Jersey remains a popular, offshore jurisdiction, even though it has never had any statutory banking secrecy. It does have a regime of data protection and client confidentiality, which is an important consideration for any offshore banking relationship.
The Jersey courts have followed the decision of the English Court of Appeal in Tournier v National Provincial and Union Bank of England  1 KB 461, which recognised a duty of a banker not to disclose his clients’ affairs. That duty applies to all information that the banker receives during the banking relationship, and even survives the relationship.
However, it seems that this duty is not absolute, exceptions being:
- a public duty to disclose
- where the interests of the bank requires disclosure
- consent from the customer
- where the bank is compelled by law to make disclosure.
Jersey is very concerned to keep its reputation clean, so while institutions there adhere to those rules, there are nonetheless competing rules, mostly concerning the proceeds of crime, and the holding or retention of property connected with criminal activity. When such conduct is suspected, there is a duty to report it, and such disclosure is a defence available to the institution in respect of the above rules.
Suspicious can be legitimately aroused, when transactions are such that they are unusual, in that they are inconsistent with the expected pattern of activity or type of business of the particular account, or indeed, even those where there is ‘no apparent economic or visible lawful purpose’.
There are, however, many perfectly legitimate reasons why an individual would not want his financial affairs to be exposed, and thus seeking confidentiality should not be considered inherently suspicious. Whether the structures Jersey has in place actually achieve a balance between the duty of disclosure and the customer’s right to secrecy has yet fully to be demonstrated.
The so-called financial crisis drags on like a man in a hospital bed with a terminal illness, which the doctors are fighting day and night to conquer, because they are ignorant of what caused it, and fearful of what may follow it. But above all, they are terrified about whether they themselves might survive it.
I think some quotes taken from knowledgeable men over two centuries surpass anything I could contribute. I begin with Napoleon Bonaparte in 1815.
When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.
Then that controversial thinker, Voltaire, had among others, these two thoughts:
If you see a Swiss banker jumping out of a window, follow him, there is sure to be a profit in it.
Paper money eventually returns to its intrinsic value – zero.
John Kenneth Galbraith has been regarded America’s most famous economist. He made a very succinct comment:
The process by which banks create money is so simple that the mind is repelled.
But it was two bankers themselves who had thoughts well worth bearing mind. One was of these was Sir Josiah Stamp – President of the Bank of England in the 1920s, and then the second richest man in Britain.
Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in.
The other was Mayer Amschel Bauer Rothschild; from that very famous banking dynasty of the same name.
Give me control of a nation’s money and I care not who makes it’s laws.
Can I say very much more?
Just a quick observation, but to the amazement of some:
Germany held an auction of €4bn in six-month bills this morning, getting an average yield of -0.0122pc. In other words, investors were willing to pay Germany for the privilege of lending it money.
As eurozone worries increase, investors are seeking a safe place to stash their cash – even at the cost of letting Germany skim a little from the top.
Frontier markets would seem to offer active fund managers potentially a source of good returns, as well as opportunities for portfolio diversification. However, these potential benefits do not come without risks and challenges. These risks should be considered when determining which particular markets to pursue, and be recognized in investment processes in risk-and-return targets. Let us look at a number of these.
1. Regulatory, and Trading Execution Risk: Although increased interest in frontier markets has been enabled by market liberalisation and increased openness to non-local investors, market barriers should not be underestimated. Foreign ownership restrictions, currency limits, local custody rules, local funding and registration requirements are widespread and sometimes difficult to navigate. Some markets even require foreign market participants to execute trades via local brokers.
2. Transaction Costs: In many markets, high local transaction fees and commissions inflate trading costs.
3. Currency Risk: Investors, who seek to build a frontier market portfolio, need to be aware that they face a higher risk of investment exposure to potentially volatile currencies.
4. Governance Risk: Standards of corporate governance and financial reporting among listed companies in some frontier markets can be, at the very least, uneven.
5. Sector and Sovereign Risk: Part of the attraction of frontier markets is their low correlation with developed and emerging markets. However, investors should be aware that frontier markets are dominated by a few sectors, and hence a sizeable allocation can result in concentrated exposures to certain sectors. Frontier market equities are highly exposed to sovereign risk.
6. Liquidity Risk: Illiquidity is a feature of many frontier markets. Investors may be unable to execute trades when they want, or at the size they want. Bid-offer spreads can also be relatively wide.
7. Operational Risk: In some frontier equity markets, investing entails increased operational risk. Failed trades may occur more frequently than in developed markets, as settlement processes may be less standardised, less automated, and more prone to errors.
8. Political risk: As the recent political unrest in the Middle East illustrates, many frontier markets have fragile systems of government, which can be prone to instability. Turmoil can in turn lead to rapid declines in the market value of securities traded in impacted countries.
Now, whether an asset manager is considering launching a passive product, seeking alpha generation, or running a thematic growth strategy, it is obvious that risk must be managed carefully.
A single country, or regional, approach to frontier markets investment can create very significant sovereign, and sector/ stock concentration, risks. These limit the investment scope in such a way that it results in few potential securities, which meet minimum, objective capitalization standards or other criteria. The strategy can also limit the amount of capital that a fund can put to work. This is because of the risk that an investment in a given security will be too large to trade effectively.
Certainly, one attraction of frontier-market returns is their lack of correlation to each other, and to developed and other emerging markets. This means that adding frontier-market investments to a broader investment strategy can, in fact, reduce overall risk, and very probably improve risk adjusted returns.
Unquestionably, issues related to illiquidity, trade execution and settlement should be factored into the decision making process, and whether a manager can create an investment product with an attractive risk-reward profile. A local presence can have significant potential benefits in this regard. Being on the ground can also help an organisation monitor and mitigate other key risks, such as a lack of disclosure in financial reporting, or the potential for political uncertainty to destabilize markets, etc.
Frontier markets undoubtedly offer what are very likely compelling investment opportunities, which satisfy investor demand. Frontier markets are growing rapidly, but are still new enough to offer significant return potential, and attractive correlation characteristics, as globalisation continues to unfold.
Nonetheless, asset managers must work diligently to assess whether a frontier product is a good fit for their portfolios. Performance potential and asset gathering are only part of the equation. To be successful in developing an effective frontier investment capability, managers must ensure that their approach to risk management takes into account the particular blend of risks, which these markets entail.
Funds which invest in so-called frontier markets are often an appealing way to increase assets under management, particularly when given strong investor demand. Nonetheless, these markets present various risk management challenges.
Sometimes called “emerging markets,” “next-generation markets,” “N-11 (next 11) markets” as well as “frontier” markets, these lie beneath the top two tiers of markets, which normally attract asset managers. Investors paid US$2.6 billion into dedicated frontier funds in 2010. Relatively robust economic growth, impressive stock-market performance and increasing investor appetite for exposure to emerging markets such as Vietnam, Bangladesh and Pakistan are among the main reasons, why managers are launching stand-alone frontier funds, or allocating more assets to frontier markets.
Frontier countries are usually defined as those with economies whose size and growth are below Brazil, Russia, India and China (the BRIC group) and the next tier down, Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (CIVETS), although as a matter of practice, some market participants deem CIVETS such as Vietnam to be “frontier.”
In the second quarter of 2010, China supplanted Japan as the world’s second-largest economy. Many analysts forecast that the size of China’s economy will surpass the US within two decades. Be that so or not, the global economy is reconfiguring, and frontier markets comprise part of this reconfiguration. Sustained demand from China, India and other rapidly growing economies for commodities and other products have bolstered the prospects of frontier markets.
Economic growth in the frontier market is being driven by various factors. In Vietnam, Bangladesh and Pakistan, rapidly growing, younger populations are fuelling increasingly competitive labor forces. They are benefitting from the so-called demographic dividend, as the rising proportion of working-age people in the population helps to sustain economic growth. Quite differently, Kenya, Nigeria and Ghana have younger populations alongside plentiful agricultural and natural resources. For some other frontier countries, notably Qatar, Bahrain and Kuwait, natural resources are the main economic driver.
In many frontier markets today, economic, fiscal and monetary policies are more supportive of sustainable growth than was typically the case a decade or two ago. Government debt markets are growing, and some frontier markets now support relatively well functioning stock markets with frequent IPO activity, although they remain small in terms of total capitalization.
Typical valuations of many frontier-market stocks in recent years have tended to be lower in terms of price-to-earnings than comparable stocks in developed markets, or indeed top-tier emerging markets. It should come as no surprise then that typical frontier market stocks are in the micro-/small-/mid-cap range. The financial and telecommunications sectors account for the largest frontier sector exposures within broad indexes, such as the S&P Extended Frontier 150.
Although a number of frontier economies are dominated by large energy companies, some of these companies are unlisted or remain government owned. And with many frontier-market currencies appreciating against the US dollar, investing in local currencies also demonstrates a potential for higher returns.
Two previous blogs have dealt with the registration in Ireland of Special Purpose Vehicles for Structured Finance Transactions. Many advantages have been noted, but here now are a few of the more ‘sideline’ benefits.
Stamp duty will not apply on the issue or transfer of notes issued by a Section 110 company. Stamp duty can apply on the transfer of Irish assets, but should not be payable on the transfer of non-Irish assets.
Special Purpose Vehicles are engaged in exempt activities, and so will generally have limited ability to recover any VAT charged to them. Irish VAT legislation confirms that management services (which includes portfolio management services) supplied to an SPV falling within Section 110, whether by an originator or otherwise, can be supplied exempt from Irish VAT. This exemption from VAT strengthens Ireland as a location of choice, as recent European Court decisions have confirmed that these services are otherwise within the VAT net.
Thus, to have a legislative exemption amount to the provision of absolute clarity, which is not available in other jurisdictions.
Any Special Purpose Vehicle, seeking to qualify for registration under Section 110, must notify the Irish Revenue and confirm that it satisfies the conditions in Section 110. Unlike other jurisdictions, this is a simple notification and self-certification process. No return approval or Revenue Ruling is required.
Ireland is party to an extensive range of double taxation treaties which, depending on the particular treaty, can ensure that the SPV receives income on its underlying assets free from withholding tax, or at least at a reduced rate. Avoiding tax leakage in this manner is very important to a transaction. A list of countries with which Ireland has a double tax treaty is available at http://www.revenue.ie/en/practitioner/law/tax-treaties.html
An Irish company is not required to make an annual statutory minimum profit for Irish tax purposes. Instead, the Special Purpose Vehicle need only receive a nominal fee (corporate benefit payment) at the start of the transaction.
The Irish Stock Exchange (ISE) has become the largest European exchange for the listing of asset backed debt securities, such as those issued by Special Purpose Vehicles. The ISE provides an efficient and comparatively speedy response time to draft offering circulars. Currently, the ISE guarantees comments within three days of receipt of the first draft of an offering circular.
All in all, it makes for a very attractive domicil for such transactions.
On May 17, 2011, the EU General Court provided a reminder that parents are responsible for the behaviour of their children – in this case that parent companies must be presumed responsible for the behaviour of their subsidiaries, because the latter are presumed not to be independent companies.
In judgments involving the Elf Aquitaine group, the court confirmed that there is a presumption (admittedly rebuttable) that a subsidiary wholly owned by its parent company does not freely determine its own conduct on the market. But further, such a presumption also applies where a parent company owns almost all of the share capital of its subsidiary. Elf Aquitaine held more than 97% of the shares of its subsidiary Arkema France, and did not furnish evidence, which could be held by the Court to be capable of rebutting the presumption of parental control. Arkema France’s breaches of competition law could therefore be imputed to Elf Aquitaine.
The court also confirmed that, when setting fines, the EC has the power to impute the responsibility for an infringement committed by a subsidiary to its parent company. This issue is important, for example in cases following a sale of the company, since a vendor, which is said to have controlled a former subsidiary, may well find itself the subject of a fine for competition law breaches incurred by that subsidiary (for the period up to completion of the sale).