Offshore financial centers should focus on simplifying their business and having economic substance in their jurisdiction to thrive. “Having warm bodies in cool offices making real decisions,” is part of what Tim Ridley calls the long game that offshore centers must play to survive.
In his lecture at the annual STEP Caribbean conference in Cayman last month, the former Maples and Calder partner and Monetary Authority chairman said the Organisation for Economic Co-operation and Development’s initiative to tackle the erosion of tax bases and profit shifting and the latest offshore blacklist from the European Union both include actual economic activity criteria. One way to demonstrate substance in the wealth management industry is to have fully staffed family offices offshore.
This would bring the obvious direct and indirect economic benefits for offshore centers that do not suffer from overcrowding, have good office and residential property available at reasonable prices, good accessibility, weather and general infrastructure.
But to take advantage of this potential business, Ridley said, offshore financial centers must put in place the necessary and simple “package” that can be promoted internationally by the public and private sectors and encourage potential candidates to relocate.
Offshore centers must be particularly vigilant in ensuring that they have the right home-base infrastructure, such as stable political and economic environment, a welcoming immigration regime, the appropriate financial laws and structures, top quality courts and judges that are particularly important in the trust area, tax neutrality and quality professional services.
Ridley’s second point, simplifying the business, may seem counterintuitive at first, he said.
In a world where tax information is exchanged automatically between countries through the common reporting standard developed by the OECD, reporting may result “in conflicting or confusing reporting from different jurisdictions up the ownership chain.”
One school of thought therefore argues for concentration of entities and activities in a single reporting jurisdiction, whereas another favors no reporting under common reporting standard with critical family members moving to the jurisdiction where their offshore structure is domiciled.
With global wealth creation still on the upswing, wealth creators are becoming more global.
For example, Ridley said, an Asian family that owns or controls a global business and global investments, and which has widely dispersed children, is likely to need structures that deal with inheritance, estate, succession and tax planning issues where the investments and assets and family members are located.
Legitimate asset protection and wealth preservation strategies are very relevant to these clients just as they are to wealthy individuals from countries with strict forced inheritance laws.
The best jurisdiction for “some of the critical cogs in the structure” may be onshore, offshore or a combination of the two, he said.
Critically, Ridley said, offshore centers must find the right balance between legitimate privacy rights and the proper needs of law, regulatory and tax enforcement.
While the importance of maintaining confidentiality of the information exchanged under CRS and the beneficial ownership project is well known, there are several concerns.
Of the countries that have signed up to the common reporting standard, not all have a strong rule of law, and it is uncertain whether the information supplied will be kept confidential, he said. Offshore governments “should not simply accept OECD confirmation that the recipient country has the necessary laws in place to protect the confidentiality of the information; the test should be how effectively are those laws actually implemented.”
The second concern is cybersecurity. “Given the various leaks of confidential information over the past few years, it is evident that, once the information is in electronic form, the risk of unauthorized release and hacking is greatly increased,” the former CIMA chairman noted.
Continued engagement, preferably through a united front of offshore centers, is critical in this process. But the offshore narrative must be based on substance and not purely aspirational, he said. “Equally, OFCs must challenge “false facts” thrown around by onshore politicians, media and NGOs.”
Overall, Ridley concluded that the future of professional advisers and services seems well assured, but they must be able to change and adapt. “The mantra for all should now be ‘add substance and add value.’”