Cypriot bail out sparks fears of a run on the banks

The Cypriot government and the EU/IMF finally agreed the long awaited bail out package for Cyprus on Friday, but in hugely controversial fashion. In fact, so controversial that it is not beyond the realms of possibility that when put to the Cypriot parliament for approval tomorrow, they could actually reject the deal and opt instead to leave the Euro and face almost inevitable bankruptcy instead.

The main reason for the passionate opposition from some quarters to the deal which has been struck is that, after pressure from the Germans, an integral part of the bail out deal was agreement to impose a "levy" on all holders of bank accounts in the island, equivalent to 9.9% on accounts of more than €100,000 and 6.75% on accounts under that sum.  It is the first time that the EU have made what effectively amounts to a partial confiscation of cash deposits a condition of financial assistance, and there were immediate fears that it would lead not only to a run on Cypriot banks, but that the panic could spread to account holders in other countries suffering financial difficulties, such as Greece and Spain, sparking another wave of financial problems.

There had been rumours for some time that the EU was seeking to make deposit holders share some of the burden of the bail out, although the Cypriots fought hard to resist it, knowing that it would damage the Island's lucrative financial services sector. The official reasoning for the imposition of the levy was that it was required to keep any rescue package down to a sustainable size for the future, but it is also known that some EU politicians, and most vocally the Germans, feared a political backlash if they went ahead with a loan, leaving the many wealthy Russians who hold accounts in the territory protected and not contributing the rescue cost.  

The fact that larger account holders are facing a levy will not have come as a surprise to everyone, but there is real shock that small depositors are also being hit. The EU has depositor protection in place for account holders of less than €100,000 and it is not clear how this can be squared with the Cypriot deal.

It is a national holiday in Cyprus on Monday, and so nervous banks will have to wait until Tuesday to see what the impact will be within the Island.  Meanwhile, on Monday bankers in Greece, Spain and Portugal will be working hard to calm jittery customers who may fear that similar measures could be taken elsewhere in the future now the principle has been established.

Nautilus Trust acquires New World Trustees Limited

In a continuation of the trend of consolidation in trust companies, Jersey head-quartered Nautilus Trust Company Limited has acquired New World Trustees (Jersey) Limited. 
 
Nautilus was incorporated in 1999 and has grown from a team of two to 51 through organic growth and a series of small scale acquisitions under the leadership of Jason Cowleard.

New World Trustees was incorporated in 1983 and has been providing structuring solutions for its clients for 30 years. 

The combined business will comprise 65 employees.

Non-doms deserting the UK

Since the financial crisis, there have been cries from many quarters that wealthy people should be required to pay more tax.  Morally it is hard to argue that the rich should not share some of the burden of fixing the fiscal deficit through higher taxes, but the difficulty is that if you tax the wealthy too much they often have an option open to them which is simply not available to many of those of far more modest means – and that is simply to relocate to a lower tax jurisdiction.  Those in favour of higher taxes on the rich tend to dismiss this possibility as scare-mongering, saying that the wealthy choose to live in the UK for many more important reasons than tax, whilst those who make their living representing the affairs of the well-heeled sound dire warnings every time a tax increase is proposed.  It was therefore with interest that I read the results of a recent study by law firm Pinsent Masons (“PM”), to try and get a factual perspective on whether higher taxes do indeed cause the wealthy to leave.

And it seems that they do. According to the PM report, the number of UK registered non-domiciled individuals fell by 2,000 in 2012, and by 24,000 since an annual £30,000 non-dom levy was introduced by the UK government in 2008.  This represents a 17% drop in the number of non-doms in the UK since 2008 – a significant fall by any standards.

The introduction of the £30,000 levy (which rises to £50,000 for those who have been in the UK for 12 or more years) is one of a range of measures which have been introduced which are unpalatable to many non-doms, including a 50p top rate of income tax (albeit that this is to reduce to 45p this year), increases in CGT, increases in stamp duty on residential properties (and a clamp down on structures designed to reduce the stamp duty), and frequent public debate about the possibility of a “mansion tax”.

According to PM, together these represent an “increasingly hostile tax code” for high net worth individuals, which is undermining the Government’s efforts to attract more non-dom investment in UK businesses.

Jason Collins, Head of Tax at PM added: “Non-doms are more important to the UK economy now than ever before. They have huge spending power, invest in businesses and create jobs. They can’t do this if they aren’t here – and there are plenty of other countries competing to welcome them to their shores.”

Of course, the fact that 24,000 non-doms have departed UK shores may not be a bad thing if the various measures introduced to raise more tax from this grouping have lead to a balancing influx of tax receipts.  Trying to compute this is immensely complex, but PM point out that the non-dom levy has actually only been paid by less than 5% of non-domiciles in each year since it was introduced and last year generated a relatively paltry £168 million for the Treasury.  I suspect that the direct and indirect contributions to the Exchequer by the 24,000 non-doms who have departed since 2008 would be significantly greater than £168 million.

“The threat of the levy is driving high net worths away, but to make matters worse it is not even a significant revenue generator to make up for this,” said Collins.

And this sums up the problem with the current debate around taxation.  The UK government is increasingly taking decisions which are designed to appease an angry public who feel that the wealthy should contribute more in times of hardship.  But whilst the spin-doctors may love it, it is a pyrrhic victory if the net result is a further decline in tax receipts.

Ogier open Luxembourg trust company

In a move that will surprise few, Ogier Fiduciary Services has opened an office in Luxembourg.

Last year Ogier took the step of opening a law firm in the jurisdiction - something which none of the offshore law firms had done before, for fear that being seen to compete with the onshore firms from whom the offshore firms traditionally receive most of their work might result in a drop-off in referral work. Opening a fiduciary business was a natural progression, and is far less controversial, being a step that many of Ogier's competitors have already taken, as many trust companies seek to establish a multi-national footprint encompassing both traditional offshore locations and international financial centres with large double tax treaty networks.  

The new office will be headed by Paul Lawrence (who will be relocating from Jersey) and Michel Thill (formerly of BI-Invest Advisors SA) and will provide administration services to corporate, fund and private wealth companies.

CIMA revokes banking licence of HSBC Mexico's Cayman Branch

The Cayman Islands Monetary Authority (“CIMA”) has revoked HSBC Mexico’s banking license in Cayman following an investigation into the Cayman Islands Branch of HSBC Mexico SA.

Four months ago the bank’s parent company admitted the money laundering at the Cayman registered subsidiary.

According to a statement released by CIMA on 27^th February, they have “concluded that the Cayman Islands Branch of the company is conducting business in a manner detrimental to the public interest, the interest of its depositors or of the beneficiaries of any trust or other creditors and that the direction and management of its business has not been conducted in a fit and proper manner”.

The scandal surrounding the Mexican based branch of HSBC has already led to the Bank agreeing to  pay $1.92 billion to settle US money laundering allegations. A US Senate committee report had revealed that tens of thousands were poorly regulated, and had possible links to organized crime.  An estimated 15% of the accounts had no KYC information at all.

So what are the lessons to be learned here?  Firstly, the finger of blame for KYC lapses is often pointed at smaller businesses, but this shows that there are still very large organisations which have a lot of work to do to get their house in order.   In some ways, it can be easier in very large businesses for the leaders to become divorced from what is going on at the coal face. We should not necessarily assume that small is bad, and big is good – best practice, and worst, comes in all shapes and sizes.

Secondly, it shows that no business is big enough to be exempt from draconian action if it fails in its KYC obligations.  There was a time when regulators would have been reluctant to tackle big businesses with household names for fear of damaging the jurisdiction’s reputation.  It seems those days have gone.

Jersey posts strong Q4 2012 performance

Figures released yesterday by Jersey Finance show that the Island's finance industry finished 2012 on an upbeat note, seeing increases in bank deposits and funds under administration.

Bank deposits rose 2.3% in Q4, up to £152.1bn from £147.8bn in the previous quarter.

The total net asset value of funds under administration rose to £192.8bn from £189.5bn at the end of the third quarter.  Over 2012 as a whole, the value of funds under administration has risen by approximately £3 billion, with the specialist fund sector being particularly buoyant.

STM focus on Pensions and Life Products as core Trust and Company business comes under pressure

STM Group, the AIM-listed fiduciary services business head-quartered in Gibraltar, has seen a sharp increase in losses in 2012 despite revenue growing by 18%, after it took a one-off amortisation hit of £3.8m.

The £3.8m charge resulted from the amortisation of the Zenith business acquired by the company.  EBITDA rose from £700,000 to £1,000,000.

However, apart from the headline figures, the most interesting aspect of the accounts is to look at the big changes that have occurred in from where STM derives its revenues, as it is one of only a handful of fiduciary businesses to publicly release trading figures. 

Its traditional trust and corporate services business (based principally in Gibraltar and Jersey) has declined (down from £7.5 million in 2011 to £6.5 million in 2012) and is expected to decline further for the foreseeable future, given the continuing difficult economic climate and the public debate about the morality of tax avoidance.  Whereas in 2011 the CTS business represented 77% of the group income, this has declined sharply to 55%.  The CTS sector performance was further hampered in 2012 by problems that the company had with the Jersey regulator, resolution of which required both management changes and a considerable focus on bringing the business up to the expected standards. 

STM is seeking to shore up its CTS revenues for the future by shifting its traditional focus away from the UK non-dom market and launching specific products designed for the Japanese, South African and Belgian markets.  It has also opened an office in Cyprus, which is aiming to funnel business from Eastern and Central Europe to the Jersey office.

By contrast to the CTS business, pensions were a star performer in 2012, with revenues from that division rising from £600,000 in 2011 to £3.6 million in 2012, largely thanks to the Maltese QROPs product.  STM was a pioneer in the development of QROPS and Malta has benefited from having many products remaining on HMRC’s approved list (unlike Guernsey, where approved status was removed from most QROPS last year).

STM Life, the division of the company which provides life insurance bond investment 'wrappers' has yet to deliver material revenue contributions to the Group, but STM chairman Julian Telling has high hopes for the future of that business, and released a bullish statement saying that he was confident that the company would return to profitability “in the near term”.

Despite his bullish statements, STM shares fell by 1p or 3.33% to 29p following release of the figures,  putting them 20% below their 52-week high of 36.25p, reached in May of last year, and a long way from the 73.5p high point achieved in mid-November 2007.