Issues & Integrity in Offshore Structuring

Chris Harkness discusses the search for jurisdictional prudence…

Litigation is on the rise and investment fund promoters (i.e. Directors and managers) are paying close attention to the winds of change. Restructurings are transforming into insolvencies and international tax/regulatory initiatives continue to evolve across the globe. Contractual disputes involving Net Asset Value restatements, clawback liabilities, service claims, provisional liquidations and numerous other contributing factors have forced investors to become more intimate with the offering and legal documents relating to their investments. Specifically, fiduciaries have been tasked with the responsibility of overseeing and interpreting the rapidly changing landscape. This has recently brought into acute focus the domicile in which the fund operates.

Historically, when considering where to domicile a commingled investment vehicle, the typical promoter was often focused on the path of least resistance. This had more to do with speed of execution and associated set-up cost than with the integrity and credibility of the jurisdiction in question. Investment managers relied upon offshore legal counsel for advice, with many simply deferring to their selection.
Directors were often attached to these newly incorporated funds based on relationships, cost and ease of management. Often the Directors were inactive, and performed perfunctory tasks on a committee level—often not appreciating or truly understanding the importance of their role or the legal liability attached thereto.

In the post-2008 environment, Directors have become increasingly involved, and a new focus has come to be predominantly concerned with fiduciary responsibility. In lieu of the numerous contractual disputes involving investment managers and their respective fund vehicles, jurisdictional prudence has emerged as a critical element for consideration when attempting to gauge the beneficial elements of offshore structuring.

D&O insurance rates have soared, audit costs have jumped, and reflective of these renewed levels of due diligence, eyes have turned to issues surrounding the status, residence and overall acceptability of the jurisdiction of choice to underlying investors. As such, ancillary issues such as offering restrictions, regulatory position and tax/exchange controls are being measured against the confidence, familiarity and preference of underlying investors when dealing with the domicile in question.
At Altree Services Ltd. (“Altree”), we believe that investor preference will continue to strongly influence the promoter’s choice of fund domicile. As new regulatory initiatives (e.g. anti-money laundering, Tax Information Exchange Agreements (TIEAs), transparency, et al.) are integrated into the legal framework of leading offshore financial centres, investor preferences are changing and the concept of jurisdictional prudence is being challenged unlike ever before.

Altree has headquartered its operations in Hamilton, Bermuda and as such, is able to leverage Bermuda’s credible status for the purpose of delivering unparalleled jurisdictional prudence to its clients. As the oldest and most populous British Overseas Territory, Bermuda benefits from the age of its judicial system and experience of its regulatory authorities. Bermudian monetary authorities are widely recognised as having both developed and implemented a risk-based framework and capital model designed to ensure the highest level of observance with respect to International Association of Insurance Supervisors (IAIS) Core Principles.

As a result, Bermuda has emerged as the world’s second largest captive insurance domicile and third largest reinsurance centre, behind only London & New York. Similarly, the longstanding credibility of the Bermuda Monetary Authority (BMA) has resulted in a significant and active investment fund and fund services sector. Bermuda presently houses nearly 1,500 collective investment schemes with an aggregate net asset value of more than $250 billion. Importantly, Bermuda’s banking system possesses excellent capital adequacy as evidenced by a capital to risk-weighted assets ratio of nearly 17 percent and consolidated total assets in excess of $25 billion (more than four times GDP). As such, the country boasts one of the highest credit ratings of any offshore jurisdiction (Moody’s Aa2; outlook stable).

Bermuda reinforced this reputation by successfully implementing the internationally agreed-upon tax standard as set forth by the Organisation for Economic Co-operation and Development (OECD). In so doing, Bermuda has gained universal recognition for having been the first offshore financial centre to ascend to OECD White List status. By the date of writing, Bermuda had concluded its 18th TIEA, once again reinforcing its status as the international offshore jurisdiction of choice for professional investors.

Bermuda’s Ministry of Finance has also dedicated itself to streamlining the incorporation processes for offshore funds, partnerships and other collective investments. The Ministry has further reinforced this process by making legislative updates to the legal framework—ensuring that promoters and the individuals, companies, foundations and families that support them, can access and use the latest corporate, trust and estate planning vehicles. This in essence permits professional investors to locate not just their investments, but also the structures that support them, in one complimentary and very price-competitive jurisdiction. This truly is paving the way for a new wave of incorporations and business to make Bermuda their jurisdiction of choice.

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Chris Harkness is a Director of Altree Services Ltd.