Jersey's finance industry on the up

In what come as a surprise to many given the levels of anti-offshore rhetoric at the present time, it seems that Jersey’s finance industry is buoyant.

Data released yesterday showed that the value of funds under administration have reached a four year high, with the total NAV of funds under administration in Jersey showing a quarterly increase of 6.5%, to stand at £205.3bn. 

Bank deposits also grew for the second consecutive quarter – by £3bn, or 2% – to £155.1bn, although they still remain significantly below the 2007 peak.  It is thought that the Island may have benefited to some extent from the Cypriot banking crisis, with deposit-holders fearing that if they hold deposits in EU member states they could lose their cash in the event of a bank collapse.

Accountant successfully sued for £1.4 million for NOT advising client to avoid tax

I don't often have cause to feel sorry for accountants, but this week I have to express a twinge of sympathy for them.

Over the last couple of years the accountancy profession has been trying to adjust to a “new morality” which seems to be sweeping across the world, which blurs the line between tax avoidance and tax evasion, and increasingly deems both to be morally repugnant.  In the face of this, the use of entirely legal schemes which to keep tax bills to a minimum can result in clients and their advisers being hauled before parliamentary committees to be given a metaphorical public flogging. Given this climate and the impact of the recently enacted GAAR, one might have thought that accountants holding themselves out as advising on tax mitigation would start to become rarer than hen’s teeth.

But just as we were starting to adjust to an apparently new paradigm, a High Court judge has thrown a spanner into the works, by finding that an accountancy firm were negligent for not advising a client how to mitigate his tax bill by using a highly artificial offshore structure.

Hossein Mehjoo is a UK resident “non-dom” who built up a multimillion-pound fashion business in Britain.  After selling his business, he successfully sued his local accountancy firm for £1.4 million for failing to advise him to enter an offshore tax avoidance scheme known as the Bearer Warrant Scheme, which was at the time available (it is no longer) and which enabled non-doms to avoid paying capital gains tax on the sale of companies.

Mr Justice Silber, said that  “The defendants had a contractual duty to advise the claimant that non-dom status carried with it potentially significant tax advantages” and went on to say that if the firm itself did not have the expertise to advise on the scheme, then it should have referred the client to another firm which did, in much the same way as a GP would refer a patient with complex medical needs to a specialist.

Using this logic, an accountant advising a firm on how to structure its intellectual property rights (Google/Amazon etc) would have a duty to advise them that structuring business through somewhere like the Netherlands or Ireland could well save a small fortune in tax.  But then that very same accountancy firm can fully expect to be publicly berated for carrying out his legal duty of care to his client.  It does seem to be something of a no-win situation.

Many directors have been vocal about the fact that they too have a duty to the shareholders of their company to keep the level of tax that they pay to the lowest amount permissible by the law, and that subjective views on what it ethical and what is not cannot override that duty.  It would seem that Mr Justice Silber would agree.

Not surprisingly, yesterday’s judgment has got Richard Murphy et al up in arms, demanding that something must be done to protect accountants who act ethically.  But the whole issue of trying to blur the lines between illegality and immorality is opening up an enormous can of worms.  If governments around the world want to stop certain types of tax avoidance then they need to make it illegal.  Having it as legal, publicly and political unacceptable, and a professional duty all at the same time leaves companies and their advisers in a complete Catch 22 situation – damned if they do, and sued if they don’t!

Sanne Group completes acquisition of State Street's capital markets corporate admin business

Sanne Group's acquisition of State Street Jersey's capital markets corporate administration business (formerly part of the Mourant International Finance Administration business) has completed.

The financial aspects of the deal, which was accomplished with financial backing from Inflexion, which invested in Sanne earlier this year, are not being disclosed. 

The addition of the new staff will take the Sanne Group to over 200 employees in Luxembourg, London, Dublin, Dubai, Hong Kong and Shanghai as well as the Channel Islands, making it one of the larger independent fiduciary businesses.

Sanne Group chief executive Dean Godwin will be very familiar both with the newly acquired business and the 40 staff moving to Sanne, having been managing director at State Street until his move to Sanne last year.

HgCapital sells ATC to Intertrust for €303 million

HgCapital has today announced the sale of ATC to Intertrust (the trust company backed by PE firm Blackstone) for an enterprise value of €303 million.  

This realisation represents an investment multiple of approximately 2.2x original cost and a gross IRR of 37% over the two year investment period - an excellent example of a highly successful collaboration between a PE firm and a fiduciary services business. 

Hg acquired a majority stake in Amsterdam-based ATC in March 2011.  ATC had been independent since 1893 and HgCapital was the first external investor in the business. ATC provides fiduciary, management and administration services to multinational corporations, financial institutions and fund managers.  

The sale of ATC is expected to formally complete in September 2013 following regulatory approval.

Not all Regulators are the same...in assessing risk and compliance you need to understand the nuances

Much of my consultancy work involves advising potential acquirers of fiduciary services and fund administration businesses regarding the risk and compliance aspects of target businesses.  This usually involves, amongst other things, conducting file reviews to ensure that the practice implemented within the business meets best practice and complies with all applicable regulatory requirements. 

In a perfect world, the reviews would reveal no deviations from best practice at all, but we don’t live in a perfect world and keeping these businesses fully compliant is a task akin to painting the Forth Bridge – periodic reviews have to be done on schedule, risk weightings have to be reassessed, corporate governance standards change on a regular basis, identity documents need to be updated when they expire etc – and so there are invariably some weaknesses which need to be remedied at any given point in time. 

But the raw data showing the level of discrepancies that can be found are of surprisingly limited value. The most important thing in my view, is to be able to answer the “so what?” question once the results are in, and clients are often surprised at how much the answer varies from jurisdiction to jurisdiction.  Weaknesses which in some jurisdictions might earn you a gentle admonition from the regulator may in other locations put the entire business at threat of closure.  It is therefore critical that investors understand the subtleties and distinctions of application of regulations in different territories.

Nor are the jurisdictions which take a more “relaxed” approach to regulation necessarily the ones you would expect.  Although the press tend to paint the offshore Islands as the weak link here, the reality is far more complex than that.

A recent point in case can be seen in the Grand Duchy of Luxembourg. In the past week, Luxembourg’s financial regulator, the CSSF, has been under attack for refusing to help a group of investors who lost money in a fund (Petercam’s L Bonds Eur Inflation-Linked fund), despite the fact that the CSSF acknowledges that the fund violated the jurisdiction’s investment laws in a number of different respects including investing in prohibited investments and deficiencies in the Fund’s prospectus.

Luxembourg has in place the panapoly of legislation and regulation that you would expect to see to keep investors safe, but the key issue is whether it is implemented with adequate vigour. There is a suspicion in some circles that the CSSF is wary of taking a hard line with Petercam, for fear of upsetting the many fund managers who structure their business through the territory.  After all, there is big money involved in the industry; Luxembourg has risen to become the second largest centre for investment funds in the world and naturally would not want to kill the golden goose - or to lose business to arch rival Dublin - by gaining a reputation for taking a hard line on regulated businesses.

It might seem an odd notion that regulators can feel the impact of market competition, but they are only human.  If the success of their country depends on keep certain key client sectors happy, then there is a natural tendency to want to play down any issues that may arise.  It takes a brave regulator (and there are some out there) to ignore the pressure and to do the right thing.  Perhaps this explains why the Cayman Island regulator was so apparently slow to step in and take action as the Axiom Legal Financing Fund debacle unfolded.  Nor are onshore locations immune – the FSA, amongst other onshore regulators – was heavily criticised for being too “cosy” with banks and not sufficiently robust to address the risks that they were taking.

But although taking a lax line (which, incidentally, the Luxembourg authorities vehemently deny doing, despite appearances) might be seen as good for business in the sense that it keeps the regulated businesses happy, in the long run it must be a strategy doomed to failure if investors lose confidence in a jurisdiction as a consequence.  That doesn’t appear to have happened in Luxembourg yet, but if there are too many instances like the Petercam one, then it will become a real possibility.

There are some jurisdictions who appear to have taken this threat very seriously, and where the regulators are notoriously tough – Jersey being one example where the regulator is widely viewed as taking a hard line on businesses which fail to meet the required standards.  It is not uncommon in Jersey to see businesses subject to special regulatory supervision or ordered to cease taking new business altogether  if the authorities do not believe that standards are being properly enforced.  By and large, practitioners in the Island applaud this stance, but there are still a reasonable number of those involved in the Island’s finance industry who complain that the JFSC’s approach means that the Island loses business to Guernsey, or to Cayman, both of which are seen as locations where regulatory action is less likely.

Getting the balance right is not an easy one.  All of these places, whether onshore or offshore, want to retain thriving financial services businesses and in order to do that they cannot afford to scare off regulated businesses or their investors.  But a savvy investor (whether a client of a fund manager or a PE house looking to buy a financial services business) will take the time and care to understand the regulatory environment in which they are investing in order to be able properly to evaluate the risks.  And that means doing a lot more due diligence than just reading the regulations.

Ireland becomes first jurisdiction to accept AIFMD applications

Ireland has become the first jurisdiction to begin accepting applications for the authorization of alternative investment fund managers, which will enable them to use the Alternative Investment Fund Managers’ Directive (AIFMD) passport from 22 July of this year.

The Irish Regulator last week published the AIF Rulebook, application forms and a Q&A document which provides guidance on exactly what firms must do by July 2013, what they may do during the transitional period between July 2013 and July 2014 and how they can plan for achieving AIFMD compliance while maintaining the continuity of their business in the interim.

IOM trust company merger reflects Island's ambitions in yachting and shipping

Two Isle of Man trust companies, Vantage Corporate Services Ltd and Corsiom Corporate Services, have merged and joined forces with the Peter Dohle Group to form a new entity to be known as Döhle Corporate and Trust Services Ltd.   

The newly-formed company will offer a range of corporate and private wealth fiduciary services, but with a particular focus on the maritime sector, reflecting the background of Dohle - a Hamburg-based shipping group which reputedly runs a fleet of more than 400 vessels including containerships, bulk carriers and multi-purpose vessels.

The Isle of Man has long been a location for yacht and ship registrations but is looking to further expand its offering in that area.  Last month, the Tynwald made legislative changes to allow the Island's ship registry to accommodate vessels with ownership structures in Monaco or Switzerland.