Offshore Financial Intermediaries and Private Banking Sector:
Present and future issues and opportunities
By: Samuel M. Lohman
The author is bullish on the future of the Offshore World. As long as there are persons who have accumulated wealth, there will be the need for professionals with expertise in wealth planning. Clients that are successful in their given discipline generally see the need to seek assistance in matters outside their expertise.
Over the years, an abundance of knowledge has been built up in various offshore jurisdictions throughout the world. It is up to the various jurisdictions and practitioners involved to adjust in order to compete in the current new world order of the international financial service industry.
The business of providing financial services is a dynamic one; to succeed, among other factors, the organization involved must continuously monitor accumulation of wealth, legal, regulatory and other relevant (and not so relevant) trends. In addition, it must be perceived to be doing the same whilst at all times ensuring that the client (and prospective client) is treated as priority one.
Some observations and trends regarding the international financial services industry include:
Enforcement shift from the public sector to the private sector. In the 70s and 80s the emphasis was on shifting enforcement from the public sector to the private sector and from 'on-shore' to 'off-shore'. Post 911 the United States has become engaged in anti-money laundering compliance, which will be equal to that imposed on Offshore Financial Centers throughout the world. Thus, we shall see a level playing field when it comes to compliance.
In the past, the Financial Intermediary (bank, trust company, etc.) that failed to meet its responsibility to its client could be subject to negligence, breach of contract and the like. Indeed, with secrecy driven structures of the past, it was entirely likely that an injured client would simply accept the fault rather than launching an action (for fear of exposure). In light of developments anti-money laundering and other compliance (civil and criminal) law and regulation, the provision of financial services has become a relatively higher risk industry for the Financial Intermediary involved.
Transparency, exchange of information and reporting of suspicious transaction reports are and will continue to be the order of the day.
What definition of what is 'reasonable under the circumstances' will evolve (e.g. finger printing for identification of customer) as the anti-money laundering, compliance industry, case law and regulation continues to expand.
The advent of domestic legislation in the areas of anti-money laundering compliance coupled with bi-lateral and mutual assistance agreements will result in greater frequency in international criminal and civil litigation, forfeiture and the like.
Secrecy planning is (and should be) out. It was always a lousy basis for planning. There will be steady growth in planning for the unfortunate beneficiaries of such structures. If the descendent did not report the assets, then the beneficiaries may never receive them. Alternatively, the beneficiaries are faced with the dilemma of receiving assets that are the proceeds of evasion or the like. Such cases are complicated and even more so if there are several beneficiaries involved, each having their own ideas of how to deal with the situation. Inevitably, one beneficiary makes the decision for all. This often results in tension between heirs.
Information is being gathered, retained and made available, as needed by governments. Technology will be used in order to utilize the information gathered in order to enforce anti-money laundering and other crimes. Cooperation amongst states on these matters will be at a level never before seen in history. Cooperation amongst departments at the domestic state level will likewise be at a level never before seen in history.
The popularity of asset protection trusts in the 80s will continue to mount as the same are marketed heavily in the United States and other countries where litigation and / or general paranoia for what ever reason, exists. By definition, asset protection trusts will hold assets and the opportunity to manage the same will be maintained.
There will be greater frequency of legal actions on behalf of creditors of settlers of asset protection trusts. The ability to place pressure on such creditors, obtain information internationally and successfully challenge infirmed structures will become more and more sophisticated.
There will be more frequency of actions by client against Financial Intermediaries based upon overzealous suspicious transaction reporting, breach of privacy and the like. Thus, resulting case law will evolve.
Political volatility in various countries throughout the world will continue to evolve and wealthy persons within such countries will continue to require stable financial Centers to secure their wealth.
Corporations will continue to be used as entities for holding assets, dividing interests in assets, segregating activities within a group, etc. Offshore companies (from whatever jurisdiction is most competitive or familiar to the Financial Intermediary at the moment) shall continue to be purchased for such purposes.
The cost of doing business will rise. Customers will absorb much of this cost. However, fiduciaries, banks, etc. will continue to consolidate. They will cross sell services and those that can, will benefit from distribution.
Financial Intermediaries will continue to strategically shift costs of operation to jurisdictions that have relatively low work force costs. Financial Service Centers will promote the availability of cash grants for jobs created, personal tax concessions for management, work permits for key personnel, and other incentives to encourage such inbound investment creating jobs within the international financial service center involved.
In the past, banks, mutual funds and other Financial Intermediaries would take a strategy of avoiding the United States (and thus its regulatory and court system). Such days of purposefully attempting to avoid the United States are gone. Based upon domestic legislation, international cooperation, IRS Qualified Intermediary Agreements (and the like), Financial Intermediaries generally will not avoid the jurisdiction of the United States. The good news is they probably should never have done so as the United States represents one of, if not the, largest consuming market for financial services products and services.
The Common Law Trust will continue to be used for estate planning, holding of assets, dividing interests in assets, segregating activities within a group, etc. The Common Law Trust, from whatever jurisdiction is most competitive (or familiar to the Financial Intermediary) at the moment, shall continue to be utilized for such purposes.
Offshore Financial Centers will continue to evolve and develop 'products' geared to the international wealth planner and his/her client. Jurisdictions will compete on the basis of added value products and services offered to Financial Intermediaries and the clients that they serve.
Offshore Financial Centers may pull together in order to assert a common voice in matters regarding level playing fields and the like. Further, disclosure precedents established by the United States with the IRS Qualified Intermediary reporting rules will flourish amongst OECD and non-OECD nations.
Banks and other Financial Intermediaries will become more sophisticated at making uncontrollable factors controllable by influencing change via lobbyists, associations, government and other acceptable means.
There will continue to be an explosion in education programs catering to the international financial service industry. This sector of the education industry continues to develop as a result of legislative, regulatory, and private group / association training requirements. Such programs will include diplomas, certificates, university and professional qualifications in matters relating to the international financial service industry. Support such efforts.
Traditional unlimited liability of private bankers will meet the long arm of the United States under, say the IRS QI Agreement which makes the withholding agent liable under certain circumstances (as well as generally subject to the Internal Revenue Code of the United States).
The international financial service industry has always serviced corporate and individual clients alike. Unfortunately, the media has portrayed international financial service Centers inaccurately in this regard. Blue chip multi and trans-national corporations will acknowledge the continued importance of the use of international financial Centers.
Supra-national organizations that are charged (or charge themselves) with authority to regulate the international financial services industry will see the need to engage in dialogue with financial service industry representatives from the private sector, Financial Service Centers (large and small). Decisions made in a vacuum are never as effective as those, which are the result of fact, dialogue and debate.
Banks will see the competitive advantage of retaining fiduciary related companies, as the due diligence required to open an account can be the basis for providing additional fiduciary services. To this extent, the ability to share such information within a banking group will create a competitive cost advantage.
Amongst Financial Intermediary firms will continue diversifying in the short term. These actions are not generally taken from a position of strength. Rather, they are the result of the need to spread increased costs of operation, inability to sustain certain client files, and the like.
Financial Intermediaries will ensure that each professional in the client structure will take responsibility for their own due diligence. Clients will be asked to consent that all Financial Intermediaries within the structure to be established share due diligence amongst each other.
Firms that suffer from employee flight or transfer will be vulnerable to hidden or latent due diligence problems that would otherwise be dealt with in absence of such management problems.
Although much due diligence will continue to be conducted in house, the need for outside counsel, protected by attorney client privilege, will intensify in situations where the focus could shift from the underlying wrong doer to the Financial Intermediary in the middle - that suspicious transaction report can and will be used against you.
Prior to 911 the right to privacy was often raised as a ground to ensure that due diligence requirements respected the rights of the individual client involved. It is foreseen that the right to privacy will be re-visited. The world has yet to appreciate the full weight of the racial, sexual and ethnic 'profiling' that is being implemented in relation to the KYC process.
Traditional and emerging financial Centers will diversify and attract investment on the basis of non-financial service related regulatory areas. For instance, in the medical sciences where regulation of new medicines, would be within the sovereignty of the financial service center involved. Financial service Centers could pursue a policy of facilitating or reducing time to market process.
Among other factors, in order to remain or enter the international financial service industry, the Financial Intermediary of today (and tomorrow):
Will have to maintain well-defined robust compliance strategy (in-house, public image, government image, etc.)
Implement smart suspicious transaction reporting procedures
Conduct internal corporate risk prevention / asset protection planning
Understand and monitor relevant civil / criminal law and exposure
Consider the embarrassment factor should a client matter go wrong
Utilize the attorney client privilege when necessary
Efficiently use technology; monitor wealth patterns, product and service developments worldwide
Be pro-active on matters that are politically correct and in the best interests of the private sector and its clients; ensure that clients are well informed of external factors
Ensure that clients have legitimate expectations and objectives
Concentrate servicing existing clients and pursuing new clients
Seek formal training qualifications in matters relating to the international financial service industry; provide clients with trusted, loyal, competent added value support
Be able to compete on the basis of competence, performance, added value, access to markets, etc.
There will remain a thriving market for international financial services. It is incumbent upon the Financial Intermediaries and Financial Service Centers involved to maintain trust and competence whilst being able to evolve in order to service domestic, regional and global markets. Although the financial services industry is being re-defined, its relevance will remain and continue to grow. The net result of the new world order relating to the international financial services industry is that Financial Intermediaries and Financial Centers will be better prepared to service the needs of the world.
Samuel M. Lohman
Law Firm Lohman
Attorneys at Law
11 Rue Verdaine
PO Box 3377
1211 Geneva 3 Switzerland
Tel: + 41 22 317 8020
Fax: + 41 22 317 8030
E-mail: lohman@lohman-law.com
Web: www.lohman-law.com
