The Regulatory Regime In Offshore Jurisdictions

Thirty years ago, it was a brave investor who ventured without a guide into some of the more exotic offshore jurisdictions. Even communicating with a Pacific island might take hours of work. But intense competition for business has led to the evolution of fairly sophisticated regulatory regimes in most of the leading jurisdictions, and communications are state of the art. Unlike high-tax countries, the offshore jurisdictions mostly do not attempt to screen out the riskier (= often more rewarding) types of investment activity - instead, they often provide differential levels of investor protection according to the type of investment product.

This can be most clearly seen in those jurisdictions which have stock exchanges, and which are also therefore favoured locations for mutual fund managers. Almost invariably, there is an independent financial supervisory commission which provides the regulatory environment for the stock exchange and for mutual fund managers and custodians. In order to attract international mutual fund business, the stock exchange will want to become 'recognised' by key destination markets such as the UK and the US, so that funds can be publicly marketed in those countries - and in order to achieve recognition, the supervisory regime will have to be of good quality.

However, in most cases the legislation will also allow for other types of investment fund which are not to be marketed publicly, often limiting the number of members (subscribers, shareholders) to fewer than fifty, although the managers will still have to be licensed by the financial authority. This is the legislative regime usually chosen by 'LLCs' (Limited Liability Companies) or Limited Partnerships, favoured by wealthy US investors in particular since they give a tax 'pass-through', with profits being assessed directly to the individual investors. Since most offshore jurisdictions do not tax the profits of such an investment fund, its gains accrue 100% to the investors without any intervening taxation.

Although mutual and investment funds will be the most obvious type of offshore investment for many people, others will want to pursue more individual investment or asset protection strategies through banks or trust structures. Most offshore jurisdictions combine bank and trust supervision, since trust work is often the major activity of an offshore branch of a major bank. In almost all cases, the Central Bank is responsible for licensing banks and trust management companies, and these regimes are usually very stringent, with stiff penalties for breaches of trust or statutory privacy rules.

Trust law itself is a separate matter (as distinct from the regulation of trust managers). Most offshore jurisdictions have a common law system, based on English law, but have evolved away from basic English trust law to offer more flexible and more secure trust regimes, allowing almost 100% safe asset protection for people on the run from their ex-wives (joke- do not try this at home!). Most civil law offshore jurisdictions have either imported trust law wholesale into their legal systems, or have invented trust-like instruments such as the foundation or stiftung.