A cursory look at leading financial centres such as Bermuda, the Cayman Islands, the Bahamas and the Channel Islands, leads one to instantly detect certain underlying ingredients which underpin their international financial services industry (often erroneously referred to by laymen as “offshore banking”). The most critical of these factors combine to form what I refer to as “jurisdictional profile” which is determined after a particular type of peer review process. A jurisdiction is not reputable merely because its local inhabitants, government or regulator says so. On the contrary, the accolade is earned only when those countries which are already deemed “reputable”, admit this other jurisdiction as a “recognised jurisdiction” and gives its practitioners all the facilities and accommodations worthy of membership of this informal yet elitist club. Any country that “recognises” other jurisdictions, but is recognised by no other, is clearly at the bottom of the pecking order.
The factors referred to above are primarily:
- The competence and reputation of the local regulator;
- The level of technical expertise available on the private sector side of the industry;
- The quality of the banking services and facilities available in the jurisdiction.
There are certain secondary factors which come into the mix, but only after the primary issues above have been properly satisfied. Such secondary factors include: (a) the quality and scope of the legislation (especially as this relates to companies and trusts), (b) the level of taxation, and (c) the quality of the general infrastructure (airport access, schools, restaurants, conference facilities) etc.
Regulatory Regime
In virtually every reputable financial centre, the regulator has the statutory responsibility to: license, supervise, regulate, and discipline practitioners and entities which fall within the scope of its regulatory powers. In addition, the regulator has the responsibility (after proper consultation) of setting the standards and guidelines with which practitioners are expected to comply. It goes without saying that the regulator has to be ahead of the private sector, leading from the front as it were. The corollary of this is that the regulator must have the technical competence to lead. Any attempt to lead the private sector from a position of blindness will be met with resistance and hostility, especially as the private sector will invariably turn to the regulator for technical advice when confronting certain thorny or difficult issues which arise in their work from time to time.
Hence, in any reputable financial centre, the regulator is expected to be fully versed in the laws of its own jurisdiction and simultaneously have a good commercial awareness of best international practice particularly in the areas of corporate and trust law, investment management, banking, and captive insurance management. These competences can only be gained from rigorous training (much of it at postgraduate and professional level) and periodic secondments spent in other reputable financial centres. In reputable jurisdictions, the regulator leads the way, rather than bluffing its way into areas it does not understand.
The Registered Agents/ Private Sector
There is no reputable offshore jurisdiction that lacks a significant nucleus or pool of skilled professionals in the areas of trusts and corporate law, accountancy, fund administration and management, captive insurance company management and compliance and risk management. Such a correlation is not fortuitous. However, such a skills pool does not always exist at inception when the offshore sector is first created. Where a deficit exists, governments (working in conjunction with the regulator) have sought to remedy the problem by importing key expatriate professionals to fill the void, on the expectation (if not the condition) that these expatriates will train the local staff in the art and science of the industry.
Training is therefore a core component of success and the building of jurisdictional profile. Currently, the leading professional body for practitioners in the field of offshore financial services is the Society of Trusts and Estates Practitioners (“STEP”). However, many other avenues for developing expertise, do exist, including some at regional level at leading financial centres like the Bahamas and Cayman Islands. The choice will depend on the area of specialisation a registered agent expects staff to pursue.
For example, STEP may suit those who seek a foundation in trusts, ACAMS may suit those who wish to specialise in compliance, while those who wish to specialise in company administration may choose CGI. Some suitable links for entities providing professional certifications include the following:
Availability of efficient banking services and products
Most clients use the services of an offshore financial certain to manage their financial affairs in a tax efficient manner. The most basic of the products available in these offshore centres is the (international) business company, which when used in a private wealth management or succession planning situation is a virtual private account formed under a corporate name.
An offshore company that is unable to open a bank account is of little use to anyone, since in order for the vehicle to be of maximum use, it must be able to disburse funds for the acquisition of assets, and receive funds when assets are disposed of.
It stands to reason therefore that a jurisdiction that is able (or willing) to open corporate accounts for clients is more likely to develop into a banking centre than one which is not. When coupled with the availability of additional services like portfolio management (whether discretionary or advisory), back- to-back financing and secured lending which invariably involves the pledging of shares and securities, the scope for reputation building is enormous. Yet few banks within jurisdictions in the OECS have grasped these opportunities.
Secondary factors
On the matter of taxation, I know of no small island jurisdiction that is or has become reputable while simultaneously levying a high rate of direct taxation, especially when done at both corporate and personal bases. As regards corporate tax, the international bodies seem to imply that any rate below 15% is harmful, and this rate has been set as an acceptable global minimum tax rate. Some states clearly differentiate between passive entities (which mainly hold securities and investments), and active entities which are engaged in trading. Under this scenario, passive entities are tax exempt, while trading entities are taxable.
It begins to get interesting however, when an island state that has no high-quality medical care, no universities of stature, and overall, no world class intellectual capital, then imposes a rate of corporate tax which is higher than exists in many European states, particularly if such state also levies a personal income tax.
As far as personal taxation goes, jurisdictions are free to set their own rate, and many do choose to go to zero rate.
A high jurisdictional profile generates high rewards for those countries that are prepared to make the investment and adopt the correct policies and procedures in order to strengthen their regulatory regime, skills pool and banking industry.