IN THIS ISSUE Page 2 - Welcome to the winter 2014 edition of Hawk-i Middle East - Tim Cartwright, Director Page 4 - What is succession planning? - James Howe, Director Page 6 - Risky business - Ian Murphy - Risk, Governance and Compliance Director GUEST
Page 8 - Pension planning for expatriates in the GCC - Rebecca Ford, Partner and Judith Donnelly, Partner, Clyde & Co LLP Page 10 - Meet the team
MIDDLE EAST Issue 3 Winter 2014
Welcome to the winter 2014 edition of Hawk-i Middle East Even at this early stage, we can see that the year ahead is going to be another exciting and challenging one for the Middle East team at Hawksford. The team continues to grow thanks to the influx of new work from existing clients in the GCC region, as well as new relationships that have stemmed from our on-going visiting programme. Our clients and business colleagues continue to make the point that we must show commitment to the region. Building relationships face to face is key. Accordingly, following on from the theme of 2013, our team will be visiting a variety of countries and states, including Bahrain, Oman, the Kingdom of Saudi Arabia, Kuwait, Qatar and many of the emirates making up the UAE. Maxine Rawlins joined Hawksford as CEO in January 2014. As part of our visiting programme, she looks forward to travelling to the region to meet with intermediaries and clients.
Tim Cartwright Director T: +44 (0) 1534 740115 E: firstname.lastname@example.org
Continuing the theme of building relationships, we are pleased to be supported in our efforts by the work undertaken at Jersey Finance in promoting Jersey as the number one jurisdiction globally for trusts and offshore corporate services. We understand Jersey Finance is looking to expand its presence in the region and we welcome this move whole heartedly. Warming to the theme of Jersey’s position as the major centre for clients from around the globe, but particularly from those in the GCC, as the best location for trusts and offshore corporate services, I am delighted with the content of this edition. While presenting three very different thought
pieces about succession planning, risk profiling and pensions for expatriates in the GCC, all have a theme that resonates amongst fiduciary providers in reputable offshore financial centres. This being that the world has changed, and continues to change, and we must therefore all be prepared to adapt our outlook. From many of our discussions with advisers and prospective clients, we are reminded that Jersey is seen as a safe haven into which they can place private and corporate structures that deal with their international assets. It is pleasing for us to see evidence of how life has moved on in the last five to ten years, with many of the second and third generation family members returning home within the GCC and challenging how personal or corporate assets might be managed in the future. Many are beginning to understand the appeal of structures for succession planning, wealth preservation, employee benefits and philanthropic reasons. The geo political challenges for the region continue, and why wouldn’t a prudent businessman look to safeguard his family or corporate wealth that he has built up over many years? The articles highlight what we are seeing across the spectrum of trust and corporate services in offshore centres, namely:
“…the world has changed, and continues to change, and we must therefore all be prepared to adapt our outlook.”
• The need to consider succession planning, given the many international challenges families with global wealth now face. • Where do I domicile the structures that will hold that wealth? Do I want to place those assets in a far flung location that has a limited business infrastructure and immature court systems? Do I want to deal with providers that have limited experiences in working with multigenerational international assets, or
a centre such as Jersey, that has over 30 years’ experience in looking after the personal and corporate wealth of clients from across the globe? • Many companies in the GCC are taking account of the changes going on around them in the business world. They understand that in order to build that business, they must attract and retain staff of the highest calibre. Whilst many companies in the GCC operate on an immediate cash benefit system for their employees, some are now looking at
pension provision, or similar, in order that they can replicate what is now regarded as a fairly standard offering when seeking to attract employees in other parts of the world. I hope you enjoy reading this edition, and as always, members of the team and I would welcome feedback. Please therefore do not hesitate to contact us after having read any of the articles.
MIDDLE EAST Issue 3 Winter 2014
What is succession planning? Wealthy families often lose their family wealth within three generations. You can argue about the numbers, but it is reasonable to say that 80% of families believe that the second generation will find it difficult to handle the responsibility of managing the family wealth without education, planning and sensible structures to help them.
â€œIf we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.â€? Edmund Burke
It is generally accepted that some 60% of families will lose their wealth by the first generation, some 30% will lose their wealth by the second generation and only around 10% of families will protect their wealth by the third generation. When heirs inherit great wealth, they do not always understand the values and the sheer hard work, grit and discipline that their parents and grandparents had when accumulating the family pot of gold. Some heirs do not understand the delayed gratification, sacrifice and selfworth principles that enabled their older generations to accumulate their wealth, to be able to take care of it and the moral responsibilities that go with the wealth status. When a patriarch takes a step back from his or her day-to-day business and stops to think about the family wealth, what three things should the patriarch think about? 1. The individual 2. The family, and 3. The community The three things any patriarch wants are summarised as a PET: • Protect wealth • Enhance and grow assets • Transfer wealth to family and community How do you do this? You can start by doing three things: Step 1. Work out what assets you own now. This is called consolidated reporting. This requires some homework and planning as it is an audit of your current wealth. Look at all of the asset classes such as cash, bonds, stocks, options, real estate, investments and insurance and pension policies. Keep it simple, and write down the various asset classes, institutions and countries involved. You might want to segment the liquid and investment assets in one document, with real estate, chattels and fixed assets on another. Think about the currency and geopolitical asset split also. US bonds and property in New York will be treated differently to domestic cash and investments in Saudi Arabia.
“Some heirs do not understand the delayed gratification, sacrifice and selfworth principles that enabled their older generations to accumulate their wealth… “ In other words, think about onshore assets in one basket and offshore assets in another. Finally, think about what assets you expect to receive during the rest of your life in terms of income, gains, inheritance and commercial profits. This may take a few months, but the end of step 1 is when you can produce a consolidated reporting statement. Most importantly, you must keep this up to date. Look to achieve, at the very least, a quarterly report.
decisions. It may have a committee for investments and one for executive decision making. When a family protocol is accepted by a family, it tends to be strictly applied and, in most cases, helps to ease tensions that may arise between family members. An investment committee will look at your assets in terms of growth and income and the risk v return ratio. The executive decision making committee will review the control mechanisms, the spending and saving and the transfer of assets between family members. The patriarch will need to look at the education of family members in terms of family protocol and develop a mechanism for power sharing across generations. Your family can use a fiduciary structure for the offshore assets, such as a foundation or a trust, and can create a Private Trust Company to control the assets in accordance with the family protocol, using a wealth partner to administer the structure in a disciplined manner. This is called structuring. By following these three steps and having an effective, well managed structure in place, you can not only enhance your wealth during your lifetime, but protect it for your future generations.
Step 2. Think about you and your partner. List what assets are personal and will be at your disposal for the rest of your life, which may or may not fall into the family structure. These are your assets, under your control during your life and which will be covered by a will or pass under Sharia principles. You still follow step 1 by being disciplined and using the consolidated reporting function for your assets. Step 3. Family protocol. An audit of both your onshore and offshore assets should be carried out for those assets that are seen as part of the family assets. These may be in different jurisdictions, but your family will be guided by the principles to be written down in a family protocol document. This will usually be done with the help of a family or third party lawyer. The family protocol is a document that sets down the philosophy of your family and the values and rules in making
James Howe Director Hawksford T: +44 1534 740246 E: email@example.com
MIDDLE EAST Issue 3 Winter 2014
Risky business - how Jersey’s financial services providers risk rate business Managing risk is a key factor to operating a successful business. Jersey’s financial services providers must be on their guard as to the risks they face. It is not taking the risk, but managing the risk, that is the critical factor for success. Risk is present in all decisions undertaken by Hawksford. We can never completely eliminate risk, but whatever approach we take to manage it, the end result should always be the same – to control it. Successful risk management can be cost effective. There is a need to balance risk and commerciality and apply appropriate levels of capital expenditure proportionate to the nature of the business concerned. Jersey’s financial services providers are encouraged to adopt a ‘risk based approach’ in managing their risks. Industry regulator, the Jersey Financial Services Commission, describes the main risk elements as country, product, delivery and customer specific risk. From a Hawksford perspective, client entities are categorised as high risk, medium risk and low risk. The elements that make up the decision to rate into a particular category can be numerous and diverse.
Risk management is best described as the identification, assessment, and categorising of risks, which encompasses the coordination and application of resources, procedures and monitoring, to enable the control and/or impact of seen and unforeseen events to be managed to best effect. Within an effective control environment, risk is actually good for business. Under the right circumstances it can create a powerful commercial advantage for an organisation, however poor practice can cause risk to become a hazard. Methods used to identify risks may vary depending on legislation, industry practice, culture or geographical considerations. Once risks have been identified, they must then be assessed as to their potential severity of impact and to the probability of occurrence.
“From a legal perspective, there are factors which will automatically result in Jersey service providers having to categorise the client as higher risk.”
Ian Murphy Risk, Governance and Compliance Director T: +44 (0) 1534 740250 E: firstname.lastname@example.org
The control of high-risk business within the Jersey market is critical to its success as it affects all practitioners, no matter what their speciality. Risk is a subject on which there are numerous opinions ranging from who is actually classed as high risk to how they should be treated and monitored. The Jersey Financial Services Commission and the Jersey government assist its finance industry in managing risk by issuing laws, orders, codes of practice and guidance. One of the most important pieces of guidance is the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism. The handbook advocates the use of the ‘risk-based approach’ to dealing with and classifying clients. From a legal perspective, there are factors which will automatically result in Jersey service providers having to categorise the client as higher risk.
It should be noted that, whilst the regulator expects any businesses operating in Jersey to adopt a risk-based approach when categorising and managing business under their supervision, they do set the â€˜barâ€™ at a certain level and insist that aspects will ensure some clients and their entities are automatically classed as high risk. In determining a risk assessment for a customer, the presence of one factor to consider that might indicate higher risk will not automatically mean that a customer is higher risk. Equally, the presence of one lower risk factor should not automatically lead to a determination that a customer is lower risk. There are a number of factors that cause a client to be classed as high risk, which include the client not having been met face-to-face, association with a sensitive activity, association with a sensitive jurisdiction or having a split board of directors, for example. Jersey companies are faced with more business from higher risk jurisdictions than ever before. Wealth is increasingly coming from the BRICS areas and this often brings greater risks in terms of background of client and source of wealth identification.
In addition to the regulatory expectations, we are likely to see costs increasing due to the introduction of initiatives such as FATCA. Intervention by US tax collectors is likely to be just the start of what is going to become a global phenomenon as other jurisdictions join in the race. Simply having a connection to the US may mean a client being classified as high risk. Whilst it is understood that competition is healthy and can benefit the client, the industry is starting to see some firms giving quotes which can be difficult to match, given the risks involved and breadth of work to be conducted. Whilst this may be an effective method of securing business in the short term, in the long term it can create problems and could result in a drop in standards. If the regulator becomes aware that a business is providing services to clients at a potential loss, it can draw two conclusions. Firstly, the business is not fully aware of the risks and scope of work to be undertaken and secondly, it is cutting corners to ensure the relationship is run at a profit. If the regulator finds either to be true, a business may find itself in serious trouble.
Everyone at Hawksford is encouraged to manage risk, with the risk, governance and compliance team having oversight. The team comprises 12 individuals who ensure conformity to the requirements of the legislative framework. They report any material findings to the board of directors. We conduct business risk assessments and document the risks associated with the conduct of business within a corporate risk matrix. Each risk is assessed for probability and impact. We have policies, procedures and contingency plans in order to mitigate material risks. The ultimate responsibility for risk management, however, lies with the board of directors. The reputation of any business is the most precious asset it has. This is certainly true of a financial services provider such as Hawksford. We need to protect our reputation at all costs and excellent client service, combined with good effective risk management, is the key to this.
MIDDLE EAST Issue 3 Winter 2014
Pension planning for expatriates in the GCC Many UAE employers are not aware that legislative changes in Europe and elsewhere can have a material impact on their business. As most UAE employees are expatriates, their employers often need to consider the labour laws of the employeesâ€™ home countries as well as the labour laws of the GCC country in which they work.
â€œPension schemes are a valuable benefit to employees, from senior management to more junior employees. People are living longer, and their expectations of a comfortable retirement require careful planning.
An example of such a legislative change is the new workplace pensions laws in the UK, which can affect British expatriates working in GCC companies. This new law will affect some GCC employers, and may provide fresh impetus to the debate about the provision of pensions for all expatriate workers in the region.
UK workplace pensions laws Under the new laws, which come into force on a date between 2012 and 2017 (depending on the size of the employer), qualifying British workers must be automatically enrolled into a pension scheme when they start employment. The law specifically allows the employer to make deductions from an employee’s salary for the purpose of making contributions to the scheme. Further, the employer, as well as the employee, must make contributions to the pension scheme. UAE companies will now need to consider whether they are affected by these laws. In determining whether an employee is entitled to automatic enrolment into a pension scheme, the UK courts will apply their own labour laws rather than those of the GCC country where the employee is working. Thus, even if an employee is employed by a local entity in accordance with the rules of the local labour laws, they could still be considered by the UK courts to be employed by a UK employer. The new pensions laws apply to any employee who is, according to UK law, ordinarily working in the UK. If a worker who was employed by a UK company intends to return to work for that company at some date in the future, then they may be considered to be ordinarily working in the UK – even if they are in the GCC for a fairly long period of time. Whilst many employees who are on short term secondments or placements to the GCC will remain enrolled in their company pension scheme, those employees on longer term secondments may have been moved to contracts with the local employer and no longer be in a pension scheme. Yet whilst the contract may be with the local employer for the purposes of local labour law, there is a risk that the UK
courts consider that they are still employed by the UK employer. GCC employers will need to consider whether they need to provide pensions for such employees. Further, even where a British worker on a secondment or placement to the GCC is enrolled in a pension scheme, the employer will still need to consider whether the administrative requirements of the new legislation are complied with. There are strict rules on the detailed information which must be provided to affected employees about their pension rights, and the timescales within which the information must be provided. Where an employee exercises their right to opt out of the pension scheme, they must be automatically re-enrolled in three years’ time. The law on this is not clear, and employers should take advice if they are in any doubt whether their employees are affected. The UK Pensions Regulator has the power to issue fines on a daily basis to any employer who fails to comply with the legislation. Employers should also note that if the pension scheme is set up before their staging date (the date on which the laws apply to their organisation) then the employer has more flexibility when deciding where the pension scheme should be established.
Pensions in the GCC
which existing international pension schemes are unlikely to do. The rules of the scheme would need to be carefully worded to ensure that employees do not inadvertently become entitled to a double benefit, claiming both the pension and the end-of-service gratuity (unless of course it is the intention of the employer to offer both benefits). Employers should not make a pension scheme available to their employees without first taking advice on the compatibility of the rules of the pension scheme with local labour laws. Pension schemes are a valuable benefit to employees, from senior management to more junior employees. People are living longer, and their expectations of a comfortable retirement require careful planning. The provision of pensions can be a valuable recruitment and retention tool, particularly as the economic outlook within the Gulf continues to improve and employers start to hire staff (including those from local competitors). There can also be financial benefits for both employer and employee. Since pension contributions are not considered to be part of salary for the purposes of calculating the end-of-service gratuity, the employer can award additional benefits to senior employees without significantly increasing their liability for the gratuity. From the employee’s perspective, they benefit from the security of knowing that their pension is safe.
This may be a good time for GCC employers to consider more generally the issue of providing pensions for expatriate workers. In addition, the Dubai Department of Economic Development has been in discussions with the World Bank, and it looks likely that legislation will be introduced at some point. Whilst there is currently no detail on what this legislation might look like, there is a possibility that it will introduce mandatory pension provision for employees who are not currently covered by a pension scheme. Employers wishing to design their own pension schemes may benefit from having those schemes in place before legislation is introduced. The benefit of designing a pension scheme for expatriates is that it can address existing local statutory entitlements to end of service gratuity, something
“There can also be financial benefits for both employer and employee.”
Judith Donnelly Partner Clyde & Co LLP
MIDDLE EAST Issue 3 Winter 2014
Meet the Hawksford Middle East team
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Business Development Manager
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Assistant Trust Manager
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Company & Trust Administrator
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Published on Jan 30, 2014