ regulatory credentials? A: The Seychelles as a country and SIBA are constantly reviewing the laws and regulations that need to be put in place or amended so as to achieve the aims and goals that have been set out. In regard to the regulatory aspect, the government of Seychelles has already announced that SIBA is set to become the Financial Services Commission (FSC) for the Seychelles jurisdiction during the year 2013.

SIBA is set to become the Financial Services Commission (FSC).

This change is expected to further enhance the supervisory and regulatory mandate of SIBA within the non-bank financial services industry in the Seychelles, thereby strengthening further the position of Seychelles in the international financial services arena. Mrs. Wendy Pierre, MD, Seychelles International Business Authority (SIBA).


Photo CC by Jurvetson

Botswana Botswana has a distinctly market-oriented economy and can boast the status of the premier mainland African hub for financial services such as banking, insurance and pan-African investment funds, while its flagship business entity comes in the form of the International Business Company (IBC), which is often structured in the form of an investment holding company or regional headquarter operation. The jurisdiction also enjoys a role as a primary access point into the increasingly important African market for investors, while a proactive stance on the compliance front serves to further enhance its credibility. The country can point to an effective Government and a strong financial position stemming from prudent fiscal policies. This state of affairs has been recognised by Moody’s, which in November 2012 gave Botswana a renewed A2 rating with stable outlook, ensuring it continues to represent an oasis of stability in Africa for international investors. Botswana offers investors low fees, straightforward incorporation procedures, a highly skilled and specialised workforce, an absence of exchange restrictions and a know your customer philosophy. Other key attributes include an absence of prohibition on the foreign ownership of companies, reduced corporate tax of just 15% and exemptions from capital gains on the disposal of shares, provided the company owns 25% or more of the underlying assets. Moreover, there are further exemptions from withholding tax, VAT and foreign exchange controls, a choice of currency denomination and robust regulation. This last is epitomised

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by the activities of the Non Bank Financial Institutions regulatory Authority (NBFIRA), which regulates non-banking financial entities registered in Botswana such as pension funds, asset management, consumer/micro lending, insurance, collective investment undertakings, as well as asset managers and investment advisors. In addition, it is an integral member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), not to mention a signatory to the Basle Statement of Principles, the IMF Financial Action Task Force (FATF) and the UN Geneva Convention.

Botswana can boast the status of the premier mainland African hub for financial services such as banking, insurance and pan-African investment funds. Botswana has an impressive number of DTAs encompassing both near African neighbours, as well as the likes of India, Russia, the UK and France. In addition, a unilateral tax credit of up to 15% is extended to accredited companies for withholding taxes suffered in countries with which Botswana does not yet have a double taxation agreement. The Botswana International Financial Services Centre (IFSC’s) recent merger with the Botswana Export Development and

Investment Authority (BEDIA) to create the Botswana Investment Trade Centre (BITC) is an evolution that is sure to create a better and more efficient cross border financial and business services platform for multinational corporates into Africa. Other recent developments of note include the establishment, respectively, of the Botswana domiciled Bourse Africa Limited (BAL) and the Automated Trading System (ATS) by the Botswana Stock Exchange (BSE). Outside South Africa BAL constitutes the first spot and derivatives exchange in the continent and aims to catalyse development of African commodity and financial markets through enhancing price discovery, market transparency, risk management, cross-border economic integration, finance and investment in Africa. Administered by the BITC, as well as a spot and derivatives exchange BAL comprises of a central counterparty clearing house and depository platform offering trade in commodities, currencies and other asset classes in Botswana and across Africa. Its establishment is informed by an acknowledgement that in challenging financial times such as these, derivatives are important risk management instruments for commodity chains, companies, banks, financial institutions and investors, providing opportunities for physical delivery and procurement, as well as hedging, arbitrage and investment. ATS meanwhile, will be utilised by BSE market participants to increase the trading of shares with an associated anticipated increase in liquidity in the financial sector.


Mauritius

Financial services constitutes an integral part of the Mauritius economy, contributing over 10% to GDP, while recent product innovations and legislative developments point to Mauritius’ drive to distinguish itself further via high end and value added services in banking, global business, insurance and capital markets. It is small wonder then that the jurisdiction is becoming something of a regional hub for global investment companies and funds looking to invest into Africa and Asia and in particular, India. New improvements to legislation and regulation surrounding GBC Category 1 companies, foundations, limited partnerships, LLPs and private pension funds are set to provide clarification to investors and cement Mauritius’ international reputation further. The LLP legislation in particular should act to see many more international service providers such as tax advisors and law firms setting up shop. In addition, Mauritius is looking to build upon its position as a domicile for some 800 registered global funds by setting up a regime for non-treaty based funds. This will increase its competitiveness as a fund destination able to attract funds which can effectively target any country and afford it the opportunity to sit alongside other IFCs which already have such exempt fund structures in operation. Meanwhile, the growing number of Double Taxation Avoidance Agreements (DTAAs)

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and Investment Promotion and Protection Agreements (IPPAs), which protect foreign investments into certain key nations, are set to increase the flow of capital, whilst providing spin-off skilled job opportunities from the new international firms that are looking to utilise Mauritius as a centre for regional treasury and headquarter administration.

(Mauritius’) high profile investment relationship with India…has matured to a stage whereby a TIEA will in the near future come into force. Mauritius also enjoys a high standing in respect of compliance such that on the Peer Review front it is at a much more advanced stage than many other jurisdictions. On the subject of its high profile investment relationship with India, which has been pivotal in directing FDI towards India and thereby contributed significantly to that country’s development, this has matured to a stage whereby a TIEA will in the near future come into force. This is set to enhance cooperation between the two jurisdictions and assuage any fears from the international community about suspicious activity in the form of round-tripping, in the process attracting more business from

previously hesitant clients. A commitment to transparency is also evidenced in Mauritius having established institutions such as the Financial Intelligence Unit (FIU), Financial Services Commission (FSC) and the Independent Commission against Corruption, as well as it’s status as a signatory to the IOSCO Multilateral Memorandum of Understanding (MoU). There are two clear categories of Global Business Company (GBC) for international investors: GBC1s and GBC2s. GBC 1s are considered resident for tax purposes and so enjoy exemption from stamp duty, land transfer tax, and capital gains taxes. They also benefit from foreign tax credits and the network of DTAs, meaning they pay no more than a 15% corporate tax rate, and as little as 3% on overseas profits. Moreover, there are no withholding taxes on dividends or other payments issued to non-resident shareholders. GBC 1s are also now entitled to carry on business within Mauritius itself. However, 2013 is set to see more stringent tax residency requirements as part of a new ‘commercial substance’ test. GBC 2s can be 100% foreign owned, have no minimum capital requirements and are not subject to tax on income derived from outside Mauritius, although this means they cannot make use of the DTA network. In addition, they must state their business objective to the Mauritius FSC and provide details of the beneficial owner, as well as an annual financial summary.


Liberia

Against a background of increased international scrutiny which has prevailed over recent years, Liberia has nonetheless managed to emerge as one of the favoured choices for financial planners seeking nonresident tax efficient business entities synonymous with low levels of bureaucracy and ease of company formation. The increasing recognition of the jurisdiction’s credentials is inextricably linked to its ongoing political stability, embodied in Nobel prize winning Ellen Johnson-Sirleaf’s continued Presidential incumbent status. The jurisdiction offers a range of business entities: Corporation; Limited Liability Corporation (LLC); Partnership; Limited Partnership; Private Foundation; and Registered Business Company. These can variously be used for activities including international trade, real estate investment, joint ventures, holding securities and bank accounts, trust and estate planning, management of investment portfolios, asset ownership etc. As one of the oldest corporate jurisdictions, the Republic of Liberia, located on the west coast of Africa, has provided corporate registry services internationally for more than 60 years. Its history of legal stability, innovation and client-oriented outlook has

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earned the Corporate Registry worldwide recognition by key industry professionals.

The increasing recognition of the jurisdiction’s credentials is inextricably linked to its ongoing political stability. The Liberian Corporate Registry, which is operated out of the US, maintains full-service offices in Hamburg, Hong Kong, London, New York, Piraeus, Tokyo, Virginia and Zurich, as well as having recently opened a new regional office in Cyprus, by way of consolidating its global physical presence. In addition, the Registry is supported by a worldwide network of Liberian representatives and Special Agents who are available to legalise and accept documents for filing. The Registry’s global infrastructure allows for same-day formation of business entities, prompt issuance of certificates and filing of documents 24/7. In 2002, Liberia adopted a new Electronic Transaction Law and Anti-Money Laundering

Law, paving the way for the Registry’s use of an electronic Register, a secure, web-accessible data network, to facilitate the prompt and efficient formation of entities and the filing and issuance of documents on a worldwide basis. Significant investment in advanced information technologies makes the Liberian Corporate Registry a valued partner to its corporate clients. This is further illustrated by the Registry’s development of eCorp©, a webbased client interface which provides clients 24/7 access to their accounts to form new corporations, generate certificates , reserve names, manage existing corporations, pay invoices and file documents. In addition, Liberia is a respected and professional provider of corporate and ship registration services, with some 11% of the world’s fleet. Since major international financial institutions routinely loan billions of dollars to Liberian corporations under ship finance arrangements, Liberian corporations are recognised internationally by banking facilities and investors. For more than half a century, high net worth individuals and companies have been using Liberian entities to facilitate their business endeavours.


Photo CC by Benedict Adam

Cook Islands

The Global Forum’s Phase 1 Peer Review Report on the Cook Islands’ Legal and Regulatory Framework points to an IFC that has worked hard to marry the concept of compliance and transparency with a regulatory culture that does not stifle investment. It is, for the Cook Islands, an opportunity to bring the spotlight on to the raft of specialised vehicles available and finely tuned expertise that prevail within the jurisdiction. The essentially positive outcome document comes complete with recommendations to be addressed in advance of Phase 2 set for later in 2013 to ensure its long standing good reputation is maintained. The jurisdiction’s International Trusts constitute a flexible planning tool that can be customised to suit clients’ needs, while there are also noteworthy merits in respect of LLCs, International Companies, Partnerships, Insurance and Banking, not to mention a pedigree stretching back to 1982. Other factors by which the Cook Islands can recommend itself include its political and economic stability, a geographical status offering ready access to the world’s prime emerging markets now driving global growth, its legal system based on English law, a proactive position on the compliance front, a well respected regulatory framework, manifested in the form of the FSC, extensive skilled labour pool of qualified professionals, forward thinking and

business-enabling legislation and a strong pedigree of the public and private sectors working closely and efficiently together towards a common goal.

in an era when globalisation of businesses and families increasingly prevails, the jurisdiction has ensured it is also fit for purpose for emerging markets such as China.

There has been significant interest resulting from the enactment of the Cook Islands Foundations Act 2012.

To those who consider the Cook Islands to be solely synonymous with Asset Protection Trusts, you’re missing the half of it. There has, for example, been significant interest resulting from the enactment last year of the Cook Islands Foundations Act 2012. This legislation allows for the flexibility of a civil law type foundation combined with the wealth preservation aspects of the Cook Islands international trust, and is ideally suited for clients from locations such as China. These clients may be unfamiliar or uncomfortable with the trust concept, since the governing legislation of that country does not make it clear whether the legal title of an asset is transferred to the trustee, such that Chinese trusts have typically only been used for asset investment purposes.

The Cook Islands is undoubtedly most readily associated with asset protection trusts, the origins of which can be traced back to pioneering 1980s legislation. Key aspects 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. While the Cook Islands has managed to stay relevant to traditional markets such as the US,

Recognising that international clients require a broad suite of services from an IFC, the Cook Islands has determined to legislate accordingly in the near future to ensure all relevant bases are covered. All things considered, the Cook Islands is set to to represent a potent and unique IFC force to be reckoned with long into the future.

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Photo - Andriy Bozhok

Walkers 2013 Global Hedge Fund Outlook

January 2013 Large Investor Clout on the Rise In 2012, the global hedge funds industry saw single investors - especially large investors - gain increased leverage at the negotiating table as they demanded lower fees, more transparency, and more flexible terms. While capital has been available, it has typically come with strings attached. For 2013, Walkers anticipates significant activity as big players return to the market, assuming the economic recovery continues. Factors that could weaken that positive outlook are regulatory and compliance requirements such as AIFMD and FATCA, which will increase the cost of doing business. Walkers also expects to see single investors continue to have strong negotiating power. While this is not a new trend, it will likely continue to accelerate in 2013. Investors will focus on pricing, transparency, and liquidity, including an increased ability to withdraw capital on demand and get it back in cash. Looking at Europe and the Middle East, some investors will see the uncertain situations in these regions as a challenge and will look for opportunities in Emerging Markets. While credit will be tighter overall, many managers will seek to take advantage of the volatility in the European Union, seeing greater potential for returns. Turning to Asia, one of the key trends over the past year or so has been the influx of large global hedge fund players into Hong

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Kong. By comparison, some of the smaller hedge funds in Asia have struggled due to difficult capital raising conditions, a ‘flight to quality’ by investors, high barriers to entry and poor performance in difficult trading conditions. Japan proved to be one of the better performing markets in Asia, while activity in China somewhat decelerated due to the adverse effects of the real estate bubble.

Investors will focus on pricing, transparency, and liquidity, including an increased ability to withdraw capital on demand and get it back in cash. For this year, the ever-shifting landscape in Asia has reinforced the sentiment that hedge funds provide relatively stable, core investment opportunities. To the extent investors see growth opportunities in the region, they will be interested in investing with fund managers that have a demonstrated ability to dampen the higher volatility that characterises many of the markets in Asia. 2012 Funds Trends: Increased Focus on Transparency, Liquidity and Corporate Governance The trend toward increased transparency, liquidity and corporate governance can be seen in data collected by Walkers, based on

the CIMA regulated funds that the firm set up in 2012 (as of end October 2012). Since these funds comprise a sizeable portion of overall activity, the data provides a revealing glimpse of industry trends. Liquidity Provisions The CIMA-regulated funds set up by Walkers increasingly reflected a demand for enhanced liquidity, with a significant increase in monthly liquidity provisions from 35% of funds in 2011 to 53% of funds in 2012. At the same time, the percentage of funds with quarterly liquidity dropped from 55% in 2011 to 31% in 2012. Similarly, funds were less likely to feature “lock-up” provisions, which prohibit access to funds for a prescribed period. A total of 71% of funds had no lock-up provisions. The 29% of funds that did include such a requirement often had “soft” lock-ups with fee penalties for early withdrawal. Corporate Governance During 2012, Walkers’ clients increasingly moved toward the use of independent directors. A total of 72% of new funds featured an independent director(s), up from 64% in 2011. Only 28% of new funds had no independent director in 2012. In addition, funds with independent directors are likely to have a majority of independent directors (49%) or all independent directors (37%). For more information visit www.walkersglobal. com.


Photo - Marc Turcan

World Bank Global Economic Prospects Assuring Growth over the Medium Term

Growth in middle income countries like Brazil accelerated in Q3 of 2012.

Executive Summary January 2013 Four years after the onset of the global financial crisis, the world economy continues to struggle. Developing economies are still the main driver of global growth, but their output has slowed. To regain pre-crisis growth rates, developing countries must once again emphasise internal productivityenhancing policies. While headwinds from restructuring and fiscal consolidation will persist in high-income countries, these should become less intense, allowing for a slow acceleration in growth over the next several years. Fragile rebound after mid-year turmoil… Following a resurgence of turmoil in highincome financial markets in May-June 2012, financial markets have improved markedly, as a result of national and EU-wide measures to improve fiscal sustainability, and the augmentation of measures that the European Central Bank (ECB) would take in defence of the euro. And, unlike past episodes of

reduced tensions, when market conditions improved only partially, many market risk indicators have fallen back to levels last seen in early 2010 – before concerns about Euro Area fiscal sustainability took the fore.

• Developing country stock markets have increased by 12.6 percent since June (10.7 percent for high-income markets).

While signals from financial markets are encouraging, those from the real-side of the global economy are more mixed.

While signals from financial markets are encouraging, those from the real-side of the global economy are more mixed. Growth in developing countries accelerated in Q3 of 2012, including in major middle income countries such as Brazil and China, where mid-year weakness contributed to the global slowdown. Early indications for Q4 point to a continued acceleration in East Asia and the Pacific, Europe and Central Asia, and South Asia, but slowing in Latin America and the Caribbean.

The decline in financial market tensions has also been felt in the developing world. • International capital flows to developing countries, which fell by between 30 and 40 percent in May-June, have reached new highs. • Developing country bond spreads (EMBIG) have declined by 127 basis points (bps) since June, and are now below their longterm average levels (around 282 bps).

… but the real-side recovery is weak and business-sector confidence is low

Among high-income countries, investment and industrial activity in the United States was unusually weak during Q3 despite strength in housing and consumer demand – seemingly due to uncertainty over the stance of fiscal policy in the run up to November’s elections and the end-of-2012 fiscal cliff. While the January 1, 2013 agreement

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Photo - Vacclav

In the US, policy uncertainty has dampened growth.

on tax measures resolved most of the immediate concerns about the fiscal cliff, the legislation offers only a temporary reprieve. If no credible medium-term plan for fiscal consolidation is found by end of February and debt-ceiling legislation is unchanged or only short-term extensions provided for, the economy could be subjected to a series of mini-crises, which could have potentially strong negative consequences for confidence, and even the credit rating of the US. In Japan, the economy appears to be contracting – in part because of political tension with China over the sovereignty of islands in the region and the expiration of automobile purchase incentives. Activity in Europe ceased to contract at alarming rates in Q3, but the economy appears to have weakened again in Q4 — perhaps reflecting weak demand for capital goods from the United States and Japan. Prospects for a modest acceleration in the medium term… Overall, the global economic environment remains fragile and prone to further disappointment, although the balance of risks is now less skewed to the downside than it has been in recent years. Global

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growth is expected to come in at a relatively weak 2.3 percent and 2.4 percent in 2012 and 2013, respectively, and gradually strengthen to 3.1 percent and 3.3 percent in 2014 and 2015.

International capital flows to developing countries have reached new highs. At an estimated 5.1 percent, GDP growth in developing countries during 2012 was among the slowest in 10 years. Improved financial conditions, a relaxation of monetary policy and somewhat stronger high income country growth is projected to gradually raise developing-country growth to 5.5 percent in 2013, 5.7 percent in 2014 and 5.8 percent in 2015 — roughly in line with these countries’ underlying potential. For highincome countries, fiscal consolidation, high unemployment and very weak consumer and business confidence will continue to weigh on activity in 2013, when GDP is projected once again to expand at a mediocre 1.3 percent. Growth should, however, begin firming during the course of 2013, and expand by

2 percent in 2014 and 2.3 percent in 2015. In the Euro Area, growth is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1 percent in 2013, before edging up to 0.9 percent in 2014 and 1.4 percent in 2015. This modest growth outlook is subject to risks. • Although the likelihood of a serious crisis of confidence in the Euro Area that would lead to a bloc-wide freezing up of financial markets has declined significantly, continued progress is needed to improve country-level finances, and enact plans to reinforce pan-European schemes for a banking union and sovereign rescue funds. If policy fails to maintain its reform momentum, some of the more vulnerable countries in the Euro Area could find themselves frozen out of capital markets, provoking a global slowdown that could potentially subtract 1.1 percent or more from developing country GDP. • In the United States, solid progress toward outlining a credible mediumterm fiscal consolidation plan that avoids periodic episodes of brinksmanship surrounding the debt ceiling, is needed.


• While a progressive decline in China’s unusually high investment rate is not expected to perturb global growth over the medium-to-long term, there would be significant domestic and global consequences if this position were to unwind abruptly. Impacts for developing commodity exporters would be especially harsh if commodity prices fell sharply. • An interruption to global oil supply and a resurgence in the price of internationallytraded food commodities remain risks, especially given the low maize stocks. Should local food prices rise markedly, nutrition and health outcomes for the very poor could be hit. • On the upside, a rapid resolution to policy uncertainty in the United States, a decrease in tensions in Asia, or an improvement in European confidence could speed up the return of high-income countries to stronger growth — with positive effects for developing-country exports and GDP.

Assuring growth through increased productivity… Addressing high unemployment and slack capacity remain priorities for countries in developing Europe and in the Middle East and North Africa. However, the majority of developing countries are operating at or close to full capacity. For them, additional demand stimulus could be counter-productive – raising indebtedness and inflation without significant payoff in terms of additional growth.

Many developing countries would be well advised to gradually restore depleted fiscal and monetary buffers. In what is likely to remain a difficult external environment, characterised by slow and potentially volatile high-income country growth over the next several years, strong growth in developing countries is not guaranteed. To grow rapidly, developing countries will need to maintain the reform momentum that underpinned the acceleration of growth during the 1990s and 2000s. In the absence of additional efforts to raise productivity through structural

reforms, investment in human capital, and improved governance and investment conditions, developing country growth may well slow. The longer-term structural reform agenda should also include efforts to improve food security, especially in the more vulnerable of developing economies. This would involve increasing local productivity, improving local storage and transportation infrastructure, to reduce spoilage and enable improved access to foreign markets, both in good times and bad times. Given the still uncertain global environment, many developing countries would be well advised to gradually restore depleted fiscal and monetary buffers, so as to ensure that their economies can respond as resiliently as they did during the 2008/09 crisis, should a further significant external shock arise. Developing countries also need to continue to be active players in the G-20 process, both in order to assist high-income countries recover from the crisis of 2008/9, but also to ensure that reform efforts, be they in financial or real markets, take into full consideration the potential impacts on developing markets. © The World Bank, 2013

Photo - Ingvar Tjostheim

Policy uncertainty has already dampened growth. Should policymakers fail to agree such measures, a loss of confidence in the currency and an overall increase in market tensions could reduce US and global growth by 2.3 percent and 1.4 percent, respectively.

An interruption to global oil supply remains a risk.


Photo CC by - Andreus

Tax Developments in Hong Kong During 2012

Back in January 2012, the Hong Kong Inland Revenue Department (‘HK IRD’) held its annual seminar at the HK IRD Revenue Tower. Focus of attention was the Phase 1 Peer Review Report on Hong Kong (’HK’), issued by the Global Forum at the end of 2011. The Phase 1 Peer Review Report made recommendations to ensure effective exchange of information by HK in all circumstances. One of the recommendations is to change the current law in HK so that it will also allow for standalone Tax Information Exchange Agreement’s. The risk of not allowing TIEAs is that HK could be perceived as a ‘free rider’ and be identified as an ‘un-cooperative jurisdiction’ in the Phase 2 Peer Review of the OECD Global Forum. This is due to the Global Forum’s opinion that preference for a DTA over a TIEA cannot be seen as a reason for refusal to enter into an exchange of information agreement. Another recommendation within the Phase 1 Peer Review Report relates to the issue that HK has to make necessary improvements in situations where ‘nominees’ and ‘trusts’ are involved, i.e. HK ‘nominees’ and ‘trusts’ should have complete & relevant information

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available on any ultimate beneficiaries, which could result in (finally) a proper regulation of the trust and company secretarial sector in HK.

The Global Forum’s opinion is that preference for a DTA over a TIEA cannot be seen as a reason for refusal to enter into an exchange of information agreement. Other Developments • The HK’s 2012 – 2013 Budget resulted in the abolition of the HK Capital Duty per 1 June 2012 and the temporarily reduction of the HK annual governmental business registration fee from USD 315 to USD 58; • The Judgment in CIR v Li & Fung (Trading) Limited took place on 19th of

March 2012. Li & Fung, a HK trading company, provided restricted agency services, such as managing the sourcing and manufacturing process, to its nonrelated customers in connection with the manufacture, sale and purchase of goods to ensure that satisfactory goods were supplied to its customers. For this service, Li & Fung received a commission of 6% from its customers, of which 4% was passed on to its offshore affiliates that were also involved in the agency process. The Court of Appeal held that the 2% commission received by Li & Fung was not subject to HK Profits Tax as the Court decided that the profit-producing/making activities/transaction took place outside Hong Kong and as a result Li & Fund was successful in claiming the HK offshore regime; • During the year 2012, HK was ranked 3rd in the Paying Taxes Report 2012 as one of the easiest countries to pay business taxes; • On 29th of March 2012, the HK IRD finally released its Advance Pricing Arrangement (APA) procedures in its Departmental Interpretation and Practice Notes 48 (‘DIPN 48’). This DIPN does


Photo CC by - Ding Yuin Shan

however not create any specific domestic transfer pricing legislation. As a result, Hong Kong still does not have any specific transfer pricing legislation incorporated in its domestic legislation, apart from the general-anti-avoidance provision in article 61A of the Inland Revenue Ordinance. Paragraphs 9 through 12 of DIPN 48 further show that the Inland Revenue only allows for bilateral and multilateral APAs. Unilateral APAs are, except in particular circumstances, excluded from the APA procedure. Therefore, the focus of the Inland Revenue, at least for now, is the reduction of double economic taxation that may occur between a Hong Kong company or PE and related companies established in other countries with whom Hong Kong has concluded a Double Taxation Arrangement (DTA) that allows the APA to be concluded under the socalled Mutual Agreement Procedure (MAP) of such DTAs;

Hong Kong was ranked 3rd in the Paying Taxes Report 2012 as one of the easiest countries to pay business taxes.

Photo CC by - Ding Yuin Shan

• New tax measurements were introduced for HK residential property as from 27th of October 2012 to avoid a property bubble in HK. It introduced, next to the already existing Stamp Duty for HK residential properties, a Special Stamp Duty (‘SSD’). As a result, an SSD charge of 20% is applicable if the vendor holds the property for six months or less, a 15% SSD charge applies if the vendor sells within a 12 months period, but not until after a 6 months holding period and a 10% SSD charge applies if vendor sells between a 36 months period, but not

until after a 12 months holding period. In addition, a Buyer’s Stamp Duty (“BSD”) was introduced for which the buyer will be liable. This rate is 15%, but is not applicable for Hong Kong Permanent Residents; • As from the year of assessment 2012/2013, i.e. as from April 1st 2012, Hong Kong has 15 double taxation treaties effectively in place (with Belgium, Brunei, Mainland China, Luxembourg, Thailand, Vietnam, the United Kingdom, Austria, Hungary, Ireland, Liechtenstein, Japan, the Netherlands, New Zealand and France). The ratification processes for Spain, Czech Republic, Indonesia, Portugal, Malta, Switzerland and Canada have also been completed recently but the treaties will not become effective until April 1st 2013 From HKWJ Tax Law - www.hkwj-taxlaw.hk

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Photo by Fedor Selivanov

Asset Management: A New Pillar of the Swiss Financial Centre

Supplied by the Swiss Bankers Association.

Eight areas for action

Switzerland is aiming to become a leading location for asset management in the coming years. A joint working group of the Swiss Bankers Association (SBA) and the Swiss Funds Association (SFA) has put forward eight areas for action that will provide an optimal operating framework. Strengthening asset management will put the Swiss financial centre on a broader footing, complement existing business areas and make up for those that are in decline.

The white paper picks out eight areas where targeted measures should create an optimal operating framework for offering products and services in Switzerland and abroad. These are:

The Swiss financial centre mainly has a reputation for wealth management. Asset management, a key provider of products and services for institutional and private investors, is a business area that has to date received little attention in Switzerland or abroad. Most banks in Switzerland have their own asset management activities, but these are rarely regarded as a stand-alone part of the core business. A 2011 study by the SBA and Boston Consulting Group indicated that the focused expansion of asset management as a business area could boost gross revenue by up to CHF 1.8 billion by 2015. Objectives in asset management A joint working group of the SBA and the Swiss Funds Association SFA has put forward a white paper showing how the Swiss financial centre can be expanded to become a leading asset management location. The aim is to establish asset management in Switzerland as an important field of activity of the Swiss financial sector. On the international scene it is to stand for high reliability, independence and quality and to be known and recognised for these characteristics throughout the world. This will make asset management into one of the main pillars of the Swiss financial centre, alongside wealth management, private banking and client-oriented investment banking. 

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• Establishing asset management as a brand; • Developing and applying standards for asset management; • Ensuring appropriate regulation; • Improving market access; • Promoting the right vehicles and structures for asset management; • Establishing an optimal tax environment (including various levies) for investors; • Expanding infrastructure in a targeted manner;

good infrastructure and training issues. Regulation, market access and the tax situation, by contrast, are largely in the hands of politicians and the authorities, who must also do their bit to promote asset management. SBA CEO Claude-Alain Margelisch comments: “The entire financial centre is backing this initiative to turn Switzerland into a top location for asset management. We hope that Swiss government bodies and regulators will support this. By doing so, we will put the financial centre on a broader footing, minimise systemic risks and create opportunities for the future.” Markus Fuchs, Senior Counsel at the SFA, explains: “Collective investments, especially funds, are key building blocks for asset management, along with other traditional and alternative investments ranging from equities to real estate and commodities. These are appropriate instruments for managing wealth. Hence, the fund business must also be suitably promoted in future.” 

• Providing specific training.

Asset management is a business area that has to date received little attention in Switzerland. A call to all participants Most of the initiatives can be implemented by the banks and other financial institutions themselves. Developing the brand, innovative vehicles and structures, meeting client needs and a consistently high level of quality are in the hands of the asset managers themselves. Trade associations, infrastructure providers and other industry bodies can promote recognised standards,

Low-risk and requiring little capital backing Asset management products and services are needed by both private and institutional investors. The latter include insurance companies and pension funds, who have a major interest in asset management being high-quality and efficient. In contrast to the traditional lending or insurance business, asset management has very little systemic or reputation risk because it is not involved in balance sheet transactions. Asset management is therefore capital-light, making it especially attractive for banks. The measures set out in the eight areas should be implemented in the next few years as a matter of priority.


Photo by Andresr

A New Global Economy for a New Generation Speech by Christine Lagarde, Managing Director, International Monetary Fund, Davos, Switzerland, January 2013

We all know the imperative - keep up the momentum on the policy actions needed to put uncertainty to rest.

others, but they need to rebuild the policy space that has been used up in alleviating the crisis in recent times.

Introduction: Priorities for 2013

What does that mean? For the Euro Area, it means making firewalls operational; pushing ahead with banking union; continuing with the difficult but necessary fiscal adjustment at the country level; and supporting demand, especially with further monetary easing.

So these are the short-term priorities as I see them.

I know we are all still deeply concerned with the state of the global economy. Where do we stand? Well, thanks to policy actions taken over the past year, we have seen some respite and some stabilisation in financial conditions. But it is not all good news. The recovery is still weak, and uncertainty is still high. As the IMF announced recently in its World Economic Outlook, we expect global growth of only 3½ percent this year, not much higher than last year. The short-term pressures might have alleviated, but the longer-term pressures are still with us. As I have said recently and it bears repeating: We have avoided collapse, but we need to guard against any relapse. 2013 will be a make-or-break year.

For the United States, it means pulling together in the national interest and avoiding further avoidable policy mistakes, such as failing to agree on increasing the debt ceiling - and, for the United States and Japan, reaching agreement on medium-term debt reduction.

We have avoided collapse, but we need to guard against any relapse. For the emerging and developing economies, faring better despite their concerns about continued turmoil and lack of decisive action in the advanced economies, conditions differ greatly. Some are more vulnerable than

The Broader View But here in Davos I would like to take a somewhat broader view - looking to the longer horizon, to the new global economy taking shape before our eyes. Over the past few months, I have visited all of the major emerging regions of the world - Africa, Asia, the Middle-East, and Latin America. And I must say, the world looks very different from their vantage point. It is a world of challenges, yes, but it is also a world of “resilient dynamism�. The burning question is this: How we can make sure that all regions grow strongly, converge rapidly, and succeed in meeting the aspirations of their people? To answer this question, we need to reflect upon some of the megatrends shaping the future. Many thought leaders are pondering

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Photo by ixpert

60% of the population in the Middle East and North Africa is under 30.

this issue, including here at the World Economic Forum. I would submit the following four pivotal points: Firstly, a growing demand for individual empowerment, including for women, and a growing sense of a single global community. Secondly, a reallocation of political and economic power across the world. By 2025, for example, two-thirds of the world’s population will live in Asia. This can lead to greater cooperation or to greater tension and competition. Thirdly, a seismic shift in demographics, as the “youth bulge” in various emerging regions rubs up against the “greying” populations elsewhere. Sixty percent of the population in the Middle East and North Africa is under 30. It is 70 percent for sub-Saharan Africa. Again, either a great opportunity or a source of instability. Fourthly, increasing vulnerability from resource scarcity and climate change, with the potential for major social and economic disruption. This is the real wild card in the pack. So how can we successfully navigate our way into this future world? There are no easy answers. So where to begin? I think it starts with the new generation on the march - in a world that is flatter, more closely-knit, more interconnected than ever before in history. This new generation thinks differently. It is a generation weaned on immediacy, democracy, and global reach of social media. Consider the scale: Facebook and Twitter have about one billion and 500 million users respectively. If they were countries, they would be the 3rd and 4th largest nations in the world!

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Perhaps we can lay the groundwork for future success by embracing some of the emerging values of this new generation. Let me touch on three of these in particular: (1) greater openness; (2) stronger inclusion; (3) better accountability.

temptations to look only at the national interest - with competitive devaluations, barriers to trade, and a zeal to protect their own financial institutions at the expense of others. This is an anachronistic mindset illsuited to a modern global economy.

1. Greater Openness

On the contrary, opening up and removing barriers has proven to be more efficient. I am thinking, in particular, about trade and financial integration.

Let me begin with openness. This generation is a global generation and an open generation. Open to the world, and to the idea of a common global community. In a sense, this is really an old lesson for a new era - that when countries transcend the narrow national interest and come together for the global good, everybody wins. This was the reason the IMF was founded in 1944 and it remains our guiding principle.

If Facebook and Twitter were countries, they would be the 3rd and 4th largest nations in the world. In fact, this principle is more important today than ever before. In this era of globalisation, cooperation needs to be hardwired into the psyche of policymakers. Why? As we saw clearly during the crisis, this is a world where economic jitters in one region or market can have instant repercussions all across the globe. In a flat world, there is no room for economic silos. But old instincts die hard. At the first hints of improving sentiment, countries are enticed to retreat to the alluring comforts of their own backyards. They face the perennial

Look at Asia, for example. This is a region that has made tremendous progress in trade integration - trade within Asia tripled over the past decade, and regional trade among emerging Asian nations grew even faster. But it has lagged behind in financial integration. It is not investing enough of its own savings in its own future. And yet, the advantages of financial integration in Asia are clear. It can lift people up by boosting domestic demand and helping small firms get access to credit. It can make economies safer, by providing more insurance against adverse developments. It can reduce inequality, by helping financial inclusion. Other regions too can benefit from more integration, including the Middle East and Africa. These regions will gain from opening up - knocking down barriers to trade and welcoming investment. In this way, they can set in train a virtuous circle of higher productivity, enhanced economic diversity, and greater resilience against external turmoil. Take the Maghreb, for example. On its own, each country in the region is small. But together, they form a vibrant market of 90 million people, offering limitless possibilities.


Possibly the greatest integration of all comes from Europe. If you look behind the daily headlines related to the Eurozone crisis, you see a region in the midst of a historic process of integration. It is really the culmination of a centuries-long search for peace and prosperity, with the understanding that by linking arms you are unlocking swords - and also unlocking a million avenues for mutual gain. Yes, the European economy faces serious issues that need to be addressed - deeper banking and fiscal union, for example. But destiny beckons through the smoke and the fog. And I, for one, am optimistic about Europe’s future, especially if it stays on the path of reform, integration, and renewal.

Just look at some recent examples - from the yearnings on the Arab Street for greater dignity and opportunity, to the brave cry of young women for education and equality, and to the heartfelt urge of Indian women for greater respect and justice. These demands must be met.

I am optimistic about Europe’s future, especially if it stays on the path of reform, integration, and renewal.

2. Stronger inclusion

What does it mean for economic policymakers? It means that we need more fairness in economic life; more inclusion. This has numerous dimensions.

Let me turn to what I see as the second major aspiration of the new generation and the new global economy: Stronger inclusion. Our close-knit world is a participatory world. The new generation demands opportunities for all and insists on tolerance, respect, and fairness for all.

At its core, it relates to growth. Surely we have all learned by now that it is no longer enough to focus on growth alone. We need all people to share in rising prosperity and, by the same token, share fairly in any economic adjustment needed to achieve or restore prosperity.

As Franklin Roosevelt once said: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.” Inclusive growth is certainly a top concern of policymakers. The message is resonating widely. I was not surprised, therefore, to see that the World Economic Forum’s most recent survey puts “severe income disparity” at the very top of global risks over the next decade. Excessive inequality is corrosive to growth; it is corrosive to society. I believe that the economics profession and the policy community have downplayed inequality for too long. Now all of us - including the IMF - have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust. The research reaffirms this finding.

The new generation is weaned on immediacy, democracy, and global reach of social media.


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What is less clear is how we achieve more inclusive growth in practice. Certainly, universal access to decent education is the non-negotiable starting point. Beyond that, I believe policies such as robust social safety nets, extending the reach of credit, and - in some cases - minimum wages can help. Above all, inclusive growth must also be job-rich growth. This is really a symbiotic relationship - we need growth for jobs and jobs for growth. Right now, 202 million people are looking for work, and two in five of the jobless are under 24. Relieving this sense of desperation must be the over-riding goal of everything we do. Inclusion has other dimensions too. Gender inclusion is critically important, and, frankly, too often neglected by policymakers. In today’s world, it is no longer acceptable to block women from achieving their potential. Think about it: Women control 70 percent of global consumer spending. All studies point to the economic benefits of full female participation in the labour force, in the economy, in society. One recent study estimates that by simply raising women’s employment rates to the level of men, GDP would jump significantly - by 5 percent in the United States, 9 percent in Japan, 10 percent in South Africa, 27 percent in India, and 34 percent in Egypt. The evidence is clear, as is the message: When women do better, economies do better. So policymakers and economic leaders must do better in supporting women. That means we must tear down all obstacles

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Behind the Eurozone crisis you see a region in the midst of a historic process of integration.

in the path of women, even the subconscious obstacles of the mind. One other point on inclusion: we need a greater sense of solidarity across generations. We need to be cognisant of the legacy we are leaving for those who will come after us. One such legacy is public debt, which now hovers around 110 percent of GDP among the advanced economies - the highest level since World War II. We owe it to the next generation to put in place credible plans to reduce this burden on them. Even more important is the issue of climate change, which, in my view, is by far the greatest economic challenge of the 21st century. The science is sobering - the global temperature in 2012 was among the hottest since records began in 1880. Make no mistake: Without concerted action, the very future of our planet is in peril.

The new generation demands transparency. They demand good governance. We must deliver. So we need growth, but we also need green growth that respects environmental sustainability. Good ecology is good economics. This is one reason why getting carbon pricing right and removing fossil fuel subsidies are so important. This too is an element of inclusion.

3. Better accountability Let me turn to my third and last principle for the new global economy: Better accountability. The new generation demands transparency. They demand good governance. We must deliver. Just look at the role of information technology in forcing change. It was the citizen power of social media that sparked a peoples’ transformation in the Middle East, put pressure on U.S. policymakers to compromise on the fiscal cliff, and prompted Chinese policymakers to publish frequent updates of pollution levels. These forces for greater accountability will only get stronger. Of course, governments can try to push back and restrict access to information technology. But this is like King Canute ordering the tide not to come in! Accountability is really a two-way street institutions must be accountable to citizens, but citizens must also have the knowledge, education, and training needed to hold them accountable. It is mutual responsibility. What does this all mean for economic life in the public sector, the private sector, and international institutions too? Beginning with the public sector, we have learned that good governance is the bedrock of economic success. Without strong institutions, good policies cannot be developed and implemented.


Zero tolerance for corruption must be foundational. The state must be the servant rather than the master of the people meeting their basic needs and providing an enabling environment for the private sector to thrive. But the private sector also needs to be accountable. The goal of the private sector cannot be only profit; it must also be to add value, create jobs, develop the new ideas that drive an economy forward. Vested interests and arbitrage typically hinder the accountability principle. One has in mind the financial sector, which turned out to be insufficiently accountable - to its clients, its shareholders, and to society in general. As we all know, the global economic crisis was, in many respects, a governance crisis originating in the financial sector. It hid too much activity in murky and dark corners, and put its own short-term gain ahead of supporting the real economy. As Plato said long ago, “Excess generally causes reaction, and produces a change in the opposite direction.”

Photo by QQ7

Frankly, we need to see more of that change in 2013. Finishing the job of financial sector reform must be a priority. We can already see too many signs of waning commitment - dilution of reforms, delays in implementation, inconsistency of approaches. And we can see the risks - a further weakening in capital and liquidity

standards; and not enough progress on key areas like cross-border resolution, shadow banking, and derivatives. We must also move in the direction of more prudent compensation practices. Ultimately, again, this is all about accountability: We need a financial sector that is accountable to the real economy - one that adds value, not destroys it. One final point on accountability: It also relates to international financial institutions like the IMF. We too must respond to the new imperative for greater accountability.

Finishing the job of financial sector reform must be a priority. And so we are trying to become more open and transparent, reaching out to all stakeholders. Recognising the profound changes in the global economy, we are pushing ahead with our governance reforms so that all countries have a fair stake in the running of the institution. For at the end of the day, our job too is service: For our 188 member countries. We must be accountable to them - but even more than that, to the citizens of those countries who now hold us, rightly, to a new standard of effectiveness.

Conclusion: A New Moment in History I believe that if we continue to act, 2013 will be a defining year in terms of finally getting beyond the crisis. But more than that, I believe we are standing in the antechamber of a new global economy, marked by rapidly shifting circumstances and new modes of thinking. Yes, this new economy will be geographically different, driven more by the dynamic emerging markets and developing countries. But it will also be generationally different, shaped by different values and principles. What we need today is a “new moment in history” that embraces the values of a new era - more openness and cooperation between nations, more inclusion and solidarity among peoples, and stronger accountability of those responsible for the global economy. In the final analysis, there are no easy answers to the big burning questions like the sources of future growth and the harnessing of technology to benefit the entire planet. But we can at least say that, together, we are grappling with the right issues - with our intelligence, goodwill, and courage. Let me assure you that the IMF will always be ready to help in whatever way we can.


Photo by - chuyu

5th Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes

Statement of Outcomes - Cape Town, South Africa, 26-27 October 2012 1. On 26-27 October 2012, over 200 delegates from 80 jurisdictions and ten international organisations and regional groups came together at the fifth meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) in Cape Town, South Africa. The Global Forum welcomed the ten new members which have joined since its last meeting, increasing the membership of the Global Forum to 116 members. 2. The Global Forum adopted and published a further nine peer review reports and three supplementary reports, representing further progress in the finalisation of the Phase 1 review programme. Accordingly, the Global Forum discussed the expectations and challenges that member jurisdictions will face in the context of the Phase 2 reviews, which assess the practical implementation of the international standard on tax transparency and information exchange. 3. At its meeting held in Paris in 2011, the Global Forum agreed to extend its current mandate to the end of 2015. While during the second mandate the focus of its work will be on the Phase 2 reviews, the members discussed the

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future direction of the Global Forum after the completion of its current schedule of reviews. The members agreed that there should be a continuing role for the Global Forum in providing an essential framework for work on transparency and exchange of information for tax purposes and that this should include a monitoring role, combined with further development of the Terms of Reference and the sharing of best practices, as experience of information exchange increases and the exchange of information environment continues to evolve.

The Global Forum discussed the expectations and challenges that member jurisdictions will face in the context of the Phase 2 reviews. 4. The Global Forum was also pleased to note the interest shown by a range of jurisdictions in signing the multilateral Convention on Mutual Administrative Assistance in Tax Matters, making it a key instrument for the exchange of tax information to the international standard.

5. The main outcomes of the meeting which were agreed by delegates are set out below. Membership and Governance 6. The Global Forum welcomed ten new members: Albania, Burkina Faso, Cameroon, Gabon, Kazakhstan, Latvia, Lithuania, Pakistan, Tunisia and Uganda. It also welcomed the Centre de rencontres et d’études des dirigeants des administrations fiscales (CREDAF) and the World Customs Organisation (WCO) as new observers. The constant expansion of the Global Forum reiterates the relevance of the Global Forum’s work and brings it closer to the ultimate goal of achieving a level playing field for transparency and exchange of information for tax purposes. 7. As the Global Forum will start its second mandate in 2013, the composition of the Steering Group and the Peer Review Group needed to be re-visited. As three new members joined the Steering Group last year, the meeting agreed on re-appointing the existing members of the Steering Group, including the Vice-Chairs, for a period of one year. Indonesia was designated to replace Australia, which stepped down from its roles in the Steering Group and Peer Review Group. Being a new member, Indonesia will be appointed for a period of two years. It has also agreed


that further rotation of the Steering Group will take place in 2014 based on a rotation mechanism that will be developed next year. 8. With Australia stepping down from the Steering Group, Mr. Mike Rawstron’s term will expire at the end of 2012. The Global Forum expressed its warm appreciation of Mr Rawstron’s success in leading the Forum throughout its first mandate and wished him well for the future. The Global Forum designated South Africa (Mr. Kosie Louw) as the new Chair to take over from Australia at the beginning of 2013 for a period of two years. 9. Three new members, Indonesia, Norway and Spain, were appointed to the Peer Review Group for a period of three years, replacing Australia, Denmark and Ireland. Existing members and the Chair and Vice-Chairs were reappointed for one year. In addition, it was agreed that Global Forum members may attend PRG meetings as observers in certain circumstances. Finally, an annual rotation mechanism would be implemented next year, based on the governance principles already agreed on by the Global Forum, to provide the opportunity to more Global Forum members to contribute to the work of the Peer Review Group.

Progress with the Peer Reviews 10. The Global Forum adopted and published an additional nine peer review reports (i.e. the combined reviews of Argentina and South Africa, and the Phase 1 reviews of Dominica, Marshall Islands, Niue, Russian Federation, Samoa, Sint Maarten and Slovenia). A further three supplementary reports for Liechtenstein, Monaco and Uruguay - were adopted and published as well. As a result of the progress reflected in their

The constant expansion of the Global Forum reiterates the relevance of (its) work. supplementary reports, Liechtenstein and Uruguay, which earlier could not move to Phase 2, can now do so. After adoption of 88 reports, including 22 combined reports, there are now 14 jurisdictions which are unable to move to Phase 2. The progress with the peer reviews is also reflected in the Global Forum’s 2012 Annual Report Tax Transparency, 2012: Report on Progress, which was adopted by the Global Forum.

11. After almost three years, most of the members have undergone their Phase 1 review, and the Global Forum has recently launched the first standalone Phase 2 reviews, which assess the practical implementation of the international standard on tax transparency and information exchange. Members discussed the expectations and challenges for the Phase 2 reviews. The Global Forum members recognised the significance of Phase 2 reviews, which will eventually lead to ratings of jurisdictions on essential elements and an overall rating, and resolved to ensure that this sensitive exercise was conducted with equity, fairness and in a transparent manner. Technical Assistance 12. In response to a call from the G20, the Technical Assistance Coordination Platform was launched in February 2012. This platform, in the form of a secure website, is a tool to enhance coordination between providers of technical assistance in the field of tax transparency and information exchange, notably international organisations and development agencies and the recipient member jurisdictions. The Global Forum noted with satisfaction that the Coordination Platform has raised awareness of its work with these

Photo by Minerva Studio

The Global Forum has the whole world in its sights.


Photo by Toria

It was agreed that the Global Forum’s core focus should continue to be on the exchange of information.

partners, providing them with access to relevant materials and alerting them to upcoming events and training seminars. However, the Coordination Platform has not yet reached its full potential, and all of the Global Forum’s partners agreed that it should be developed further. 13. In accordance with the guidelines that were adopted at last year’s Global Forum meeting in Paris, the Secretariat reported that over the last year, 58 requests for advisory services were received from 36 member jurisdictions. The Global Forum also welcomed progress in respect of the pilot projects for assistance in Ghana and Kenya, and noted the new requests for project assistance from nine other member jurisdictions. Recognising the increasing demand for assistance, in particular from its newer members, the international organisations and development agencies were called upon to take the lead in delivering such assistance. Evaluation Exercise 14. As indicated in its initial mandate, the Global Forum completed an evaluation

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exercise, which was adopted at the meeting. This exercise concludes that the establishment of a peer review mechanism and subsequent completion of reviews on 88 jurisdictions in three years is a significant achievement. The output is significant not only in terms of number of reports, but in terms of concrete results which can be clearly identified across a wide range of

The possibilities for exchanging information have increased dramatically. jurisdictions. Transparency is improving, strict bank secrecy for tax purposes is disappearing and bearer shares are being eliminated or measures put in place to identify their owners. Further, the possibilities for exchanging information have increased dramatically, with more than 800 bilateral information exchange agreements signed since 2009 and more countries signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which is

now open to a potentially worldwide membership. All of this will have a significant deterrent effect on tax evasion, and in the course of the Phase 2 reviews the Global Forum will examine the practical impact of these changes. Future Direction 15. At its meeting in Paris in October 2011, Global Forum members agreed to extend the mandate until the end of 2015. As the schedule of reviews currently does not go beyond the 1st half of 2014, a discussion on the future direction of the Global Forum’s work was held. 16. It was agreed that there should be a continuing role for the Global Forum in providing an essential framework for work on transparency and exchange of information for tax purposes. The Global Forum should further develop its monitoring role to ensure that the international standard is applied to the full extent by all jurisdictions. Its core focus should continue to be on the exchange of information. It should examine the Terms of Reference in the light of experience of the peer reviews


and as the exchange of information environment continues to evolve. The Steering Group should further develop proposals in the light of the Global Forum’s discussions in Cape Town. Competent Authorities 17. In May 2012, the Global Forum organised a successful meeting of competent authorities in charge of exchange of information, bringing together 186 delegates from 78 jurisdictions and six international organisations. Considering the outcomes of that meeting, the Global Forum welcomed the progress made in the development of a database of competent authorities, and adopted the joint Global Forum/OECD publication Keeping it Safe: Guide on the Protection of Confidentiality of Information Exchanged for Tax Purposes. The Global Forum agreed to hold the next meeting of competent authorities in the first half of 2013. Budget

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18. An intermediate financial report for 2012 was considered and the Global

Forum adopted the proposed budgets for 2013 and 2014. It was agreed that the members’ contributions for both years will not be subject to an annual increase. The members also agreed on a policy to suspend and ultimately exclude members who do not pay their dues. A number of Global Forum members and observers are making voluntary financial contributions and assisting by seconding

Global Forum members agreed to extend the mandate until the end of 2015. staff to the Global Forum Secretariat. During the year, Japan offered to provide a voluntary contribution to the Global Forum to provide assistance as well as training seminars to a number of Asian countries including Indonesia, Philippines, Thailand and Vietnam. The UAE agreed to host two training seminars by the Global Forum Secretariat in the MENA Region, the first of which will take place in November 2012.

Next Steps 19. Having considered its programme of work for the coming year, the Global Forum looked forward to the Phase 2 peer reviews, which will be a key focus of the Peer Review Group in 2013, together with the attribution of ratings for more than 50 jurisdictions that will have undergone Phase 2 or combined reviews by the autumn of that year. The Global Forum also recognised the continuing work that needed to be done with respect to the future direction of the Global Forum. 20. The Global Forum agreed that its next meeting will take place in October-early November 2013, and looks forward to offers by member countries to host the meeting. Finally the Global Forum thanked the government of South Africa for its generous hospitality. © OECD (2012) Global Forum on Transparency and Exchange of Information for Tax Purposes - Statement of Outcomes - Cape Town, South Africa, 26-27 October 2012. For more information visit: www.oecd.org/tax/ transparency

Samoa was one of the jurisdictions that had its Phase 1 peer review adopted and published in 2012.


IFC Forum Discusses Role of Global Financial Centres International financial centre government officials, United Kingdom parliamentarians, G20 and OECD officials, financial services professionals and leading journalists debated the role of international financial centres in the global economy back in November 2012 at the IFC Forum annual conference at the British Academy in London. Former Government Minister and UK economic commentator John Redwood opened the conference by emphasising the important economic role of financial services sectors. Mr. Redwood noted the benefits of tax competition and referred to the mutually beneficial relationship between London and small international financial centres such as the British Overseas Territories and Crown Dependencies. This message was elaborated on later in the day by conservative parliamentary colleagues Mark Field, a member of parliament, and David Maclean, also known as Lord Blencathra. Delegates at the conference also heard from United States Counsellor for Economic Affairs in London, Julie Nutter, who confirmed that Washington will continue to progress its regulatory drive, while attempting to safeguard economic growth. Achim Pross, head of the International Cooperation and Tax Administration Division

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at the OECD, also addressed the audience in a panel discussion looking at the programme on information exchange. Issues of US compliance were addressed in the context of discussion on the recent report “Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies” authored by Michael Findley, Daniel Nielson and Jason Sharman.

The conference closed with an informative discussion on achieving greater cooperation between IFCs. The conference closed with an informative discussion on achieving greater cooperation between IFCs, concluding that in the face of common threats, small IFCs will be better represented at the negotiating table if they work together on issues of shared interest. Grant Stein, chairman of IFC Forum said, “It was encouraging to hear the level of political support at the conference for our constituency and it highlights the importance of enhanced cooperation, both in the private sector and intergovernmental

level, in promoting the value of international financial centres. “The forum has also been engaged in highlevel dialogue with representatives from G20 governments in London, in particular the Troika – which chairs the G20 in 2012 – France, Mexico and Russia. This runs alongside our on-going programme of engagement with UK parliamentarians and senior policymakers. Through this engagement, the Forum has focused on explaining the key role IFCs play in economic growth for both developed and developing economies,” he said. “We were pleased to hear from the US Economic Counsellor, Julie Nutter, and to have the opportunity to welcome a Russian diplomat as part of the delegates. Ensuring that the public debate around IFCs, financial intermediation and cross-border business is informed by authoritative information serves the public interest. This is why were delighted to have leading business and financial journalists Kamal Ahmed (Daily Telegraph) and Patrick Jenkins (Financial Times) speak; IFC Forum was particularly encouraged by Kamal Ahmed’s recognition of this and his desire to explore this area in the near future.” www.caycompass.com


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