Axiom Legal Financing Fund stakeholders to oppose receivership application

Battle lines are being drawn up between the various stakeholders in the beleaguered Axiom Legal Financing Fund (the “Fund”).

Taylor Moor (“TM”), who acted as the main distributors of the Fund, are angry that the directors notified that shareholders that they would apply to the Cayman Grand Court for KPMG to be appointed as receivers of the Fund, without putting it to a shareholder vote.  Originally, this was one of the matters upon which the shareholders were expected to vote at the EGM earlier this month, but at short notice the resolution was withdrawn and the directors announced that they intended to go ahead with the receivership application unilaterally. TM intend to take legal action to oppose this move.

TM believe that the Fund should be put into liquidation rather than administration, with independent insolvency practitioners being appointed as liquidators. They believe that this would enable the liquidators to conduct a thorough investigation into the past affairs of the Fund and to take action against anyone who has been guilty of wrong-doing. The powers of Receivers are materially more limited in this regard. Furthermore, they are unhappy that the sole aim of a receivership is to ensure an orderly closure of the Fund – a decision which they believe is premature given that the investigation into the Fund’s loan portfolio is far from complete.

TM are also unhappy with the costs of investigating the situation to date ($1.3 million) and the lack of a complete and coherent report detailing the findings.

Whatever the merits of the case, this does seem to be a situation of poor stakeholder management by the Fund directors.  They must be aware of the sensitivities of the investors and need to be seen to take all steps that are necessary to investigate fully and take action if wrong-doing has occurred.  By proceeding with a receivership application in circumstances where they have not permitted the shareholders a vote on the issue, and in the knowledge that the main distributor of the Fund is clearly opposed, they are setting themselves on a difficult and antagonistic course.  Given the atmosphere of allegations and suspicion, it does appear unnecessarily inflammatory to proceed with an application that may limit a comprehensive investigation, without fully explaining the rationale for that to those who stand to lose their investment.

The Cayman Islands court is expected to hear the parties on 31^st January.

McKeeva Bush removed as Premier of Cayman Islands

The governor of the Cayman Islands, Duncan Taylor, has revoked McKeeva Bush’s appointment as Premier following yesterday’s vote of no confidence in his government, which was supported by members of his own UDP party.

Juliana O’Connor-Connolly has been appointed Premier in his place, to lead a minority UDP government.  The new government will need to build support from the opposition in order to be effective, with 3 of the former UDP members having crossed the floor along with Bush during yesterday’s no confidence debate, and so it will be a significant challenge for the new Premier to ensure the effectiveness of her leadership.

The move has come as something of a surprise to those who were expecting the governor to dissolve the Assembly instead, provoking an election - something which Bush himself had apparently suggested should happen.  Bush retains support amongst a not insignificant number of Islanders, and may have been hoping that they would vote to re-elect him and thereby vindicate his decision not to step down voluntarily.  It seems, however, that the governor has thwarted this ambition, for the time being at least, with O’Connor-Connolly’s appointment.  

Vote of no confidence in Cayman government passed

A motion of no confidence in the Cayman Islands government was passed yesterday in the Legislative Assembly, with 11 supporting the motion, and only 3 opposing. The no confidence motion was proposed after Bush refused to resign following his arrest and release on police bail on corruption charges, even after he had been called upon to do so by members of his own United Democratic Party

. 

The issue has split the UDP with a small number of his colleagues publicly backing the beleaguered Premier, but, as yesterday’s voting shows, he has lost the confidence of at least some of his colleagues and a split has opened up in the party, making its government untenable.

At the beginning of the debate, Bush and 3 UDP colleagues expressed their split from the remainder of the party by crossing the floor of the house.  Bush himself did not speak in the proceedings and abstained from voting.

He is expected to meet with the Governor to discuss what to do now – a difficult meeting no doubt, given the fact that Bush has very publicly called the Governor the “enemy” and accused him of being behind a “vindictive witch hunt”.

It would appear that an election is inevitable.

McKeeva Bush's position looking increasingly vulnerable

Confusion reigns over the position of Cayman Islands Premier McKeeva Bush’s political position following his arrest last week on corruption charges.

Following several days of almost complete silence from his party, the UDP, it was reported that over the weekend the party (with the exception of Ellio Solomon who publicly backed Bush’s decision to remain in office whilst the allegations are investigated) had decided to oust McKeeva Bush from office and replace him with Juliana O’Connor.  However, it seems that the position is not yet a fait accompli as although a letter was delivered to Bush asking him to step down, he has made it clear that he will not go voluntarily and no action has yet been taken to force this to happen. Politicians who are brave and make bold statements behind closed doors seem more reluctant to do so in public. The Governor’s office has said that it has not yet received any communication on the issue.

The opposition leader wrote to the speaker on Friday asking her to call a special meeting of the Legislative Assembly to debate the situation with a no confidence motion.  In view of the position taken by the UDP over the weekend, it is impossible to see that McKeeva Bush could count on the support of his erstwhile political colleagues to support him. As a result, it is difficult to see how Cayman can in practice avoid an early general election.

Bush, who retains a fair degree of popular support in the Island, did not release any statement on the situation yesterday although he is understood to feel angered and let down by the actions of some of his colleagues in failing to support him.  

The current uncertainty is not good for Cayman.  The government is effectively paralysed whilst this situation unfolds – an invidious position to be in whilst there is so much going on which needs to be very carefully handled – such as the Island’s relation with the UK and the new proposed “mini-FATCA” negotiations. 

Silverfleet in exclusive talks to acquire Ipes

It is understood that Silverfleet Capital, the European mid-market buy-out firm, is in exclusive discussions with RJD Partners to acquire Guernsey head-quartered fund administration business Ipes for a sum in the region of £50 million.

The deal is expected to close in the new year.

Axiom Legal Financing Fund managers asleep at the wheel

KPMG, the firm appointed initially to carry out a review of goings-on at embattled Axiom Legal Financing Fund, are reported to have said that whilst the fund does not appear to be a Ponzi scheme the managers of the suspended £117m fund carried out "little or no due diligence" on the cases in which they invested shareholders' money, and did not follow investment criteria.

Following a period of suspension, the funds directors have now appealed to have the fund wound up because it is unable to meet its financial obligations.  According to IFA online, the court documents disclose that KPMG's investigations "reveal grounds for suspecting there has been mismanagement" of the fund's assets, and that the net asset value of the fund has been overstated.  The size of the shortfall is not clear at this stage.

The loans made by the fund appear to have been made to law firms conducting genuine cases, but are unlikely to be repaid within the time frames required by the fund’s investment criteria.  Loans should only have been made to cases which could be completed within a year, whereas most, if not all, of the cases being funded will take much longer than this to resolve – in some cases up to 3 years – and in at least one case a loan appears to have been made to a firm which was close to insolvency at the time. 

There is also controversy regarding the payment of a “facilitation fee” of 50% of the loan value.

The findings disclosed in the court paper seem to show a situation where there has been a real breakdown in good governance at the fund.  However, it is not yet clear whether some of the stronger allegations of fraud made by OffshoreAlert are well founded – the court papers suggest that further investigation  is required before a conclusion can be drawn on that issue.

Does FATCA pose an unacceptable security risk to Americans abroad?

There has been a lot written about the problems of FATCA recently.  The financial institutions which will be subject to the new law have complained about the burden (in both time and costs) of reporting the information, and the fact that the anticipated IRS revenue receipts (estimated at $8 billion over 10 years – which is not a huge amount of money for a nation the size of the US) are probably outweighed by the costs of implementation. Americans expats (and in particular those who hold dual citizenship) are starting to appreciate the difficulties in opening bank or investment accounts overseas and are resentful of the fact that America is the only one of the leading industrialized nations which requires its citizens to pay US taxes even if they live outside the United States.

But one aspect about which there has been surprisingly little fuss is the security implications for Americans living abroad.  When FATCA becomes fully effective, foreign financial institutions will have to submit detailed annual reports on their American customers with bank accounts of more than $50,000, including cash balances, receipts, and withdrawals.

In order to meet all of the FATCA data gathering and reporting requirements FATCA will require the banks to keep data on a plethora of information including residential addresses, green card status and even the names of the Americans’ relatives.  The information is far, far more detailed than that which has been previously held by any financial institution with which I have ever had dealings.  Never before would the banks have had to gather and isolate such detailed records specifically relating to US citizens.

The US is a nation which is, post 9/11, usually somewhat obsessed with security.  And not without good reason.  It is a powerful country which has made a lot of enemies in recent years, and it usually takes the safety of its people very seriously.

Who might find it useful to have a database of all of the American residents in their territory?  Might perhaps a jihadist group in Afghanistan be interested to know where all of the US persons in Afghanistan live?  Might a South American kidnapping group be interested in a list which shows the cash balances held by US citizens in their territory, and the names of their relatives?  Might an anti-capitalist extremist be interested in being given the private and business details of a US resident business mogul near them?

Of course the data that the financial institutions gather should be kept confidential.  But bank IT systems are only as confidential as the employees who have to access them.  The IRS and HMRC (who are likely to follow the US in implementing FATCA-type legislation) know this already – indeed, they both make very good use of it by encouraging and even paying handsome cash rewards to whistle-blowers.  So if the IRS know they can get information from the banks by offering employees cash incentives to blow the whistle on wrong-doing, what on earth makes them think that Al-Qaeda can’t employ the same techniques with very different aims?   

By introducing legislation designed to stop tax cheats in their tracks, the US may be unwittingly putting at risk the lives of many of their expatriate citizens.  It seems that being seen publicly to take a tough stance on tax cheats takes a higher priority in these straightened times than the security of US citizens abroad.

The UK has a huge number of expats based in countries all over the world – including a large number of relatively unstable locations where corruption is rife.  The UK government would do well to consider this important aspect of security before deciding simply to follow a “me too” strategy and take the same route as the US.

Relations between Cayman's Premier and Governor go into melt-down

Relations between Cayman Islands Premier McKeeva Bush and its Governor Duncan Taylor have gone into melt-down following Bush’s arrest last week on suspicion of corruption and the illegal importation of explosives. 

Whilst speaking publicly in Jamaica on Thursday, Bush described his arrest as “a vindictive witch hunt” fuelled by the petty jealousies of the UK’s representative and political opponents, and pointed the finger of blame squarely at Mr Taylor, who he described as his “enemy”. Not surprisingly, the governor’s office has flatly denied the accusations.

No doubt it will be some time before the legal process sorts out the rights and wrongs of the allegations made against Bush, who strenuously denies any impropriety.  However, even if he is exonerated it is difficult to see how there can be any sensible working relationship between the two men in the future, which presents a real head-ache for an Island already having to adjust to a much tighter degree of control from the UK following the adoption at the insistence of the UK of the Framework for Fiscal Responsibility.

McKeeva Bush has insisted that he would remain as Premier, despite the inevitable calls for his resignation from opposition party members.  Meanwhile, his own party colleagues are reported to be meeting to discuss how best to handle the situation and it is notable that so far none of them have publicly come out in support of him since his arrest.

Whilst Bush undoubtedly retains a significant degree of support from the public in the Island, it is difficult to see how he can be effective as Premier with such serious allegations hanging over him, and with such an abysmal working relationship with the Governor.  

McKeeva Bush bailed without charge

Cayman Premier McKeeva Bush is reported to have been released on police bail without charge until February, while the Cayman Islands police continue their investigation into allegations including corruption and the illegal importation of explosives.  

Mr Bush spent several hours being questioned today and police have seized some property, including computer equipment. 

It is not yet clear where the situation leaves Mr Bush politically.  Not surprisingly, some opposition members have been calling for his resignation.  Several members of the United Democratic Party met at the Premier‘s house in West Bay after McKeeva Bush’s release from police custody following his arrest, but it is not yet clear what their response will be. 

Axiom Legal Financing Fund to be wound up

Axiom Legal Financing Fund, which has faced a slew of fraud allegations in recent weeks, is reported to have been put into receivership by its directors following a vote at an Extraordinary General Meeting held in London yesterday.

Until a few months ago, the award-winning Fund had been considered a great success but OffshoreAlert, a Miami based company, began to publish a series of articles raising red flags regarding the Fund’s activities, ultimately suggesting that it appeared to be a Ponzi scheme and questioning the bona fides of the CEO of Tangerine Investment Management, the Fund’s investment manager .

The £117m Cayman Islands based Fund was suspended in October following a flood of redemption requests in response to the allegations, and KPMG were appointed to review what had gone on.  It is understood that KPMG will be now be appointed as receivers, following yesterday’s shareholder vote.

It is not clear where this will leave the investors in the Fund, but some are already believed to be taking legal advice about their options.

GAAR commencement date pushed back, and will not apply to arrangements entered into before Royal Assent

It was today announced that the UK’s new general anti abuse rule (GAAR) will come into force from royal assent to the Finance Bill 2013 (expected to be July 2013) and not from 1st April 2013 as originally proposed.

The Government has also proposed that the GAAR will not apply to tax arrangements that have already been entered into before royal assent to the Finance Bill, which will be a significant relief to people who may have set up arrangements many years ago, for example to minimise inheritance tax.

Draft legislation for the Finance Bill 2013 was published today, including detailed guidance notes from HMRC and it appears that the government has taken on board some comments made during consultation in a number of amendments the draft legislation.

The main change relates to something which has been dubbed the “double reasonableness test”, about which there has been widespread concern.   The key aim of the GAAR is to prevent “tax advantages” arising from “tax arrangements” which are “abusive”.  In determining both whether there has been a "tax advantage" and if so whether it was "abusive" the concept of reasonableness was used.  The Government has amended the draft legislation by including clarification of the circumstances to be taken into account in determining whether arrangements are abusive. In addition the draft legislation has been amended to remove a reference to transactions or agreements which include non-commercial terms as one of the indicators of abusiveness.

The legislation also sets out how the GAAR Advisory panel will operate. It will give opinions on specific cases and approve HMRC guidance on the operation of the GAAR, although concerns have been expressed about the length of time that opinions are likely to take. However, it is expected that the opinions of the Advisory Panel will be published in anonymised form which should be a significant help to tax advisers in the early days of the GAAR’s operation. 

However, some trust practitioners remain concerned that the new legislation still provides insufficient clarity for individuals seeking legitimately to minimise their tax affairs.  

The GAAR will not impact the manner in which profits of multinational corporations are allocated between the UK and other countries – something which has been receiving much press attention in recent months.  Tackling that issue would require an international review of the complex transfer pricing rules.

  

Cayman Islands Premier arrested on suspicion of corruption

Premier McKeeva Bush, the leader of the Cayman Islands government, was arrested today in connection with allegations of theft and corruption in connection with the misuse of a government credit card and the importation of explosives without valid permits. 

He was detained at his home by members of the Financial Crime Unit of the Royal Cayman Islands Police Service and his office was searched.

Earlier this year, Cayman Islands Police Commissioner David Baines said Bush was the subject of three police investigations, two of them involving what he described at the time as financial irregularities.

Bush has publicly denied any wrongdoing and was tonight bailed without charges being preferred.  However, he is expected to return to police custody tomorrow for further questioning. 

Blackstone to acquire Intertrust

Private Equity giant Blackstone Group has agreed to acquire Intertrust, the international company and trust administration group, for a reported €675m from Waterland Private Equity Investments.

Fiduciary businesses have long been a favourite with PE houses, largely because of their stable client base and annuity revenue streams but also because the fragmentation of the industry allows for a buy-and-build strategy to be effectively employed as fiduciary businesses undergo a period of rapid consolidation.  Past transactions have included Doughty Hanson’s acquisitions of TMF and Equity Trust, IK Investment Partners acquisition of the Offshore Incorporations Group and Vistra, CBPE’s acquisition of Jersey Trust Company, and RJD’s acquisition of Ipes.  However, the purchase of Intertrust has been agreed at a time when there are unprecedented levels of pressure being put on the activities of multi-national firms such as Google, Amazon and Starbucks, which structure their activities through locations such as Luxembourg and Netherlands.  As such, the acquisition is effectively a bet on the resilience of those locations to weather the current storms.

Jersey and Guernsey fighting for a level playing field on UK's "mini FATCA"

The Chief Ministers of Jersey and Guernsey have issued a joint statement on developments relating to the UK Government’s attempts to introduce a “mini-FATCA” whereby the Crown Dependencies and Overseas Territories would be required to report assets for UK individuals to the UK authorities, in much the same way as the US government requires for its citizens under FATCA.

The fact that the UK is seeking to do this is no great surprise – there has been a whole series of initiatives over the years which are moving inexorably towards automatic data exchange, and most in the industry regard this as inevitable at some point in time.  Although there are vocal arguments that the costs of such arrangements are likely to be disproportionate to amounts collected in additional tax revenue as a consequence, there are equally those in the business who would welcome an opportunity to prove that the onshore jurisdictions are wrong to label the offshore centres as havens for tax evasion, and who resent the fact that the UK media consistently portrays them as such.  However, in my view the real risk for the Islands is that they are required to begin reporting well before other countries are – as it creates an uneven playing field in terms of cost and administrative burden, which will likely result in the flight of business to locations which can offer their services more simply and cheaply.  In short, the clients will disappear to less reputable locations, which does not serve the interests of HMRC, the Overseas Territories, the Crown Dependencies or, indeed, the clients themselves. 

It seems from the statement released by the Jersey and Guernsey authorities that they have decided not to fight the basic principle of reporting the information:

“As communicated last week, officials from Guernsey, Jersey and the Isle of Man continue to engage with US officials, aimed at concluding Intergovernmental Agreements under the US FATCA regulations.

We also share a common commitment with the UK to combat tax evasion and to participate in international efforts to combat financial and fiscal crime. We have long made it clear that neither Island has any wish to accommodate those engaged in tax evasion.”

However, Senator Gorst of Jersey added:

“The UK Government is seeking to promote more widely as a new international standard the principles of the US Foreign Account Tax Compliance Act (FATCA). Jersey considers that it is important that in doing so the UK Government mirrors the approach of the US FATCA in being global in its application, ensuring a non-discriminatory approach for all jurisdictions.  In our ongoing discussions with the UK Government we will be pressing them to make clear the steps they are taking to promote the adoption of automatic exchange of information worldwide to ensure that a level playing field is achieved for all finance centres competing in the global market place.”

It seems therefore that Senator Gorst is well aware of the risks of being at the “bleeding edge” of such initiatives, and will fight to ensure that the Islands are not singled out as being the only territories to which the rules apply.  I commend him in taking this approach, which is in the circumstances probably the only feasible option, as to resist the entire principle would leave the door open for people to conclude that the offshore centres are there to assist in tax evasion.  However, in doing this, the Islands can and should try to regain some of the initiative against those who seek to blacken the reputation of the jurisdictions unfairly.

Top Chinese Banker Criticizes Extra-Territorial Effect of FATCA and Dodd Frank

Liu Xiangmin, deputy director general of legal affairs at People's Bank of China, has roundly criticised the FATCA regulations introduced by the U.S., on the basis that they impose unfair costs on foreign banks and cause difficulties with conflicts with local laws.  According to a report first published by Reuters, he said that the U.S. should find a better way to tackle tax evasion than FATCA.

The comments were made during the Thomson Reuters Pan-Asia Regulatory Summit, where Liu was giving a speech on the foreign impact of financial regulation. He also noted the challenges posed to foreign banks by some of the regulation contained in the Dodd-Frank Act, such as the Volcker Rule, which bans banks from engaging in proprietary trading and will apply to many foreign banks if they have a branch in the U.S.

"The Volcker Rule seems to be intentionally designed to apply to a broad range of foreign institutions in order to level the playing field for U.S. entities subject to the rule."

Liu said governments should find a more effective way to regulate international finance.

He added "While it is understandable to address the cross-border externalities or spill-over effects with national legislation, a more effective and acceptable regime would call for better co-ordination between home and host-country regulators ..... An extra-territorial effect should be carefully evaluated and limited, so as to minimise the undue burden on foreign financial institutions" .

Liu's comments echo the sentiments expressed by many finance industry participants in other jurisdictions, who are angry at the costs being pressed upon them by the U.S.

Investors in Axiom Legal Financing Fund urged to boycott EGM and sack directors

Taylor Moor, the main distributor of embattled Axiom Legal Financing fund is reported by IFA online to have urged investors to sack the fund's directors and boycott the EGM to be held on 11^th December.

Axiom, a Cayman fund which provides financing for no-win, no-fee legal cases in the UK, was suspended in October following serious allegations of fraud made by OffshoreAlert.  The allegations have been strenuously denied by those involved, and KPMG has been engaged to investigate the situation.

However, having apparently grown impatient with the lack of sufficient explanation from the directors on how this situation has arisen, the fund’s main distributor, Taylor Moor, has written to investors saying "it is time for investors to take control of the situation" and to replace the current directors with new, impartial individuals.

According to IFA Online, Taylor Moor has urged investors to boycott the emergency EGM to discuss the future of the fund on 11^th December, because KPMG have not been given enough time to investigate.  Concerns are being expressed that because the investors have so little information available, they will be in no position to vote on the important matters to be discussed at the EGM.

Bank deposits continue to decline in Channel Islands

Guernsey has seen the value of deposits held with banks in the Island dip to a 6 year low.

Deposits declined 6% in Q3 to £96.9bn, more than 15% down on a year ago.

The drop was said to be due to the ongoing economic crisis.

Jersey has not yet released its Q3 statistics, but it too has experienced a steady decline in bank deposits since the 2007 peak of £212 million.  As at the end of Q2 2012, Jersey bank deposits stood at £150 million.

Guernsey fund manager acquisition - MitonOptimal to buy Argyll

MitonOptimal, the Guernsey head-quartered multi asset management business founded in 2002, is to acquire a majority stake in Argyll Investment Services in Guernsey for an undisclosed consideration.

Following the acquisition Argyll will be re-named MitonOptimal Portfolio Management (CI) Limited.  The group will have operations in Guernsey, South Africa and Singapore, and $600 million of funds under management.

Argyll was established in 2000 as an independent discretionary portfolio manager. It offers investment portfolio management services, a niche discretionary fund management service, bespoke pension services and the Fortress Pension Plan.  Like MitonOptimal, Argyll is an owner-managed company.

The deal is subject to final approval by the Guernsey Financial Services Commission.

Blackstone reported to be in exclusive talks to acquire Intertrust

According to Reuters, Blackstone have been granted exclusivity in talks to buy the Intertrust Group, which is being sold by private equity house Waterland.  They report that banks are now being lined up to finance around Euros 400-500 million to back the deal.

Intertrust is a trust and company administration specialist with over 1,000 employees in 20 locations.

Huge threat to Crown Dependencies and Overseas Territories from UK

According to International Tax Review, a leaked government document shows that the UK is planning to impose its own version FATCA on its Crown Dependencies and Overseas Territories, such as the Channel Islands, the Cayman Islands and the Isle of Man.  This is something which could be a huge blow for those territories – although not for the reasons that many might expect.

The offshore centres are already facing a huge workload in preparing for compliance with FATCA which requires foreign financial intermediaries to report all activity with “US persons”.

During the summer, Britain’s International Development Committee recommended that the UK should introduce equivalent legislation to FATCA, requiring the automatic reporting of information relating to UK citizens or corporations. The proposals were controversial for many of the same reasons as the US equivalent has been controversial – including claims that the costs of compliance by the FFIs will outstrip any taxation benefits gained through the reporting, and that nationals of the countries who have FATCA-type legislation will face higher costs and less choice of service provider.  In the case of the UK, the cost/benefit analysis is likely to be even more skewed, because HMRC does not currently track the affairs of all UK citizens – only those who are resident in the UK.  The imposition of a citizenship based reporting would therefore require a huge change in HMRC infrastructure and reporting systems.  For those reasons, there were many who doubted that FATCA equivalent legislation would really get off the ground in the UK, at least unless and until its EU colleagues all agreed to do the same. 

However, in a development which will be seen as very worrying for the British offshore centres, it seems that the government may be determined to go down a route which, so far as the British offshore centres are concerned, is the worst of all worlds.  It is being claimed that the government has already drafted FATCA equivalent legislation which will be imposed on its Crown Dependencies and Overseas Territories. The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies.  However, by making the legislation apply only to the Crown Dependencies and the Overseas Territories, the government is putting them at a huge disadvantage to other offshore centres.  The costs of compliance will rise significantly, and therefore the clients are likely to move their financial arrangements to other centres which will not be affected by the legislation, such as Singapore or Switzerland. 

The Tax Justice Network is cock-a-hoop at the situation, saying that it shows that the UK government for the first time is really getting to grips with tax evasion and that it is the start of the end of tax haven secrecy.  I have never believed for one second the statistics put out by TJN on the scale of tax abuse in the tax havens and therefore do not think that FATCA-type legislation would have the hugely positive impact that they expect – as someone who worked in the offshore financial centres for almost 25 years, I think the days where people put their assets offshore and simply did not report them to the UK revenue are for the most part long gone.  However, even if the TJN was right and there are huge numbers of tax evaders in the Crown Dependencies and the Overseas Territories, this action by the UK government, if it does come to fruition, will not stop those who are determined to evade taxes – it will simply move them elsewhere.

And there is a real and much more damaging danger for the UK in that.  Numerous studies over the years (including the UK government sponsored Edwards Report) have shown that the funds which are routed through the Channel Islands in particular end up being invested in the City of London, and HMRC gets the benefit of that.  If those funds are moved to Asia or Switzerland, then chances are the assets will not be invested and managed through London, but through New York or Hong Kong.  The UK would therefore lose out rather than gain.

If the UK wants to introduce FATCA-type legislation then in my mind it can only make sense if it is done in a way similar to the US – ie impose it on a worldwide basis, not singling out a small handful of jurisdictions.  Doing the latter will mean it is doomed to be ineffective.  Personally, I am very far from convinced that it makes sense for the UK to have FATCA equivalent legislation at all (at least, until we have had a few years to understand the impact that is has on the US economy), but imposing it in relation to the Crown Dependencies and Overseas Territories alone would, in my view, be a massive own goal for the UK.

Unless there is a change of tack, the UK government is expected to announce the new rules this autumn, with the legislation coming into effect on 1 January 2014.

Axiom Legal Financing Fund - Time for Regulatory Investigation

The situation regarding the Axiom Legal Financing Fund has become increasingly farcical.

As previously reported in this blog, US-based OffshoreAlert has made a series of very serious allegations, claiming publicly that the Fund appears to be a Ponzi scheme and warning investors that they have been victims of a massive fraud.  The Fund directors have denied any wrong-doing and brought KPMG in to investigate, although the publication of their findings has been delayed. In the meantime, redemptions and subscriptions from the Fund have been suspended, Tim Schools, the founder of the Fund and former boss of its investment manager, Tangerine, has been replaced as its head as a consequence of the allegations, and Tangerine itself has been sacked as investment manager of the Fund.  And to ramp up the pressure a notch further, Tim Schools has now commenced legal proceedings in the UK to sue OffshoreAlert for defamation.  The whole sorry scenario is being played out in public, through blog posts, social media and published correspondence between the protagonists.  

Spare a thought in all this for the investors who have invested in good faith in the award-winning Fund and who have no idea who to believe as the pressure increases.  I have been contacted by one such individual, who has asked whether there is any likelihood of him getting his money back.  The truth is that I have no idea.  The specifics of the allegations being made by OffshoreAlert are fairly detailed and on the face of them certainly merit a thorough and independent review, but they are being robustly denied by all involved and it would be dangerous simply to accept them at face value.  If they are true, then the investors and those involved in advising the Fund could potentially lose very significant sums of money.  If they are false, then doubtless huge damage will have been done to a Fund which may struggle ever fully to recover.  

Whilst the whole sorry saga is being played out, there has been a striking lack of comment from the Cayman Islands authorities.  Surely now it is time for them to launch their own investigation?  Given the size of the Fund (over £100 million), the very public and serious nature of the allegations, I do not think it is sufficient comfort for the investors to have the directors organising an investigation (albeit by a third party) into what, if anything, has happened.  Whilst the directors were absolutely right to launch their own investigation, they cannot be seen as entirely impartial as there may be implications for them if the allegations are substantiated. Investors may, therefore, not be entirely satisfied with the outcome of a review where the terms of reference are set by the Fund's directors, and they are the recipients of the report.  

In my view, it is time for CIMA or the Cayman Islands police to be seen to take control of an investigation into whether there is any truth in the allegations, as a matter of urgency. This is not because I believe that a fraud has been committed - as I have said earlier, I simply do not have sufficient facts available to know - but because the current very unsatisfactory situation should not be permitted to persist.  The reputation of the Fund, its advisers, and the Cayman Islands regulator are all at stake.  

IFG acquire Moore Group

IFG Trust and Corporate Group (“IFG”), the trust company and fund administrator, has agreed to acquire Jersey-based fund management business Moore Group for an undisclosed sum, subject to regulatory approval. 

The acquisition is the first for IFG since AnaCap Financial Partners backed its £70 million MBO from the wider IFG Group in the summer.

IFG was established in 1975 and today provides fiduciary services, fund administration and services to the leisure industry through offices in the Isle of Man, Jersey, Cyprus, Switzerland and the Republic of Ireland.

Moore is a specialist fund administration business founded in Jersey by Ian Moore in 1996 and which now administers assets in excess of $17bn.  It has had a long-standing focus on Asian clients, with offices in Tokyo and Bermuda, and IFG believes that the acquisition will strengthen the combined group’s position in Asia.

Ian Moore will continue to work with the group and will become its executive chairman.

IFG is currently undergoing a rebrand to establish itself as corporate service provider independent of the IFG name, and is due to unveil its new corporate identity shortly.  For the time being at least, the Moore brand will exist as a subset of the new brand, retaining its own name and trademark.

Brooks Macdonald to acquire Spearpoint for £34 million

Channel Islands investment management boutique Spearpoint is to be acquired by Brooks Macdonald Group plc, an AIM listed wealth management group, for approximately £34m.

Spearpoint was established in 2007 by Jon Davey and has grown to 54 staff across Jersey and Guernsey. It offers fund management, retirement services, and execution only stock-broking.

Spearpoint has assets under management of approximately £1.1bn and the new combined group will have funds under management of approximately £4.5bn.

As Brooks Macdonald had no Channel Islands presence prior to the acquisition, and as the plan is to expand the business, it is believed that all of the existing staff will keep their jobs.  It is also understood that the key senior executives will all remain with the business.

Santander reported to be pondering sale of its Jersey private banking business

Santander, the huge Spanish banking group, is reported to be looking into the possibility of selling its Jersey-based private banking operation, believed to comprise tens of thousands of customers and around £4 billion in deposits.

The Jersey business was rebranded in 2010 as Santander Private Banking from Abbey International (which it acquired in 2004).

The fact that Santander are looking at the options is by no means evidence that it has already taken a decision to sell – it conducted a similar review of its Alliance & Leicester International business on the Isle of Man earlier this year, and has retained ownership of that business.

The sale of a private bank in Jersey is not necessarily straight-forward because of the policy of the Island’s regulator only to grant banking licences to banks amongst the world’s largest 500.  This limits the pool of potential buyers quite considerably, although there are still numerous banks operating in the private client field in the Island who could view this as an opportunity to add some significant critical mass.  Royal Bank of Canada, Kleinwort Benson, UBS and Investec are amongst a number all of whom have significant existing operations in the Island.

Santander is understood to have appointed London based corporate finance advisory firm Gleacher Shacklock, to assist in the process.

FATCA Model 2 Agreement published

The United States Treasury has published a second model agreement, developed in conjunction with Japan and Switzerland, designed to facilitate the implementation of FATCA.

In February this year, the US Treasury announced the first model agreement – negotiated with France, Germany, Italy, Spain and the UK - to facilitate a government-to-government mechanism for implementing FATCA.   Under the first model agreement, FFIs would report the necessary information regarding US persons to their respective governments rather than directly to the IRS.   The agreement also envisages tax information sharing between the governments on a reciprocal basis, based on existing bilateral tax treaties.  This model agreement is expected to be available only to jurisdictions who have signed a Tax Information Exchange Agreement with the US, or who have a double tax treaty in place.

The second form of model agreement takes a different approach.  It does not obviate the need for direct reporting by FFIs to the IRS, but it does deal with some perceived legal impediments which would otherwise prevent FFIs from passing the information across. In essence, governments using the second model agreement would issue a directive to their resident FFIs directing them to register with the IRS by January 1, 2014, to comply with all of the requirements of an FFI agreement, and instructing them to request the consent of pre-existing account holders to the reporting. 

There are likely to be some situations where existing US account holders refuse to consent to the reporting of their information.  The model agreement deals with this by providing that in those situations the FFI will provide aggregated information on all such accounts to its own government’s tax authority, which will then be authorized to transmit the data to the IRS.  

New accounts for US persons would only be permitted to be opened if the FFI first obtains consent from each account holder for the FFI to comply with the requirements of an FFI agreement. 

The model two agreement is a pragmatic solution to situations where a country’s laws would prevent the passing of data to a foreign tax authority without the explicit consent of the underlying client, and as such has been welcomed by American Citizens Abroad (ACA), a Geneva-based organisation which represents American expatriates.  However, as it does not obviate the need for the FFI to have a direct reporting relationship with the IRS, it is likely to be viewed in many quarters as less attractive than the first model agreement.

Some offshore jurisdictions, including the Channel Islands, have already announced their intention to put IGAs in place following model one.  The Cayman Islands, by contrast, decided not to commit themselves to any particular course of events until the second model agreement had been published.  It can therefore be expected to make an announcement as to its preferred course of action shortly.

The IRS is currently understood to be in dialogue with around 50 countries in relation to arrangements for FATCA compliance.

FATCA Survey Results - opinions deeply divided on impact on trust company profits

It seems that trust companies are starting to get to grips with what FATCA will mean for them.  In October I ran a survey of trust companies to test their preparedness for the new regulations.  The results have now been collated and seem to show that plans are further along than some might have feared, but that there is a real lack of clarity regarding whether FATCA will have a positive or negative financial impact on the trust company industry.

7% of respondents had little or no idea how FATCA would affect their business and a further 7 % had only a basic understanding of what FATCA was about and did not yet have a clear idea of how it would impact the business.  However, a creditable 86% had at least a fairly detailed understanding of the regulations and their impact, with 29% believing they had a thorough understanding and were already well into their implementation preparation.  One respondent commented that they had a dedicated programme office to handle the regulations, had already analysed the entire client base and were well into the process of gathering any missing data items - a commendably thorough approach.

There seems to be some doubt as to whether time costs will be billable for FATCA work - 39% of respondents thought that revenue would increase because of FATCA, but the majority (62%) felt that income would be unaffected.  None of the respondents felt that revenues would actually decline, which seems to indicate that practitioners do not feel that many clients will close their structures as a result of the new regulations.  

The picture with regard to profits shows more of a divergence of opinion - 39% felt that profits would decline as a consequence of FATCA (citing amongst other things the cost of implementing the necessary controls), 39% felt that they would increase as the additional time costs would be recovered, and 23% felt that they would be unaffected.  It is clear that there is a great deal of uncertainty regarding what proportion of the costs of FATCA compliance can be passed on to clients, but it is a matter of crucial importance for fiduciary businesses.  My own view is that in the first year or two profits are likely to decline, because I do not feel that all of the costs of adjusting IT reporting procedures and systems can or will be passed on to client, and nor do I expect non-US clients to pay for the privilege of being able to prove that they are not caught by the regulations, without a great deal of resistance.  However, once new systems and procedures are in place for the efficient gathering of data and reporting to the relevant authorities in the future, then I would expect that these ongoing costs could reasonably be expected to be passed on to the US clients maintained by each trust company.  

FATCA will require trust companies to gather data on the 6 indiciae of a US person.  43% of respondent trust companies believe that they already have the data they need to test the 6 indiciae for each client, but that the data was not stored electronically, implying that there will be a big manual task involved in implementation.  Just under one third of respondents believed that they had all the required information and it is stored already on an IT system.  Perhaps surprisingly, only 29% of respondents believed that they were missing necessary information.  In my experience, I have never come across a trust company which recorded the data required to consider all 6 elements of the US person test prior to the introduction of the FATCA regulations, which seems to suggest that either trust companies still do not understand the depth of information that they need, or that there has been a very large amount of data gathering in the last year.

There was complete unanimity that the FATCA rules would not prevent trust companies from representing US clients.  100% of respondents said that they do currently have US persons amongst their client base, and none proposed to change this view.  This is in contrast to some of the larger banks and investment managers (particularly those based in Asia), who have announced an intention to cease to service US persons as clients.

And in a final bit of good news for the consultants who work in the field, 57% of trust companies felt that they would need to pay for external help in implementing FATCA, with the remainder believing that they could manage with internal resources and knowledge sharing within their industry bodies.

The survey does seem to suggest that FATCA is now getting the attention of very senior individuals within the trust company sector.  In 55% of respondent companies the CEO/Managing Director was taking direct responsibility for the new regulatory project, with the Head of Compliance taking control in 36% of cases, and only 9% of trust companies having delegated the task to business unit directors.

After a slow start it seems that trust companies are now making real efforts to get to grips with the impacts of FATCA, and to prepare themselves for implementation.  The task is not made easier by the fact that certain key grey areas remain, and that the US is currently negotiating IGAs with up to 50 different territories.  Until this process is complete, it is difficult for companies to be sure that they have done everything that needs to be done.

Many thanks to all of those trust companies who participated in the survey.

Guernsey proposes new 10% tax rate for fiduciary businesses

There has been speculation for some time about whether Guernsey would extend its 10% tax rate to fiduciary businesses, to bring it in line with current practice in neighbouring Jersey and to help fill the fiscal hole brought about by the abolition of the deemed distribution provisions under pressure from the EU earlier this year.

Today has seen confirmation that this will be debated by the States on 12 December 2012 as part of the budget proposals.

Up until now, under the Island’s zero ten tax regime, fiduciary businesses have been zero rated for tax.  The aim of the new budget proposals is to raise an additional £12 million from the financial sector.

As yet details are sketchy, and it is not entirely clear exactly who will be caught into the new 10% tax band (for example fund administrators), but it can be assumed that traditional trust companies certainly will be.

The new tax will be applied to fiduciary businesses, but not to any underling client entities administered by them, unless they also meet the criteria for fiduciary business themselves.

Axiom Legal Financing Fund sacks Tangerine Investment Management

The directors of Cayman based Axiom Legal Financing Fund, the embattled fund at the centre of a storm of serious fraud allegations, are reported to have sacked the current investment managers, Tangerine Investment Management.

Last month all redemptions in the fund were suspended following a flood of redemption requests in the wake of allegations made by OffshoreAlert about Tangerine’s boss, Tim Schools, and management of the fund.   The seriousness of the allegations made by OffshoreAlert has escalated over the past couple of months, and now includes claims that the fund appears to be a Ponzi scheme and that investors have been defrauded. 

Mr Schools, Tangerine and the Fund have all strenuously denied any wrongdoing, and Mr Schools has indicated that he will be taking defamation proceedings against OffshoreAlert.  Despite this, Mr Schools stepped down as head of Tangerine following publication of the allegations.  He is separately under investigation by the Solicitors Regulation Authority in England in relation to alleged misconduct at ATM Solicitors, an English solicitors firm he sold last year.  His case has been referred to the Solicitors Disciplinary Tribunal, where it will be heard in due course. The allegations are as yet unproven and again Mr Schools strongly denies any wrongdoing.

KPMG Cayman was appointed by Axiom to carry out an independent review of operations and it was said that Tangerine was “actively cooperating with that review”.  The output of that review was expected by today at the latest, but whilst it is understood that the directors have seen a draft of the report, the final version will be delayed as KPMG have now been asked to provide interim advisory services in the light of Tangerine’s removal and need to focus on this as their priority.  KPMG’s role will be to preserve the fund’s assets, to interact with a panel of law firms to determine their short-term funding requirements for the progression of cases and to gather proposals for the ongoing management of the fund.  The delay of the publication of the report will doubtless be a disappointment to the many investors in the £100 million fund, who are desperate to know whether there investment is safe and whether there is any truth in the allegations.

In a letter dated 14 November, the directors said that an Extraordinary General Meeting will be held in December at which the directors, will present proposals regarding the continued management of the fund.

There is no explanation in the letter as to why Tangerine’s appointment has been terminated.  It is therefore not clear whether the action is because KPMG have found prima facie evidence of wrongdoing, or simply that the step was necessary to restore credibility in the fund’s management in light of the allegations.

Global offshore incorporations up 9%

Despite all the doom and gloom in the press recently regarding tax havens, according to a report released by offshore law specialists Appleby the number of new offshore companies being registered globally in the first six months of 2012 was up 9% from the previous six months, to 41,556, indicating that the offshore markets are recovering from the financial crisis.  

The British Virgin Islands, which have always been very popular with clients from Asia in particular, dominate offshore new company registration activity by volume, enjoying a huge six-fold lead over its nearest rival, the Cayman Islands. However, Cayman was the fastest growth jurisdiction for new registrations, with a 13% increase in the first half of 2012 over the previous six months. 

Despite the global growth, overall company registrations in the offshore sector have still not yet returned to their pre-crisis growth - hardly a surprise given the very slow haul out of recession being experienced by many of the major economies which provide them with their work. Furthermore, the total number of active offshore companies has actually decreased 4% to 801,168, implying that significant numbers of companies are being wound up.  Nevertheless, the level of activity in new incorporations will be reassuring to those working in the sector.