Offshore funds and their importance to the global economy
29 November 2017
The contribution made by offshore finance centres to the global economy should not be underestimated, writes Paul Smith, Chairman of the Guernsey Investment Fund Association.
Offshore funds provide a way of facilitating the flow of capital around the world in the most efficient and cost-effective way possible and Guernsey has been at the forefront of the development and administration of them for more than 50 years.
These investment structures are (and have been) vitally important in supporting the global economy, facilitating complex global transactions and enabling investment in both established and emerging markets. With over half a century of experience, Guernsey has evolved into a highly skilled and well-regulated international finance centre, capable of establishing and servicing a wide range of investment structures investing in anything from ‘blue chip’ equities and bonds, to private equity and venture capital, real estate, infrastructure, green finance, social impact and other ‘alternative’ asset classes.
It is suggested that the first closed-ended investment trusts were established by a Dutch merchant named Adriaan van Ketwich in the Netherlands in the late eighteenth century. His idea was that diversification would increase the appeal of investments to smaller investors with minimal capital; and the name of his fund, Eendragt Maakt Magt, translates to ‘unity creates strength’. The investment fund industry steadily developed over the centuries with the launch of open-ended funds in 1928 and the development of the ‘modern’ investment fund market in the 1980s.
In the 1970s and early 1980s, the Guernsey finance industry was primarily centred on the banking sector, which was split between the high street banks offering everyday banking services, such as cheque and deposit accounts, and merchant banks which provided trustee and investment banking services for higher net worth clients. The merchant banks recognised that establishing funds outside the finance centres such as London and New York could provide additional benefits and they began to offer more sophisticated investment vehicles in offshore jurisdictions, where the restrictions on what funds could invest in were more flexible. This approach enabled their clients to gain access to the stock markets and other forms of investment via unit trusts and corporate vehicles, giving rise to the offshore fund market as we know it today.
Little has changed regarding the basic reasons for these types of investment vehicle to exist, in that they are still a means of providing investors with access to a wide range of investments whilst mitigating investment risk through the diversity that might not otherwise be available to those investors individually. Whilst institutional investors, such as pension funds, sovereign wealth funds etc., might have the resources to enable them to invest directly, they are also able to gain further benefits by investing in funds that pool their money with other investors and manage those monies collectively, for all investors.
The advantages of using an investment fund include: (i) professional management of the target assets by individuals or teams with specific industry expertise, (ii) the ability to diversify portfolios across a broad range of individual investments or investment strategies, (iii) sharing investment and professional expenses, thereby providing economies of scale, and (iv) access to alternative investments which may well be outside the scope of even the most sophisticated investors acting on their own.
Investment is a truly global activity and it needs to take into account the location of prospective investors, fund managers and potential investments, all of which have to comply with the tax and regulatory obligations in their respective jurisdictions. It is therefore vital that investment funds are located in jurisdictions that offer flexibility, do not add to the tax and regulatory burden unnecessarily and have a highly skilled work force with an established infrastructure capable of establishing, managing and regulating what can often be very complex structures. International finance centres such as Guernsey are able to meet all of these requirements.
The issues of investor protection, tax avoidance, money laundering and the financing of terrorism are high on the political agenda – and rightly so. Guernsey was one of the first offshore jurisdictions to establish its own independent financial services regulator in 1987, the Guernsey Financial Services Commission, and, since then, has introduced and updated a regulatory regime that meets the highest international standards. Guernsey also has its own, internationally recognised, regulations on anti-money laundering and countering the financing of terrorism and a centralised beneficial ownership register.
Offshore funds are not established to enable investors to avoid tax. They are, however, tax efficient vehicles that facilitate investment without adding yet another layer of tax, i.e. they are tax neutral. Guernsey is a member of the OECD and it fully complies with tax reporting regimes such as the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), by automatically providing information on investors in funds established in Guernsey to competent authorities. It has also signed tax information exchange agreements with 60 countries to date.
Many projects would not proceed or succeed without access to the capital that offshore funds are able to attract; and the absence of that capital provided by offshore investment funds would be to the detriment of the economies in which those businesses or projects are located. Offshore funds are particularly important in providing funding for infrastructure investments in both developed and developing countries, emerging technology and specialist or alternative investments, as they bring together the relevant expertise required to manage and monitor these types of investments. Guernsey is a leading international finance centre with a wealth of experience in the establishment, administration and management of offshore funds, which are vital cogs in the global economic machine.
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