Offshore financing - Enron raises the game

Offshore financial centres have been under pressure from the OECD to tighten up their tax haven status and secrecy rules following the Enron debacle. Stephen Mulrenan examines the legitimacy of this

When is a special purpose vehicle not a special purpose vehicle? Answer: not since energy trader Enron filed for bankruptcy towards the end of 2001.

"We don't call them that any more because Enron has made it politically inadvisable to do that," says one lawyer. "The term 'special purpose vehicle' gives it an implication of dirty money, which is actually not what it is at all."

Special purpose vehicles (SPVs) are still of course in high demand by issuers and arrangers of highly structured asset-backed securitisations, for example. It is only the name that has changed.

But ever since millions of dollars of Enron debts were discovered stashed away in off balance sheet partnerships, companies, or offshore entities, SPVs and the use of offshore jurisdictions in general have been subject to considerably greater scrutiny.

In the Senate Sub-Committee hearings on Enron, US Senator Carl Levin even went so far as to refer to the Cayman Islands as a "secrecy jurisdiction".

In the case of the Caymans, however, Levin may have been overextending his hand. With some 600 banks and trust companies (more than 100 of which have a physical presence) regulated to the standards of the Basle Convention and holding over US$700bn in deposits, the Caymans was one of the first jurisdictions to enter into the full spectrum anti-money laundering treaty - the Mutual Legal Assistance Treaty - with the US in 1990.

And it has been compliant ever since - having put into place the Proceeds of Criminal Conduct Law (2000 Revision), for example. This is so much the case, in fact, that it remains omitted from the Organisation of Economic Co-operation and Development's (OECD) now infamous 'blacklist', drawn up by its Financial Action Task Force (FATF) on money laundering.

"We're right up there," says Clark. "We subscribed very early on to the OECD and the FATF initiatives and have cooperated in every way."

This is an achievement not shared by the likes of the Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, the Philippines and the Ukraine. These Non-Cooperative Countries and Territories (NCCTs) will remain 'blacklisted' until they make serious efforts to implement the legislative changes necessary to improve their anti-money-laundering system.

Know your client
There are hundreds of billions of dollars of well-structured financial transactions based in well-regulated transparent offshore financial centres with excellent professional infrastructure to support them.

The use of offshore jurisdictions is favoured because what is often required is a tax neutral jurisdiction with a certain legal system.

Recognised principles concerning directors' fiduciary duties, the duties of care and skill and of corporate governance, for example, are also required if the finance company or vehicle is to be properly regarded as independent.

And well-regulated transparent offshore financial centres - such as the Caymans, Bermuda and Jersey - play an important role in enabling onshore institutions to access the international capital markets by reducing the cost of borrowing.

Says Brian Salter, financial services head at Clayton Utz: "Because of the globalisation of the capital markets, issuers are very quick to look for arbitrage opportunities in their quest for cheaper sources of funding."

But despite such attributes, offshore jurisdictions - with their more competitive tax rates - have represented soft and immediate scapegoats for the Enron fiasco.

Securitisation lawyer Salter - who has intermittently used the Caymans and Jersey in highly structured asset-backed programmes - says: "If there isn't a tax issue, you might actually be attracting attention to yourself by using those jurisdictions."

Anthony Travers, OBE, of Maples and Calder in London, goes further. He says that "deliberate disinformation and disingenuity" has been at the heart of OECD claims of seeking a level playing field for the regulation of all jurisdictions, with no specific adverse conclusion yet to be drawn from the use of an offshore jurisdiction in the Enron structuring.

"It may have been convenient during the political phase of the Enron enquiries to deflect criticism further from home," he says. "But the negative references to offshore 'secrecy' jurisdictions appear no more than an obfuscation."

US efforts to deflect criticism since events such as Enron and September 11 have included information exchange agreements with offshore financial centres, making it easier to pursue tax evaders and money launderers.

And since the June 2000 publication of its initiative on harmful tax practices, the OECD has issued a number of progress reports in an effort to force rogue centres to keep one eye firmly over their shoulders.

The FATF, in turn, has spent the last year revising its 40 recommendations to combat money laundering, leading FATF President Jochen Sanio to say: "The FATF has accomplished one of the most important tasks it has undertaken since its inception in 1989".

And together with its eight special recommendations to counter terrorist financing, the FATF has agreed a common methodology with the IMF and the World Bank to assess their compliance, since October last year.

In order to stay off the 'blacklist', offshore jurisdictions must now, for example, complete - by mandatory deadlines imposed by the FATF - the retroactive 'know your client' due diligence.
This has already been implemented in the Caymans. Says Clark: "It is a series of questions that we ask all the clients [regardless of the date of inception] to make sure we can drill right down to the very roots of these organisations, so we can make an assessment as to whether or not there is potential for money laundering."

Clark says that although the 'know your client' due diligence is not an unnecessary piece of legislation, significantly it has had no effect on the trade levels of the Caymans.

"Which shows we have retained our integrity," she says. "There has been no problem with money laundering in Cayman, but the legislation has been put in place to reinforce the point."

The net result is those offshore financial centres that have acceded to the OECD initiatives and the FATF regulatory regime - such as the Caymans, Bermuda and Jersey - now have a higher standard of due diligence than exists under the Patriot Act in the US and in continental Europe.

Double standards
So why have offshore financial centres been subject to the short end of the stick when it comes to scrutinisation? Why is there not similar pressure on OECD jurisdictions to improve their own transparency to such levels?
Travers believes double standards are being applied; that the OECD is not proving to be an impartial referee in regulating a market in financial products and services, 80% of which is dominated by its own members.

Referring to a report prepared by Canadian firm Stikeman Elliott, he describes the OECD and the FATF as "agencies of the G7 countries".

He says the G7 nations' application of a double standard is primarily driven by the need to prevent an outflow of mobile capital from the high tax European Union jurisdictions, where the fear of budgetary deficits, unfunded pensions and uncompetitive levels of social security spending make increased levels of taxation a foregone conclusion.

Says Travers: "To the treasury departments in these jurisdictions, globalisation and mobile capital are the weapons of mass destruction; no wonder the events of September 11 have been so conveniently hijacked by those treasury departments keen to maintain political momentum against those offshore financial jurisdictions which, in their eyes, harbour the threat."

And the EU has additional problems. In May this year, the European Council of Ministers approved changes to accounting rules governing SPVs, meaning that more than five million companies will find it harder to move assets off their balance sheets.

The Council's agreement of the EU's updated accounting regulations brings EU legislation in line with International Accounting Standards (IAS). But although standards have been raised for off-balance-sheet reporting, the net result is that companies will find it more difficult to establish SPVs.

"There's a movement away from the Channel Island jurisdictions of Jersey and Guernsey because of their disclosure requirements resulting from the EU and the OECD," admits Michael Olesnicky of Baker & McKenzie in Hong Kong.

"The OECD is trying to ensure compliance but in reality some jurisdictions have embraced its recommendations more than others."
He adds: "Jersey wants to protect the fund side and is therefore more enthusiastic to be seen to be compliant. Vanuatu, in contrast, had to be dragged kicking and screaming because it is not used so much for this."

And the winner is &
Whatever the agenda behind the implementation of the highly successful OECD initiatives and the pressure applied by the FATF with regard to money laundering, they have resulted in higher standards of transparency, 'know your client' due diligence, and anti-money-laundering legislation.

Higher levels of corporate governance and compliance with the new regulations are now required if, for example, the off balance sheet element to a transaction is to obtain its intended tax, regulatory and financial benefits. And, as a result of this, there has been a significant improvement in the quality of the structuring, management and control of many of the relevant vehicles.

In the Cayman Islands, for example, the diverse range of financial services offered is regulated by a number of different statutes such as the Banks and Trust Companies Law, the Building Societies Law, the Companies Management Law, the Co-operative Societies Law, the Insurance Law, the Money Services Law and the Mutual Funds Law.

And even hitherto unregulated services were addressed by the implementation of the Securities Investment Business Law, 2001 (SIB Law), which focuses on securities investment, tackling issues such as insider dealing and the creation of a false or misleading market in securities.

Bermuda, in turn, has been known to impose a vetting system requiring disclosure on a confidential basis to the Bermuda Monetary Authority of the full identity and other particulars of proposed shareholders and ultimate beneficial owners. In addition, its policy of prohibiting certain types of business and regulation of other industries (eg captive insurance, mutual funds) continues to serve as a deterrent for offences such as money laundering.

"Bermuda has successfully passed through the various examinations and tests that have challenged the offshore financial world," says Frances Woo, resident partner at Appleby Spurling & Kempe in Hong Kong.

All of which spells good news for clients, including the major commercial law firms and the banks.

Olesnicky's use of offshore financial centres is more for the purposes of setting up trusts for high-net-worth individuals.

"We turn to the likes of Maples and Calder in the Caymans or Harney Westwood & Riegels in the British Virgin Islands only when we need an opinion," he says.

"By default we often use the BVI as it's the most popular centre for high-net-worth individuals in Hong Kong. But for trusts that require asset protection, for example, you might turn to a jurisdiction that has such special laws like the Bahamas and the Cook Islands.

Alternatively, for trusts that you want to run for as long as possible, you might turn to the Caymans because it permits this for 150 years."

Olesnicky adds: "These jurisdictions have to decide whether their focus is on the private side or the commercial side."

Clayton Utz's Salter, in contrast, uses offshore financial centres as an element in a structured deal. "Clients will have international tax and structuring advice to say they want to issue through the Caymans or Jersey. We would set up the structures and then approach a firm over there to act on our behalf in relation to the transaction" he says.

Despite only acting on approximately half a dozen deals in the last five years that have had an offshore element, Salter says specialist offshore firms are very active in self promotion and keen to keep potential clients updated on the strides taken by their respective jurisdictions in recent years.

"I haven't used some firms for nearly 10 years but I still get written materials from them. They're quite keen to keep up the contacts and rely a lot on the international network of lawyers in order to be able to direct work to them."

This is confirmed by Appleby's Woo. "A substantial part of our marketing efforts are targeted to these firms and include advertisements, in house seminars and presentations, the provision of our publications, and business development trips."

Adds Maples' Clark: "It's always a question of making sure that people are aware of the jurisdiction. We obviously have close relationships with the lawyers because we work closely with them in the nuts and bolts of the transaction. But we also work directly with the clients on the transactions.

"We provide firms with quotes and we'll discuss what are their clients' requirements and cost constraints. We think it's very important for them to know that they need to instruct a Cayman lawyer and that it shouldn't be somewhere where they try to cut costs, but we understand that there are cost constraints and the need for us to work within them."

Raising transparency standards and filling regulatory loopholes are having the desired effect, with the accelerated use of offshore financial centres by multinationals. As part of that evolution, specialist law firms in Asia are experiencing greater levels of competition.

With offices in Hong Kong, Bermudan firms Appleby Spurling & Kempe and Conyers Dill & Pearman have both benefited from the prevalence of GEM listings. The same holds true for Cayman firm Maples and Calder, who is joined in Hong Kong in September by fellow Cayman firm Walkers.

Opening an office on 15 September, Walkers has plans to roll out an aggressive expansion strategy under the guidance of office head Vicki Hazelden.

"Clients need reliability with their offshore counsel," she says. "The word spreads and people are so relieved to find someone who gets the job done efficiently."

Maples' Clark welcomes the competition. "It shows the market out here is continuing to be strong."

She says that offshore firms' clientele is huge and growing simply because they tend to act on the small elements of an enormous number of financial transactions.

"Whereas a lawyer from Clifford Chance will have three deals on the go at one time - and be completely busy - the lawyers here will have a significantly larger number of case files going."
Illustrating the point, Clark says Maples' Hong Kong office has grown five-fold in three years and now numbers 14 lawyers.

When Appleby Spurling & Kempe first opened in Hong Kong in 1990, its work was primarily corporate in nature. Woo says this has now broadened to include the full complement of Bermuda and Cayman Islands corporate work, with the firm specialising in capital markets/securities/mergers & acquisitions work, as well as structured finance/securitisations and banking-related matters, funds and restructurings, privatisations and insolvency related matters, many generated as a result of the Asian financial crisis.

"When we first established in Hong Kong, we had one partner and one assistant," she says. "Stories abound of late nights when that particular partner would have to stand by the sole fax machine feeding 400 pages of a document one by one in order to meet deadlines!" The firm has since grown to 15 fee earners.

Woo adds: "In the initial days, clients and other professionals would stay up to call our Bermuda office. Now, it is much more efficient as substantially all the work and advice is rendered by the fee earners in Hong Kong."

While offshore financial centres now enjoy higher standards of transparency, 'know your client' due diligence, and anti-money-laundering legislation, they all have distinct characteristics and are moving in different directions.

The Cayman Islands is known as being the market for structured transactions and capital markets products, so clients will tend to go to the Caymans because that is where the legislation is sufficiently mature, sophisticated and flexible enough for them to do what they need to do.

Bermuda on the other hand is well known for reinsurance and is often the first port of call for the P&I Clubs. It is the largest offshore captive insurance domicile and enjoys an increasing popularity for specialty insurers and re-insurers.
"It's very much a choice," says Clark.

"Sometimes it's geographical and sometimes it depends on how easy they want it."
And despite Enron, no one jurisdiction meets every requirement.

 

The Financial Action Task Force

The main priority of the FATF during 2002-2003 has been to complete the revision of its 40 recommendations, the international anti-money-laundering standard. The major changes that have been adopted include:

• specifying a list of crimes that must underpin the money laundering offence
• the expansion of the customer due diligence process for financial institutions
• enhanced measures for higher risk customers and transactions, including correspondent   banking and politically exposed persons
• the extension of anti-money-laundering measures to designated non-financial businesses   and professions (casinos; real estate agents; dealers of precious metals/stones;    accountants; lawyers, notaries and independent legal professions; trust and company   service providers)
• the inclusion of key institutional measures, notably regarding international co-operation
• the improvement of transparency requirements through adequate and timely information on   the beneficial ownership of legal persons such as companies, or arrangements such as   trusts
• the extension of many anti-money-laundering requirements to cover terrorist financing
• the prohibition of shell banks

The FATF is an independent international body whose secretariat is housed at the OECD. The 31 member countries and governments of the FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark; Finland; France; Germany; Greece; Hong Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; the Netherlands; New Zealand; Norway; Portugal; the Russian Federation; Singapore; South Africa; Spain; Sweden; Switzerland; Turkey; the UK; and the US. Two international organisations are also members: the European Commission and the Gulf Co-operation Council.

 

Island jurisdictions

Channel Islands
While Jersey has developed a reputation for debt securities issues and securitisation, Guernsey continues to offer specialist opportunities in insurance related business.

Ireland
Ireland has a significant advantage over other jurisdictions as it is an EU member state with both an effective tax regime and an extensive treaty network. As a result, Ireland has recently become a popular venue for securitisations and structured finance transactions.

Cayman Islands
Special purpose vehicles can be structured in the Cayman Islands to be 'bankruptcy remote'. They regularly receive Triple A ratings from the ratings agencies.

Bermuda
Bermuda is probably best known as a major international reinsurance centre, which now surpasses Lloyd's of London in that particular area in terms of capacity and premium volume. As of last year, premium volumes underwritten by Bermuda companies amounted to gross premiums of US$18bn and net premiums of US$14bn. In Asia, however, Bermuda is probably better known as an offshore vehicle for public listings, structured finance and funds.

 

FIRM PROFILE

Fortune favours the brave
Cayman Islands-based law firm Walkers added a Hong Kong office to its expanding network in September, enabling it to provide a 'real time' service for clients in Asia

The general malaise in economic fortunes has resulted in some notable international law firm departures from the Asia Pacific region in recent times.

But as one door closes another one usually opens. And on 15 September, Cayman Islands based law firm Walkers opened its latest branch office - at Chater House, 8 Connaught Road, Central, in Downtown Hong Kong.

"We haven't really seen a particular slowdown in activity in Hong Kong," says Vicki Hazelden. "Offshore deals seem to ride economic difficulties."

An experienced Cayman Islands lawyer, who has acted for Asia based clients for a number of years, Hazelden is the firm's resident partner in charge of the Hong Kong office.

"The demand from clients for Walkers to set up an office in Hong Kong has been growing steadily," she says. "We see a lot of potential in Hong Kong and plan to grow the office substantially over the next 12 months." 

Together with corporate associate Nick Rogers, she plans to significantly expand and develop the office and has set a near term target of having eight or nine lawyers in Hong Kong.

Offering Cayman Islands and British Virgin Islands (BVI ) legal advice, principally in the areas of capital markets and structured finance, investment funds and insolvency and corporate recovery, Walkers' presence in Hong Kong complements its offices in the Cayman Islands, the BVI and London.

Senior partner Grant Stein says: "Our Asia based clients form an important part of our practice and our new office in Hong Kong will enable us to provide advice in Asia to the same high standard as in our other offices in Cayman, the BVI and London. With offices now in the three key time zones of North America, Europe and Asia we can offer an efficient round the clock service anywhere in the world. The 'one stop' service offered by the firm and its affiliated trust company, Walkers SPV Limited, essentially covers all time zones as well with the newly expanded Tokyo office of Walkers SPV Limited having been established for more than a year."

The firm believes that being able to provide clients with a 'real time' service is key to meeting their expectations and developing opportunities for growth.

Hazelden says: "Walkers is known to be a flexible firm with a 'can-do' attitude. We are now able to offer real-time Cayman and BVI advice during Asian office hours, combined with the continuing facility for overnight document turn-round from our offices in the Cayman Islands, the BVI  and London."

She adds: "There can be difficulties for Asia based clients in relying on offshore counsel located in another time zone, as even the best run multi-jurisdictional transactions can throw up last minute issues. We can now immediately address those issues."

Hazelden's confidence in the future is well founded. "Walkers has a very well established client base in Asia, particularly in Hong Kong and Tokyo, and certainly for Cayman Islands work, the combined services of the newly opened office of the firm and the existing Tokyo office of Walkers SPV Limited will be a tremendous 'one stop' advantage to clients in this region," she says. "We anticipate getting substantial amounts of work from our clients because they told us we would if we were here in Hong Kong."

She adds: "The role of offshore counsel is very much to provide an efficient service. There is no doubt that we can offer an even better service by being here in Hong Kong and being able to see the clients face to face."

Appearing at or near the top of published offshore transactional league tables on a regular basis, Walkers acts for a wide range of clients, including: major financial institutions; investment banks; arrangers; promoters and managers; law firms and accounting firms; corporations; partnerships; trust companies and other fiduciaries and high net worth individuals.

And as well as being one of the most established firms in the Cayman Islands, the firm's full service office in the BVI provides it with an additional string to its bow in Hong Kong, where the BVI enjoys an enviable reputation as a popular offshore financial centre for high net worth individuals.

"For institutional work, the BVI is less well established than the Cayman Islands, which is seen as the blue-chip offshore centre," says Hazelden, who along with Rogers is admitted in the BVI. "But certain clients will appreciate our ability to provide BVI advice if, for some reason, they don't want to use Cayman."

As Walkers sets up camp in Hong Kong, the firm has adopted an aggressive marketing campaign to raise its profile.

"It's necessary when you're setting up a business," admits Hazelden. "In Hong Kong, I've had a lot of contact with the big London firms. But the best marketing is doing excellent work."

She adds: "Clients have become familiar with the Walkers product. The word spreads and people are so relieved to find someone who gets the job done efficiently.

"Clients need reliability with their offshore counsel. Our message is they can instruct us and not worry about that side of the transaction."

FIRM PROFILE

Private wealth - how family legal advisers can assist their clients

Most people are deeply suspicious of financial services sales people and would rather seek advice from those whose opinions they respect, even if they are not experts in this area.

Consequently lawyers are often asked for their opinions on the private wealth plans of their clients. This article seeks to assist them in this important role.

Structures are far more important than investment performance
The importance of planning cannot be overstated. Not to put too fine a point on it, there is little benefit in worrying about whether the investment return is 5% or 7%, when 50% or more of your client's wealth could be erased by avoidable taxes, legal liabilities and poor succession plans.

What effective private wealth planning involves and why it is so important
This question is perhaps best answered by considering the following illustration. Your client is a successful Hong Kong resident businessman holding a BNO passport. His wife holds a US passport (although she has not lived in the US for 20 years), the youngest child is studying in the US, and the eldest (a US green card holder) is working with his father in the family business. Your client has investments/properties, both in his own name and through BVI companies, in various jurisdictions including the US, UK, Australia and elsewhere in Asia.

Were the client in this (not unexceptional) scenario to meet an untimely death the grieving family would encounter many difficulties:

1) Succession and probate
All accounts and safe deposit boxes in the deceased's name - including those in joint names - will be frozen while probate or letters of administration are obtained. This can take many months, often years, and create unforeseen and quite problematic liquidity and other issues for the family. The problems are multiplied by the fact that assets are held in several jurisdictions.

Next consider the family business. Not only can probate issues cause significant liquidity problems, but also disagreements between family shareholders (eg between those working in the business and those not) and can lead to dissolution or even the loss of family control if individual heirs sell shares to third parties.
Another, often overlooked, risk is that your client's wife remarries and all, or a substantial part, of the family wealth passes to the new husband and his family, with the children of our client missing out altogether.

2) Taxation
Hong Kong estate duty will be payable upon all Hong Kong situs assets (almost certainly including those held through the BVI companies). Additionally, estate or inheritance taxes will likely be payable in other jurisdictions where assets are held - even if the deceased has never visited the jurisdiction. Examples include the US (estate taxes up to 50%) and the UK (inheritance tax at up to 40%).

3) Ongoing US Taxation
If the wife (a US Citizen) inherits the family wealth it will be subject to ongoing US income and capital gains taxation on a worldwide basis, as well as suffering further US estate taxes when it passes to the next generation.

So why is planning/structuring important?
Because all of these problems could have been avoided or at least mitigated.

How family legal advisers can help
Even if they are not specialists in private wealth, training and experience make lawyers well placed to assist. They may not know the answers to their clients' private wealth problems but they can provide a valuable service by asking appropriate questions and helping evaluate the answers.

 

FIRM PROFILE

Belize - the best kept secret in Central America

Location and geography Belize is in Central America, cuddling a corner of Mexico's Yucatan Peninsula, and is a country with much natural beauty. With Guatemala as its neighbor to the west, Belize is an important part of the Maya Indian Culture. The Maya - the most advanced of all ancient Mesoamerican cultures - reigned in the countries that are today called Belize, Honduras, Guatemala, El Salvador and southern Mexico. Many descendents of the Maya still live there and some extraordinary structures, built with the vision of the gods of those years, still remain. The structures are surrounded by luscious forests, pristine wildlife, and flora. Belize has an area of approximately 9000sq miles being 174 miles at its longest point and 68 miles at its widest.

Historical background
Although Belize was ruled by the British crown from 1798, it only formally became a British colony in 1862 - a time well chronicled in history under British Honduras (Belize's former name). Belize became an independent nation in 1981. This brief historical introduction is of most importance because it defines what Belize is today: the only English speaking country in Central America. English is the official language, but Spanish, Creole, Garifuna, and Maya dialects are also widely spoken. The population of Belize is approximately 260,000 and is made up of great ethnical diversity, including Caribbean people, Caucasians, Chinese and East Indians.

Political stability and legal system 
Another legacy of the long-standing British heritage is the legal system based on English common law and supplemented by local legislation. The court system is also like that of England and contract and commercial law are based on the English law model. Its political system is based on the British Westminster model. Belize has a longstanding peaceful and stable democracy exercised by the prime minister. This stability has permitted Belize to maintain its currency, the Belize dollar, tied to the US dollar with a fixed exchange rate of two Belize dollars to one United States dollar. 

Economic activities
Agriculture constitutes the major income earner from sugar, banana, citrus, coffee, rum, marine products and garments. Increasingly, there is a significant contribution from two other sectors - tourism and international financial services. 

Tourism
More than 40% of Belize's natural environment is protected by the government and ecology-minded organisations. Belize boasts the largest barrier reef in the hemisphere, a jaguar sanctuary, Maya ruins, a great variety of birds, hundreds of cayes, caves, and cultures virtually unchanged in the past hundreds of years. Just off the magnificent barrier reef along the coast of Belize, coral and mangrove isles (known as cayes) bask in the clear turquoise and emerald green waters of the Caribbean. Three of the four atolls in the western hemisphere are also located in Belize. Situated beyond the barrier reef, long coral isles surrounding lagoons are popular and idyllic destinations as well as ideal for water sports.

Favourably, few things have changed in Belize. Nonetheless, modernisation and technology are consonant with present day international standards. You can get to Belize via its international airport in Belize City, which provides daily services through international carriers to the United States, Central America and the Caribbean. Telecommunication services between Belize and the world are excellent, via internet, international courier, and digital telecommunications to name a few.

International financial services
This Belizean industry is in great demand internationally. A combination of the marvellous status described above and its formidable reputation since the creation of its offshore industry mark Belize as a leader. 

Superior trust laws for asset management and protection - the International Business Companies Act (IBC Act) of 1990 was designed to enhance tax planning and wealth management strategies - and a commitment towards excellence by the government and offshore industry professionals make Belize a most attractive jurisdiction in Central America and the Caribbean.

Belize Corporate Services (HK) Ltd is the country's largest and most experienced corporate and international financial services professional. We have served our customers worldwide for more than 10 years. Now, in Hong Kong we are the only corporate services provider that emerges directly from Belize. To ensure no lengthy waiting and no complicated billings, Belize Corporate Services (HK) Ltd only offers its services to professional intermediaries. Belize offshore companies are an intelligent alternative for the savvy professional. You should know about this; after all, Belize is Central America's best kept secret.

Belize Corporate Services (Hong Kong) Ltd. is located at: 3/F Printing House, Office 304, 6 Duddell Street; Central, Hong Kong. Call (852) 2521 0788 or write info@belizeco.com.hk for more information about Belize offshore companies or Belize in general.

 

FIRM PROFILE

The Isle of Man -international finance centre

By Nick Verardi, Dickinson, Cruickshank & Co

The Isle of Man - situated between England and Ireland - is a self-governing British crown dependency. It has the oldest continuous parliament in the world. Over the years the island has earned an excellent reputation as a respected offshore jurisdiction of great financial stability which is maintained by strong regulation.

The island has its own judicature, with a legal system similar to the English and other Commonwealth models. The Isle of Man's courts are modern and flexible.

The Island's independence has enabled it to become a low tax jurisdiction. There is no capital gains tax, capital transfer tax, no inheritance tax, no stamp duty and low income tax. Its independence has also enabled the government to adapt quickly to meet international standards and to promote its industries, creating a stable and prosperous environment for its 75,000 population. 

Relationship with the European Union
The Isle of Man is not a member or an associate member of the European Union (EU) but is a signatory to protocol 3 of the UK's Treaty of Accession 1972 - allowing free trade with other EU countries in agricultural and industrial products - and the island maintains the common external tariff against other countries. No payments are received from or made to European funds and the island is excluded from most of the effects of the Treaty of Rome. Nevertheless, thanks to the relationship it enjoys with the UK, it is still able to trade freely with countries throughout the European economic area. Furthermore, EU directives do not bind it. 

Economy
Two of the most significant sectors of the economy are financial services and high-tech manufacturing, which make up over half of the national income. There is no restriction or control on the transfer of funds between the Isle of Man, the UK or elsewhere in the world. The Isle of Man government is constantly looking for new areas of diversification for the Manx economy, hence they were instrumental in the launch of Europe's first 3G mobile phone pilot and a £25m development fund to attract big budget feature films to the island. The film industry on the island has already become a major success in attracting the film and television industry.

The Isle of Man's economy is robust, in fact its public finances have been AAA rated by Standard and Poor's and Moody's - a status that has recently been confirmed. It remains to be seen whether they will sustain the zero rate tax strategy, emulated by other jurisdictions. The last two years has seen budget surpluses (despite major capital investments), alongside an economy that has an average annual real output growth of approximately 10%.

Taxation
The standard rate of income tax is currently 10%. The EU's code of conduct on business taxation and the savings directive has been on the island's horizon for many months. In June 2002, the Isle of Man announced the next development in its national tax strategy. This was seen as one of the most radical steps ever taken by an international finance centre, namely, a corporation tax rate of zero. 
Under the EU saving tax directive, member states, dependencies and relevant third countries are expected to introduce automatic exchange of information, or the withholding of tax, in relation to the interest paid to individuals resident in any EU country. The island has agreed to introduce withholding tax when the directive takes effect, in line with (currently) Austria, Belgium, Luxembourg, Switzerland, Jersey and Guernsey.

Companies
The Isle of Man Companies Act 1931 - 1993 provides a simplified corporate environment while at the same time providing the necessary shareholders' protection. The various types of Isle of Man companies are widely accepted as useful vehicles for asset owning by, for example, ship owners and their operators, and aviation companies for other special purposes. As a result of the company infrastructure, the provision of corporate services has become substantial and well-regulated industry in the Isle of Man.

Trusts
Isle of Man trust law has developed in parallel with English trust law. Common types are discretionary, interest in possession, life interest, charitable and purpose trusts. The statutory perpetuity period for trusts created after 2000 is 150 years and there is also no restriction on accumulation of trust income during the perpetuity period. Isle of Man trust law has developed extensively over the last ten years and, along side the provision of corporate services, forms a large part of business conducted on the Isle of Man.

Shipping and aviation
The Isle of Man has a flourishing international shipping register. The Island is a British flag state; it is not a flag of convenience. 
The island is also developing a reputation as an efficient jurisdiction to establish aircraft financing and leasing structures, and it is used for these purposes by some of the world's largest airlines and aircraft engine manufacturers. The zero tax rates for both shipping and aircraft industries take effect from April 2003.

Banking and insurance
The Isle of Man has a mature banking industry with some 60 of the world's top banks present here. Meanwhile, the insurance industry is a major employer on the island. Its life industry is recognised as the world's leader and it also has a healthy captive insurance market. Protected cell company legislation is soon to be introduced onto the statute books and is eagerly awaited by the capture industry.

Mutual funds
Mutual funds on the Isle of Man can take the form of companies (open-ended or close-ended, trusts, limited partnerships or pure contractual arrangements). Regulation rests with the Financial Supervision Commission, which has struck a balance between the need for investor protection and the commercial requirements of the industry. Funds of all descriptions can be established quickly and efficiently and at very competitive prices. Zero tax for all third-party fund administrators and managers of experienced investor funds (EIF) and professional investor funds (PIF) now applies, as does VAT exemption extended for EIFs and PIFs management. Funds incorporated in recognised jurisdictions can be administered without being subject to further Manx regulation.

E-commerce
The island has become a centre for the location of e-commerce and internet linked businesses, providing significant direct tax advantages to international corporations in the establishment and operation of internet trading subsidiaries. Online gambling legislation and electronic transaction legislation has attracted new business.

Conclusion
The Isle of Man is well set for the future scrutiny that all International Finance Centres will always endure. The stability of its government and finances are the envy of many 'offshore' jurisdictions and will ensure its permanence well into the future. The Isle of Man accepts regulation that permits reasonable transparency for law enforcement purposes, provided such regulation respects legitimate privacy and the entitlement of all jurisdictions to offer financial services on a fair and competitive basis.

FIRM PROFILE

Segregated portfolio companies:
a new design in offshore structuring

Christopher Bickley of Conyers, Dill & Pearman considers the advantages of segregated portfolio companies and the latest legislation of offshore jurisdictions affecting these structures

The popularity of offshore jurisdictions has to a great extent been a result of each jurisdiction tailoring its corporate laws to allow a legal environment that is conducive to the demands of the global marketplace. A number of offshore jurisdictions have flexible rules in relation to financial assistance, distributions, repurchases and redemptions of shares, redomicile and the use of orphan or purpose trusts. The enactment of legislation in offshore jurisdictions for segregated portfolio companies (SPCs) is a further example of this trend.

General
A SPC - also known as a protected cell or segregated accounts company - is a company which may create one or more segregated portfolios in order to isolate the assets and liabilities of the company held within, or on behalf of, a segregated portfolio from the assets and liabilities held by or on behalf of any other segregated portfolio, or the assets and liabilities of the company generally. A SPC structure, therefore, only permits creditors in a liquidation to have access to those assets in a specific portfolio to which the portfolio is liable and then the assets of the company generally, but not the assets of any other portfolio. SPCs may also create and issue shares in one or more classes, the proceeds of which may again be included in the segregated portfolio assets of the relevant segregated portfolio.

The advantage of a SPC, therefore, is to allow a company to 'ring fence' certain assets without incurring the expense and complications of incorporating - and in certain cases licensing - a separate company to hold the segregated assets, or having to resort to trust or contractual structures. SPCs are noticeably becoming more in demand in the insurance, funds and structured finance fields.

Set out below is a brief summary of the background behind the legislation in Bermuda, the Cayman Islands and the British Virgin Islands.

Bermuda
Bermuda was one of the first offshore jurisdictions to implement protected cell legislation in 1991. The legislation was initially drafted on a case-by-case basis through a Private Act regime to cater for the demands of Bermuda's insurance industry. Bermuda enacted public legislation, The Segregated Accounts Companies Act (the 'Bermuda Act') in 2000. The Segregated Accounts Companies Amendment Act 2002 amended the Bermuda Act and the legislation now establishes a system of registration so that SPCs may be created speedily and with the flexibility necessary to respond to the needs of international business.   

A Bermuda company may also continue to petition the Bermuda legislature for a Private Act where it wishes to obtain additional provisions not obtainable under the Bermuda Act. In most instances, however, the Bermuda Act should provide an effective alternative to the lengthy and expensive Private Act procedure.

Initially, the Bermuda Act and its regulations only permitted insurance companies to make an application to the Bermuda Registrar of Companies to be registered as SPCs. However, the Bermuda Act now allows other types of company to be registered with the consent of the Minister of Finance and the first mutual fund was registered earlier this year. 

The Bermuda Act also allows for conversion of existing Bermuda companies to SPCs. Conversion requires a statutory declaration, made by at least two directors, setting out the company's assets and liabilities and any pending material transactions. The declaration also requires the directors to confirm: the company is solvent and that no known creditor will be prejudiced; or all creditors have consented in writing to the registration; or all creditors have been given notice and not objected. Where the company has carried on business prior to the application consent to registration in writing of 75% of the account owners of the company and 75% of those who on registration of the company will be creditors will need to be furnished.

A company may request to be removed from the register of segregated portfolio companies where it submits evidence in writing of 75% in number of the account owners and 75% in number of any counterparties who are creditors have consented to the deregistration and a declaration by two directors confirming that no known creditor will be prejudiced or all creditors have consented in writing to the deregistration.

Cayman Islands
The Cayman Islands introduced the concept of SPCs in 1998 pursuant to the Companies Law (1998 Revision). The legislation was amended in 2002 through the Companies Law (2002 Revision) (the 'Cayman Law') to, among other things, provide for a mechanism to expressly allow for conversion.

The introduction of SPCs under the Cayman Law has been welcomed in the funds industry. Umbrella funds, hedge funds and master-feeder funds, all of which may have separate sub-fund structures, will be able to take advantage of the legislation to protect certain of their portfolios from the risks associated with the leverage employed by other portfolios. 

An additional advantage of the SPC legislation under the Cayman Law is that any form of exempted company may apply to be registered by means of a filing, and only when other Cayman laws regulate the company will any governmental approvals be required. The simple implementation procedure will be particularly advantageous to structured finance vehicles.

An existing exempted company may convert to an SPC structure by filing with the Registrar of Companies a declaration by at least two directors. The statement must detail: the company's assets and liabilities; any transactions which would have a material affect on such assets and liabilities; the assets and liabilities to be transferred to segregated portfolios; that the company and the segregated portfolios will be solvent on registration; that creditors have consented in writing to the transfer of assets and liabilities into segregated portfolios or that adequate notice has been given to all creditors; and 95% of creditors have consented to the transfer of assets and liabilities into segregated portfolios. In addition, a special resolution authorising the transfer of assets to segregated portfolios and regulatory approvals (if the company is otherwise regulated) must be obtained.

Interestingly, there is no express procedure for deregistration of an SPC under the Cayman Law. There is therefore some doubt whether an SPC can deregister without further changes to the Cayman Law.

British Virgin Islands
The establishment of insurance companies with segregated portfolios became possible in the British Virgin Islands in September 2002 with the coming into effect of the Insurance (Amendment) Act 2002 (the 'BVI Act'), which created a regime for registration and regulation of SPCs.

The BVI Act now permits insurance companies formed under the International Business Companies Act 1984, or the older Companies Act, in the British Virgin Islands to register as SPCs as part of their application for an insurance licence. They are expected to prove particularly useful to 'rent-a-captives' - insurance vehicles which 'rent' their existing captive facility, capital, surplus, and license. 

Legal recognition
Legislation for the establishment and maintenance of SPCs is untested. In particular, where assets of an SPC are located in a jurisdiction that does not recognise the concept of legally segregated portfolios there is doubt as to how a foreign court would view the structure. However, legislation recognising protected cell structures now exists in states in the United States - such as Delaware, Illinois, Iowa, Rhode Islands, South Carolina and Vermont - as well as other jurisdictions such as Guernsey, Bahamas, Barbados, Mauritius and Labuan. It is submitted that, with the growing popularity of these types of structures internationally, courts will find it difficult not to recognise them.

Conclusion
The prospects for SPC structures appear bright as their worth has yet to be fully exploited. One can see potential benefits in their application in joint venture transactions, banking transactions and any other investment scenarios where investors wish to inject funds into a single legal entity to fund a particular financial objective securely.  The introduction and future implementation of SPCs is a further example of how offshore jurisdictions are able to quickly adapt their legislation to meet the demands of a complex and ever changing business world.

 

FIRM PROFILE

Labuan plans

Labuan may not be the first International Offshore Financial Centre (IOFC) that comes to mind among businesses looking for an offshore destination. Not yet anyway. However, things are changing in this quaint Malaysian island situated off Borneo. If all goes to plan, Labuan will soon give its more established competitors a run for their money and earn its place as a reputable and attractive IOFC.

What sets Labuan ahead of the rest of the major players in the Asia-Pacific region is its unequalled infrastructure efficiently administered by a single-dedicated regulatory body, the Labuan Offshore Financial Services Authority (LOFSA) and its status as a federal territory governed by Federally enacted laws.

Further, Malaysia being a stable and vibrant nation of over 20 million people provides a strong backdrop to Labuan's progress. The support of senior politicians together with experienced government officials at the international arena ensures that rules set in Labuan are in harmony with internationally accepted standards.

Realising however that the pace of progress is not as rapid as previously anticipated when Labuan was first established as an IOFC some 13 years ago, the Malaysian government has stepped up its campaign to boost the offshore industry on this 87 square kilometre island.

The Malaysian government's commitment to develop Labuan into a reputable IOFC is clearly spelt out in the Third Outline Perspective Plan (OPP3), the blueprint for Malaysia's Vision 2020 which sets out the country's aspirations and strategies to achieve the status of a developed nation by the year 2020.

OPP3 spans from 2001 to 2010 and during this period efforts will be focused on enhancing Islamic banking and retakaful (Islamic reinsurance) business in Labuan, developing the banking and insurance sectors as well as positioning the Labuan International Financial Exchange as a leading international offshore exchange for listing and trading of equities and debt instruments. In other words, placing in Labuan all the necessary elements of the successful Malaysian domestic financial market with the objective of turning Labuan into a significant regional hub for the banking and insurance sectors.

Labuan plays a significant role in developing a niche in Islamic finance for Malaysia. Malaysia's objective to tap the vast opportunities in Islamic financing in the global financial market has also led to the establishment of the International Islamic Financial Market (IIFM). The idea for the setting up of the IIFM was mooted by LOFSA.

The advantage of being a relatively new kid on the block in the offshore world is that there is no time to engage in undesirable activities. Unlike some other offshore jurisdictions, Labuan enjoys a clean slate and is not blacklisted by organisations such as the Organisation for Economic Co-operation and Development (OECD) or the Financial Action Task Force on Money Laundering (FATF).

The Anti-Money Laundering Act which came into effect in January 2002 serves to reaffirm the Malaysian government's stand against money laundering and its commitment to the global combat against money laundering, financing of terrorism and serious crimes as well as to ensure that the reputation of Labuan is not tainted by any undesirable activities.

Labuan recognises that the development of the island as an IOFC must be complemented by developments in other economic sectors. The Malaysian government plans to promote Labuan as a centre for educational excellence, a free trade zone to certain industries, a tourism centre and a paradise for the over 55. A special retirement package incentive offers a permanent resident status to high net-worth retirees.

Also in the pipeline is the establishment of an international shipping registry (ISR) in Labuan as proposed in the 2002 National Budget. The establishment of the ISR will benefit Labuan in terms of domestic economic spin-offs and the addition of more players in the offshore industries.

The offshore playing field is indeed rapidly changing and increasingly competitive. In order to survive, Labuan, a fully capable but under-utilised offshore financial centre, recognises the need to capitalise on its strength and expertise as well as to expand the scope of its services and products. There are signs indicating that the time has come for Labuan to position itself as a reputable IOFC equipped to face the intense competition and challenges of an increasingly global market.for the future