Responding to the relentless negative publicity directed at offshore territories, the International Financial Centres Forum was formally launched in London at the end of last year. Legal Business assesses the drivers behind this development and which offshore law firms have continued to expand despite the global economic crisis
‘The offshore world is tired of being the world’s whipping boy,’ says John Collis, chairman of Conyers Dill & Pearman. ‘Most of the negative publicity fired at offshore markets is simply wrong, and we now have a committed agenda to getting the story straight.’
The International Financial Centres (IFC) Forum began with a formal discussion between a number of organisations and individuals that are recognised as thought-leaders in international finance. Ultimately, its objective is to provide authoritative and balanced information on the positive role of IFCs in the global economy and to present a more co-ordinated response to the political rhetoric aimed at offshore financial centres (OFCs), so that policymakers fully understand the potential consequences of restricting their activities. ‘We always understood the contribution we made to the global economy,’ says Robert Shepherd, managing partner of Ozannes, ‘but now we can point to empirical research.’
The offshore legal community certainly feels positive about this collaborative initiative, ultimately hoping that the Forum will enable a more levelled debate through its dissemination of objectively assessed research and information. The offshore lawyers want to show that it’s not all bad in the offshore world, as opposed to the negative way in which these markets are frequently portrayed; often by those who do not actually have the research and facts to back up their comments, but who have recognised what a crowd pleaser beating up the offshore world has become. ‘If you are under attack, then it is reasonable that you get together to defend yourselves,’ Shepherd says.
Peter Tarn, London-based global head of banking and finance at Harneys, agrees. ‘It is important to have a unified view to counter the constant battering that OFCs receive from certain people devoting all their time to spreading ill-informed information. The response was well overdue.’
Telling the truth
The Forum has already launched a website – www.ifcforum.org – where the public can access a ‘key issues’ area and a ‘knowledge centre’, and policy papers will be regularly added to these sections. A monthly newsletter will also be published online. The OFCs are especially keen for the world to sit up and recognise the pivotal role they play in the global economy by enhancing the liquidity in international markets and providing neutral jurisdictions for investors where participants are based in multiple countries. And, as regards the current global downturn, many OFCs maintain that they have undertaken key roles in initiatives designed to support the economic recovery, such as the Troubled Asset Relief Program (TARP) launched in the US to revive those securitisation deals that involved the use of offshore vehicles. ‘There have been numerous transactions in the past year by major investment banks using offshore structures that were designed to provide relief to balance sheets stricken by toxic assets during the financial crisis,’ says Grant Stein, Walkers’ global managing partner.
Plus, it is now generally accepted that none of the major incidents that occurred as the credit crunch unfolded originated offshore. For example, the Madoff situation could never have happened in Cayman, believes Paul Govier, joint managing partner of Maples and Calder’s London office, because Madoff would have had to appoint an approved auditor. ‘When the major merchant banks looked to launch a syndicated super fund to buy toxic assets, it was us that they called,’ Govier says. Others too agree that the offshore world is part of the solution to the efficient, regulated flow of global capital, not part of the problem. Indeed, the IFC Forum maintains that the consensus view of technically informed observers such as the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), the Financial Action Task Force (FATF), and the World Bank is that the principal IFCs are already generally regulated as well as, or better than, their big-country counterparts.
Many offshore lawyers are mindful of making predictions about the start of the recovery in case things deteriorate again, either because of the global situation or rising interest rates.
The founding members of the Forum are the primary law firms from several leading small IFCs, member firms including representatives from Appleby, Conyers Dill & Pearman, Mourant du Feu & Jeune, Ogier and Walkers. Unsurprisingly, the Forum has been criticised by some as being too lawyer-oriented. ‘The IFC Forum has to work hard to lose the self-interested tag,’ says Richard Pirie, head of trust at Crill Canavan.
However, to some, this likely perception is the lesser of two evils. ‘Of course the forum is self-interested,’ Tarn says. ‘It has to be, but that doesn’t mean that it does not have an accurate story to tell.’
In any event, the Forum has already recognised the need to bring on board non-lawyer organisations and, although it was the law firms that were uniquely placed to get the project off the ground, Jonathan Rigby, managing partner of Mourant du Feu & Jeune, tells LB that the Forum has already seen interest from non-legal practice organisations also keen to counter all the misinformation peddled about OFCs. And Peter Bubenzer, group managing partner at Appleby, points out that instead of airing self-interested materials, the Forum will, in fact, be a medium for access to papers and materials from academics and researchers on tax issues and the IFCs – including tax competition issues – as well as on questions of transparency and compliance.
‘Having our own resource centre and data unit properly staffed and referring to the works of economists and academics will help towards achieving our objective,’ Collis adds. Only time will tell exactly how the Forum’s contribution to this ongoing debate will help shape the public or political mindset, but Rigby believes that 2009 was the best possible year to launch the IFC Forum. This is because it was in a year when offshore centres were afforded the opportunity to explain exactly what it is they do, coupled with the OECD’s white-listing of jurisdictions effectively sharing tax information (see ‘Shine a light’, LB198, page 70) and the grey-listing of those countries not complying with internationally agreed tax standards. Then came the interesting findings of the more recent Foot and Deloitte reports.
Best foot forward
The UK government’s independent review of British offshore financial centres has taken the whole debate one step further. Michael Foot, a former managing director of the Financial Services Authority and executive director of the Bank of England, completed his ‘Final report of the independent review of British offshore financial centres’ in October 2009. It includes a detailed tax study carried out by Deloitte for the UK government (‘Understanding corporate usage of British Crown Dependencies and overseas territories’).
Unsurprisingly, it was the global economic crisis that prompted a review that was determined to focus on the future sustainability of the British Crown Dependencies (Guernsey, the Isle of Man and Jersey) and six overseas territories (Anguilla, Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Gibraltar, and the Turks and Caicos Islands). Specifically, Foot assessed issues such as management, international co-operation, transparency and taxation, not to mention the role played by these territories within the global financial services industry.
Jurisdictions such as Cayman and the BVI are, of course, no strangers to international reviews of their laws, regulations and procedures. They have already been subject to a variety of inspections by international organisations such as the Caribbean Financial Action Task Force and the IMF and have received positive reports overall. The Foot Report’s perspective was different though, in that its focus related more to certain issues arising from the relationship between the UK and its overseas territories, and the ability of the regimes in the overseas territories to ride out periods of economic turmoil, rather than the specifics of the legal and regulatory regime in those jurisdictions. Overall, ‘the tenor of the report was very positive,’ notes Jennifer Thomson, a partner with Walkers in the Cayman Islands. Indeed, the report’s positive findings on the role played by OFCs surprised many. Instead of concluding that low tax is the only reason for businesses using Crown Dependencies, as many expected, Foot also pointed out that most depositors are companies doing business in difficult locations, such as Russia, and that they also choose to use states such as Jersey or Guernsey for asset protection. Naturally, the Channel Islands were especially pleased, even more so when the Crown Dependencies were distinguished from the overseas territories. Jersey, in particular, was delighted to receive a ringing endorsement from someone of Michael Foot’s stature as to the worthwhile contribution it makes to the world economy.
‘The positive findings of the British Offshore Financial Centres Review are a further endorsement,’ says Robert Kirkby, technical director at Jersey Finance, a non-profit-making organisation that promotes Jersey as an international finance centre. ‘And it happened shortly after Jersey was placed on the OECD’s white list and was classed by the IMF in the top division of international finance centres for the excellent quality of its regulatory and supervisory regime.’ Indeed, Foot even recommended that other jurisdictions copy Jersey in introducing a financial ombudsman and a protection scheme for depositors. ‘We were pleased with the balanced conclusions of the Foot Report,’ says Alex Ohlsson, a corporate and finance partner at Carey Olsen. ‘In particular, it recognises the key role Jersey bank subsidiaries have played in upstreaming offshore deposits to their UK parents; namely, those funds that are then channelled to parent banks onshore in the UK for management and investment purposes.’
Generally, the Channel Islands received a clean bill of health from Foot. The Report noted that in the second quarter of 2009 alone, the Channel Islands provided net funds to banks in the UK totalling $323bn, of which $218bn came from Jersey, $74bn from Guernsey and $40bn from the Isle of Man. And although the report did call on Britain’s fiscal havens to raise taxes to overcome the ongoing recession, the Foot Report also paid open tribute to the resilience of the overseas territories’ regimes for their ability to weather stormy economic periods and their habit of storing up cash reserves. In addition, Deloitte’s own finding that the amount of tax lost to the Treasury from companies using legitimate avoidance techniques and offshore tax havens is less than £2bn, a small fraction of previous estimates, also delighted the offshore set. Deloitte even went so far as to say that this figure could be even lower. According to David Walwyn, Ogier’s strategy director: ‘The combined Foot and Deloitte reports have successfully contributed to the recognition of the value of offshore financial centres by focusing on some hard facts.’
It’s still early days though, and the Foot Report has not made any drastic recommendations that the UK government is likely to act upon. Many offshore lawyers do not believe that public opinion about OFCs has yet altered, but consider that the Foot and Deloitte reports have laid the necessary groundwork for changing how the offshore world is perceived. ‘People are now better informed about what the offshore centres do, but it’s never a good thing to have so much publicity, as we did in 2009,’ Shepherd says. ‘A good referee is generally one you don’t notice.’ As to whether or not the Foot Report is likely to contribute to the UK government’s policymaking, there is a general consensus that it is just another report, and that nobody really knows how the government is likely to react to it. Many believe that we are in the ‘phony war’ stage and that the real test will come after the next general election. If there is a change of government, it is generally perceived that the Conservatives will interfere less in OFCs. As for the current administration, Shepherd points out that the Channel Islands have always had a good relationship with the UK Treasury. ‘But in 2009 it looked as if the UK government was on the verge of throwing the baby out with the bath water,’ he adds.
Offshore versus Onshore
Looking at the offshore legal market, those law firms with a healthy balance of corporate and litigation work appear to have ridden out the downturn better than others. But offshore law firms were nonetheless affected by the crisis. Even the Channel Islands suffered to some degree. ‘Jersey hardly noticed the last recession,’ says Ian Strang, managing partner of Voisin, ‘so this downturn was somewhat of a shock, resulting in a surplus of lawyers being available.’ For many, the recession was proof in the pudding that the similarities between offshore and onshore firms are greater than the differences. But even though many offshore law firms froze recruitment during the crisis, the offshore legal market still did not experience the same numbers of layoffs as their onshore counterparts. Even where layoffs did happen, they certainly were not as headline-grabbing.
In any event, it is easier to turn off the taps in offshore markets. Large onshore law firms heavily gear up for the busy times and tend to work on 25% attrition rates. ‘So when staff turnover falls to zero, they can find themselves 25% overstaffed even if they are still busy,’ says Harneys’ London-based global head of banking and finance Peter Tarn. Indeed, many offshore law firms believe that they run tighter ships than the onshore practices, as it’s simply not their business model to have a surplus of lawyers in case the big deals come in.
But it would be far from the truth to imagine that offshore law firms have not undergone significant changes. At Cayman Islands-based law firm Maples and Calder, co-managing partners Charles Jennings and Julian Reddyhough suddenly retired from the partnership and were replaced in December 2009 by Henry Smith, who is now the firm’s global managing partner. This marked the second change of leadership in just over two years. The practice also established a new management committee that is made up of partners from the firm’s various offices.
And now it looks as if recruitment and partner promotions have begun once again for offshore law firms. In January, Conyers Dill & Pearman made a fresh round of hires to its corporate team, with the addition of associates in the Cayman Islands, Bermuda and Dubai, while Mourant du Feu & Jeune made up four associates in the year’s round of partner promotions, as well as taking investment funds partner James Wauchope in December 2009 from rival Maples and Calder in the Cayman Islands, with a view to grabbing a larger market share there. In Dublin, Maples itself recently raided a team of six litigators from rival A&L Goodbody, including equity partner Dudley Solan, who joined as litigation head. This was just the latest in a series of high-profile lateral hires for Maples’ Irish office. As for Ogier, it now boasts a total of 38 partners, having recently welcomed five new partners.
What Next?
In the aftermath of last year’s G20 summit, there was wide speculation that sanctions might realistically be imposed on those countries demonised by both press and politicians as tax havens. But following the various reports commissioned and the IFC Forum’s efforts to spread the word, it looks increasingly unlikely that any of the white-listed countries will feel the brunt of sanctions any time soon. Whatever might happen, the lawyers operating in territories such as Jersey, the BVI and Cayman tell LB they think it inconceivable that any of the jurisdictions in which they practise would be subject to such measures. But although there is presently a large incentive to sign up to the requisite 12 Tax Information Exchange Agreements (TIEAs) to be granted favourable white-list status, the OECD will be monitoring the actual quality of the agreements and how they stand up in practice.
‘The combined Foot and Deloitte reports have successfully contributed to the recognition of the value of offshore financial centres by focusing on some hard facts.’
David Walwyn, Ogier
There are those who believe that getting onto the white list was made too easy, and that by simply having 12 TIEAs, the OECD’s objective was somewhat defeated, even though it did psychologically tune OFCs into thinking about tax information compliance. ‘The white list should be about quality, not quantity,’ Pirie says. ‘Countries must show they have real financial relationships with the countries they enter into TIEAs with, or they should be discarded.’
Sanctions will nonetheless be discussed at the next G20 meeting, and it remains to be seen whether the world powers will attempt to agree some form of multilateral treaty to deal with those rogue states still deemed to be non-compliant. The summit would be setting itself no easy task. ‘Such initiatives should come from individual member states,’ Walwyn says, ‘and a multilateral treaty would be difficult to reach agreement on and to implement.’
Join the club
More reasons to be cheerful include Jersey being approved as an Acceptable Overseas Jurisdiction by the Hong Kong Stock Exchange, meaning that Jersey companies can join companies from countries such as Australia, China, Cyprus, Germany, Luxembourg and the UK in being able to float on the exchange.
The approval for Jersey companies was triggered by two approaches to the Hong Kong Stock Exchange. Ogier had been acting for a Jersey company that had sought a pre-IPO ruling on whether Jersey was an Acceptable Overseas Jurisdiction, while Jersey Finance had been making its own submission to the exchange on the same question. To achieve approval, matters such as shareholder protection provisions under Jersey law were considered, as any non-Hong Kong company listing on the exchange has to demonstrate that shareholder protection offered by the foreign jurisdiction is at least equivalent to that in Hong Kong. The exchange has now published the conditions under which Jersey companies may list on it and has confirmed that these companies may now follow a streamlined process and will not be required to complete a detailed line-by-line comparison set out in a 2007 joint policy statement.
‘Gaining access to a major capital market such as Hong Kong is further excellent news for Jersey and is a step forward in our ability to attract new business from the region,’ Kirkby says. ‘The move by the exchange authorities adds weight to Jersey’s reputation as a rigorously supervised, highly regarded jurisdiction, and also demonstrates how the market in Asia views the quality and robustness of Jersey company law.’
Jersey Finance is also delighted because this development gives further impetus to the formal opening of its second overseas office in Hong Kong last November and will support Jersey’s efforts to develop commercial links with the region. And certainly the approval is a pleasing development for those Jersey companies already operating in Asia, or for those who wish to do business there, as they will now be able to access the capital markets of one of the largest financial centres in the region.
In practice, Pirie believes that the opportunities for Jersey companies in Hong Kong will be limited, but that Jersey’s profile will be further raised in a marketing context. On the other hand, Shepherd expects that some existing Jersey companies that are listed on AIM may now seek a Hong Kong listing because of improved liquidity in the Hong Kong market. However this development translates into reality, the potential consequences are looking positive, something also recognised by Guernsey. Never far behind its neighbouring island, Guernsey is also likely to receive approval by the Hong Kong Stock Exchange as an Acceptable Overseas Jurisdiction. ‘Both Jersey and Guernsey are looking to diversify their offering,’ Collis says, ‘and Jersey Finance is doing a great job in spreading the word.’
Jersey has also established itself as the jurisdiction of choice for UK-based multinationals looking to re-domicile. Re-domiciliations, in which UK-based multinationals relocate their headquarters – to Ireland in most cases – have occurred in response to the way the UK government handles the foreign profits of UK-based companies. They involve the insertion of a new listed Jersey holding company as the ultimate parent company of the relevant group. ‘Many of the difficult legal and tax questions which arise on a re-domiciliation have been raised and answered by Mourant du Feu & Jeune in relation to Jersey,’ Rigby tells LB. ‘The result is that UK multinationals can be confident when choosing Jersey that the expertise and experience exists to achieve the re-domiciliation, and that there are unlikely to be hidden pitfalls.’
Safe haven
For many, the recent conclusion of the Alhamrani dispute, Jersey’s most expensive court case, has confirmed that the island remains a safe and well-regulated jurisdiction, not only to establish trusts in, but also as a secure destination in which to conduct commercial litigation when things go wrong.
The claimants, beneficiaries of several substantial Jersey trusts that appeared to have sustained considerable losses, brought proceedings alleging breach of trust and fiduciary duty against JP Morgan (Jersey) Trust Company, local trust company Russa Management and Sheikh Abdullah Ali M Alhamrani, a protector of the relevant trusts. On 16 September 2009, following an out-of-court settlement, the Jersey Royal Court made orders by consent, discontinuing 16 actions concerning the Jersey trusts of the Alhamrani family. This brought to an end a bitter family dispute that had started six and a half years earlier concerning trusts worth in excess of $100m: the Internine Trust and the Intertraders Trust.
Several household name law firms were involved in the litigation. Sheikh Mohamed Ali M Alhamrani and four of his brothers instructed Bedell Cristin; Carey Olsen advised Russa Management; while Crill Canavan advised the first defendant. Mourant du Feu & Jeune was also heavily involved in the litigation, representing JP Morgan on the issue of whether the costs of a neutral trustee should automatically be subject to taxation. Jersey law firm Sinels Advocates acted for Trustcorp (Jersey), which was appointed trustee of the Internine Trust following JP Morgan’s retirement.
The case evolved into one of the longest-running court cases in Jersey history and tackled subjects such as the availability of dog-leg claims (aimed directly against the directors of the corporate trustee); the matter of trustee’s costs; the use of English solicitors; and the disclosure of information to beneficiaries. Its conclusion not only demonstrates the ability of Jersey’s legal system to handle an exceedingly complex and long-running case, but also the Royal Court’s determination to ensure that Jersey trusts law remains relevant and that its court system is accessible and efficient. Jersey can boast a wealth of decided cases and its Jersey trust judges and Commissioners are second to none, Crill Canavan’s head of trust Richard Pirie believes.
Of course, the case might have gone the other way and caused considerable damage to Jersey’s reputation as a leading finance centre. Instead, the trustees of Jersey trusts and the beneficiaries of trusts can draw comfort from the many robust decisions reached in these proceedings. ‘Nobody expects financial centres not to produce substantial litigation,’ says Philip Sinel, principal of Sinels Advocates. ‘What this dispute proves, despite the way the offshore world is often perceived, is that Jersey is more than capable of dealing with such enormous and complex litigation. That is not the case for all offshore territories.’
Lawyers from the Cayman Islands, British Virgin Islands and Bermuda might beg to differ. The courts in each of these Caribbean jurisdictions have been involved in various hedge fund litigation and a growing number of insolvency actions relating to the orderly winding-up of corporate investment vehicles, such claims also highlighting the need for robust and comprehensive legal regimes across the offshore jurisdictions. Each of the islands claims a well-developed judicial system benefiting from experienced judges and legal practitioners who are developing a significant body of offshore case law. While each island court treats decisions of the English courts as highly persuasive, the increased internationalisation of commercial disputes has also led to decisions of other commonwealth countries, such as Australia and Canada, and other offshore courts becoming increasingly influential. ‘This convergence of thinking leads to a greater consistency of decision-making and less forum shopping between offshore centres,’ says Sheba Raza, a London-based associate at Conyers Dill & Pearman.
Keeping busy
It comes as no surprise that offshore law firms have also seen their litigation work grow in response to the downturn. Fund and trust disputes have blown up everywhere, and insolvency-related instructions have grown, with UK hedge funds particularly keen to push through litigation. The rights of redeeming investors where funds have suspended redemption, corporate fraud and the ability of companies to bring claims against professional service providers are also typical examples of recession-generated instructions. ‘We are seeing the fallout from the meltdown,’ Shepherd says, ‘as disappointed investors look for redress for money lost.’ Key instructions from recent times have often related to funds and investors in relation to claims concerning Lehman Brothers’ collapse and the Madoff fraud.
Jersey became the first Crown Dependency to offer foundations, an alternative to trusts that appeals to civil law territories such as the Far East and the Middle East.
Many firms noticed less fundraising work for most of 2009, with restructurings and refinancings generating significant activity. In response to this trend, Ogier created a restructuring and insolvency cross-group practice, and Walkers formed a global corporate and financial restructuring group in early 2009, co-headed by partners Guy Locke in the Cayman Islands and Antonia Hardy in Jersey. Walkers’ new group focuses on providing commercial business solutions to clients’ problems and delivering global support across the full spectrum of restructuring transactions, covering solvent or insolvent entities, whether contentious or out of court. Recently, Walkers acted in the Cayman Islands government’s high-profile £187m sovereign bond debt offering. The proceeds of the bond issue, which was the first public offering by Cayman, was to be used to repay bridge financing and to fund capital expenditure. Additionally, Walkers’ management services group has also seen positive growth in 2009 and added new products, including a client web portal. ‘The portal allows management services clients secure online access to documents from anywhere, at anytime,’ Stein says. ‘This will be of great benefit to our global clients.’
Cut to the present day, and some offshore lawyers report that the wave of restructuring work may be reaching an end, with banking and corporate teams again working at full stretch. In fact, financial services clients appear to have ridden out the storm pretty well, especially in the Channel Islands, and transactional acquisition opportunities are now presenting themselves again. ‘On the wealth management side, clients have realised they have to start getting on with their lives again and have been exuding new levels of cautious confidence since October,’ Pirie says.
Last year’s new Foundations Law (see ‘Shine a light’, LB198, page 70) has already brought in clients to Jersey law firms from the Czech Republic and South Africa, as well as generating interest in the Far East. Jersey became the first Crown Dependency to offer foundations, an alternative to trusts that appeals to civil law territories such as the Far East and the Middle East, as they take existing concepts and mix them up with elements of trusts and corporate principles. Meanwhile, Carey Olsen has seen an increase in takeovers of some of the smaller AIM-listed companies and a good number of convertible bonds being issued by Jersey issuers for UK-listed corporates.
The establishment of new funds, although not back up to 2008 levels, is also returning, marking a definite upswing in confidence, although funds tend to be much smaller right now and more focused. ‘They are looking to show a unique selling proposition as opposed to saying “we do the same as others, only better”, ’ says Appleby corporate partner Gray Smith. Luxembourg has seen a number of new funds established, but generally there has been a shift to Asia, and particularly to India. Looking specifically at the hedge fund market, some anticipate hundreds of smaller start-ups emerging during the course of 2010, with this industry growing to be worth $3 trillion by 2014. And one positive trend in hedge funds has been new allocations going to a variety of strategies. For example, managers in Asia have seen 75% of net new allocations coming from the US, primarily from pension funds. In Asia, the pipeline is filling up again, with a raft of IPOs underway and strategic investors spotting good asset acquisition opportunities. Hong Kong offices are especially busy and their transactional workloads are growing. When LB spoke to Harneys’ Tarn, he had seen six conflict checks from Hong Kong that same morning.
Safety first
The dependability of the legal systems in the BVI and the Cayman Islands is often a key factor in the decision to use incorporated companies in one or both of those jurisdictions in Asian corporate structures, Stein believes. Firms like Walkers that have offices in both Singapore and Hong Kong enjoy a strong position from which to guide clients, and are expecting more opportunities for offshore finance and private equity structures in Asia. As for the BVI, it is particularly appealing to high-net-worth individuals based in Asia. Moreover, the BVI remains one of the top foreign investors into China. In 2008, only Hong Kong overtook the BVI for the size of its foreign direct investment into the country. The BVI’s own investment levels reached £9.73bn for the same period, and it has also achieved the status of being the third most-used jurisdiction for Indian outbound investment.
Crill Canavan, on the other hand, has noted the Russian funds market’s considerable growth, so much so that it recently developed a Russian services team and added a Russian page to its website. Many offshore lawyers, though, are mindful of making predictions about the start of the recovery in case things deteriorate again in 2010, either because of the global situation or a rise in interest rates. Certainly, the new transactions appear to be conducted with greater levels of prudence, on the part of both financial institutions and businesses, who are again focusing on their core business activities and more realistic rates of return.
‘The UK government telling Cayman it shouldn’t be borrowing so much money is a little like George Best telling others not to drink to excess.’
Gray Smith, Appleby
However, in the Cayman Islands it has not been so rosy. When Cayman looked to raise finance on the international markets, it needed the UK government’s sign-off on borrowing. Although Cayman wasn’t asking the UK government for money, it was told it had to demonstrate how it would repay the debt as though it was not a major financial centre, even though finance is a major part of its economy and Cayman is AAA-rated.
‘The public disagreement over money with the UK government hardly helped how the Cayman Islands were perceived,’ says Jason Romer, a commercial partner at Guernsey law firm Collas Day.
To others, the affair smacked somewhat of hypocrisy. ‘The UK government telling Cayman it shouldn’t be borrowing so much money is a little like George Best telling others not to drink to excess,’ Smith says. But now the panic has cooled off, Cayman has organised its borrowing and did secure the UK government’s sign-off.
Furthermore, although Cayman did not notice any flight to quality to the Channel Islands from the Caribbean because of its delayed white-listing, some fund managers did hedge their bets for a while and looked to establish onshore and offshore funds in parallel. In April 2009, Cayman found itself on the OECD grey list because it did not yet have 12 TIEAS in place and was only moved to the white list in August that year, some four months later. ‘The problem with TIEAs is that you can invite other countries to sign up,’ Collis says, ‘but you can’t force countries, such as Italy or Germany, to take the time out to fly around the world to enter into these agreements and then push them through their own parliaments.’
Walkers’ Thomson did not notice any perceptible shift in business as a consequence of the white- and grey-list distinction during or after that period. ‘We put this down to two factors,’ Thomson says. ‘One, the fact that the institutions and businesses which already use Cayman and the BVI are comfortable with the laws, regulations and service providers in those jurisdictions and had and have no immediate incentive to switch; and two, because any concerns which our clients may have had were alleviated by the fact that the Cayman government immediately reaffirmed that it would continue to take whatever steps would be necessary to demonstrate its respective commitment to transparency and the highest regulatory standards.’ In any event, it would seem as if people generally have short memories.
‘With the performance and choice offered by Cayman,’ Smith says, ‘it’s very much business as usual again.’ Indeed, the investors have returned and market activity has picked up for the Cayman Islands. Carey Olsen has also noticed that despite the enhanced regulatory reputation of Jersey, it is difficult to persuade existing funds to relocate from Cayman or the BVI.
Nonetheless, Romer says he has seen a definite shift over the past six months of funds moving from the Caribbean to Luxembourg, Ireland and the Channel Islands. ‘The BVI has a reputation for being quick and cheap,’ he adds, ‘but managers are now opting for jurisdictions that are recognised for their stricter corporate governance, a characteristic increasingly being recognised as important in the current environment.’
Top of the world
Towards the end of November 2009, Dubai World, the conglomerate owned by the government of the Gulf emirate, asked creditors for a six-month moratorium on its debt obligations. To many, Dubai may be small fry in the world economic order, but this latest panic showed that the fallout from the global crisis was far from over and markets around the world showed their disappointment at the news. Dubai World’s reach is extensive, with its ownership of assets around the world including P&O, a world leader in international marine terminal operations and development. But unlike Abu Dhabi, its prosperous neighbour, Dubai cannot rely upon high levels of oil production to back up its ambitions. Nevertheless, in the good times, lenders threw more than $100bn at Dubai, and around $34bn of this figure ended up in Dubai World’s coffers.
Dubai’s debts are now over $100bn, with Dubai’s financial turmoil leaving many of the world’s leading creditors counting their exposure. In particular, the UK banks were left kicking themselves as the aggregate exposure of UK banks to Dubai World totted up to around $5bn and included The Royal Bank of Scotland, HSBC, Standard Chartered Bank and Lloyds Banking Group. The conglomerate also includes cash-poor Nakheel, a state-owned real estate giant that recently had $4bn in outstanding Islamic debt falling due. Nakheel has become a particularly sore subject, as bond investors feel they had the wool pulled over their eyes by Dubai’s rulers. They claim they were given misrepresentative assurances as to the emirate’s creditworthiness when, in September 2009, Sheikh Mohammed bin Rashid Al Maktoum declared that he was unconcerned about Dubai’s debt. Consequently, international investors bought up large volumes of Nakheel bonds despite Dubai already being in a property slump.
Of great relief to many is the fact that Dubai World, although state-owned, remains separate from the government. Moreover, the government has not given any guarantees in relation to the Dubai World group’s borrowings, meaning that the current debt problem is being contained at a corporate level rather than systemically. In any event, it was generally assumed that Abu Dhabi, the UAE’s wealthy capital, would support Dubai when push came to shove. Which is exactly what happened when the essential $10bn bailout from Abu Dhabi came through in December. Dubai has now directly or indirectly received a total of $25bn from Abu Dhabi, with the latest helping hand meaning that Dubai was able to avoid defaulting on its $4.1bn Islamic bond. And the surplus money will help to keep Dubai World operational until the end of April while it negotiates restructuring terms with creditors. Other initiatives recently announced include the Central Bank of the United Arab Emirates’ promise to support local banks and the cost of insuring Dubai’s debt through a credit default swap. Furthermore, in the event that Dubai World cannot agree new terms with its creditors, the Dubai government intends to introduce new bankruptcy procedures, based on internationally accepted standards for transparency and creditor protection. A tribunal is also being established to hear cases that are brought against Dubai World in light of its restructuring.
Many offshore lawyers active in the region believe that, although the Dubai crisis has the potential to have a serious impact on the world economy, the consequences for operations in Dubai are likely to be indirect and will depend on how much fire-selling Dubai World is forced to carry out of its crown jewel assets. The conglomerate is expected to keep hold of precious infrastructure such as the ports, but its worldwide real estate holdings may be disposed of.
‘So far, the Dubai situation hasn’t affected the transactional work going through our office there,’ Conyers Dill & Pearman chairman John Collis confirms.
Walkers’ own Dubai office was established to service clients across the entire Middle East region, so most of its work is related to clients and activities outside of Dubai. The Dubai-sourced instructions tend to involve advising the Dubai branches of international financial institutions on the use of offshore vehicles for activities in other parts of the Middle East, North Africa and South Africa area. ‘Accordingly,’ says Rod Palmer, a partner with Walkers in Dubai and co-head of the global investment funds group, ‘the recent announcements relating to the restructuring of Dubai World’s debt arrangements have not materially adversely affected operations.’
Notwithstanding December’s panic, Dubai went ahead with the opening of the world’s tallest tower in January and marked the landmark occasion by renaming it after Sheikh Khalifa bin Zayed al-Nahyan, the ruler of Abu Dhabi and the financial backer responsible for bailing out Dubai. The renaming looks like a public demonstration of Dubai’s gratitude for the recent loans, while at the same time flagging up how close relations are between the UAE’s two largest states. Meanwhile, looking to the future, Dubai hopes that the tower’s inauguration will entice tourists and investors back as part of the emirate’s much-needed and much-desired recovery.
Islamic opportunity
Before the global financial crisis hit, the Islamic finance, insurance and investment markets were enjoying hitherto unknown growth. The worldwide downturn cut back that development, but Islamic finance is now offering a new mainstream alternative to Western banking and investment products and is showing healthy signs of recovery. Plus, it is finding favour with a much broader range of investors. With investors paying less attention to highly leveraged loan transactions, there has never been more interest in alternative, unconventional sources of finance. And all this at a time when investors are especially keen to diversify their portfolio risks.
Many believe that Shariah-compliant products may be less vulnerable than conventional products, particularly because speculation or uncertainty must be avoided. Indeed, it is widely believed that the residential sub-prime mortgage-backed securities that sparked the onset of the economic crisis would not have been permissible under Shariah investment principles. Even in Sweden, a recently formed members’ bank has opted not to charge interest on loans in accordance with Islamic finance features. In addition, Shariah hedge funds have been gathering pace and in January 2009, the Dubai Shariah Hedge Fund Index was launched. This was the first internationally recognised index comprised exclusively of Shariah-compliant hedge funds.
Some anticipate hundreds of smaller hedge fund start-ups emerging during the course of 2010, with this industry growing to be worth $3 trillion by 2014.
Dubai is one offshore territory that has become an important hub for Shariah funds. Ogier’s David Walwyn believes that notwithstanding its liquidity problem (see box, ‘Top of the world, page 66), and the fact that the price of its financing will go up, it will remain a significant financial centre, particularly for global Islamic finance. Bermuda is another financial centre keen to tap into this potentially lucrative sector. Bermuda’s funds industry was hit hard by the downturn, but it is keen to ride the recovery wave and already houses a large institutional Shariah-compliant fund. Bermuda believes it is an especially attractive destination for the funds industry, because it can obtain prompt approval for a fund from the Island’s leading financial services regulatory authority, the Bermuda Monetary Authority, and also by virtue of its ability to structure Bermuda umbrella funds as segregated account companies with the resulting separation of assets and liabilities between segregated accounts. Conyers Dill & Pearman is one firm with a growing Islamic finance practice and recently recruited Claire McConway, an expert in the corporate aspects of Islamic finance, from US firm King & Spalding in London, into its Bermuda office.
‘We are actively researching a number of expansion possibilities. We are also listening to our clients to see what their needs are, and will develop our plans accordingly.’
Grant Stein, Walkers
The development of Islamic finance and particularly Shariah funds may represent an opportunity for many offshore jurisdictions if they can adapt to specific requirements and offer flexibility to investors, together with sophisticated infrastructures. Global law firm Appleby has also recognised this growth, and in July 2009 it opened a representative office in Bahrain for the purposes of serving clients in the Middle East, including in the area of Islamic finance.
New shores
Despite the economic downturn, some offshore law firms have continued to expand with the opening of new offices. Appleby is the most obvious example. Following its merger with Isle of Man firm Dickinson Cruickshank and recent entries into Switzerland, Mauritius, Seychelles and Bahrain, it took a group of senior associates from Ozannes in December 2009 to set up in Guernsey. The new office will be operational in the spring of 2010 and will practise Guernsey law with a focus on corporate, commercial, private client, litigation, insolvency and restructuring. Following approval by the Guernsey Financial Services Commission, a complete range of fiduciary services will also be offered. This latest move establishes the firm’s position as the only offshore legal, fiduciary and administration service provider with a major foothold in eight of the world’s leading offshore business centres. Appleby Guernsey will initially comprise two partners, Barney Lee and Helen Crossley, in the corporate team, and two partners, Jeremy Le Tissier and Gavin Ferguson, in the litigation and private client teams. David Clark, a banking and asset finance partner in Appleby’s London office, will relocate to Guernsey to lead the new office and Chris Ward will join the firm to lead the fiduciary and administration services business, having previously served as managing director of Rothschild Trust, Guernsey.
‘Countries must show they have real financial relationships with the countries they enter into tax information exchange agreements with, or they should be discarded.’
Richard Pirie, Crill Canavan
‘We are very excited about this development,’ says Peter Bubenzer, the firm’s group managing partner, in an official statement. ‘Our entry into the Guernsey market further builds our strength and depth across multiple jurisdictions, providing greater resources and a wider choice to our clients. We believe that this move will reinforce Appleby’s position as the first choice for clients in the offshore sector.’
For Guernsey, this was a rare piece of lawyer poaching. Such a raid may not raise too many eyebrows in the City, or even in Jersey, but the Guernsey legal market still relies upon personal relationships between law firms both locally and in the UK, and more generally onshore. Indeed, the market has watched Appleby’s constant expansion drive during the crisis with interest. ‘I wouldn’t sleep at night managing Appleby, from the worry of keeping the product consistent in each country,’ one managing partner tells LB.
Nonetheless, Guernsey is also likely to attract other international law firms looking to develop or expand their Channel Islands presence. Conyers closed its office in Guernsey in 2003 because it didn’t see itself competing in beauty parades and was more focused on its own BRIC (Brazil, Russia, India and China) strategy. ‘However, we are now looking to expand further,’ Collis says, ‘and would like to establish in both Jersey and Guernsey, either through a merger or by setting up our own offices.’
Being a preferred jurisdiction for Russian investment, leading treaty-based jurisdiction Cyprus has also attracted the interest of some offshore law firms. Cyprus has the most widespread double tax treaty network in the world and is very favourable for India or Eastern Europe-related deals, even though Mauritius currently remains the preferred destination for India work on the equity side. Nearly half of all foreign direct investment into Russia flows through Cyprus and the BVI, and it is expected that economic co-operation between Cyprus and Russia will continue to increase following the completion of its new double taxation avoidance treaty with Russia in April 2009, and Cyprus’ removal from Russia’s blacklist of states and territories that participated in exemption for dividends. Conyers recently launched its Cyprus practice out of its Moscow office and will advise on all aspects of Cyprus corporate law. Cypriot law firm Antis Triantafyllides & Sons has entered into an arrangement with Conyers for mutual co-operation on Cyprus, Bermuda, BVI, Cayman Islands and Mauritius work, and will assign a lawyer from its Cyprus office to Conyers’ Moscow office.
The launch of Conyers’ Cyprus practice marks continued progression of the firm’s strategy to focus on the BRIC markets, following launches in São Paulo, Moscow and Mauritius over the past two years, in addition to its already well-established Hong Kong office.
Harneys has also decided to forge stronger links with Cyprus and to step up its level of activity there. The firm is merging with ‘best friend’ firm Aristodemou Loizides Yiolitis. Harneys was already offering single bills to clients and a single point of contact, ‘but we looked at how to take this to another level and bring them into the global network,’ Tarn says.
Ogier has also continued to expand its horizons in spite of the global crisis. New offices in Bahrain and Tokyo have enabled the firm to access lucrative instructions generated by the Middle East and Asian economies. As for Walkers, it is continually evaluating its options with regard to new offices and new jurisdictions. ‘We are actively researching a number of possibilities,’ Stein says. ‘We are also listening to our clients to see what their needs are, and will develop our plans accordingly.’
However, the current interest in founding additional overseas offices does not mean that all offshore law firms are likely to follow the Conyers or Appleby strategy of establishing new branches in jurisdictions such as Russia, Hong Kong or Mauritius. Some prefer to stay much closer to home. ‘Recently we’ve seen a shift of power from West to East,’ Mourant’s Rigby says, ‘and we’re keen to explore any potential opportunities, but we’re not interested in planting flags through the opening of new offices.’ London remains an extremely important market for Mourant and it is confident in its future as a global finance centre. ‘The move to larger premises in a landmark building demonstrates our commitment to providing offshore legal services from the heart of the City to our many London-based clients and intermediaries,’ he adds.
Meanwhile, Mourant has been making news of a different kind. The offshore world’s attention was grabbed by the recent sale of its funds arm, Mourant International Finance Administration (MIFA) to US-owned State Street, leaving Mourant an independent law firm, having already disposed of its trusts business to Royal Bank of Canada in early 2009. MIFA has 650 employees globally, with roughly $170bn of assets under administration.
Many offshore lawyers are mindful of making predictions about the start of the recovery in case things deteriorate again, either because of the global situation or rising interest rates.
Mourant maintains that the decision to sell the administration business was taken before the crisis and was completely unconnected to the downturn. ‘We got to a point where the business had outgrown the private ownership model and a new owner would best assist MIFA achieve its true potential,’ Rigby says. As for the firm’s own plans, the partners of Mourant du Feu & Jeune will now be focusing exclusively on developing the Mourant legal practice, building on its position as one of the world’s leading law firms offshore.
Look after your own
A key issue for many offshore lawyers remains the current state of the EU Alternative Investment Fund Managers (AIFMs) Directive, which polarised opinion when it was released in early 2009. The Directive took aim at hedge funds and private equity funds, addressing fears that the sector was not properly regulated and attempting to ensure that it does not contribute towards future financial crises. But many are concerned that the Directive will actually harm pension fund investors by proposing stringent new laws on how alternative investment managers can operate, which are due to take effect in mid-2012. Practitioners in non-EU fund domiciles are especially disappointed with the watering down of the marketing regime under which third country funds would be able to be marketed within Europe, even if only for a transitional period. Many are convinced that the Directive as currently drafted will reduce the investment options available to investors, which could both reduce investment returns and increase risk to the European investor by concentrating alternative assets in such a limited pool of European hedge funds.
Notwithstanding the International Organization of Securities Commissions’ (IOSCO) and G20’s commitment to similar objectives, the Europeans have acted unilaterally and without consulting the global funds industry. And given that only 20% of the world’s hedge funds originate from Europe, the EU’s conduct has perplexed many an offshore lawyer. Some consider that what Europe proposes smacks of protectionism in the form of a French and German initiative to disadvantage the UK, when it would make more sense that funds be set up in territories with the requisite expertise and transparency, regardless of where that may be. As for regulation, it is widely believed that it needs to work at a world level. ‘If regulation is not proportionate,’ says Maples’ Govier, ‘and is not implemented globally, it will not work and could irreparably damage the industry in the very region it is supposed to protect.’ Voisin’s managing partner Ian Strang also believes that the Directive could backfire on the European funds industry and cause certain funds to move out of Europe.
In January 2009, the Dubai Shariah Hedge Fund Index was launched. This was the first internationally recognised index comprised exclusively of Shariah-compliant hedge funds.
Despite extensive lobbying and media criticism, the two recent proposals to revise the Directive – one put forward by the Swedish presidency of the EU and the other by Jean-Paul Gauzès (the MEP responsible for shepherding the proposed legislation through the European Parliament) – have done little to generate a consensus. Whichever draft of the Directive you read, Walkers’ London-based investment funds group head Robert Duggan believes that all suggestions are of further changes coming as Europe struggles to agree on the form regulation should take. ‘For all of Mr Gauzès’ statements of a need for proportionality,’ Duggan says, ‘many industry commentators retort that the only proportionate approach would be to start over again, if at all.’
One standing gripe is exactly what the Directive means when it refers to equivalent jurisdictions and the suggestion that it could take three years to determine equivalence. To many, the uncertainty this creates is unnecessary and damaging to the industry. Paul Wilkes, a senior associate at Collas Day, believes that equivalency remains the most pressing issue for both offshore financial centres and all non-EU financial centres. And being the world’s leading hedge funds market, the Cayman Islands is particularly inflamed, especially when the US, which the EU is keen to recognise as an equivalent territory, does not regulate its own hedge funds or managers. Cayman, on the other hand, is ranked seventh in the world by the FATF in relation to anti-money laundering and has an IOSCO regulator applying IOSCO principles. ‘We embrace industry regulation but have difficulty with it being linked to create a Fortress Europe brand,’ Govier says. ‘Surely Cayman should be the starting point in analysing the equivalency of non-EU jurisdictions for hedge funds? No other legislation in the world would exclude about 70% of its market without first analysing what that market is and how it is regulated.’
Indeed, it seems to many Cayman lawyers that the European Commission has in no way attempted to understand the Cayman Islands regime or engage with the jurisdiction in determining what standards of regulation they would like to see. ‘We want Cayman to be the guinea-pig for the equivalence test for funds-domiciled jurisdictions,’ Govier says. ‘If improvements can be identified, then I am sure that Cayman will stand ready to embrace those changes.’
Cayman lawyers have also been rattled by the fact that although countries like Luxembourg and Ireland are automatically favoured jurisdictions by virtue of their European status, they have spent most of the past decade introducing and marketing a regulatory regime for hedge funds that is modelled directly on the Cayman Islands system. ‘It is hardly surprising then,’ Govier says, ‘that an analysis of the Cayman regime reveals that a Cayman Islands hedge fund is regulated in an equivalent fashion to a Luxembourg Specialised Investment Fund (SIF) or Irish Qualified Investment Fund (QIF), let alone hedge funds in Malta and Gibraltar.’
The Channel Islands are less concerned. ‘Regulation of alternative asset class funds is something that was inevitable, and we fully support such a move,’ says Robert Kirkby, technical director at Jersey Finance. Moreover, if equivalence remains, many Channel Island lawyers believe that this will be easily achievable, given their territories’ excellent regulatory platforms. ‘We were never particularly worried about the AIFMs Directive’, says Andrew Pinel, head of investment funds at Crill Canavan. ‘Yes, the first draft had significant potential problems for Jersey, but we saw it as a knee-jerk reaction and Jersey made its concerns well known through Jersey Finance, the Jersey Funds Association and other bodies.’
‘The BVI has a reputation for being quick and cheap, but managers are opting for jurisdictions that are recognised for their stricter corporate governance.’
Jason Romer, Collas Day
What form the final draft might actually take is anybody’s guess. The various Funds Directive drafts have moved so quickly that the funds lawyers have all been kept on their toes. Nonetheless, the Economic and Monetary Affairs Committee will debate the issue in March and vote on it in April. This will be followed by a further vote on the draft report in the European Parliament’s plenary in June 2010. The Directive has provoked significantly different views even across Europe and, while many are concerned that the compromise proposal continues to limit fund managers’ activities without good reason, there are those who believe that the EU’s amendments have gone too far. It seems clear that the debate must at least continue to ensure that the final version of the proposed Directive does not end up damaging the alternative fund industry or EU investors.
The year is already looking interesting and the activities of offshore financial centres are likely to continue generating discussion. The general consensus may be that the worldwide economic recovery still has some way to go, but the offshore set has more reasons to be cheerful than most. LB