FEATURE: Offshore fightback

While offshore financial centres have taken a battering throughout the financial crisis, there is light ahead. From G20-related fallout to political and economic victimisation, many have sought to place at least part of the blame for economic collapse on the shoulders of offshore financial centres. But those centres and the lawyers who ply their trade there remain unfazed, convinced of the important role that these facilities will play in the world economy

In the long and drawn-out financial crisis post-mortem, the role of offshore financial centres has come under the microscope. Everyone from Barack Obama to United Kingdom prime minister Gordon Brown has sought to lay part of the blame for the financial collapse on the shoulders of the ‘shady dealings’ in places like the Cayman Islands, the British Virgin Islands (BVI) and Bermuda. “How much safer would everybody’s savings be if the whole world finally came together to outlaw shadow-banking systems and offshore tax havens?” was the question asked by Brown to the United States Congress earlier this year.

What was casually omitted from the political sabre-rattling of Brown, Obama and others though, is the critically important role that offshore financial centres like Cayman, BVI, Bermuda, Mauritius and others play in the global financial system. In the Asia-Pacific region offshore centres act as a nexus through which international investors can access the growth markets of China, India, Singapore and Malaysia, to name but a few.

This is not limited to international clients, however. Asia-based clients, who have long-known the virtue of structuring investments through places like the BVI and Cayman will continue to use the offshore route, but perhaps with greater frequency in calmer economic times.

Centre of finance

“Asia-based clients have been using offshore financial centres like BVI, Cayman and Bermuda for the best part of 20 years and are already familiar with what they can bring to their business,” says Michael Gagie, the partner-in-charge of Harneys’ Hong Kong office.“We would expect new incorporations in those jurisdictions to pick up again as the economy picks up, as it is generally when people are making money that they are looking to pay less tax on it,” he adds.

But increased use by clients in Asia of offshore financial centres needn’t only be about tax minimisation. Regulatory changes and the relaxation of listing rules in onshore jurisdictions like Hong Kong and Singapore (which will permit companies incorporated in a number of offshore jurisdictions to list there) will also stimulate this process.

Appleby’s Frances Woo (pictured) explains how this works. “The stock exchanges of Singapore and Hong Kong already do allow the listing of Bermuda and Cayman companies and those jurisdictions are already well established,” she notes. “If that is further opened up, to say BVI and/or Seychelles – or there is more use of Isle of Man in Singapore – then that would increase both awareness and use.” Recent developments on Taiwan’s stock exchange will have a similar affect. “The recent opening up of Taiwan’s stock exchange to foreign companies, and in particular, Cayman Islands companies has assisted and broadened the use of Cayman Islands in Taiwan,” she says.

Historically, many Taiwan entities were using Bermuda, Cayman and/or BVI for listing abroad (of which Nasdaq listings have been, so far, the most popular). In opening up, Taiwan is trying to attract both foreign groups to the nation (particularly in the technology space) as well as Asian groups who may find advantages to listing in their home region.

Cayman-incorporated Array Networks became the first international company to list on Taiwan’s Gre Tai earlier this year with its US$79m IPO. On this occasion, Walkers were retained as counsel on Cayman law while K&L Gates acted as the issuer’s Taiwan legal advisor. Spencer Privett, Joint Managing Partner with Maples and Calder in Hong Kong says that Array’s IPO is the start of many more to come.  Earlier this year, Maples acted for Want Want Holdings on its issuance of TDRs and Cowealth Medical Holdings on its Gre Tai listing and they are currently working on most of the other companies in the Taiwanese IPO pipeline.

Offshore leaders

Cayman, BVI and Bermuda remain the most widely-used offshore financial centres among Asia-based clients. The status quo is likely to remain unchanged in the future. According to lawyers ALB interviewed, Asia-based clients are starting to use other jurisdictions with greater frequency. However, the location chosen will continue to be dictated by the nature and needs of the deals being transacted.
“Cayman, BVI and Bermuda have always been considered among the top offshore jurisdictions in Asia,” notes Christopher Bickley, a partner with Conyers Dill & Pearman in Hong Kong. “Companies in these jurisdictions have the characteristics of being tax-neutral, [with] flexible but sound laws and are relatively easy to maintain.”

This is not to say that other offshore jurisdictions will be used from time, it just means that when Asia-based clients choose to do so, it is more about seeking out somewhere that dovetails with the structuring needs of a particular deal than anything else.Two jurisdictions which are used in this way are Mauritius and Isle of Man (IOM). Both have made a name for themselves over the past five years in particular, in the context of the high volume of India-bound investment that passes through these countries. Mauritius has a clear lead over other offshore jurisdictions in terms of access to India, ostensibly because it has a double taxation avoidance agreement (DTAA) with the country.

The latest OECD statistics indicate that 44% of all foreign direct investment (FDI) into India passes through Mauritius. But the island isn’t all about focusing on India, as Harneys’ Gagie (pictured, right) is quick to point out. “Mauritius is developing its profile in the PRC and has become very popular there,” he says. “Africa is also on its radar and here, as well as with other BRIC countries, I expect its usage to increase.”
Similarly, the IOM also enjoys a good reputation as on offshore jurisdiction that services India. However, where the focus for the Mauritius-India link is heavily inbound-focused, IOM is being used most commonly as an offshore centre through which India-based clients are channelling their own international investments. This is achieved most commonly through AIM listings as well as asset financing.

Mike Edwards, a Singapore-based director with Cains, says that IOM has more to offer than just these legal areas – and not just to Indian clients. “With liquidity coming back to India, we expect to see deals not only in the capital markets and asset finance areas but also project financing,” Edwards explains.
“We tip [there will be] more IOM involvement in India-related power and infrastructure projects, especially where there is a public sector element. In relation to non Indian-based clients, Singapore and other parts of southeast Asia will remain active.” Cain’s recent involvement as IOM counsel on Genting Singapore’s US$1.14bn rights issue seems to suggest this is the case.

This is not to say that the positions of Mauritius and IOM as the premier offshore jurisdictions through which to access India will remain unchallenged. Offshore lawyers expect Cayman to put up more of a fight – particularly in the funds area. Earlier this year, Cayman overcame one of the major hurdles that investment funds domiciled there face when seeking to invest into India’s capital markets, after the admission of the Cayman Islands Monetary Authority (CIMA) as a full member of the IOSCO. CIMA’s admission to IOSCO means that the process for the registration of Cayman funds as Foreign Institutional Investors (FIIs) with India’s Securities and Exchange Board (SEBI) will become much less complicated.

In the past SEBI would often conduct extensive due diligence investigations and inquiries before allowing a Cayman fund to register as an FII. As a result few Cayman funds sought registration with SEBI. It should be noted though, that Cayman does not currently have a DTAA with India. It is likely that funds from non-tax treaty jurisdictions like Cayman will continue to use a structure via a wholly owned Mauritius subsidiary. This is evidence, according to lawyers ALB interviewed, that the offshore game isn’t necessarily a zero-sum proposition. “It’s not a question of IOM or Mauritius or Cayman taking work away from one another … each have their own unique offering,” Edwards says. He does concede that in the long run, some jurisdictions may slowly “chip away at others’ tax bases” through establishing DTAA’s with countries like India and China.

But will these jurisdictions rise to challenge the positions of the likes of  BVI, Cayman or Bermuda? Maples’ Privett doesn’t believe that such a situation will eventuate. “The major offshore jurisdictions have advantages that the emerging ones do not,” he says. “In addition using BVI for holding companies and Cayman for funds and HK listings has a market acceptance element as well. All things being equal, I don’t think this will change anytime soon.”

Appleby’s Woo says that the growth of so-called “emerging” offshore jurisdictions needn’t be a process that yields changes in the status quo. It can simply be about offering investors new opportunities, she says, citing Seychelles as an example. “Seychelles offers good opportunities to break new ground, given its network of DTAA treaties with certain Asian countries – for example China and Indonesia – [because of] its efficiency, speed, close time zone proximity to Asia and lower cost,” she says. Yet just as critical for places such as Seychelles is carving out their own niche. “The so-called emerging jurisdictions, apart from developing their network of DTAAs, need to find a specialisation, their own niche,” says Harney’s Gagie. “Much like the BVI has found its space with holding companies and incorporation, Cayman with funds and listings and Mauritius with India. The alternative approach is to find a political attraction or motivation for being favoured.”

What niches remain in an already crowded offshore market remain to be seen, but the backlash emanating from the G20 summit may well fall under the ‘political reasons’ that Harney’s Gagie notes above.

Black, white and G20

The offshore lawyers that ALB spoke to all note that, in the eyes of their Asia-based clients, there has been little fallout emanating out of the G20 summit earlier this year, where regulators pointed the finger at offshore financial centres. “Very few of our clients have expressed concerns about their use of offshore financial centres after G20,” says Maples and Calder’s Privett.

Gagie cites a similar experience, saying that he expects the fallout from the G20 to be minimal. “The jury’s still out on what the longer-term practical impact will be, but we hope that in Asia it won’t be too profound.”

Regardless of these sentiments, there is no denying that there still may be a stigma attached to the use of offshore jurisdictions. But the ascendancy of both Cayman and the BVI to the OECD’s ‘white list’ earlier this year – as offshore jurisdictions that have substantially implemented the internationally agreed standards in respect of the effective exchange of information for tax purposes – has gone a long way to eroding such views.

This is so even if their elevation to the list is mere confirmation of the transparency with which both nations have been operating for many years. “The recognition by the OECD of the Cayman Islands, BVI and Bermuda as tax-transparent and cooperative jurisdictions is a very significant milestone in the long-standing efforts by these jurisdictions to cooperate with the various international initiatives by the OECD and other national and international agencies,” said Conyers’ Bickley.

As the region’s equity markets are rebounding, there are new funds being formed in Cayman and multi-billion dollar acquisition and asset financing deals returning to the deals pipeline. So is it correct to assume that the cycle is back to ‘business as usual’ for offshore law firms – have we worked through the full-cycle of offshore disputes, insolvencies and restructurings?

Appleby’s Woo, while noting that activity has picked up across the region, doesn’t agree with such assertions suggesting that there is plenty more recession-related work to be completed. “We do not believe that offshore law firms are anything close to ‘business as usual,’ she says. “Not only do we have the continuing effect of the insolvencies and restructurings … but our litigation departments are still very active. [This is] as a result of the fallout that arose, for example, out of the Maddoff issue as well as out of the significant market meltdown that took place, which created a number of substantial problems for funds incorporated in a number of our jurisdictions.”

Woo says the pace of this type of work is declining, however. Maples’ Privett says he is seeing a notable increase in investment funds work, and it is not necessarily coming from the usual suspects. “While we may not be over with the financial crisis we are seeing a recovery in funds, especially in the last two or three months in terms of new fund formations,” he says. “What is promising though is that it’s not just coming from the same existing managers but also start up managers. All bodes well for offshore law firms to move on from the crisis.” ALB