Worlds colliding

The Alternative Investment Fund Managers Directive, dreaded by the offshore world, has now been agreed. LB finds out why the offshore world’s law firms are still smiling

After laboured negotiations and more than 30 drafts, the Alternative Investment Fund Managers (AIFM) Directive was finally approved by the EU parliament in November 2010. As the terms were thrashed out in the preceding 18 months, the funds industry held its breath, stifling funds activity both on and offshore. The offshore world is now resting a little easier.

‘It’s great that the protracted Directive process has finally come to an end,’ says Heather Bestwick, a technical director at Jersey Finance, a non-profit organisation that promotes Jersey as an international finance centre. ‘The worst part for the financial world was the uncertainty, especially in light of the recent economic crisis.’

The final terms of the Directive were significantly better for the offshore world than originally feared. There has not been a complete overhaul of the fund management model and the Directive has confirmed that the private placement within the EU of non-EU (third country) alternative investment funds (AIF) to professional investors, will remain until at least 2018. This is a huge relief both to EU managers with non-EU funds and non-EU managers, as the standard model for the distribution of private equity, real estate and hedge funds in the past decade has been by way of private placement. With this seven-year window, few managers of existing Channel Islands or Caribbean-domiciled funds are now expected to relocate their funds to inside the EU.

The Directive is viewed as a lot more acceptable than the initial version presented in April 2009. The worst protectionist excesses have been removed and the offshore world is no longer shut out of Europe.

‘We can offer certainty to clients that Jersey is well-placed to slot into the passporting system.’
Kate Anderson, Voisin

It is not just the funds community that appreciates the clarity. Offshore lawyers are reasonably satisfied with the outcome. ‘A workable solution has been reached at a time when people were beginning to write off the Cayman model,’ says Tim Clipstone, a Cayman Islands-based partner at Harneys. Others are happy that the Directive sensibly focuses most of its attention on the manager rather than the fund. One fear was that the European Securities and Markets Authority (ESMA), once constituted, would be able to dictate terms to non-EU financial regulators and that the offshore jurisdictions would need to introduce legislation equivalent to that of EU countries. That is looking very unlikely now.

The debate surrounding the Directive has provoked discussions as to whether the Channel Islands or Caribbean jurisdictions will adapt best under the new regime. However, it has also served to highlight several similarities between the offshore and onshore worlds. With the leading offshore jurisdictions so vocal on the various Directive drafts, the message about the contribution made by offshore financial centres (OFCs) to the global financial system has been getting through. Consequently, the historical perception of offshore territories as unsavoury tax havens is becoming dated.

Worst-case scenario

It could have been much worse. Back in 2009, at the time of the London G20 April summit, offshore jurisdictions were being routinely demonised. It was then that the European Commission published its draft Directive. The proposal was determined to establish a regulatory framework for managers of hedge funds and private equity firms. This was to ensure that the funds industry did not contribute towards any future financial crises and the Directive also intended to protect investors in such funds. It was structured to apply to collective investment undertakings – save for those covered by Undertakings for Collective Investment in Transferable Securities (UCITS) – as well as to fund managers residing within the EU and funds domiciled or marketed in the area.

The offshore world responded accordingly. Jersey and Guernsey were especially active in lobbying Europe not to produce a final draft that would be damaging to their interests. The fact that UK pension providers were up in arms about their investment market being restricted also leant great support to their case.

It wasn’t just the small financial centres that were worried. Even US Treasury Secretary Tim Geithner got involved to protect the interests of US fund managers against the possible impact of the Directive. Geithner spoke to EU finance ministers and helped persuade them to take a less protectionist stance.

However, this does not mean that it will now be plain sailing. Certain provisions regarding offshore funds operating in Europe are still unclear. Wayne Atkinson, a senior associate at Guernsey firm Collas Day – soon to merge with Jersey firm Crill Canavan (see box, ‘Island hopping’, page 74) – says: ‘We still need to see both subordinate legislation from the EU and the implementing legislation from the EU member states. As a result, we still don’t know where we will actually end up.’

The implementation of the secondary legislation is anticipated to take effect from 2013 in each of the EU member states. At that point greater clarity is expected in terms of how the nuts and bolts will work in practice. ‘No doubt there will be some political aspect to the process,’ says Harneys’ Clipstone, ‘but we hope this will not have a malign effect on the industry.’

Whatever path the Directive takes, the Cayman and British Virgin Islands (BVI) markets are expected to continue to offer Members of the European Parliament the opportunity to speak to them about how the Cayman and BVI fund industry is already regulated. ‘We’ll continue to co-operate where we can,’ says Henry Smith, global managing partner at Maples and Calder, ‘and to assist in the discussions concerning a proportionate and sensible response to the regulation of global systemic risk in the funds industry’.

Passport please

As the Directive can only be applied once it is implemented by the relevant member states, there is no immediate change in terms of how managers based outside the EU can market their funds to EU investors.

Even from 2013, until at least 2018, the current private placement regimes will continue to apply to the marketing of a fund within the EU. This will be subject to appropriate co-operation arrangements being in place between the relevant EU and third country regulators and the third country not being listed as unco-operative by the Financial Action Task Force (FATF). Such third country funds must also comply with certain transparency and reporting requirements as set out in the Directive.

Looking ahead to 2015, if it is agreed by ESMA that the passport regime should be extended to include third countries, there will be a further three years in which third country funds and managers may choose whether or not to apply for the appropriate passport, or to continue to use a private placement regime. After 2018, the private placement system should disappear, and third country funds and managers will only be able to market in the EU with a passport. But if ESMA, the Commission, the European Council and Parliament decide that the passport regime should not be extended to third countries, then the private placement regime will remain in place indefinitely.

‘Global investors are not looking for domestic European regulation. The Caribbean is able to keep its edge.’
John Collis, Conyers Dill & Pearman

To obtain the coveted passport, fund managers will have to comply with the Directive in full and apply for authorisation by an adopted EU regulator. To do so, equivalence status must be achieved. To claim equivalence status, appropriate co-operation arrangements must again be in place between the relevant EU and third country regulators, and the third country must not be listed as unco-operative by FATF. Additionally, a tax information exchange agreement (TIEA) must exist between the third country and the jurisdiction in which the non-EU fund will be marketed. Since 2009, to achieve a placing on the Organisation for Economic Co-operation and Development’s (OECD) white list of jurisdictions effectively sharing tax information, both offshore and onshore territories have been required to enter into at least 12 such TIEAs. ‘We don’t yet know what the regulation agreements will look like,’ says Matthew Feargrieve, who leads Appleby’s global funds team in Zurich, ‘but since the G20 summit in April 2009, the key offshore jurisdictions have been getting their TIEAs in place.’

As far as equivalence is concerned, market observers in the white-listed Channel Islands do not envisage any problem complying, especially if the test remains an objective one and devoid of political interference. Bearing in mind that the US is effectively in the same boat as the Channel Islands, it seems unlikely that the EU would want to cut itself off from the rest of the funds world completely. ‘The way forward is unlikely to be entirely smooth as these processes rarely are,’ says Kate Anderson, an associate with Jersey law firm Voisin, ‘but we can offer certainty to clients that Jersey is extremely well-placed to slot into the passporting system.’ Indeed, both Jersey and Guernsey’s regulatory standards are already in tune with the International Organization of Securities Commission’s (IOSCO) standards.

‘The three Crown Dependencies (Jersey, Guernsey and the Isle of Man) all have different industry strengths,’ says Jersey Finance’s Bestwick, ‘but they are in a very similar position as far as the regulation of their financial sectors is concerned.’ By way of example, Jersey has already entered into 19 TIEAs with a good spread of countries and several further TIEAs are in the pipeline. It has also signed up to over 20 bilateral agreements with overseas regulators. Moreover, Jersey’s regulator is very keen to remain engaged in the process and will continue to liaise with the UK’s Financial Services Authority on regulatory compliance issues. Both Jersey and Guernsey overhauled their financial services industries very early on and have passed the anti-money laundering tests with flying colours. The International Monetary Fund’s 2009 assessment of Jersey even confirmed that the island was ahead of both the UK and Germany as far as AML safeguards were concerned. This was part of a worldwide programme carried out by the IMF under its financial sector assessment programme.

‘The Isle of Man also takes its international status very seriously indeed,’ says Nick Verardi, a corporate partner in Appleby’s Isle of Man office. The Isle of Man is also on the OECD’s white list and signed its first TIEA with the US back in 2002. It is now in up to

17 such agreements, with the list including Australia, Germany, France, New Zealand, the Netherlands and, most recently, China. Additionally, the Isle of Man has announced plans for the automatic exchange of information on savings interest with the UK and other EU member states. The island’s high levels of compliance with global standards of regulation and supervision in both the financial services and e-gaming sectors were also confirmed by the IMF in its 2009 assessment.

An equivalence regime for some Isle of Man funds would obviously be a significant benefit to the island’s funds industry. However, Isle of Man lawyers are also confident that the island’s alternative funds industry will continue to survive and grow whatever the outcome of the EU’s deliberations. To the extent that the Directive results in any reduction in EU-marketed offshore funds work, Ben Robins, the Jersey-based funds head at Mourant Ozannes, believes that any shortfall will be exceeded by the growing call for alternative products in emerging market economies (see box, ‘Hot spots’, page 80). Robins is referring to those offshore funds that remain free to operate outside AIFM constraints and that are already vehicles of choice.

‘The three Crown Dependencies are in a similar position as far as the regulation of their financial sectors is concerned.’
Heather Bestwick, Jersey Finance

As for the Caribbean, Maples’ Smith confirms that Cayman’s regulator has already entered into bilateral agreements with the FSA, as well as IOSCO’s multilateral memorandum of understanding, which permits regulatory co-operation between Cayman and most EU member state regulators. Cayman and BVI are also highly rated by FATF and do not anticipate making any changes in their funds’ operations to comply with the Directive. Harneys’ Clipstone predicts that so long as Cayman and BVI keep their noses clean with FATF and comply with the IOSCO memorandum, to which both are signatories, Europe will stay open to Cayman and BVI. ‘We will be able to carry on operating as we do now,’ he says.

Promised land

But while some market observers concede that the Channel Islands have always had a slight advantage because of their close proximity to Europe, many lawyers from the Channel Islands lay claim to an edge over their Caribbean counterparts as far as standards are concerned (see box, ‘Crown achievement’, below). They argue that people are beginning to rationalise and limit their choice of offshore destinations. ‘If in the past some structures went to the more free-and-easy jurisdictions, the Channel Islands raised the bar in terms of anti-money laundering standards,’ says Jersey-based Martin Paul, the head of Bedell Group’s investments and private equity group. ‘We believe that our strategy is being shown to be the right one in the long term. The Channel Islands are definitely seen as having favourable status,’ Paul says.

According to Voisin’s Anderson, the perception remains that the Caribbean jurisdictions may struggle to fall in line with the Directive’s passporting requirements. ‘Lawyers in Cayman and BVI will say otherwise,’ says Anderson, ‘but you need to have the independent reports to back up claims that the Caribbean is as well-regulated as the Channel Islands.’

Although plenty of Channel Islands lawyers concede that no offshore jurisdiction needs to feel punished by the Directive and that the Caribbean still has a lot to offer North American clients, some legal advisers do expect to pick up increasing numbers of US instructions. They argue that there is an increasing appetite in the funds sector for well-regulated and credible jurisdictions, which are appropriately positioned for access to European and Eastern investors. ‘Jersey and Guernsey are ideal choices for this purpose,’ says Adrian Odell, investment funds head at Crill Canavan, ‘and their use by clients in Europe and the East is also likely to attract further clients from North America.’

Not surprisingly the Caribbean lawyers beg to differ. Cayman can certainly point to a favourable performance in its own IMF report. The Channel Islands may say that they lead Cayman and BVI as far as compliance is concerned, but many see this as an example of interjurisdictional competition. Maples’ Smith argues that the numbers tell a different story when considering that approximately 70% of the world’s hedge funds are domiciled in Cayman and BVI. ‘This is the market telling us that the level of regulation in Cayman and BVI, and the legal system underpinning Cayman and BVI fund vehicles, are tried and tested, as well as being well regarded by the international investor and fund manager community,’ he says.

Exodus

Despite earlier media coverage, one thing the offshore world agrees on is the improbability of funds and managers exiting en-masse from either the Caribbean or the Channel Islands to certain onshore jurisdictions. Many expect a new AIFM product to emerge, giving managers and investors a choice between EU AIFM funds, AIFM-compliant non-EU funds offering equivalent products that can be passported into Europe, and fully offshore funds.

Some clients are still asking their legal advisers if they should re-domicile their funds to EU member states such as Luxembourg, Ireland, Malta or Gibraltar. However, very few are going through with it.

‘The level of regulation in Cayman and BVI, and the legal system underpinning Cayman and BVI fund vehicles, are tried and tested.’
Henry Smith, Maples and Calder

Of the 9,000-odd funds registered in Cayman, only 15 to 20 have re-domiciled to Luxembourg, points out Appleby’s Feargrieve. Although Cayman may not yet be seeing a return to 2008 levels, when hundreds of new funds were being created each month, its number of registered funds is fast approaching the 10,000 mark again. A few did shut down, but according to Maples’ Smith, in the first half of 2010 more hedge funds were registered in Cayman than in Malta, Luxembourg and Ireland combined.

Although Malta has access to the EU, it is not yet well known as a funds jurisdiction. Many see its regulator and indigenous service providers as lacking the experience found in either Cayman or Ireland.

Therefore, because the Directive does not apply to investors outside Europe, if you are raising money globally the Caribbean will still be an attractive alternative. ‘Global investors are not looking for domestic European regulation,’ says John Collis, Conyers Dill & Pearman’s Bermuda-based chairman. ‘The Caribbean is able to keep its current edge.’

Indeed, many believe it would be premature for financial centres, such as Dublin or Luxembourg, to sound the death knell for Cayman because of the Directive. Take a firm like Ogier. Eighty per cent or more of its Cayman office’s work is reportedly generated from New York, a centre that continues to produce significant flows of new business.

Others scoff at the suggestion that funds jurisdictions, such as Luxembourg, are better regulated or safer than Cayman. ‘This is difficult to swallow following the Madoff affair,’ says Feargrieve, referring to US fraudster Bernard Madoff, convicted of the world’s largest-ever Ponzi scheme fraud.

‘Dublin has been tarnished as a funds jurisdiction because of Ireland’s economic crisis.’
Matthew Feargrieve, Appleby

As for Dublin, ‘it has been tarnished as a funds jurisdiction because of Ireland’s economic crisis,’ Feargrieve adds. However, notwithstanding its recent troubles, Ireland remains of immense appeal to some law firms. It has full EU membership yet offers low tax levels and a network of double taxation treaties. Walkers recently expanded into Dublin to operate as a full-service Irish law firm with an integrated corporate administration service. This move recognises an increase in client demand for EU-domiciled vehicles for certain fund strategies, parallel Cayman and UCITS fund structures, as well as the prevalence of financing structures that incorporate both Cayman and Irish-domiciled special purpose vehicles. ‘The bottom line,’ says Grant Stein, global managing partner at Walkers, ‘is that with the Directive now in place, we see the global investment pie growing. Both onshore and offshore jurisdictions will benefit.’

‘Often there is insufficient understanding out there as to how strong our regulatory system actually is.’
Adrian Odell, Crill Canavan

Many market observers find the additional clarity on the Directive’s thresholds especially helpful, namely the E100m of funds under management as a general threshold and E500m for private equity funds in certain circumstances. Crill Canavan’s Odell believes that the cost-effective nature of the Standard Form Expert Fund, a Jersey structure developed by Crill Canavan, will be of special interest to the small-to-medium-sized segment of the funds market, including fund managers that fall below the Directive’s thresholds. This is further expected to enhance Jersey’s ability to compete in the AIF sector by showing that it is interested in attracting not only large-cap fund managers, but also managers on the other half of the funds spectrum.

Two-way traffic

Some Channel Islands funds lawyers are so upbeat that they even expect certain European funds and managers to abandon Europe for the Crown Dependencies. Ben Morgan, a partner at Jersey and Guernsey firm Carey Olsen, believes that some fund managers currently based in the EU may find the Directive provisions – for instance those regarding remuneration and custody – to be too restrictive. ‘Using a base outside the EU will mean an extra degree of flexibility for fund managers,’ says Morgan. ‘This will be very attractive to many investors when combined with the islands’ reputation for effective regulation.’

Morgan is not alone. Others also expect the Directive to produce additional flows to the Channel Islands. Principally for costs reasons, Paul expects to see some EU funds with EU managers moving to Jersey where the investor base is non-European. He anticipates a steady stream of two-way traffic as far as real estate, private equity and hedge funds are concerned.

Ultimately, it’s going to come down to choice. Managers will need to decide exactly what they are trying to achieve for their clients, where best that can happen and at what cost. For the next seven years, it will be up to the managers to decide whether they prefer the private placement or passporting regime. Some managers simply won’t like the depository requirements under the Directive and will choose to remain under the private placement model.

‘The Cayman and British Virgin Islands are fundamental to the smooth running of the world’s financial system.’
Tim Clipstone, Harneys

Relocation, relocation, relocation

With the level of activity in Asian markets, it is unsurprising that major offshore law firms are strengthening in the Far East. Ogier recently appointed finance partner James Bergstrom as its new Hong Kong managing partner and relocated two Channel Islands partners to the Hong Kong office. Marcus Leese came from Guernsey to head the Channel Islands firm in Asia and corporate partner Nathan Powell arrived from Jersey.

Ogier is not alone. In late 2010 Maples and Calder decided to send Cayman managing partner Gareth Griffiths to Hong Kong to replace joint managing partner Spencer Privett, who became chairman of the firm’s fund services Asia Pacific division. Christine Chang is the other current Hong Kong joint managing partner. ‘Gareth’s move reflects the growing importance of the Asia Pacific region to Maples,’ says global managing partner Henry Smith.

With both Maples and Ogier sending their managing partners to onshore Hong Kong, many see this as evidence that they are gearing up for significant business opportunities. ‘For the firms to be successful in China, they know that they need to have a credible senior figure and a critical mass on the ground,’ says Mark Walters, London-based head of international at Taylor Root, the global legal recruitment business.

As foreign law firms are still prohibited by the Indian Bar from establishing operations in India, several offshore law firms handle their India work from Mauritius. Jersey firm Bedell Group recently opened its own Mauritius branch. It currently has a team of four people, headed by partner Yuvraj Juwaheer. In a further sign of the Indian market’s importance to the offshore world, Jersey Finance is planning to open a liaison office in Mumbai in the first quarter of this year.

Offshore law firms must also be careful not to trip themselves up. Although Appleby has opened up several offices in recent years, its group managing partner, Peter Bubenzer, points out that the movement of offshore law firms into new locations both offshore and onshore, does not mean that Appleby will start competing with the major international law firms.

Others would be surprised were offshore firms in onshore markets to become anything more than representative offices with a marketing function. ‘They are there to steer their clients through a range of offshore options,’ says Jason Horobin, a director at international legal recruitment company Laurence Simons, ‘and to make sure they win the business ahead of their competition.’

Voisin’s Anderson believes that some clients will always prefer Jersey structures to other jurisdictions, primarily because the island’s regulatory environment fits certain clients’ culture. In the Cayman Islands, many lawyers contend that for some non-European investors the classic Cayman fund vehicle is the optimal solution.

However, there is always a range of competing managers out there. As some of them are EU-focused, certain EU-domiciled funds and investors will of course look to Ireland or Luxembourg, as they will always want a European-based fund product. That is why Maples is present in Dublin, as it helps the firm with its European footprint. Ireland also remains a good destination for investors who are fond of European-based hedge funds or UCITS, which do not exist outside of Europe.

At Guernsey law firm AO Hall, partner Sam Shires agrees that retail funds, such as UCITS, are more suitable to Luxembourg and Dublin because of the fund administration infrastructure of those jurisdictions. Guernsey itself has been trying to come up with a UCITS equivalent product for some time, but it is still waiting for approval by the FSA and HM Treasury. In any event, while some European investors like the extra regulation of UCITS, many managers and investors prefer not to use them as they think that the additional costs and investment restrictions involved are not warranted.

Of course there will also be those managers who sit in the middle, preferring a platform from which they can access different types of clients globally and who want to invest in both EU and non-EU funds. By way of example, fund managers with both Cayman and Irish funds in their platform can claim a very compelling and complementary fund offering that caters to all types of investors.

 

How much?

Cost will play a crucial part when deciding whether to passport or not. The passporting model will entail the imposition of additional registration, regulatory reporting, compliance and depository requirements. Mourant Ozannes’ Robins believes that the passport comes at an extremely high compliance cost and that small to mid-sized firms may have no choice but to operate outside the new regime.

For an arranger wishing to passport a bespoke fund into Europe, the extra cost impact of compliance could knock 1% to 1.5% off investors’ returns. Robert Christensen, the managing director at Voisin’s associated company Volaw Trust & Corporate Services, believes that the additional costs incurred by AIF managers will have to be passed on to investors in their funds. This means that investors will incur a lower return. ‘I am sure that some professional investors will question whether this cost justifies the increased protection offered by the AIFM Directive,’ says Christensen, ‘bearing in mind that they ought to be able to determine the risks of investment in a fund.’

Some commentators argue that when the European economic cycle improves, investors will care more about returns than regulation. ‘With funds on the uptick again,’ says Conyers’ Collis, ‘managers need to analyse carefully how they will structure their global platforms. The cost of compliance issues will weigh heavily upon managers’ choices. Many sophisticated investors, particularly in the Middle East and Asia, will not want the extra burden of regulatory issues that are in effect bureaucracy, but without affording higher levels of protection.’ Many offshore lawyers point to the Madoff affair, where the higher cost of US regulation did not in fact protect the global investor from the far-reaching fraud.

‘Any perception that offshore centres are used principally for the tax advantages they can offer has disappeared.’
Martin Paul, Bedell Group

Certainly there are parts of the world where investors are looking for the expertise of hedge fund managers, but without the cost of regulation designed for the domestic market. ‘By way of example, for years hedge fund managers have used Delaware for US investors and offshore structures for the rest of the world,’ Collis says.

Have lessons not been learnt from the global crisis? Over the past few years, many managers will have experienced a litmus test moment in their jurisdiction of choice. Some had positive experiences and others very negative. ‘But managers do have long memories,’ says Collas Day’s Atkinson. ‘As a result, those who are looking for alternative jurisdictions will no longer content themselves with immediate returns.’ Consequently, even if the world’s major economies are in recovery mode right now, any fund manager who forgets this may pay the price during the next downturn.

Overall, clients need to have confidence in the jurisdiction where their fund is established. It is important to consider not only the technical ability of a jurisdiction to accommodate a fund product, but also the ancillary matters relevant to a fund, such as legislation dealing with insolvency matters and security interests. Both Jersey and Guernsey can claim to boast legal systems with solid reputations for good, consistent judgments and enviable legal structures that are supported by skilled professionals and judiciary. ‘In my personal experience, this is not necessarily the case in some other jurisdictions,’ says Nuno Santos-Costa, the senior partner at Crill Canavan.

Cayman and BVI can also lay claim to reliable legal systems. They are used to being scrutinised, as well as having the capacity to deal with complex problems. ‘Because 70% of the world’s hedge funds are in the Caribbean, it’s inevitable that a larger number of funds will fail here,’ says Harneys’ Clipstone, ‘but this means that we have a great deal of knowledge and experience in dealing with such situations.’

One high-profile case recently processed by Cayman’s legal system was Walkers’ representation of the petitioning creditors (Barclays, The Royal Bank of Scotland and Calyon) in obtaining the winding-up order against Saad Investments Company, the main company in the Saudi Arabian Saad Group. The case involved several jurisdictions and billions of dollars in claims and cross claims. Walkers also advised Grant Thornton, the liquidators, on civil proceedings in Cayman. Here the claims are said to be worth $9.2bn.

As far as Cayman-based litigation is concerned Conyers has also blazed a trail. Nigel Meeson QC, the litigation head in Conyers’ Cayman office, achieved a notable victory in Re Founding Partners Global Fund Ltd. In the process, new ground in funds insolvency law was broken when the financial services division of Cayman’s Grand Court held that Conyers’ client Hibistar Pte, the sole Class E series shareholder in the fund, was solely entitled to the Class E share series assets, which had been designated to that share series and segregated by the terms of the articles. The case demonstrated that asset segregation could be achieved between the shareholders via the articles. Furthermore, this will be upheld by the court, even on a winding up, provided the rights of third party creditors are not involved. This outcome is also seen to demonstrate the benefit of having a dedicated financial services division in Cayman that provides quick and commercially sensible decisions in funds cases.

Blurred vision

The Directive has also served to highlight the increasing convergence between the offshore and onshore worlds. No longer easily pigeonholed as dodgy tax havens, several offshore jurisdictions have been banging the drum about the positive contribution they make as financial centres for the movement of the world’s capital. ‘Cayman and BVI still suffer from the John Grisham syndrome,’ says Harneys’ Clipstone. ‘Whatever the perception, they are fundamental to the smooth running of the world’s financial system.’

The distinction between the two halves is also becoming more difficult to determine because of the indirect role offshore centres play in relation to investments in the developing world. Without investment capital moving into onshore financial hubs and into developing and emerging countries from infrastructure investment funds based in offshore territories, many critical infrastructure projects in third world countries – such as commercial aircraft, power plant projects, gas pipelines, hospitals, roads and microfinance – would never happen.

Some offshore lawyers point to the pressure brought by the OECD to improve the regulatory standards of offshore jurisdictions, which culminated in offshore territories being brought ever closer to the onshore world. ‘We have effectively been brought on board by our compliance with those standards,’ says Bermuda-based Peter Bubenzer, Appleby’s group managing partner. ‘We are all now part of the same team,’ he says. The offshore world’s signing up to TIEAs has also helped it in terms of how it is perceived, as well as the fact that such jurisdictions have shown a willingness to change their own tax regimes to meet international requirements.

Overall, a corner has certainly been turned. ‘Any perception that offshore centres are used principally for the tax advantages they can offer has disappeared,’ says Bedell’s Paul. It is now widely acknowledged that even if some jurisdictions have a low tax rate, investors will still be taxed where they invest and when they take their profits. Offshore centres are, therefore, being increasingly recognised as positive facilitators channelling cross-border investment flows in a tax neutral environment.

‘With funds on the uptick again managers need to analyse carefully how they will structure their global platforms.’
John Collis, Conyers Dill & Pearman

Apart from the IMF’s positive take on the offshore markets, the previous UK government’s independent review of British offshore financial centres also helped redress the balance somewhat. In 2009, Michael Foot, an ex-managing director of the FSA and executive director of the Bank of England, completed his final report on the independent review of Britain’s offshore centres. The report’s findings on the role played by IFCs were extremely positive.

The International Financial Centres Forum, formed in late 2009 by leading international finance organisations and individuals, has likewise played its part. The Forum’s objective is to provide authoritative and balanced information on the positive role of international financial centres in the global economy, and to submit co-ordinated responses to the political rhetoric often directed at offshore jurisdictions. The founding members of the Forum included representatives from Appleby, Conyers, Mourant du Feu & Jeune (now Mourant Ozannes), Ogier and Walkers. In September 2010 Maples also joined up.

One year on, Bubenzer believes that the Forum is educating the public on understanding that the offshore world is just a part of the global movement of capital and no different, in reality, to onshore territories. Certainly, it is helping to shape the debate on what offshore jurisdictions have to contribute by way of wealth and jobs, as well as to expose the myth that they are secretive tax havens. Although the Forum has produced a stream of papers in support of the offshore world, Conyers’ Collis believes that it will still take some time for certain perceptions to change.

Some offshore lawyers feel particularly peeved when considering some of the onshore jurisdictions that fall short of the mark. Hong Kong, for instance, never made it onto any of the OECD’s white, grey or black lists of compliant and non-compliant territories because of pressure from China. Switzerland has, of course, also been dogged by accusations of bank secrecy and UBS, one of the country’s banking giants, has become a target of the court-appointed trustee attempting to recover assets in the Madoff fraud.

The blur is also spreading because of a movement by some onshore territories towards the offshore world. Jurisdictions such as Malta and Gibraltar have set up new, funds-friendly regulatory regimes, but they are based on the traditional offshore model, as pioneered by Cayman. This reveals increased competition between the offshore and onshore world but it also demonstrates how some onshore markets often look to approximate the offshore regimes.

Leading treaty-based jurisdiction Cyprus is another good example of such offshore-onshore blurring. It is part of the EU, and onshore in the classic sense, but a preferred jurisdiction for Russian investment because of its widespread double tax treaty network. Cyprus is also favourable for India or eastern Europe-related deals. As such, it has attracted the interest of Harneys, which now has a presence there. Conyers runs its Cyprus practice from its Moscow office, but enjoys an arrangement with local law firm Antis Triantafyllides & Sons for mutual co-operation in Cyprus, Bermuda, BVI, Cayman and Mauritius work. As for Harneys, it merged with best friend firm Aristodemou Loizides Yiolitis in 2009.

The work conducted by offshore lawyers is also becoming increasingly more involved and entwined with the onshore world. One reason is that administrators are now spreading their remits between the onshore and offshore world, depending on where the work, expertise and staff are located. As the economic downturn provoked a raft of onshore-related restructurings and litigation, offshore lawyers have found themselves advising on and managing such matters. ‘This is often more time consuming and involves more legal analysis than establishing the structures,’ says Harneys’ Clipstone. This is because each scenario tends to be unique.

It is not just the improved clarity surrounding the Directive that has the offshore law firms smiling. Confidence is back, new funds are being formed and the emerging markets continue to generate healthy instructions. ‘The economy has lived through an extreme business cycle but, contrary to some expectations, the financial world has not ended,’ says Bedell’s Paul. ‘We are optimistic about the future.’ LB