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White-listed jurisdictions target foundations market

In mid July, a new law took effect that will radically transform the global market for a fiduciary vehicle that has traditionally been the preserve of Liechtenstein and Panama. Foundations are widely used by family offices as an alternative structure to trusts to organise and manage family assets.

The law, which seeks to create a new form of foundation, becomes operational in Jersey. The Jersey authorities, which took several years to decide to pursue this market, framed a piece of legislation that was passed by the island's government last year. It was referred to the UK Privy Council and this gave its approval in June.

Since it became clear that the new law would be adopted, Jersey-based law firms have been promoting the vehicle to high net worth individuals and family offices. A particular target has been those individuals and family offices holding existing Liechtenstein and Panama foundations. The aim is to persuade such clients that Jersey – as a white listed jurisdiction – is viewed in a considerably more favourable light by the international community. It is seen as well regulated and compliant with international standards.

Whatever the merits or demerits of the situation, both Liechtenstein and Panama have poor standing in the global financial sector. Jersey is seeking to contrast its reputation with those. And Jersey is not alone. Guernsey, Campden FO is reliably informed, has a draft for a new law allowing foundations ready to go before the States of Guernsey. Inevitably, it will have different features to the Jersey legislation. To hedge its bets, it is waiting to see how strongly Jersey foundations perform.

One Guernsey lawyer says: "It will take a good year for the law to be passed, which will give us adequate time to see how the Jersey initiative works."

Robert Kirkby, technical director at Jersey Finance, says: "Anecdotal evidence from various law firms on the island suggests that we are right to be optimistic about the market potential for foundations. There are around 30,000 foundations in Panama and no-one really knows how many there are in Liechtenstein. It is difficult to evaluate the return from migration opportunities. Some foundations are simple structures which hold and invest money and generate perhaps £2000 a year. Others look after the interests of multi-generational families across the world with several residences, multiple assets and a group of associated companies. Some generate £1 million or more in fees.

"We are clear that we expect to open a group of foundations as soon as the law takes effect. Some families have made absolutely clear that they do not want to be linked with OECD grey-listed jurisdiction. This alone gives us an opportunity to win new business," Kirkby says.

Alongside the status of Jersey, Guernsey and the Isle of Man as white-listed, is the concentration of high quality institutions across a broad spectrum to handle the needs of new clients. Jersey is home to several major law firms and accountancy practices. Its financial services businesses are staffed by experienced and capable professionals. Other centres which offer foundations, such as The Bahamas, St Kitts and Nevis and Anguilla, cannot demonstrate financial services sectors with such scope and size.

Jersey's foundations law has two key differences from those in Liechtenstein and Panama. The first is that the foundation's council must include a regulated person who is charged with ensuring that the foundation is compliant with the jurisdiction's rules. The second is that a guardian is a key part of the structure. The guardian could be the founder or the regulated person but this again gives an added dimension to ensure regulatory compliance.

Guernsey's law will inevitably be different from that which exists in Jersey. The jurisdiction will want to offer a different model. It will capitalise on any perceived deficiencies in the Jersey law. Realistically, although Guernsey has a draft, it will need to consult widely to ensure that its financial services industry is comfortable and that the new law will be compatible with Guernsey's existing financial services legislation. In Douglas, the Isle of Man has conducted a detailed study of the market potential for island businesses of foundations. It is expected to arrive at a conclusion in the autumn.

It is worth noting that while the Jersey and Guernsey financial services models are broadly similar, the Isle of Man focuses more on corporate business. It may choose to offer foundations as part of its package but perhaps this will be to supplement existing services to client rather than as a key new product line.

The opportunity for the Channel Islands and the Isle of Man comes from the fact that the OECD launched its new list of jurisdictions in April after the G20 meeting in London. White listing means that centres under this heading are accepted as committed and compliant in OECD's vernacular. In plain English, this means that they are well regulated and held in high esteem by the larger economies. Grey-listed centres, which include Liechtenstein, Panama, St Kitts and Nevis and Anguilla, face the prospect of fiscal sanctions from G20 countries. The OECD told Campden FO that the list of sanctions exists and has been supplied to the G20. It includes, potentially, the revocation of double tax treaties, which could cost grey-listed jurisdictions millions of dollars in revenue. Further, if the G20 introduces sanctions against some centres, they could become pariah states. The G20 will review such sanctions at its meeting in November.

Some jurisdictions have responded rapidly to the threat. Bermuda, the British Virgin Islands (BVI) and the Cayman islands have all been moved to the white list after signing 12 tax information exchange agreements (TIEAs). Bahrain, the Netherlands Antilles and Antigua and Barbuda are within shooting distance of crossing the line. But among the centres with zero TIEAs are St Kitts and Nevis and Anguilla, which, along with the white-listed Bahamas, are the remaining states with foundations products. Jersey sees potential future competition from Hong Kong, Dubai and Singapore.

Liechtenstein has signed two TIEAs – 10 short of the target – and Panama has none. So if Jersey's argument prevails, the Channel Islands in particular have a real opportunity to build market share.

Traditionally, Liechtenstein and Panama have been the holding jurisdictions for the vast majority of foundations, but both centres have suffered in the light of bad publicity. Despite protests to the contrary, Liechtenstein is a banking secrecy jurisdiction and has incurred the active wrath of major European economies, especially Germany. Panama has a tradition of committing to reform and then doing nothing about it. It is one of the least well-kept secrets in the diplomatic world that the OECD's tax forum is seething with Panama's failure to deliver on promises.

Foundations come from the same family of products as trusts. They have similarities but – in many cases – provide alternative approaches to solving particular wealth planning problems.

Traditionally, foundations have excited debate among the legislators of continental European jurisdictions concerned about flexibility and transparency. Jersey and Liechtenstein have countered such objections by introducing the robust concept of enforcer or guardian.

Liechtenstein is the traditional home of foundations but has come increasingly under greater competitive pressure from more nimble-footed centres. As a result, Vaduz has passed a new law to revamp Liechtenstein foundations, which comes into force on 1 April.

Philip Munro, an associate at Withers in London, says: "The Hague Convention on the Law Applicable to Trusts and their Recognition has now been ratified by a significant number of civil law jurisdictions including Italy, Luxembourg, Monaco, the Netherlands and Switzerland, reflecting the widespread use of trusts in international succession planning and in commercial transactions. Although foundations have traditionally been identified with Liechtenstein, they are a form of legal entity which is known in most continental European jurisdictions, though in most cases their use is limited to charitable purposes (with the notable exceptions of Austria, Liechtenstein and the Netherlands).

"In the offshore world, Panama was first to introduce a foundation law in 1995. The Bahamas, Anguilla, St Kitts and Nevis have all followed suit. Jersey's law is now in place. A foundation as a legal vehicle has some particular advantages which mean that it can be useful for financial planning in a variety of contexts," Munro says.

There is a distinction between private and public foundations. In many continental countries, private foundations were banned and so an association has developed over the decades between foundations and charities. There are local variations in local foundation laws but the essence of private foundations is characterised by certain common features.

Munro says: "As a general characteristic, a foundation is a legal entity which is created when a person (the founder) dedicates assets to a specific purpose observing certain formalities. Thus a foundation is immediately distinguishable from a trust in that it has separate legal personality.

This form of entity, however, is also fundamentally different from a company in that a foundation is not owned by shareholders or members but is instead self owned being administered in accordance with the principles laid out by the founder in the foundation statutes."

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