Offshore centres have come under continued scrutiny in recent years. Whilst the majority of activity has been legitimate – the controversies surrounding tarnished jurisdictions have changed the way private banks and wealthy clients operate in select geographies. John Schaffer looks at how the wealthy are favouring “safe-haven” booking centres and how the offshore wealth management landscape has changed

 

Offshore wealth management has been steeped in controversy over the past few years. Several global banks have
faced hefty fines and reputational damages for aiding wealthy clients evade taxes. Know you customer and die diligence requirements have increased manifold and client on boarding has become increasingly complex. The Panama Papers fiasco, and even the Bahamas Leaks most recently, highlighted a number of illicit activities – at a time when tighter regulation and greater transparency has been prioritised, in a bid to eradicate banking secrecy.

However, the rationale for using offshore structures is not always limited to tax evasion. According to Verdict Financial, the dynamics of offshore investing are shifting, as it is no longer predominantly about safeguarding money from tax authorities. Many global high net worth individuals (HNWIs) opt to keep their assets offshore to safeguard their wealth, especially if their domestic market is plighted with geopolitical uncertainty.

Switzerland, the country with the largest amount of offshore wealth, has cleaned up its image considerably and, currently, has a more transparent and stringent regulatory system. The world’s wealthy are favouring “safe haven” jurisdictions over offshore destinations such as the Bahamas, where CAGR of retail non-resident holdings dipped by
32.7% between 2011 and 2015.

Heike van den Hövel, senior analyst at Verdict Financial, tells PBI that the incentive for HNWIs to place assets in offshore centres such as Panama and the Bahamas is diminishing, but that the access to more sophisticated
investment products in more stable booking centres continues to be attractive:

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“We’ve been seeing a change in investors’ attitudes for a while. Earlier scandals, including various offshore leaks, revealing numerous names of wealthy, and in some cases, well-known individuals, as well as increased scrutiny from governments worldwide have seen tax efficiencies and client anonymity as a driver for offshoring wealth diminish
over the past few years. In fact, our data shows that almost one quarter of HNWIs invest their assets offshore to gain access to a greater or better range of investment options, making it the most important driver.

“This means as long as HNW clients remain focused on the search for yield and superior investments, they will be attracted to the freewheeling offshore sector. It is those jurisdictions with sophisticated financial markets, highly skilled talent, broad investment options, and sound legal framework that appeal most to HNW individuals. According to our Global Wealth Managers Survey, the booking centres for HNW wealth are not palm fringed islands but stable economies, such as the US, Switzerland and Singapore.

“In light of this, we expect the impact of the Panama scandal to be not as wide-reaching as the media-upheaval suggests. Of course, there are still some HNW individuals investing offshore to gain tax efficiencies (in many instances this is completely legal), and some of these investors will withdraw their money and bring it back home or redirect it to more ‘upstanding’ destinations to avoid being tainted by association. So yes, there will be an impact, but not as severe as widely assumed.”

On the other hand, Miles Dean, founder of Milestone International Tax Consultants, tells PBI that incidents such as the Panama and Bahamas leaks do affect the status of offshore jurisdictions, and could be problematic for individuals and families that are opting for offshore structures due to privacy concerns: “Offshore jurisdictions have been significantly affected in the eyes of those clients with bona fide arrangements – the desire for privacy (as opposed to anonymity) is real and the security of information paramount.”

Dean adds that, in some instances, there may be a significant move away from offshore jurisdictions. Dean also suggests that Switzerland’s reputation is no better than offshore centres in the Caribbean: “Switzerland might not be a Caribbean island, but Switzerland’s USP for many years was banking secrecy – this has gone thanks to various banks’ US exploits, and with the introduction of the Common Reporting Standards (CRS) regulation. It’s difficult to see how Switzerland can continue to compete.”

 

Death of the offshore centre exaggerated?

Tim Monger, partner at BCG, tells PBI that there are multiple perfectly legitimate uses of offshore structures in order to facilitate cross-boarder wealth management. Monger says that as wealthy families become more globalised, there is a need to place assets in an offshore location when family members reside in disparate locations, and business interests are present in multiple jurisdictions.

Monger says that the “death of the offshore centre has been exaggerated” and that the centres that will become stronger are the ones that are more transparent and are not focussed on tax avoidance.

“There’s an issue with capability. Providing an offshore service is not an easy thing to do. Its complex, requires great levels of competency, skill, relationship management and requires a lot of investment. I don’t think anywhere in the world could necessarily be an offshore centre, and you have seen a certain amount of consolidation into certain
centres to reflect that capability.”

Monger adds that BCG does expect offshore centres’ growth rate to be lower than that of onshore asset growth.

However, there are signs that offshore structures are being avoided by private banking clients. Swiss Bank Pictet announced in May 2016 that it would allow its UK clients to domicile their wealth domestically. This move came as clients looked to bring assets onshore in the face of tighter regulation regarding tax transparency.

 

Asia’s offshore market – squeaky clean?

The offshore wealth market in Singapore and Hong Kong has been exhibiting significant growth in recent years. According to Boston Consulting Group’s (BCG) 2016 Global Wealth Report, offshore wealth in Hong Kong and Singapore grew by 10% in 2015 and is predicted to grow at approximately 10% annually through 2020. This
would increase Hong Kong and Singapore’s combined share of the world’s offshore assets from roughly 18% in 2015 to 23% in 2020.

Monger says that the growth in the region can partly be attributed to proximity – with a significant amount of new HNW wealth coming from emerging markets.

“Singapore is recognised as having that nexus of capability, and it’s present in a region where a large amount of wealth is being created, with a need to manage that wealth appropriately.”

According to BCG, nearly 80% of offshore wealth that is booked in Singapore and Hong Kong comes from surrounding APAC jurisdictions. The offshore wealth market in Singapore had previously prided itself on lacking in controversy. However, the offshore market in the region has experienced its glitches of late. Earlier in the year, the Monetary
Authority of Singapore (MAS) found lapses in anti-money laundering (AML) controls in among several banks operating in Singapore and connected them to the 1Malaysia Development Berhad (1MDB) scandal.

MAS said its investigations – which began in March 2015 –uncovered a “complex international web of transactions involving multiple entities and individuals operating in several jurisdictions”. The implicated financial institutions in Singapore include BSI, DBS, Standard Chartered Bank (SCB), UBS, Falcon Private Bank and Raffles Money Change. BSI’s Singapore branch was even ordered to cease operations in May 2016.

With the regulations related to cross border wealth management only getting more stringent, jurisdictions such as Singapore have to make additional effort to prove it is still a trusted destination for offshore wealth.

 

Switzerland largest, but lacks new wealth

The wealth management market in Switzerland has drastically changed in recent years and it felt the full brunt of the increased transparency and regulatory pressures after the financial crisis. The largest offshore wealth haven in the world had to succumb to losses, penalties and bank closures.

However, the tide is slowly turning and the Swiss regulator, Financial Market Supervisory Authority (FINMA), has made significant efforts to increase transparency and end banking secrecy in recent years, most notably committing to the automatic exchange of tax information as part of the OECD’s CRS, which it will begin acting upon in 2018.

Switzerland still remains as the largest offshore centre by a considerable lead. According to BCG, there was $2.7trn of offshore wealth held in Switzerland in 2014.

Monger, BCG, tells PBI that the Swiss expertise goes a long way: “If you go back 20 years, having a Swiss bank account would be a brand that people might talk to their peers, colleagues or friends about – that’s not enough today. The need today is to demonstrate value to your clients, to be able to help them manage their wealth internationally.

“Swiss banks have that depth of capability and experience with hundreds of years of doing offshore banking. That is what maintains Switzerland’s presence in the world of offshore centres. But when you look at where Switzerland is – Western Europe is not growing massively fast in terms of wealth, and comparatively other centres are picking up a greater share of the new wealth that’s being created. However, you still have a large stock of wealth in Switzerland.”

 

UK popularity could dip

The UK has been popular with overseas investors – especially in the London real estate market. Yet June’s Brexit vote may have caused the UK to lose some of its shine.

Hövel, Verdict Financial, tells PBI that there could be some negative implications for the UK as an offshore wealth centre:

“In the short-term we are likely to see some HNW wealth be channelled out of the country. Uncertainty is toxic when it comes to offshore investments, and this will motivate investors to look for new homes for their money. For example, a significant proportion of German HNW wealth is kept in the UK and Switzerland – known for their welldeveloped
financial markets and sound legal and political systems. However, as long as uncertainty regarding Brexit implications
persists, risk-averse Germans are likely to opt for the Alpine state.”

Currently, London is a one stop shop for global HNW wealth. There are plenty of currencies, financial instruments as well as many direct or indirect investments into global companies. Hövel says if the UK loses its right to “passport” into the rest of the 28-member block, UK will “lose some of its appeal”. “But a well-managed post-Brexit trade agreement with the EU could see the effect of Brexit being nothing more than a sharp currency revaluation,” she adds.

Verdict Financial data indicates that the UK’s crown dependencies have somewhat lost their shine. Offshore retail holdings in Jersey, Guernsey and the Isle of Man all dipped between 2011-2015. Hövel says that the crown dependencies have suffered from reputational issues. “Jersey and Guernsey have consistently featured in front positions
in the Tax Justice Network’s Financial Secrecy Index, and the media is picking up on this, damaging these centres’ reputation.”

Marked US offshore growth

The US, due to its proximity, is attractive to Latin American HNWIs – especially in countries experiencing political and economic instability. Hövel suggests that the US is particularly popular with Brazilian investors: “Brazilian HNWIs hold 20% of their liquid wealth offshore, with local economic and political instability being the top reasons why wealthy investors channel funds offshore as the country continues to struggle with high levels of corruption, and its worst
recession in 25 years. The main beneficiary of this trend is the US. It’s interesting to see that despite Brazil’s close proximity to offshore tax havens, only a negligible proportion is booked in the Caribbean, highlighting the fact that stability features more prominently than tax efficiency as a driver to invest offshore.”

Another reason why the US is attractive is because it combines a safe-haven status while not having the stringent transparency requirements as European booking centres.

While many of the global wealthy will look to move their wealth onshore, due to the impending deadline of the CRS starting 2017, the US is the only western country that has not signed up for it.