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Offshore banks: complex solutions for global families

With families spread across many timezones and cultures, offshore banks are adapting to cater for their complex needs. Rodrigo Amaral explains how some banks offer tailor-made services to suit families and that, despite recent news stories, secrecy is their top priority

The globalisation of finance has turned the transfer of assets abroad into a valuable tool for a wiser, and perfectly legal, wealth management strategy. But today's global family requires a bespoke service in order to get the best out of its own complex structures. "Wealthy families don't come to offshore centres purely because of tax anymore," says Ian Bancroft, the managing director of Cayman National in the Isle of Man. "What is attractive today is a combination of a benign tax regime and an efficient servicing structure geared towards the needs of the family."

Contrary to popular belief, offshore centres actually offer tools to achieve several goals other than dodging tax. And banks are continuously updating their services and products as wealthy families expand their interests well beyond their countries of origin. "Clients are much more sophisticated today and the range of services they require is much broader," says Karen Winter, senior manager, Services for Family Offices at Butterfield Bank in Guernsey. "The ability to hedge foreign exchange risks is much more relevant now than it was some 10 years ago. They are also much more aware about technology, so the delivery of information and reporting to clients have had to change completely."

The goals of offshore banking
Investment diversification, including an increasing exposure to alternative investments, is one of the goals that can be maximised by offshore banking. Constantin Salameh, the managing director of Geneva-based family office Safinvest, points out that vehicles such as private equity funds attract a growing number of business people who are used to manage their own investments, and opportunities in this sector are popping up everywhere. So many families choose banks in reliable, stable jurisdictions to act as custodians to their assets and from there spread their bets around. By choosing a good custodian, families can invest in several different markets taking advantage of a range of clearing, reporting and advisory services. The best providers keep networks of fund managers, banks and other local providers in different markets, including emerging and frontier economies.

Most custodians really focus on institutional clients and are unlikely to be impressed by the wealth families can bring in. But others, like Pictet, the Geneva-based private bank, have developed a reputation to provide bespoke custody services to private clients. "If someone with assets worth $5 billion go to a bank that has $10 trillion in custody assets, he is a very small fish in a very big pond," says Richard Humes, Pictet's head of Global Custody. "But, if he comes to a bank like Pictet, he is a much bigger fish and has more leverage in the relationship."

Some offshore banks have also been striving to come up with a portfolio of international investment opportunities that may help clients to maximise their assets. Michael Chan, chief representative for the Greater China region of Switzerland-based Banque Piguet, presents a variety of over 60 global offshore internal and external funds to Asian clients interested on banking with Piguet in Geneva.

He points out that Asian families used to living in more volatile economies have traditionally looked at Switzerland as a safe environment to keep their assets, but, today, that is often not enough. "Our Asian clients are attracted to the Swiss tradition of stability and confidentiality, but they also demand consistent rates of return for their investments," he explains.

The level of complexity gets higher as families from all around the world demand more than asset protection from their offshore banks. For instance, with the Middle East and Asia generating a huge number of new millionaires, the ability to offer products that comply with Sharian or Islamic financial rules is quickly becoming a necessity.

"We are seeing a growing volume of investments in properties in the UK coming from the Indian subcontinent and the Middle East," Winter says. "In these situations, we've got to make sure that a legal and financial structure that works in the UK will also work in the country where the client comes from."

Such developments have urged many offshore banks to work in partnership with other companies to offer a broader variety of services at competitive prices. Santiago Ulloa, the president of American multi-family office GenSpring International, has noticed that offshore investments by wealthy families involve several different providers anyway. "A company will manufacture the product, another will distribute it, and a third group will give advice," he says. "Until now, it has usually been the case that the same institution did everything. But then there are a lot of conflicts of interest, and I believe the industry is changing away from this model."

Another goal of offshore banking is asset protection. By transferring assets into a legal structure offshore, usually a private trust company or a foundation, the client can add a layer of protection from lawsuits against his business in the country of origin. Some may find keeping assets offshore useful too in case of an acrimonious divorce or business divergences between family members.

Businesspeople from parts of the world with a tendency to turbulence can look to offshore banking in a reliable jurisdiction in order to minimise risks that something might happen to their patrimonies. Ulloa says his clients are advised to keep assets with custodians based in two different offshore jurisdictions in order to better protect their wealth and take advantage of investment opportunities.

A variety of legal structures are offered that can help to distance the assets of a family from potential liabilities linked to their business. Ulloa points out that much depend on what clients are used to see in their home countries. "People from anglo-saxon countries like the idea of  setting up trusts that manage the assets on behalf of the clients. Clients from places like Spain or Latin America are more likely to prefer foundations," he says. Such instruments are also recommended to facilitate the transfer of assets spread around the world to the next generation.

The solutions are usually tailor-made according to the needs of each family, but they are developed from a number of standard products like private trust companies and foundations. Other asset protection structures include family captives, which are companies that are set up in an offshore centre allowing the insurance of risks in tax efficient ways, as well as acting as a source of savings that can be re-invested by the family business. A more recent innovation is the protected cell companies, which allows people to protect their assets in segregated pockets within a single legal entity. Each "cell" of assets is legally independent from the others. As a result, the portion of capital designated for one cell is not liable for obligations incurred from others. These structures originated in Guernsey a little over a decade ago and are now available in dozens of other offshore centres. "The reduction of the risk of commingling assets is very important for clients now," Winter remarks.

In light of the recent controversy in Europe involving Germany and Liechtenstein, the issues of regulation and confidentiality remain in the spotlight. Salameh believes that the tendency of governments to demand more transparency from banks is likely to have a negative effect on the offshore banking industry. In his view, more than benign tax regimes, confidentiality has always been the greatest competitive advantage of the industry.

"In the next five to 10 years the big advantages of offshore banking will probably get diluted," he argues. Ulloa comments that the controversy shows that clients must be careful when choosing an offshore jurisdiction.

The case has also made it extremely hard for banks to base their business models purely on a competitive tax regime and an uncompromising take on secrecy. "Legitimate offshore centres have realised that it is much better for them to engage with international bodies," Bancroft says. "In order to do that, they have to understand the difference between legitimate confidentiality and outright secrecy. Engaging internationally, rather than burying your head on the sand, is the right way to go."

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