Investors Offshore Special Reports: Private Wealth Management

Disclaimer: The Lowtax Network has taken reasonable care in assembling this report but accepts no liability for any actions taken or not taken as a result. In particular, this report does not constitute investment advice. Anyone contemplating an investment, or a change to a current investment, needs to take appropriate professional advice.

Despite a presumably temporary dip in asset values as a result of shell-shocked markets post sub-prime, HedgeFund.net said recently that total hedge fund assets stood at USD2.848tn at the end of March 2008.

New allocations of USD53.02bn during Q1 couldn't overcome performance losses of USD93.18bn, resulting in total hedge fund assets experiencing a quarterly decrease for the first time on record. The 1.4% decrease in Q1 2008 compares to an increase of 11.5% in the first quarter of 2007.

According to the 12th annual World Wealth Report, released in June 2008 by Merrill Lynch and Capgemini, the wealth of the world's high-net-worth individuals (HNWIs1) increased 9.4 percent to US $40.7 trillion in 2007. The number of HNWIs in the world increased 6 percent in 2007 to 10.1 million, the number of ultra-high-net-worth individuals (Ultra-HNWIs2) increased by 8.8 percent, and for the first time in the history of the Report, the average assets held by HNWIs exceeded US $4 million.

A study by consulting firm McKinsey and Company published in January, 2007, estimated that the value of total global financial assets, including equities, government and corporate debt securities, and bank deposits, expanded to $140 trillion in the 12 months to the end of 2005, an increase of $7 trillion from a year earlier. That is a growth rate of 5.3%.

There are no consolidated figures for the growth in offshore assets - many jurisdictions simply don't release figures. But for those that do, it is clear that the rate of increase in banking, trust and fund assets dramatically outpaces McKinsey's global figure.

In Jersey, for instance, banking and investment fund assets were approaching GBP500 billion at mid-year, up 40% in the last two years. In Guernsey, bank deposits rose 14% last year to GBP92 billion, and fund assets rose 45% to GBP210 billion in the year to June, 2008.

In the Isle of Man, fund assets surpassed the $50 billion mark as at June 30, 2007, bringing the total of assets just in the UK's near-shore islands to more than US$2 trillion, up 30% in total over the previous two years.

They are the new kids on the block, the new rulers of our world. They are going to get richer, and there are going to be more of them. There are already more than 10 million dollar millionaires in the world, and that number has seen more than 10% annual growth in the last few years.

It is estimated that the assets of these 10 million rich people top US$50 trillion. And beneath them are tens of millions of 'mass affluent' people with free, investible assets in excess of US$100,000. And beneath them . . .

Circling these glittering concentrations of gold, silver and diamonds are shoals of advisers, wealth management consultants, hedgies and, especially, private bankers. The purpose of this Investors Offshore special feature is to analyze in particular the role played by bankers in wealth management, and to offer some basic principles for choosing between the many investment options available to the affluent.

As a phrase, the term 'private banking' is becoming so over-used that it is close to losing the cachet that once attached to the intensely secret dealings between a banker in his Zurich parlour and his wealthy visitors.

Almost every bank with any pretensions to being international offers special rates of interest to wealthier private depositors under the heading of private banking. Minimums have fallen to as low as US$10,000 in many cases, although some firms still maintain more traditional entry levels of US$100,000 or higher before offering special treatment to their clients.

The truth is that there are vast numbers of banks competing ferociously to capture the admittedly even vaster numbers of clients with money to invest. The customer with $20,000 dollars of spare cash today is worth the time of a 'relationship manager' in the hope that he will have $200,000 or $2m of spare cash tomorrow. It's a marketing exercise.

Private banks, once the traditional first port of call for a rich person seeking to safeguard wealth, tended to lose out to alternative forms of wealth management during the last 20 years of the 20th century. Bankers came to be seen as old-fashioned. The very rich began to use 'family offices' to manage their money, in effect directly employing skilled advisers. And the bankers were slow to recognize the attractions of investment funds in general and hedge funds in particular. The liberalization of capital markets and improved telecommunications focused the attention of the media on investment as a major preoccupation of readers or viewers, and it became fashionable for moderately wealthy people to self-invest.

But the banks have fought back, gaining expertise in the new types of investment and broadening their horizons. In the last few years they have reclaimed a leading position in private wealth management, and have enthusiastically expanded out of their traditional bastions such as Switzerland and Liechtenstein into newer 'offshore' jurisdictions. Almost every week sees the announcement of another private banking merger or expansion plan. Here is a recent sample:

The expression 'private banking' is nowadays more to be seen as a gateway into investment management in the broader sense than as offering a confidential, almost family relationship with a man to whom you entrust your money. Those relationships still exist in the traditional places, but they apply more to extremely rich people than to moderately wealthy or well-off people who want more personalised treatment than they can get from their high street branch, or their regional 'personal banker'.

Here, 'private banking' is taken to mean investment management offered on a personalised basis by bank to an individual (or indeed his company) with disposable wealth of more than $100,000. 'Private banking' is obviously not synonymous with 'offshore', but the costs of a personalised relationship begin to be worthwhile at the $100,000 level in the light of the superior gains to be realised from offshore investment.

Some care is needed when approaching a 'private banker' or a bank offering customised relationship management (there are lots of expressions all amounting to the same thing). What matters is the structure of the bank. This is not to say that one kind of bank is necessarily more reliable than another, just to understand why the bank is offering personal attention, and what it hopes to gain from it.

Some banks are little more than front ends for investment funds. They may be safe enough, but are they objective? Perhaps it is best to look for a bank that is trying to make money out of private banking as an activity in itself, rather than just using it as a scoop for customers for its financial products. If you just want a bank that will give you a good rate of interest without deduction of withholding tax, then the choice is simpler.

Private banking doesn't just mean investment: banks like to lend money, and especially to richer people. This raises the question of how a private banker is going to get rewarded. Depositing money with a bank is reward enough, of course, whether into the bank or into one of its financial products, but private banking when it has an advisory nature and is not accompanied by lending or borrowing may be fee-based. Provided the sum involved is large enough to justify the fee costs, an advisory private banking relationship is probably a good way to go. The bank will get the benefit from time to time of being able to offer bridging finance, or of holding large amounts in transit etc. It can hope for more substantial involvement with you in future. But the immediate relationship is between financial adviser and client.

Given the snowstorm of advertisements and mail-shots which surrounds richer people, the problem might seem to be more one of avoiding private bankers than finding them. But most of the offers are from banks wanting to sell their own services.

As explained above, a 'private banker' is probably best approached as an objective financial adviser rather than as an investment-provider, and may also not be the most effective choice for a reasonably sophisticated investor who wants to play an active role in the management of his investments.

Many people may have contacts or advisers who will be able to recommend a particular bank, but assuming a blank sheet of paper, then the first step is to decide between an onshore or offshore bank. This will depend on an individual's residential situation, but if you either already have residence in a low tax area, or plan to have it in future, or want to explore trusts and other 'distancing' techniques which can legitimately reduce your exposure in high-tax areas, then you are probably going to choose an offshore bank.

There is a huge spectrum of different offshore banking services available to expats, international investors, globetrotters, international consultants and corporations, offering varying degrees of return, protection, and privacy. Before we look into the different sorts of offshore bank account available, however, a brief rundown of the background of this ever-growing industry is necessary, in order to understand the present situation.

As more and more financial institutions became keen to establish themselves on an international level, regulators perceived a need for greater banking regulation, and introduced a set of minimum standards and safeguards, known as the Basle Accord (introduced 1988). The Accord outlined the requirements necessary for banks to obtain licenses, which included two minimum types of bank capitalisation- core capital and supplementary capital. Core (Tier 1) capital is basically a mixture of shareholder equity and disclosed reserves, and supplementary capital is a mixture of debt and equity instruments.

The Basle Accord set the minimum capital adequacy level for each type of bank capital at 4%, meaning that many banks operating in countries under this accord were forced to increase their capital reserves and to invest in 'safer' investments. Recently introduced modifications to the original Basle Accord (originally enough, called Basle 2, and running to 541 pages) seek to align capital requirements with the underlying risks of loans made, and will further affect the amount of capital which each bank is required to hold. This may mean that banks in countries which are operating under the Basle Accord are forced to be more cautious about the instruments in which they invest, resulting in potentially less attractive returns. However, in non-Accord countries (which includes many offshore jurisdictions), regulation of this kind is usually down to the regulatory authorities of the jurisdiction, and the required capital adequacy levels can vary.

Other legislative issues have also had an effect on the offshore banking world. Initiatives by the OECD/FATF/G7 countries to combat money laundering have, in the process, severely damaged the banking secrecy laws of many offshore jurisdictions. 'Know your Customer' legislation has meant that privacy in high tax and certain low tax jurisdictions has been jettisoned in return for international acceptance. In addition, US rules have introduced 'Qualified Intermediary' status which also imposes more stringent controls on any institution wanting to avoid having to tax US-source income regardless of the nationality or tax status of the recipient. For all these reasons, opening an offshore account can now often require a small rainforest's worth of paperwork.

The OECD's first shot across the bows of banking secrecy was fired in earnest with the release of a report in 2000 into improving access to bank information for tax purposes, endorsed by all 29 members of the organisation. Although the report was more a statement of intent rather than a detailed plan, it set the template upon which national tax authorities could obtain information about specific individuals or companies whom they have reason to suppose are engaged in tax evasion or criminal activity.

Although many offshore jurisdictions have responded to the pressure brought about as a result of their blacklisting by the OECD and the FATF by strengthening legislation against money-laundering and introducing better controls over financial institutions, the high tax countries have failed to really galvanise a move towards any comprehensive dilution of banking secrecy, and the international framework of mutual assistance treaties remains largely as it was.

Indeed, the high-tax countries themselves are gradually being forced by peer pressure and international regulations to tighten up their own regimes.

In January, 2007, for instance the UK took the latest in a series of EU-inspired measures when Economic Secretary to the UK Treasury, Ed Balls, published draft money laundering regulations for consultation. They were passed by Parliament in July, and came into force on 15th December.

The regulations are designed to implement the EU's Third Money Laundering Directive, and have already caused controversy.

The proposed regulations include:

Extended supervision so that all businesses in the regulated sector comply with money laundering requirements, including estate agents, trust and company service providers and unsecured lenders;
Strict tests to ensure people running money services businesses and those who help set up trusts and companies are fit and proper;
Extra checks on customers that firms identify as posing a high risk of money laundering;
A requirement to establish the source of wealth for those in high risk situations, for example those involving deals with high ranking public officials overseas; and
A strengthened and risk-based regime in casinos, in line with, but stricter than, international standards.

Mr Balls announced that: 'These Regulations will strengthen further the UK's defences against money laundering and terrorist finance. By taking tough and targeted new measures where the risks are greatest we will crackdown further on illegal activity and help force criminals and would-be terrorists out of the shadows. At the same time our Regulations will ensure that businesses and consumers in low risk situations face fewer burdens than previously.'

The Directive includes criminal penalties for advisers ranging from stockbrokers to lawyers and estate agents to bankers if they do not carry out multiple checks.

However, the UK's Law Society warned that the new money laundering regulations could put solicitors at risk of inadvertently committing criminal offences because they are "impossible to interpret" in practice. It also warned that the new rules will increase the cost to clients of solicitor’s work in dealing with trusts.

According to the Law Society, a number of the terms in the new EU Directive are unclear, and unless the Government clarifies them, solicitors will have to make extensive enquiries – at clients’ expense – in order to avoid inadvertently committing a criminal offence.

Offshore banks, or the offshore branches of banks based in 'high-tax' countries, may apply some residence tests when you approach them. The situation is odd: there are hardly any countries which make it illegal for their citizens to have offshore accounts (there used to be plenty, but the abolition of exchange controls has changed all that). The illegality comes if you don't declare the account (in some cases) or if you don't declare the income from it (other cases). But the offshore bank may well not be allowed to offer you the account in the first place if it is not regulated and licensed in your home country. The publicity of such banks normally puts the onus on you to abide by the regulations of the country you are in; their practise is variable when it comes to accepting your business.

The Internet has of course sharpened the banks' dilemma. If a bank is not licensed in a territory, it clearly can't mail leaflets into it, or advertise on television locally. But the Internet jumps these barriers, to the extent that a bank cannot (and of course doesn't in fact want to) prevent a prospect in a regulated country from seeing its publicity. If the prospect then approaches the bank of his own accord, is the bank to turn him away because he found their publicity on the Internet? The answer to this question probably depends on the regulatory regime applying to the offshore bank in question.

See Regulation of Alternative Investment for more details of the regulatory regime in different countries. The licensing regime for offshore banks is explored in www.lowtax.net under Law of Offshore for a number of jurisdictions.

The choice of an offshore bank is in itself a difficult, and to some extent a circular task. You will not find it easy to distinguish between the merits of different offshore jurisdictions, or the banks they offer, until you have got to know them quite well. This is the point at which you might think that an onshore adviser in your own home country can help you - and it may be so, but remember that only a very skilled, knowledgeable and above all, objective, adviser is going to be useful. Such a person is hard to find.

www.lowtax.net is designed to help people who do not have access to the perfect adviser we just described. www.lowtax.net is not an investment adviser, and is no substitute for professional advice, which is an absolute necessity for anyone planning a move offshore. But the www.lowtax.net site does contain a wealth of information about 35 offshore jurisdictions, which is designed to help you to make a preliminary choice of one or a few offshore jurisdictions suited to your circumstances, which you can then explore in depth.

Assuming that you have been able to choose a particular offshore jurisdiction in which to establish your investment base, you now face the problem that people in that jurisdiction are quite likely to be anything but objective when it comes to planning international investment structures. It is therefore likely that the best choice will be a bank which has an international network, with a well-established branch in the jurisdiction you have chosen. It may even be that the head office of such a bank can have assisted you in the choice of jurisdiction. But beware: if a Zurich bank has just one branch, in the Cayman Islands, which jurisdiction do you think they will recommend?

Purely as a factual guide, here is a list (in aphabetical order!) of those offshore jurisdictions offering a reasonably wide choice of banks:

Once you have chosen a jurisdiction, it is quite easy to find the names of the banks which operate there. A number of banks will be available in the Private Banking Providers Plaza; and our section Gateways To Offshore Information Providers will lead you to further sources of such information.

Offshore Versus Onshore in 2008

It is unlikely that the relative advantages of offshore will be undermined in the short term at least. The OECD's rather uneventful Global Forum on Taxation in Berlin in June 2004 encouraged participants to continue to strive towards effective exchange of information and transparency by 2006, although it was also recognised that flexibility is required since many participants have not yet initiated negotiations towards the required signing of bilateral agreements.

The OECD claims however that substantial progress has been made. A report from the Global Forum secretariat in 2006 stated that countries continue to improve their international cooperation to combat tax abuse by putting in place mechanisms which enhance transparency and exchange of information for tax purposes. Many of the economies reviewed have enhanced transparency by introducing rules on customer due diligence, information gathering powers and the immobilisation of bearer shares. Most have entered into double taxation conventions and/or tax information exchange agreements, and many are engaged in negotiations for such agreements.

The OECD also noted that none of its member countries, and very few non-members, now make domestic tax interests a condition for responding to a treaty partner’s request for information on a specific taxpayer. However, the Organisation argues that more progress can be made to improve global tax transparency, and stated that some countries still place constraints on international co-operation to counter criminal tax matters and a number continue to impose strict limits on access to bank information in civil tax matters.

"The direction of change is clear," Paolo Ciocca, Chair of the OECD’s Committee of Fiscal Affairs and Co-Chair of the Global Forum stated. "Onshore and offshore financial centres are prepared to work towards the implementation of mutually agreed standards. I look forward to the day when the centres that have met these standards are joined by other jurisdictions that have not yet achieved them," he added.

Leasi P. T. Scanlan, Governor of the Central Bank of Samoa and also a Co-Chair of the Global Forum, said the report demonstrated the ability of OECD and non-OECD countries to co-operate in order to prevent their financial centres being misused for illegal tax avoidance and evasion. "This has been a huge undertaking but we now have a clear idea of where we stand. It is an important step in helping countries to work towards a level playing field so that these abuses do not simply shift from one financial centre to another," he observed.

In October, 2007, the OECD published two new reports outlining the progress made so far in its campaign against tax evasion.

'Improving Access to Bank Information for Tax Purposes – the 2007 Progress Report' describes developments in OECD countries and six others (Argentina, Chile, China, India, the Russian Federation and South Africa) with respect to access for tax authorities to bank information.

Meanwhile, 'Tax Co-operation: Towards a Level Playing Field – 2007 Assessment by the Global Forum on Taxation' compares the legal frameworks for international tax co-operation of 82 OECD and non-OECD economies. It is the second in a series of factual reports by the OECD’s Global Forum on Taxation.

The OECD says that significant restrictions on access to bank information for tax purposes remain in three OECD countries (Austria, Luxembourg and Switzerland) and in a number of offshore financial centres (e.g Cyprus, Liechtenstein, Panama and Singapore). It further argued that a number of offshore financial centres that committed to implement standards on transparency and the effective exchange of information standards developed by the OECD’s Global Forum on Taxation have "failed to do so".

“No one country or even a small group of countries can address the issue of harmful tax practices on their own,” commented Paolo Ciocca, chair of the OECD’s Committee on Fiscal Affairs and co-chair of the Global Forum. “This is a global challenge which requires a global response. In co-operation with partner financial centres, that is what OECD is seeking to achieve.”

However, Mr Ciocca went on to announce that in the view of the OECD, progress has recently been made in the following areas:

Nearly 100 more exchange of information arrangements are now in place, compared with one year ago, including tax information exchange agreements between the United States and Guernsey, the Isle of Man and Jersey which entered into force in 2006.
The scope of some existing arrangements has been extended. For example, Switzerland has signed a number of protocols to its bilateral tax conventions to allow it to exchange information, including bank information, in cases of tax fraud and the like. Some of these protocols also allow for exchange of information in both civil and criminal tax matters in the case of holding companies.
Access to bank information for tax purposes has been greatly improved in economies such as Belgium, which in November signed its first tax treaty providing for exchange of bank information for all tax purposes.
Increasingly, legislation requires financial and other service providers to have available details of the beneficial as well as the legal owners of corporate vehicles. For example, in Macao, China; new anti-money laundering legislation requires financial institutions to verify the identity of customers and their beneficial owners. In San Marino, new legislation requires that from 2008 meetings of joint stock corporations must be held in the presence of a notary public who is required to identify holders of bearer shares.
Some jurisdictions, such as Guernsey and Jersey, have brought into force legislation empowering them to fully implement the provisions of their bilateral exchange of information arrangements.

“The vast majority of OECD countries already meet or exceed the standards set in 2000 regarding access to bank information for tax purposes, and the direction of change is clear,” Mr Ciocca stated, but warned that jurisdictions which have not yet implemented the standards for transparency and exchange of information developed by the Global Forum must now do so.

He concluded:

“We will continue to press for further progress and explore within the Committee how such progress could be achieved.”

The offshore jurisdictions themselves have become highly active in attracting wealth management business, often creating marketing departments for the purpose. Isle of Man Finance, the Manx government's finance industry promotional arm, for example, recently hosted a ‘Family Wealth Management Seminar’ in Geneva, which sought to showcase the strength of the Island’s attractions for high net worth individuals. Leading the delegation and speaking on behalf of Isle of Man Finance, Deputy Head, Steven Beevers commented:

"The Island now has a strong message for private client business, therefore Geneva, as the centre for wealth management and the gateway to high net worth individuals, was the most appropriate venue to leverage support and interest. This high calibre event provided us with the opportunity to showcase our attractive tax package and expertise, to an audience of top level advisers with a global client base. The inclusion of industry and government spokespeople helped to convey how well we work hand in hand to promote the common goal of the Island’s finance sector."

He concluded: “The Isle of Man is continuously looking at ways to increase our services and attractions to this niche but high value market. Therefore, it was pleasing to see that the broad range of Isle of Man business offerings including the super yacht register and shortly to be introduced aircraft register also met with considerable enthusiasm by the wealth management professionals.”

Research published in October, 2007, by Barclays Wealth revealed a trend amongst wealthy investors of an increasing appetite for financial products that help reduce volatility such as derivatives, private equity and hedge funds, particularly in the Middle East and Asia. “Intuitively, absolute returns make a lot of sense and we see that more wealthy individuals are thinking in those terms,” said a spokesperson.

The findings also indicated that wealthy families are encouraging children to gain a university education and have their own careers, as they aim to ensure their children strive to achieve their own success. More than a third (34%) of those questioned think it is a bad idea to leave large sums of money to their children.

Interestingly, those who have inherited their own wealth are even less likely to pass on large sums of money to their children than those who have earned their wealth. Some 41% of respondents whose wealth was given agree it is a bad idea to leave large sums of money to children, compared with 33% of respondents whose wealth was earned.

Barclays Wealth surveyed 790 wealthy individuals, in partnership with the Economist Intelligence Unit (EIU).