Marketing Offshore Financial Services
By: Drs. René A. KOOYMAN

The Offshore Sector

The offshore sector has a long history. The European continent is serviced by offshore finance centers (OFCs) that have been structured decades ago. Some of the older ones are genuine 'offshore' jurisdictions. These traditional offshore centers have created their position on the basis of a colonial past: the British Virgin Islands, the Dutch Antilles (Curaçao, Aruba, St Marten), etc. Others have created a special status as being an island just in front of the mainland (e.g. the Channel Islands of Jersey and Guernsey).

Yet not all so-called offshore centers were created decades ago. A number of recently created jurisdictions exist. Some of these are islands (Mauritius, Malta, Cyprus and Ireland); others have used the offshore status as a generic term for a financial tax-driven position (Liechtenstein, Luxembourg, Gibraltar, Monaco).

Surrounding each of the major trading blocks of the world economy is a growing number of jurisdictions often known as 'tax havens'. The Pacific islands including Vanuatu, Western Samoa and the Cook Islands, Labuan and Singapore serve the Japanese area. The North American Free Trade Association and the Caribbean and Central American havens include jurisdictions such as the Cayman Islands, the British Virgin Islands and The Bahamas. China has Hong Kong; the Gulf States, Bahrain; India and Southern Africa, the Seychelles and Mauritius. Some authors even include relative independent financial centers such as Delaware, London, Brussels or New York in their analyses of offshore centers. 1 And the sector is growing. At present over fifty jurisdictions offer a variety of facilities for tax-driven activities and offshore finance. 2

It is a sector that has been formed by a growing competition in the financial markets. The development of the offshore sector has had large effects on the financial sector. For some it has meant accelerated financial growth, especially in those underprivileged areas such as small offshore islands. In these areas it means employment and prosperity. For others it has meant an ever-growing threat of financial losses. 3

The financial sector is subject to permanent supervision. Each country involved has its own structure of regulation and control. The products offered in the financial sector have to comply at least with one crucial criterion: they have to be legally reliable. The legal foundations of the products (a combination of local legal entities and international tax treaties and provisions) have to provide a sound financial structure, with which the client is certain he or she will reach the results he/she wants.

The Marketing Perspective: International Competition and Cooperation

The financial service sector is in a constant flow of creating financial instruments that cater for very different needs of the various clients. The different service providers find themselves in a highly competitive market in which the different competitors are continuously developing new products and offerings. Traditional offshore financial centers are facing increasing competition following the proliferation in recent years of new offshore locations. Offshore financing was formerly the exclusive domain of a handful of European centers together with some islands in the Caribbean and isolated centers in the Far East. In the last decades a number of newly established centers have evolved (Dublin, Madeira, Malta). An increasing quantity of Caribbean Islands have upgraded their financial infrastructure, while further afield tropical islands such as Mauritius have joined the offshore financial service sector. In addition, the UAE (United Arabic Emirates) has been marketing itself as a financial center following the rapid growth experienced by the emirates after the 1970s surge in oil prices. 4

Product Dynamics

The different financial products offered are often based upon the different tax regimes and bilateral and multilateral tax treaties between the nation countries. These nation states find themselves in a multinational playing field with harsh competition amongst the different nations. Each of these countries want to attract a slice of the large financial streams that operate on a global scale.

To complicate our image of the financial markets we have to realize that each country is at the same time competitor and financial partner in relation to other countries. The local states act as an enterprise, a competitor on an international financial market. Yet at the same time they want to restrict the damage done by so called 'harmful tax competition'. Within the countries covered by the OECD we find a parallel double bind dilemma. Here too we find a permanent interaction of cooperation and competition. 5

Entering the Public Domain

The financial sector has come under severe debate. Even though the sector has a long history and tradition it seems that only in recent years has the sector become the focus of public attention. A number of social developments have stimulated the open public debate on financial planning:

In general there has been a growing availability of financial information, partly stimulated by the technological developments through the Internet

Secondly there have been a number of financial scandals that have been widely published in the different media (see the article published here covering the ENRON story). More than ever the relative well-to-do individuals know the existence and potential possibilities of international offshore financial planning

Thirdly there has been a growing debate upon the globalization on the one hand and the necessity of social accountability of international operating firms on the other

Lastly we have to point out the growing tension created by the increased international cooperation of the different nation states (globalization) and the growing international competition at the same time (as mentioned above).

Globalization versus Localization

Recently we have seen a growing internationalization of the financial sector. The key players in the financial market are trying to keep their share of the markets by initiating international mergers and/or strategic alliances. This globalization of financial markets is also stimulated by the technological developments through the Internet that creates a global virtual reality without local boundaries and time zones.

At the same time we can see a counter-movement. Local nation states try to compete by protecting and safeguarding their market position. The OECD strives to promote democratic government and the market economy. 'Good, effective public governance helps to strengthen democracy and human rights, promote economic prosperity and social cohesion, reduce poverty, enhance environmental protection and the sustainable use of natural resources, and deepen confidence in government and public administration.' 6 Striving for increased regulation of financial services the OECD has urged national governments to cooperate in order to create a counterbalance on a global scale. The OECD tries to promote good governance in the public service and in corporate activity. 'For a global economy to succeed, governments must intensify their co-operation and provide international frameworks for the effective management of global issues. Taxation is no exception.' 7

Good Governance versus Privacy

In direct contrast with the urge for global good governance, there is the right of the individual to protect his personal privacy.

It has been a long tradition that one's financial status should be kept private. It is up to the individual to reveal its income, debts, assets and possessions. It is this very principle that the financial sector works upon. 8 Whilst there is a high degree of consensus that the taxpayer's rights should be protected, no attempt has yet been made to incorporate these principles into an international legal instrument.

It seems that two different social movements compete for the future developments within the financial sector. On the one hand there is the movement towards increased social control and regulation (OECD). On the other there is the social battle for privacy and individual legal rights.

Center and Periphery

The very origins of the offshore centers can be identified upon the peripheral position within the international organizational structures. Most of the countries positioned far away from the well developed (urban) centers did not have any other choice but to develop their specific financial status in order to cope with the ever proceeding economical growth. In the political arena the debate is often structured on the basis of the central, high regulated powers. The position of small, less political developed nations with limited resources is a priori weak. 9

With the increasing globalization these small countries have to fear an increasing influence of foreign entities such as banks and other financial institutions. Empirical research on the factors that compel foreign banks to enter a country indicate that the market opportunities available in the host country, entry restrictions and other regulations (including tax treatment) have all affected the decision of foreign banks to set up operations in a host country mainly by either opening up a branch or a subsidiary. 10 It is however a question whether we can a priori assume that 'Growth is good for the Poor'. 11

The State of Affairs

We have conducted a field study on the marketing activities of international Financial Service Providers (FSPs). All respondents show the feeling that the international financial sector is in permanent change. All aspects of the profession have undergone an update during the last five years. The type of clients, the product range, the way the business was done, the type of competitors, the size and type of structures, they all have been updated. Old products fade away, jurisdictions flourish or become obsolete, companies are bought by competitors, colleagues leave the firm in order to start their own enterprise, etc. As a consequence a permanent need for education and update of information is felt.

There is a general feeling that the offshore sector is moving from the offshore products that build the sector towards onshore financial products. These onshore structures will hold an optimal transparency. All actors, transactions etc. are publicly known and discussed with the different fiscal authorities. In this respect the expectations are that offshore jurisdictions that hold on to the relatively simple, 'quick and dirty' offshore bulk-products will loose out in the future. The general movement of both clients and markets is towards more professional, more elaborated onshore products or onshore/offshore structures.

A second commonly shared notion is that the sector is moving from the financial structures for the well-to-do individuals towards institutional structures based upon professional international tax planning and financial strategy. It creates the need for an increased level of professional standards.

In discussing the different competitive forces we have to make a distinction between three different levels of competitive behavior:

the competition amongst individual FSPs at a local level

the competition of the different nation states, responsible for the legal vehicles and limitation

of the different products

the competition amongst supra-national organizations

Competition amongst individual Service Providers

Every respondent in our study is in general terms aware of the existing direct competition. They share the feeling that they operate in a competitive sector where quality of the product and service rendered are being judged by the price asked.

New customers do shop-around; compare prices and pricing structures. On the basis of this information they choose a certain service provider. If the services however have been set up, there is a large price-elasticity. If the structure is set up and incorporated the customer will go to great length to stay with that service provider. Part of this notion is based upon the fact that the information shared with the FSP has a confidential nature, and the fact that an existing judicial structure is hard to transfer because of the fact that the service provider in that case will not be very cooperative.

The urge to stay with an existing service provider sometimes leads to low initial pricing for new clients, a policy used to attract the new customer (a low basic fee) combined with a more elevated and partially hidden high operational fee (on a time spend basis). As a counter approach we can find service providers who tend to offer an all-inclusive price. This price will be higher than the one of the competitors mentioned before; they include a calculated risk for unforeseen activities. Yet - dealing with institutionals and hoping to build long lasting client-relationships - it is thought that this way of pricing is unavoidable. These types of FSPs even refuse clients if the pricing structure is a problem. If a client wants to have a professional structure, yet does not want to pay for that quality it is better not to get involved with that client. A professional client will have done his homework; they will have calculated the net profit of a financial structure in advance. They are looking for reliable high quality services that will be worth its costs. In these cases quality is more important than costs.

Competition amongst Nation States

It is impossible to look at the nation state as an impartial, neutral actor. Nation states are active as entrepreneurs in an international financial market competing for optimal market share in the international financial money-flows. On the one hand they hope to avoid tax-avoidance and financial fraud. Yet at the same time they are creating financial vehicles that will allow for aggressive tax planning for foreign actors. Each state is choosing its market niche in order to compete with other entrepreneurial states. Competition amongst supra-national structures

As in the case of the nation state we can identify different political and geographical collectives that compete for the world's prosperity. On the one hand we can identify mature and relatively well-to-do nations who use their international political platforms (OECD, FATF, EU) to defend their position in the financial markets. As a counter movement we see the smaller offshore island jurisdictions getting organized in order to create 'a level playing field' in the financial markets. There is a growing cooperation amongst the smaller offshore jurisdictions in order to safeguard their position in the financial markets.

Client developments

We can identify several client developments. Clients have widely become more aware of the possible benefits of offshore services than five or more years ago. Some years ago they thought that offshore structures were a vehicle only for the rich and the famous. Now they know that it is more widely applicable. Clients are better informed because the information is more available. It is no longer an almost hidden sector. It is open to more types of clients. And clients have become more mobile. Cross border transactions, and people who live in different jurisdictions outside their national home state have grown in number.

The old type of client - an individual looking for a simple straightforward solution - still exists. Yet they are becoming a minority. These individual clients have changed their attitude. Customers have become more nervous. The different legislations have changed. The idea of confidentiality has been damaged by computer programs sniffing for tax related information, cross-border information exchange, anti-money laundering activities, etc. These type of individuals are either looking for fully legitimate ways of diminishing the tax burden (life insurances, investment funds), looking for more secure jurisdictions, or have decided to pay their taxes avoiding more complex and therefore costly offshore structures.

On the other end of the spectrum, there is the institutional client that knows exactly what he wants. There are a growing number of corporate clients that are looking for products of undisputable nature. They want a fully transparent structure that can be publicly published and will be available to all interested sources. The financial structure has been discussed with the local lawyer or tax advisor, the homework is done and they contact the Financial Service Provider with an exact defined request to set up the structure. The FSP in these cases is becoming more the executor of an already tested and proven structure.

Communication and Public Relations

Advertising one's services is seldom done. Partly the character of the profession justifies this. A service provider does not want to loose time communicating with people that he does not want to accept as a client. A second justification given is the argument that the profession is based on personal relations. Even though many clients will be contacted through other intermediaries (lawyer, tax advisors, fiduciaries) they still will feel the need to know the client in person - if possible - in order to be able to justify the services created.

The Internet has had a profound influence on the day-to-day interaction. All FSPs mention the fast and efficient Email facilities that they use. They also however stress the complete lack of confidentiality on the Internet. Confidential financial information is therefore always exchanged in hard copy or through the fax machine. Nobody encourages online sales. First of all because of the security reasons mentioned. And because of the fact that they want to know the client personally. The website is seen as a good way to start and invite potential customers to call the office. Yet only after personal contact and the required paper work one can move on to the operational stage. Different respondents have stressed the importance of long-lasting client relationships. During the years the client is giving confidential information to his personal contact within the FSP. This contact knows the background of the different structures that have been put in place, the goals and requirements of these structures, the history and background of the customer. Many smaller and medium size service providers are proud of the fact that the marketers hardly ever leave their company. They are being valued as one of most important assets of the company and one is taking great care to keep them on board.

Marketing strategy

The offshore market has grown and become well known to the larger public for its simple, easy to understand and relatively cheap tax-avoiding products. Respondents share the idea that these days have gone; the large bulk of relative easy products will disappear. A number of service providers realize that they will have to look for different product-marketing strategies. Our respondents all stress the fact that there will always be a demand from individuals and institutions in high tax jurisdictions for products that can lower the tax burden, can guarantee asset protection, future litigation, etc. If the sector will be able to defer assets and reduce effective taxation it can please a lot of people. The market will never disappear. It won't get easier but the demand will be there. 'The tougher it gets the more the need for our services will be increasing'. The discussions about the sector will only attract more and new target groups for the products range.

One strategy is the intention to keep the number of clients at the present level by means of diversification of the product range. In these cases one is looking for a combination of financial offshore products, private investment funds and family office activities. A second strategy is based upon the realization that there will be fewer customers in the years to come. These fewer customers however will have a demand for more complex, more sophisticated and more time-consuming services. In these cases one is concentrating on that segment of the exiting customer base that is much more promising with respect to larger and longer-lasting financial structures. Attention goes especially to those feeders (international business lawyers, accountancy firms) that hold a key position in the different markets. A third strategy is based upon the historical dynamics of the financial markets. In order to keep up the volume of customers and services one is moving from the jurisdictions that grow to a mature status towards the upcoming new emerging market (Eastern Europe, Russia, South America). A fourth strategy is going towards the opposite direction. One is not concentrating on the offshore vehicles developed in the past but - as mentioned before - one is moving towards complete transparent onshore constructions, in which the offshore component plays a minor role or is completely absent.

Sector perspectives: towards a formal institutionalized sector

The offshore sector is changing fast. The future of the sector is hard to predict. Fundamental changes are taking place in regulation and information exchange requirements both in the EU and the US. If the confidential nature of the activities will be lost, the offshore character of the sector will be a historical phenomenon. A number of general trends can be seen.

We can identify three possible roads to go. Within the present development it will be difficult to stay afloat as a small, independent trust company. The smaller service providers can only survive if they are capable of outsourcing a large number of activities to other service providers. They will have to concentrate on the marketing aspects - bringing in the customer - and handling the due diligence procedures.

The sector itself shows a shift towards larger institutions with a package of sophisticated international structures both onshore and offshore. Here we can see two directions. There is a move towards larger financial groups that specialize in the offshore sector. They try to buy out or merge with different smaller trust management companies in different jurisdictions in order to be able to provide a large range of different products. They position themselves as offshore / onshore specialists who can offer a large range of services to the clients who are looking for more complicated financial structures.

A third path is followed by independent trust management companies who become part of larger financial structures; international banks that are looking for the possibilities to offer international financial tax planning instruments to their existing clients. In these cases the trust management activities are an additional service offered on the basis of the core activities of the bank. The trust management company will become a specialized department in a wide variety of other departments. Their customers often come through the other activities that the bank pursues.

The offshore sector is growing towards a more sophisticated and mature state. Coming from an almost hidden, obscure presence in the past the sector is more and more widely known, debated in the public domain and therefore subject to governmental and institutional regulation.

Further institutionalization and regulation will be unavoidable. The sector is growing towards a formal status comparable to that of the institutionalized international banking sector.

Drs. René A. KOOYMAN
The Offshore Financial Intermediary
Managing Editor
1 Rue Micheli du Crest
CH 1205 Geneva Switzerland
Tel: + 41 22 751 04 27
Fax: + 41 22 751 04 28
E-mail: rkooyman@bluewin.ch
Web: www.financialintermediary.org