Small crumbs of comfort on FATCA compliance

After facing a barrage of criticism over the enormous administrative burden associated with compliance with the USA's Foreign Account Tax Compliance Act (FATCA), it appears the Obama administration may be ready to water down some of the more draconian provisions of the Act.

FATCA, which will require foreign financial institutions (FFIs) to identify all their US customers, is expected to pose a very significant burden on foreign banks, brokers, trust companies and other financial institutions.

The legislation was enacted by Congress in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, as a result of the belief of the Obama administration that a very significant amount of assets is held undeclared by Americans in overseas jurisidictions.

Under the present proposals, an FFI must enter an agreement with the IRS to provide information on each account and US account holder by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.

Due diligence requirements for identifying new and pre-existing US accounts (including certain high-risk accounts, such as private banking accounts with a balance that is equal to or greater than USD500,000) will begin in 2013, and reporting requirements will begin in 2014.

Emily McMahon, acting assistant Treasury secretary for tax policy, told a New York State Bar Association meeting that the concessions are likely include an extended phase-in period and a work-around of domestic privacy laws (through entering into bilateral cooperation agreements with key territories), after having been deluged with objections that the new regime will be hugely costly, dangerously extraterritorial and may breach privacy laws in the jurisdictions in which the FFIs are based.  McMahon also stated that the proposed regulations will try to align FATCA compliance with procedures already in place to comply with anti-money laundering and other customer rules.

Nevertheless, despite these small concessions, considerable opposition is expected to continue as many financial institutions are likely to have to reprogramme existing computer systems and introduce new systems to help the IRS track Americans.  In the trust company sector, where many companies remain seriously ill-prepared for the new rules, some trust companies appear to be taking a decision not to offer services to US persons, in order to avoid the burdensome new regulations.  However, there will remain the issue for these businesses of how to deal with US persons who may already have an interest in existing structures, as it is not always a simple matter for a fiduciary to resign their role.

Hawksford snap up Trustcorp Jersey

Jersey based trust company, Hawksford, has acquired trust and corporate services provider, Trustcorp Jersey Limited.

The deal is said to be aimed particularly at helping Hawksford to grow its Middle Eastern business.

Hawksford was established in 2008 following a management buyout of Rathbone Trust Company Jersey Limited, backed by UK private equity company, Dunedin.  Acquiring Trustcorp Jersey Limited will boost the company’s capacity and increase headcount by 30.  This is something which enables Hawksford in its press release now to claim the coveted spot of "largest independent offshore trust company business", with over 150 staff, although there are many others who might dispute that claim.  Nevertheless, the deal does put Hawksford firmly amongst the ranks of the trust companies who are making the most of the current period of consolidation to reinforce their market position.

Since its management buyout in October 2008, Hawksford has focused on overseas expansion. In June 2011, it opened a Dubai office and in August 2011, it acquired Swiss firm L-S&S GmbH, a boutique private wealth law firm, which was founded in Zurich by English lawyers Geoffrey Shindler, Roger Lane-Smith and Tim Urquhart.

New man at the top for Minerva Trust

Minerva Trust and Corporate Services Limited (“Minerva”), one of Jersey’s larger independent trust and wealth management companies, with over 130 employees, has appointed Brian Lee to the new role of Group Managing Director.

Brian is a Chartered Accountant who qualified with Deloitte. Previous roles include Managing Director of Allied Irish Bank’s wealth management business, Chief Executive of the fiduciary business of Ogier in the UK and most recently the Managing Director of IFG, the Isle of Man head-quartered trust company business. Brian has worked in the international and offshore market place for over twenty years including living in Jersey, the Isle of Man and the USA.

The appointment is designed to assist Minerva through a phase of further expansion of its overseas operations.  Minerva, which has been operating for over 30 years, provides trust, corporate and fund administration services in Jersey, London, Geneva, Mauritius and Dubai, and administers over $15billion of assets for clients.

A new approach to due diligence on trust company acquisitions

Nowadays, detailed due diligence on client files and on risk and regulatory compliance is a key requirement of most potential buyers of trust company businesses, and of their bank funders.  This is because there is a heightened awareness of the potential dangers and difficulties associated with buying trust companies where work standards have been poor, or where compliance has not had the prominence it should have had over the years.  There have been some notable and high profile cases where buyers have suffered the consequences of not having paid enough attention to these aspects, and as a consequence bought trust companies only to find themselves embroiled in client litigation, problems with the regulators, and huge back-logs of remediation work to undertake.  The quality of work done on a file and the approach taken to risk and compliance has a direct and very tangible link to the value of these businesses, and the brand damage associated with regulatory action and client litigation can be enormous.

The usual way of doing due diligence on the client files is for each potential buyer of a company to undertake its own file reviews, often at a second round stage where there may be 3 or 4 potential bidders remaining in the process.  The difficulty with this approach from the Vendor’s perspective is that each potential buyer will approach the task in a slightly different way, may wish to review a different selection of files (or to duplicate work already done by another interested party), and will want to spend time not only with the physical files but also with staff members who are involved in running them.  In my experience (having seen both sides of the fence – from the perspective both of being the vendor and the buyer), the file reviews are usually very time consuming for the business and can often be the most disruptive element of an investment or sale process (not least because of the need to remove the physical files from the fee earners for a brief period).  The reviews are also always an area of particular sensitivity regarding client confidentiality, and the findings may be contentious as they inevitably involve a degree of subjective judgment.  Given that the file reviews are usually done only in the second or third rounds of bidding, it can be disastrous to the Vendor to be presented with negative findings late in the day, as these can result in price chips or the deal itself being aborted.

In light of all these difficulties, it seems to me that a better approach would be to have the file reviews done as part of the Vendor due diligence.  That way, there is only one team of people looking at the files, who is engaged by the Vendor.  The work can be done at a slightly more measured timescale, to try to minimise disruption to the business.  Furthermore, by doing the work up front, then it lessens the opportunity for investors to chip away at their commercial terms as the process evolves, as there should be no surprises.   If there are weaknesses identified, then these can be remediated and addressed in advance.  Provided the organisation carrying out the diligence is demonstrably capable and experienced in the field, then many private equity houses and their bankers appear to be comfortable with this approach.

Of course, the obvious downside of file reviews being done as part of Vendor due diligence is that the Vendor is then paying for the work rather than potential investors.  However, the costs involved are likely to be offset by the saving in fee-earning time by not having to repeat the process with a multiplicity of possible buyers/investors, and the invoices can in some cases be passed to the buyers as part of a successful acquisition.

Financial and commercial vendor due diligence has been an accepted part of the sales and investment process for a long time.  In my view, there is much to be said for dealing with regulatory and compliance due diligence in the same way.

CPA to be sold to Cinven

CPA Global, the Jersey based firm which began life in 1969 as an intellectual property management service provider, but which developed itself into the world's leading global provider in its field, with 1,500 employees, is to be sold. Current owner, Intermediate Capital Group, has agreed a sale to Cinven, a leading private equity firm, in a deal that is reported to value CPA at £950 million.

ICG invested in Jersey-based CPA only 2 years ago, taking a significant minority stake in a deal which apparently valued the business at £440 million pounds at the time.  To have more than doubled the value of the company during a period of unprecedented market turmoil is a phenomenal performance by any standards.  The growth has been driven by the increasing trend for companies to outsource protection of their intellectual property and related litigation to firms like CPA. CPA's last set of reported accounts showed an EBITDA of £77m.

Cinven, who are believed to have fought off rival BC Partners to secure the deal, will take a majority stake in the business, buying a portion of the company from CPA's other private shareholders.

Apex predicting a bright future for offshore fund sevrices

Apex Fund Services, one of the world’s largest independent fund administration companies, has published some interesting findings from its global research into how changes in the asset management industry will impact domiciliation and fund servicing patterns from 2012 to 2015.  The findings were drawn from interviews carried out on Apex's behalf between June and October 2011 with 75 fund managers and 25 investors located across the globe. 

There has been much speculation about the impact of the financial crises and regulatory initiatives such as the AIFM Directive and the Dodd-Frank Act on the offshore funds industry in general, and the offshore world in particular.  Many expected that these factors would have an adverse impact on the offshore centres, but in fact the research carried out by Apex seems to suggest the opposite.  Key findings were that:

• Investors will have more influence on managers’ domiciliation and fund servicing decisions, particularly in the hedge funds arena, where investors are predominantly institutions rather than wealthy individuals;
• Offshore centres will prosper and gain market share - something which seems to have become more pronounced since the European financial crisis has worsened, as the offshore financial centres are seen as areas of stability;
• Greater specialisation in fund jurisdictions is anticipated  offshore centres will have to have a particular niche to thrive, and there will be increased "clustering" around those centres;
• There will be consolidation of service providers - particularly amongst fund adminstrators, where there is a move towards the bigger service providers; and  
• Non executive directors will play an increasingly important role on funds, and investors will expect to have more visibility regarding the composition of the Board.

The findings of the survey are bound to be welcomed by the offshore centres, who have successfully fought of threats to their business from legislative and political initiatives in the onshore centres.

The full survey can be accessed on http://www.apexfundservices.com/.

Ogier make bold move into Luxembourg Legal Services

Ogier has made a bold move in becoming the first offshore firm to open an office in Luxembourg.  Although many offshore law firms have established trust company operations in Luxembourg over recent years, this is the first time one of them has taken the much bigger step of moving into the civil law jurisdiction for the provision of legal services.  In order to ensure local credibility, Ogier have hired senior partner François Pfister from Luxembourg fund specialists OPF Partners (formerly Oostvogels Pfister Feyten), a firm which appears to have lost a number of its well-known partners in recent years.

Francois will be joined by Ogier partner Daniel Richards, who will relocate from Jersey.

This is not the first time that Ogier has taken an innovative step for an offshore headquartered firm - it became the first offshore firm to open in mainland China when it set up in Shanghai last year.  However, the important difference is that the Shanghai office is effectively providing offshore legal advice (BVI, Jersey, Guernsey and Cayman law) from a base in China, whereas it appears the new Luxembourg law firm will offer Luxembourg legal services.  This is an interesting new step, as it will put Ogier Luxembourg in competition not only with the indigenous law firms but also with the Luxembourg branches of the major City firms who have traditionally been the main sources of work referral to the offshore law firms.  Ogier's competitors will doubtless be watching closely to see whether or not the opening of a competitive offering in Luxembourg results in any straining of relationships with the City firms.  If it does not, you can expect others to follow in their wake.

Service Providers Identify Malta as Growth Area

Malta has been emerging for some time as a growing player in the international financial services arena, with a particular strength in relation to funds. This has led to many of the long-standing trust companies headquartered elsewhere establishing a presence in the Island, although at present most of these are relatively small scale.  Active Group, the Guernsey head-quartered compliance specialists, are seeking to benefit from this rash of new service providers in Malta, by offering them an out-sourced solution to the compliance, risk management and anti-money laundering implementation procedures which apply in that jurisdiction, through the establishment of its own new business, called Active Malta. 

Active's identification of Malta as an attractive business target is likely to be a shrewd move, as it will assist the many new trust companies there to minimise compliance costs at a time when the businesses are small and cost sensitive.

A global survey on the future of fund domiciliation and servicing carried out by International Fund Investment Global (IFI) with 75 fund managers and 25 major institutional investors around the world recently noted that Malta is now the first choice of domicile in the Mediterranean and that its fund industry is growing at a very rapid pace, with a record number fund registrations during 2011. 

　
The main reason for Malta's success appears to be the preference by institutional investors to allocate investments to onshore EU funds. The survey indicates that Ireland and Malta are more popular for hedge fund managers whilst Luxembourg is preferred for private equity fund structures.

As at June 2011, Malta had 519 registered investment funds (including sub-funds). 

Jersey and Guernsey pick a fight with UK Treasury

The governments of Jersey and Guernsey are not taking lightly the United Kingdom's decision to exclude the Channel Islands from value-added tax exemptions on low-value goods, under the Low Value Consignment Relief (LVCR) regime. 

In recent years, the Channel Islands have become a hub for many businesses which sell low value goods into the UK (originally those costing less than £18, although this figure has now been reduced to £15), such as CDs, DVDs and toys.  This was because under the LVCR arrangements, companies established in jurisdictions outside of the EU (and the Channel Islands are outside of the EU for these purposes) were permitted to import the goods into the UK and sell them free from VAT.  Big names who took advantage of the scheme include Play.com, Tesco and Indigo Lighthouse.

The UK government faced considerable lobbying from UK based high street retailers, who blamed the LVCR for the demise of their businesses and the UK Treasury responded to this pressure by announcing in November that from April 1, 2012, the relief will no longer be offered to goods exported to the UK market from the Channel Islands.  Although not an unexpected move, it was nevertheless a considerable blow to the Islands, where the fulfilment industry has become a major source of employment and revenue for the Islands' coffers.  With unemployment already on the rise, the potential loss of a significant number of jobs was a serious problem, and the Islands have come out fighting by announcing that they intend to challenge the move.

The reason for the litigation appears to be the perceived unfairness caused by the fact that the UK Treasury will continue to apply the LVCR to commercial supplies from all non-EU jurisdictions except the Channel Islands. Jersey and Guernsey believe that in so doing, the United Kingdom has infringed European law. Within the Islands there are very mixed views on whether taking the UK government on in this way is a wise move or not.  There is concern in some quarters that even if the Islands do win, the likely reponse of the UK Treasury would be to remove the LVCR regime altogether, rather than singling out the Channel Islands for special treatment, which would represent something of a Pyhrric victory for the Islands and leave the Islands to foot a potentially expensive legal bill for little financial game.  However, the politicians in the Islands doubtless felt that they could not sit back and let the UK Treasury take such action unchallenged.

The issue raises a perennial problem for small international financial centres, in that whenever legitimate tax structures are identified which become a real success, they represent a high profile thorn in the side of the larger jurisdictions who then feel compelled to respond by legislating to prevent the structures from being used in the future.  Success itself brings problems in its wake.  Similar attempts have been made in the past to close down other tax saving opportunities, such as stamp duty saving schemes.  These latest developments should therefore come as no surprise to any observer of the international finance centres.