OFCs and Clients of the Future

For the sake of our discussion, an offshore financial centre (OFC) is a jurisdiction that seeks to create a competitive advantage through law. Despite the best efforts of the United States (US) and the Organisation for Economic Cooperation and Development (OECD), OFCs are thriving and their numbers are growing. This is no mere hyperbole – OFCs are being developed in Bangladesh, Tunis Financial Harbour, Azerbaijan, Republic of Montenegro, Jamaica and Ghana, to name just a few – other, more high-profile financial centres are continuing to evolve and become more independent from former empires and from the US and OECD overseers.

These OFCs are doing this through individual innovation, imitation of other successful OFCs and development of regional OFC advantages. The emerging and existing OFCs are cultivating their regional and jurisdictional advantages in addition to their advantages in law.

OFCs are not only growing in numbers, the dominant, prominent players are becoming more diverse and competitive, too. This blossoming of OFCs is not a fluke or a counter-trend – it is the trend. Entrepreneurs worldwide are leveraging information technologies to employ comparative jurisdictional advantages and concentrate wealth. They, as with all entrepreneurs, seek protection from taxes and litigation and operational efficiencies not found in their domestic financial centres. Entrepreneurs on the internet and in developing nations are the primary source of new clients and expanding demand for OFCs.

What does this mean for OFCs and for service providers in OFCs? In short, it means that they are going to be facing competitive pressures in several areas – some that we can foresee. As the competition for clients between OFCs escalates, this competition will promote even more innovation in their products and legal environments. The innovations and changes this competition will spark will influence the entire world of finance. For example, in the last several years common law OFCs have passed laws allowing for the formation of foundations aimed specifically at clients from civil law countries. While panned by many, these foundations have been reasonably successful at drawing civil law clients to new common law jurisdictions where the transition structure and civil law foundation are recognised by the client's country and allow the client access to advantages offered by common law.

Expect OFCs to become much more responsive to the formation of more complicated structures and entities that require some form of licensing. A six-month process to establish a captive insurance company, a trust or a hedge fund is non-responsive, and in the future will be the death knell for an OFC jurisdiction. Further, jurisdictions that do not respond to due diligence enquiries – questions such as, “is X fund licensed and in good standing?" – will also fall out from the field of competitive players. Today, no one will invest in a fund unless they can get independent confirmation of its license status. The courts, as arbiters of these agreements and regulations, need to be accessible and authentic in the way they conduct themselves, open to all, and reasonably efficient in terms of time and cost. Currently, several OFCs exist in the shadow of an ossified or disreputable judiciary. Jurisdictions with dysfunctional courts encourage the inclusion of independent international arbitration clauses to avoid the judiciary whenever possible – and create opportunity for competing OFCs. The OFC of the future will be quick, modern in all aspects of communication and law, and will promote closer relationships between the regulators, professionals and service providers.

OFC service providers are going to have to evolve or cease operations. No longer are single structures a ‘cheap and cheerful’ means of accessing the international financial community to achieve commercial and legal objectives. The current purveyors of one-stop solutions are offering neither ‘cheap nor cheerful’ solutions – they are simply failing to meet client's needs and expectations. As professionals, we need to learn the advantages of each location, each structure, and each agreement. We need to learn the specific and artistic abilities of all providers, as well as an ability to blend and arrange those services to achieve our clients end objectives.

The first step in this evolution is occurring in the form of location-specific formation specialists for structures. Many formation firms have dropped multinational financial planning and only specialise on the advantages of their jurisdiction. These firms will shrink to one or two knowledgeable practitioners with a clerking staff, and will be beset by intense pricing competition to lower the cost of formations. International financial planners are freeing themselves from single jurisdiction providers and tutoring themselves on the advantages of various jurisdictions. The planners also tend to have many affiliates, with subject matter experts working on such things as contracts, options, intellectual property, web commerce, geographic advantages, trusts, escrow, payment management, insurance, estate planning and forecasting. These firms are evolving into loose or virtual affiliations of professionals representing multiple jurisdictions and experiences. The client's faith in a resident expert, operating in one location, capable of assisting and servicing all of their needs, is dying – and very near death.

Clientele for OFCs has changed. Generally, the last 30 years has been dominated by the model of a financial expert, generally working with a family that had a presence in one or two countries. The patriarch of the family typically sought tax minimisation, control of their heirs, and multi-generational wealth management. It was straightforward work even though the solutions appeared elegant. What we frequently see today is a professional entrepreneur with operations in many locations, who may have more than one passport and may spend most of their time in foreign countries sourcing opportunities. When they find opportunity, they rely heavily on the expertise of their international professional team to locate the right domicile, for the right purpose, for right now. That’s right – for right now. If another country offers a better tax environment, better incentives, less litigation or more certainty in the rule of law, they will move their enterprise lock, stock and barrel (domain, structure and e-commerce solution) to the better jurisdiction. This used to be difficult as you needed to set up manufacturing and obtain labour permits and work permits for the expatriates. Not any more. Most functions are outsourced to supporting companies to allow maximum flexibility for the entrepreneur. It’s easier to move from country to country in this age of the Intangible Economy* than it has been at any other time. The client of the future values freedom of movement and embraces choice.

What these changes mean for both the OFC and the international experts is that they need to be able to speak more languages, be sensitive to more customs and know that the non-resident, non-domiciled, expatriate, nation-wandering entrepreneur is the client of the future. You must be able to respond to their needs. This requires the ability to construct solutions that can be presented as a seamless integration of law and purpose, with supporting technology, services and ideas – wherever they exist in the world. Established nations will react to this by making it harder to move once you are established as a resident or enterprise. The best advice might be to counsel would-be entrepreneurs to start operations in a financial centre free of such restrictive covenants.

These changes speak volumes to KYC rules and how – for the most part – they needlessly impede business. The KYC function is about knowing your client, really knowing your client, so that you know the origin of funds, the desires of the clients (both today and tomorrow) and can assist in fulfilling those needs. KYC is about due diligence during the client intake process and ongoing refreshment of that knowledge in every year of your relationship. Trust between you and your client, however tenuous, is gained through an open and transparent process of requests for, and delivery of, professional solutions. Where these rules are failing today is in the fractionalisation of the process and the abject lack of follow-up.

During the intake process, the bank has one set of due diligence, the service provider another, the trust officer a third and the underwriter a fourth. It is a ridiculous circus of forms, meaningless disclosures and duplication of effort. Dawdling clerks do their best but fail to respond in either an intelligent or timely fashion. The professional working in a group needs one person designated to gather required information, that can be shared as needs demand. Five or more original copies of a bank reference letter should not be necessary – one should do.

The OFC that understands how the results of a due diligence investigation can be freely and openly shared, and can respond to that knowledge, will have seized an opportunity and will enjoy a jurisdictional advantage. Banks, trust companies, underwriters and escrow agents, as a service providing community, should not each need to hire an investigative expert. All parties need to agree in advance who is going to do the work and let the client know exactly what is going on – no back-office whispering – get it done and share the information with each of the responsible professionals.

Both the changes I am observing and the opportunities I’m suggesting are changes in procedures that can be loosely described as ‘critical information’. ‘Intellectual property’ and ‘critical information’ (collectively, IPCI) are terms that will enter all of our lexicons, as IPCI is the currency of the future. IPCI is at the very heart of the modern corporation's vitality. In the modern world, information is the currency that gives a business value. Understanding this is the key to understanding the flexibility of emerging business models, and how their needs are changing.

Intellectual property is any intangible asset that consists of knowledge or know-how. A tangible asset is physical – it has form, it has a creation date and its location can be described. Tangible assets are created from intangible assets. While this description is as accurate as a brief description can be, it could also be describing critical information. So, to be more specific, let's refine our definitions.

‘Intellectual property’ is a concept that includes copyrights, trademarks, service marks, patents, trade secrets and other related rights. Intellectual property is an abstraction recognised by the law. The holder of these abstract ‘properties’ has certain exclusive rights to their creation (work, symbol or invention) that is covered by law. These rights are specific to the jurisdiction in which they are registered or are covered by international treaties that accept registration in third country jurisdictions. If a legal authority somewhere does not recognise the intellectual property, the holder has no rights. Thus, if your intellectual property finds its way to jurisdictions where it is not protected, this will pose a problem.

‘Critical information’ is specific information about your intentions, capabilities and activities which in the hands of your adversaries would allow them to plan and act effectively against your best interests. It is information about your company that your competitors could use to make you non-competitive or hammer you into bankruptcy. The identification of your company's critical information should be construed in the broadest of terms and include items such as customers lists, employee handbooks, formulas, shipping and receiving records, travel of key personnel and presentations made at conferences.

Researching several studies on business acquisitions and mergers shows that on average 75 per cent of the purchase price of a company represents intangible assets and goodwill. Analysing mergers shows a further breakdown of the intangibles to be approximately 25 per cent ‘proprietary technology’ and 50 per cent goodwill. These numbers demonstrate that buyers and sellers clearly assign significant value to intangible assets. This awareness explains why there is global attention by management to protect their IPCI. The emergence of IPCI as a key form of corporate assets begs a redesign of the modern corporation's financial structure to account for, recognise and deploy IPCI. Corporate vitality will lay within the organisational change that contributes most significantly to the development of a robust IPCI Asset Elements Registry – the balance sheet, if you will, for intangible assets.

"I hate what private banking has become, from Wall Street to High Street to the Bahnhofstrasse. You can't get them on the phone; everyone has their nose in the air, read only the WSJ and FT and never get out. Not one of them understands what it means to be an entrepreneur or the mechanisms of a web-based business. It’s no longer porn and pills – it’s software, merchandise and customer services." Not a resounding endorsement from a long-time international entrepreneur. Wealth, today and tomorrow, is coming from the entrepreneur on the internet and the entrepreneur in developing nations. We must prepare to serve them.

* This is the era of the Intangible Economy - This is the Intangible Age.

• The Industrial Age – began in Britain in the 18th and 19th Centuries • The Information Age – roughly from the 1980's to 1992 • The Knowledge Economy – started in 1992 and continued to 2002 • The Intangible Economy – started in 2002.

L. Burke Files DDP CACM
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.