28 February 2010

HMRC : Residence, Domicile and the Remittance Basis

This guidance has been updated in February 2010 to reflect legislative changes made to the remittance basis rules. The only changes in this version compared to the earlier version (published April 2009) are in part 5.

Download Guide (PDF)

26 February 2010

FinCEN Proposes Clarifications to Foreign Bank Accounts Report (FBAR)

FinCEN today issued a Notice of Proposed Rulemaking (NPRM) proposing to amend the Bank Secrecy Act (BSA) implementing regulations regarding the Report of Foreign Bank and Financial Accounts (FBAR).

The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database. They are used in combination with Suspicious Activity Reports, Currency Transaction Reports, and other BSA reports to provide law enforcement and regulatory investigators with valuable information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.

In developing the NPRM, FinCEN worked closely with the Department of the Treasury, Office of Tax Policy (OTP), and the Internal Revenue Service (IRS). FinCEN delegated the authority to enforce the FBAR rules and to amend the form to the IRS in 2003. However, FinCEN retained the authority to revise the applicable regulations.

The proposed rule:

  • Includes provisions intended to prevent persons from avoiding reporting requirements.
  • Defines a "United States person" required to file the FBAR and defines the types of reportable accounts such as bank, securities, and other financial accounts.
  • Exempts certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs.
  • Exempts certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting will not be required.
  • Exempts participants/beneficiaries in certain types of retirement plans and includes a similar exemption for certain trust beneficiaries.
  • Clarifies what it means for a person to have a "financial interest" in a foreign account.
  • Permits summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts.
  • Also permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50 percent interest.

The FBAR filing requirements, authorized under one of the original provisions of the Bank Secrecy Act, have been in place since the early 1970s. In August 2009, the Treasury Department announced its intent to issue regulations clarifying the FBAR filing requirements and sought public comment on related issues.

The NPRM as published in the Federal Register is available on www.FinCEN.gov. Comments concerning the NPRM are due to FinCEN by April 27, 2010.

Mauritius and Republic of Congo sign General Framework Agreement

Mauritius and the Republic of Congo signed yesterday in Port Louis a General Framework Agreement to explore possibilities of common interests for both countries. The agreement was signed by the Minister of Foreign Affairs, Regional Integration and International Trade, Dr. Arvin Boolell and the Minister in the Presidency in charge of Special Economic Zones of the Republic of Congo, Mr. Alain Akouala Atipault.

In his speech, Dr Boolell recalled the privileged relations that the Prime Minister, Dr Navin Ramgoolam GCSK, FRCP has with the President of the Republic of Congo, Mr. Sassou-Nguesso. These friendly ties rights should be translated in greater economic cooperation links, he said.

According to the Minister, advantage should be taken by the two countries beyond this fraternity, and consequently see how efforts can be brought together so as to create the appropriate climate and give a chance to entrepreneurs. A follow-up committee will have to be put in place and the process accelerated. Furthermore, stakeholders at ministerial level will have to be identified which will not only provide the necessary information but also help in ensuring better interaction with the institutions concerned, said the Minister.

For his part, Minister Akouala Atipault stated that despite the great potential in the mining, tourism and agricultural sectors that exists in his country, yet President Sassou-Nguesso, wished to send a delegation to learn from the Mauritian experience in the manufacturing sector. The Minister further said that Mauritius has the required expertise of international standards in terms of know-how and experience.

A calendar of activities has been worked out and is due to start with a prospection mission expected in Brazzaville with some experts from the Board of Investment followed by another delegation of Mauritian businessmen.

25 February 2010

OECD : A progress report on the jurisdictions surveyed by the OECD Global Forum in implementing the internationally agreed tax standard

FSA : Evaluating the prospects for the UK and European market under the Alternative Investment Fund Managers Directive

Speech by Dan Waters, Director, Conduct Risk, and Asset Management Sector Leader,
Euromoney AIFM Directive conference
25 February 2010

Good morning ladies and gentlemen. Thank you for your invitation to speak this morning. I have been asked to evaluate the prospects for the UK and European alternative investment fund managers’ market under the new Alternative Investment Fund Managers Directive (the directive).

You have already heard a summary of the main components of the directive from the first two speakers and you will hear more detail on some of its more important and more controversial requirements over the course of the next two days.

I will not therefore cover the detail of directive’s provisions here, but instead focus on two aspects of negotiations.

First, I will comment on some of the important changes which have been made to the directive over recent weeks in the Council of Ministers. Second, I will provide an overview of the direction of travel of the 1,700 amendments submitted by MEPs, which were debated for the first time in Parliament earlier in the week.

I want to conclude by speaking about the Hedge Fund Survey, recently published by the FSA, which summarises the work we have been doing to better understand the systemic relevance of the hedge fund sector to the financial system.

The FSA’s view on the directive

Before I turn to the negotiation of the directive in the EU Council of Ministers, I think it is important to remind ourselves briefly of the Commission’s original objectives for introducing the proposal.

These were twofold. First, in accordance with the agreement reached by the G20, to provide regulators with the ability to identify, monitor and, where necessary, address potential systemic issues arising from the activities of alternative investment fund managers (AIFM). Second, to provide appropriate protection to investors, in the context of the universal passporting regime for alternative investment funds (AIFs) and AIFMs, proposed by the Commission.

As you hear more from me and the other speakers at this conference over the next two days, I think it is important not to lose sight of what the original proposal was trying to achieve. We must continue to ask whether the directive will be able to meet those objectives.

It is also worth stating again, as we so often have, that the FSA, as the regulator of around 80% of the hedge fund management industry and 60% of the private equity industry in Europe, has welcomed the creation of a harmonised framework of sensible regulatory standards across Europe for AIFMs.

We have long supported the creation of a marketing passport for fund managers to sell across Europe under a single authorisation, which would replace the current patchwork of national private placement regimes. In creating such a passport, and through it the possibility of a new cross-border European market, sensible investor protection measures are appropriate. Consistent with the findings of The Turner Review, we also supported the proposal to allow supervisors the power to collect relevant, systemically important information from AIFMs.

While we have supported the benefits of the directive, there were significant problems with the initial draft, which have been well-ventilated and which I will not repeat here. So significant were our concerns that we commissioned Charles River Associates (CRA) to carry out an independent impact assessment of the key proposals in the original draft of the directive, which disclosed significant negative impacts on investor returns, including for pension funds and other institutional investors, through a combination of reduced access to best in class funds and large, unjustified implementation costs for a variety of fund models.

EU council negotiations on the directive

So where are we now? Nearly a year from the initial proposal, we are on our third Presidency of the Council of Ministers, and the changes to the directive just keep on coming. It is worth emphasising that, in our view, important progress on many issues was made during the Czech and particularly the Swedish Presidencies.

The majority of the equivalence tests which were originally proposed alongside a passport for third country funds and fund managers were removed, consistent with the removal of the universal passport. A more considered view was taken on many technical aspects of the proposal, which were unfortunately overlooked in the haste of the initial drafting of the directive.

The Swedish Presidency successfully coordinated negotiations to reach broad agreement on a number of issues. These improved the proposal by removing those transactions entered into at the investor’s own initiative from the definition of marketing, by providing greater clarity in the determination of which entity is caught by the directive, and in the application of capital and organisational requirements.

Overall, there was a welcome move towards differentiation and proportionality in the directive, recognising the many different types of fund structures and practices that were captured.

At the beginning of this year, the Spanish Presidency took the helm of negotiations. Some issues that had previously been agreed in the Swedish text have been reopened, which is unwelcome. This has been accompanied by increased pressure to try to conclude the discussion in the Council by the middle of March, which would be a great deal easier had thorny issues not been revisited. Given constraints of time, I will focus my remarks on the AIFMD to the recent changes proposed in respect of so-called third country funds and fund managers.

Among the most unwelcome of the recent changes to the text are the provisions relating to the marketing in Europe of non-European funds managed in the EU, and the marketing in Europe of non-European funds managed outside the EU. The debate around requirements for so-called third-country funds and fund mangers is a debate which the Council has already had. In removing the universal passport proposed by the Commission, the compromise proposal put forward last year proposed that marketing of third-country funds by third-country fund managers and by EU fund managers would, as they are now, be subject to the national private placement regimes of Member States.

These regimes could impose any requirements the local regulator thought appropriate for their investor bases, including even banning marketing all together. Private placement regimes were preserved for the very sensible reason that, if these funds had no passport, they should not be required to meet the requirements that were being put in place for passporting EU funds. The exception to this, which we supported, was that systemic information could be gathered from EU-based fund managers of third-country funds. Indeed this information is already available to the FSA, as is clear from the Hedge Fund Survey, which I will discuss in a moment.

The version of the Council text published on 15 February contained an unwelcome new requirement in respect of the marketing in Europe of a third-country fund managed in the EU – for example, a Cayman Islands, Bermuda or US hedge fund being managed out of London – and the marketing in Europe of a third-country fund managed outside the EU. This text puts the Commission in the remarkable position of attempting to dictate to non-European regulators the terms of information-sharing arrangements they must enter into with European Member States. This would enable the Commission to dictate, for example, to the SEC and the FSA, the terms of agreement between them on the marketing by US managers in the UK on a private placement basis of funds that do not have a European passport. This offends the principle of subsidiarity. It could also run contrary to well-established principles of international cooperation between financial regulatory authorities.

In the case of non-European funds marketed in the EU by non-European fund managers (for example, a US hedge fund manager marketing their third-country funds in Europe), the recent changes impose a huge raft of detailed requirements on these funds, while not offering them the passport. As already stated, the UK has always favoured granting a passport to third country funds managed outside the EU, on terms equivalent to those applying in Europe. This was a feature of the original Commission proposal – although we considered that much of the substance of what was proposed for the EU regime itself was deeply flawed. But in principle, if a sensible European alternative investment funds regime could be put in place, we see real benefits to economic growth and development in Europe from an international passport based on equivalence to such a regime.

But an international funds passport was perhaps too ambitious a place to start and in any event that passport is gone from the current draft directive. To finish, however, with a proposal that imposes burdensome, detailed requirements on funds that have no passport, will be seen as an attempt to protect European funds from competition from legitimate funds outside the EU. In the fragile international economic environment in which we find ourselves, post one of the greatest financial crises in modern history, introducing these damaging constraints on international investment flows is surely the opposite of a sensible policy.

But that is not all. This text puts the Commission in the astonishing position of dictating to the supervisors of fund managers the information that they have to receive from the fund managers they regulate. There are very limited, if any, precedents for imposing such prescriptive preconditions on non-EU entities and their regulatory authorities in relation to cross-border marketing of financial products to institutional investors.

Despite a welcome statement of intention to the contrary in the latest text published by the Spanish Presidency today, such a level of intervention would restrict the access of institutional investors in Europe to valid investment opportunities in third countries, while delivering little real benefit to European market stability or investor protection. We note that many EU investors (for example, Dutch pension funds) have already publicly aired their views on such a restriction. This is to say nothing of the impracticability of such an approach.

The proposals put forward last year required that these third-country centers and/or the funds domiciled there met certain standards set by international organisations such as IOSCO. This is consistent with the G20 commitment to a framework of internationally agreed standards and something we supported. A great deal of good work has been and is being undertaken by IOSCO and others in this area. It is that wider international framework that is relevant for funds and fund managers that have no European passport, not a European framework unilaterally forced upon third countries.

In addition to third-country aspects, other parts of the directive, including those in respect of the liability of depositaries, the delegation of activities outside the EU, the requirements on valuers and the rules on remuneration all remain the subject of debate. There are difficult discussions still to be had in the Council working groups on these issues, in addition to the raft of challenges coming from the Parliamentary side. Let me turn now briefly to that strand of the debate.

EU parliamentary negotiations on the directive

Negotiations in the Parliament commenced in September last year and the Rapporteur for the directive in the Economic and Monetary Affairs Committee, Jean-Paul Gauzès, published his draft report in November.

At the end of last week, around 1700 amendments tabled by MEPs in the ECON Committee, including the Rapporteur, were published. While some of these amendments duplicate each other and/or are quite similar, this is a record number of amendments for any directive in the history of the ECON Committee.

The ECON Committee held its first formal consideration of these amendments on Tuesday this week and has scheduled a second consideration in March. A similar process is underway in the Legal Affair’s committee, which has ‘competencies’ for certain areas of the directive.

We are still digesting the significant number of amendments table by MEPs in ECON, but I want to make a few observations at this stage.

On the issue of scope, some MEPs have suggested the exclusion of certain types of funds, such as listed closed-ended funds, private equity funds and those funds that are just marketed in the country in which they are authorised. Other MEPs have taken a different view and supported a limited application of the directive to those funds that are not systemically relevant. Whatever approach is eventually decided on, there does appear to be a shared view, which we welcome and is also held by the Rapporteur, of the need for proportionality and differentiation in the directive between fund managers of different sizes and types.

Turning to the depositary provisions, most MEPs who submitted amendments called for increased flexibility and differentiation in the requirements. There is an acknowledgement that the depositary model does not sit well with all types of fund, including private equity models, and strong support for permitting a wider range of institutions to be depositaries and permitting delegation to sub-custodians in third countries.

On the complex and sensitive issue of depositary liability, there is also strong support for an alignment to the UCITS standards and the ability for liability to be passed to sub-custodians under certain conditions. We are supportive of the pragmatic approach, which MEPs appear to be taking in this regard, to provide an appropriate level of investor protection without unduly constraining the choice of investors.

There has been near consensus from MEPs in a number of other areas, including removing the requirements for legally independent valuers and restricting the definition of marketing to the proactive offering or placement by fund managers, rather than also at the initiative of investors.

A number of areas in the directive have cross-market relevance to a number of different types of financial institutions and market participants. These areas include short selling and the issue of the disclosure of information by fund managers or investors when they acquire a certain degree of control in companies. There are a range of views across the spectrum from MEPs on these points, but at least some recognition, which we would support, of the need to introduce any new requirements on a horizontal basis rather than just for AIFMs.

On the contentious and divisive issue of third-country funds and fund managers, many MEPs commented that rules should not be protectionist and Mr Gauzès has expressed his view that Europe should not be a fortress. As I have already described, this is a difficult issue and there is no clear consensus emerging in Parliament yet on the best way forward.

Some MEPs have put forward proposals for private placement and a third-country passport to co-exist for a period of time, or for a passporting regime to come into effect at some point in the future. There are many detailed amendments, which have been submitted on a wide variety of issues. The Rapporteur’s role in this process will now be to construct compromise amendments from those which have been submitted and to prepare a report on which the ECON Committee is scheduled to vote in April.

Once the Council of Ministers and the Parliament have a mandate from their respective institutions on which to negotiate, they will then seek to develop a version of the directive which is amenable to all through a trialogue process with the European Commission. This will be a challenging process, as the current positions of the Commission, the Council of Ministers and the Parliament are materially different in a number of areas.

Adoption of the directive

By way of conclusion to my remarks on the directive, I want to stress that it is essential to get the framework right. We urge the Council, the Commission and the Parliament not to act in haste on these complex matters. Thoughtful and proportionate resolution of these issues is necessary to deliver a regulatory framework that enhances the stability of the financial system while encouraging sustainable economic growth and development across the EU.

Hedge funds and systemic risk

I want to turn now to the work the FSA has been doing to better understand the potential for systemic impact of the hedge fund sector on financial markets, a topic that is of particular relevance to the AIFMD debate. After all, as I outlined at the start of my speech, the genesis of the directive was an objective to identify, monitor and, where necessary, address the potential systemic issues arising from the activities of AIFMs.

The review undertaken by the FSA’s Chairman, Lord Turner, in March of last year, recommended that supervisors should have the power to gather information on all significant unregulated financial institutions including hedge funds, to allow assessment of overall system-wide risks.

Last year the FSA ran its first hedge fund survey, through which we sought to identify the type of information we would collect to enable us to undertake such an assessment. As many of you will already be aware, the FSA has for the last five years undertaken a survey of the largest investment banks in London, which act as prime brokers, finance providers and counterparties for hedge funds.

The hedge fund survey seeks to enable us to better understand:
  • the size of hedge funds’ ‘footprints’ in various financial markets, including measures of leverage and risk;
  • the scale of any asset/liability mismatch;
  • substantial market or asset class concentration and liquidity issues; and
  • credit counterparty risks between hedge funds and other market participants.
The survey covered around 50 of the top London hedge fund managers, touching over $300bn of assets across a range of investment strategies.

At the beginning of this week we published a report outlining our findings from this survey, which I commend to you. There are a number of interesting findings from our work. I will cover here which are the most significant and which are most relevant to the directive debate.

First, the survey allowed us to assess the presence of hedge funds in a number of different asset classes, both in terms of size and contribution to daily volume. We examined the idea of hedge funds’ ‘gross footprint’ – by which we mean the total value of their exposure to an asset class whether long or short and whether that exposure is gained directly or via derivatives. Notably, our sample data suggested that there were few asset classes where the aggregate ‘footprint’ of hedge funds was greater than 3% of any total market size. In European equities, for example, the sample data suggested that the gross footprint of surveyed hedge funds was only 0.9% of the value of European equity markets.

Second, the survey allowed us to examine the extent to which hedge funds have a material mismatch between their assets and liabilities. In other words, whether they are promising to provide investors with the ability to redeem their holdings faster than they can reasonably liquidate their assets. While this sort of analysis contains a degree of subjectivity, particularly in how liquid these assets would be in a stressed market, in aggregate the survey suggested that hedge funds in the sample did not have a significant asset and liability mismatch.

Third, the survey allowed us to examine the credit counterparty risks that exist between banks and hedge funds, enabling us to understand one possible transmission mechanism for systemic risk. The survey suggested that the maximum potential exposure any one bank had to a single hedge fund was less than $500m and the individual hedge fund with the largest aggregate credit exposure accounted for just over $1bn in total across the banks we surveyed. While these are large numbers, they are manageable in the context of these banks’ overall loan books and their capital requirements. We note that the credit crisis did not expose any prime broker in the UK to a material loss.

The word ‘leverage’ is often incorrectly used in respect of hedge fund as a synonym for risk. In the hedge fund survey we have deliberately avoided asking fund managers directly about what their leverage is and instead gathered the basic building blocks that might make up any assessment of risk – for example, their position sizes, both long and short – in different asset classes and the value of their cash borrowings and of borrowings via derivatives such as contracts for differences and total return swaps.

Such an approach reflects the different trading strategies and products used by hedge funds and allows us to select the most appropriate and relevant metrics to determine the extent to which funds pose regulatory risks.

This is of particular relevance to the debate in respect of whether national supervisors or indeed the new European supervisory authorities should set limits on the leverage that can be used by hedge funds, how these limits should be applied, and whether they should be temporary or permanent.

The FSA’s view on this is clear and has been set out in The Turner Review and repeated in subsequent speeches by Lord Turner. We do indeed see a macro-prudential role for supranational bodies, such as the Financial Stability Board and, at a European level, the European Systemic Risk Board, in overseeing system wide risks. We believe, however, that it is appropriate for national supervisors, who have the knowledge and the information to identify emerging issues in their local markets, to have the necessary power to deal with issues of financial stability at the individual firm level and local market.

These powers should include the ability to apply appropriate prudential regulation, including setting limits on leverage, for hedge funds or, where appropriate, other categories of investment intermediary.

As I have noted above, there is not one universal definition of leverage that applies across all investment strategies. As the local supervisor, however, we have necessary information to understand the relevant regulatory or supervisory risks that particular strategies pose and can take appropriate action to deal with these risks.

While during the crisis and at present it does not appear that any hedge fund reached a systemic level of importance, it is possible that hedge funds could evolve in future years in their scale, their leverage and their investor commitments, in a way that makes them more bank-like and more systemically important and that might require the application of a leverage limit. Because of its very nature it is not possible to predict precisely the type or point at which an emerging systemic issue might occur, which could necessitate the use of a supervisory tool such as a leverage limit. Local supervisors, who have access to sufficient information and appropriate powers to act in a proportionate and targeted manner, are best placed to make these judgements.

Conclusion

I will conclude by reiterating the importance of constructive engagement on this point and others by stakeholders of all types, including investors, in the directive debate to ensure that the final framework is right. Thank you for your attention this morning.

OECD - Promoting transparency and exchange of information for tax purposes: A background information brief

International regulators publish systemic risk data requirements for hedge funds

The International Organization of Securities Commissions’ (IOSCO) Technical Committee has published details of an agreed template for the global collection of hedge fund information which it believes will assist in assessing possible systemic risks arising from the sector. The template was developed by the Task Force on Unregulated Entities (Task Force) following requests from the Financial Stability Board (FSB) as well as from IOSCO members.

The purpose of the template is to enable the collection and exchange of consistent and comparable data amongst regulators and other competent authorities for the purpose of facilitating international supervisory cooperation in identifying possible systemic risks in this sector. IOSCO believes that participants are best monitored through their trading activities, the markets they operate in, funding and counterparty information, amongst others.

Kathleen Casey, Chairman of the Technical Committee, said:

IOSCO believes that regulators should seek to develop a comparable and consistent set of data to be collected from local hedge fund managers and advisers to monitor systemic risks and prevent gaps in regulatory reporting requirements.

We recognise that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.

Data Reporting Categories

The intention behind the IOSCO template is to allow regulators to gather comparable and consistent data from managers and advisors about their trading activities, the markets they operate in, funding and counterparty information, amongst others. There are 11 proposed categories of information which incorporate both supervisory and systemic data and build on the data collection recommendations set out in its final report on Hedge Fund Oversight.

The template is not a comprehensive list of all types of information and data that regulators might want and so regulators are not restricted from requiring additional information at a domestic level. IOSCO is publishing the template now to help inform any planned legislative changes being considered in various jurisdictions, as well as providing securities regulators the type of information authorities could gather.

The Task Force has recommended that the first data gathering exercise should be carried out on a best efforts basis (given pending legislation in many jurisdictions) in September 2010.

1. General manager and adviser information

This is supervisory information that regulators would generally have available about hedge fund managers they have authorised and may be obtained via other mechanisms separate from any systemic risk survey.

 Key principals, registered address, number of employees, number of funds, name of compliance officer, overseas offices, regulatory status, related affiliates, equity owners, relevant information about the financial health of the asset management company including, if applicable, any guarantees or agreements with parent companies; and

 Key service providers:
o PBs, custodians
o Auditor
o Fund administrator and/or independent valuer
o Outsourcing and delegation arrangements
o Names of key funds managed and predominant investment strategies
o Location of overseas offices and approximate split of assets between these offices.

2. Performance and investor information related to covered funds

 Recent performance details (net and gross);
 Recent investor redemptions/subscriptions;
 NAV vs. High Water Mark;
 Investor classifications (Institutional, fund of funds, high net worth); and
 Primary marketing channels.

3. Assets under management

 Group wide assets under management i.e. Total AUM and HF AUM;

4. Gross and net product exposure and asset class concentration

 For the manager’s aggregate hedge fund assets detail the material positions in various asset classes e.g. split:
o For securities: Value of Long and short positions in Equities/unlisted equities/Corporate bonds/sovereign bonds/Convertible bonds/loans/securitised credit products/other
structured products; and
o For Derivatives: Long and short CDS positions and the gross value of FX, Interest rate and other derivatives. There should be an indication of the geographic split of assets within some of these products e.g. equities;

 For significant individual HFs run by the manager detail the material positions in various asset classes e.g. split: as above but with more granularity.

5. Gross and net geographic exposure

 High level regional investment focus: e.g. US, Europe, Asia ex-Japan, Japan, Global, Global EM; and
 Split of aggregate assets by the underlying currency of the assets held i.e. this is not the same as currency exposure which could be obscured by FX hedging.

6. Trading and turnover issues

 Turnover in various asset classes;
 Clearing mechanisms for balance sheet instruments e.g. OTC vs. exchange traded; and
 Derivative clearing mechanisms e.g. CCP vs. bilaterally.

7. Asset/liability issues

 Liquidity of assets;
 Investor liquidity demands, short of suspension i.e. all gates enforced but assuming funds have not suspended redemptions;
 Extent of term financing;
 Use of side pockets; and
 Ability to gate or suspend funds and any restrictions currently in place.

8. Borrowing

 Value of borrowings by source (PB, repo, stock lending, off balance sheet, unsecured); and
 Borrowing from regulated vs unregulated entities.

9. Risk issues

 Unencumbered cash;
 Various risk measures used by hedge fund managers, e.g DV01, CS01, Equity delta – which are examples of a portfolio’s sensitivity to movements in interest rates, credit spreads and equity markets; and
 Description of mechanisms to assess tail risk e.g. stress tests.

10. Credit counterparty exposure

 Net credit counterparty risk, identifying primary counterparties and identities and locations of those counterparties; and
 Extent of rehypothecation (% of net equity rehypothecated) and contractual limits to rehypothecation.)

11. Other issues

 Complexity e.g. gross size of options book, Number of open positions; and
 Concentration e.g. Top 10 positions as a % of gross market value.

Hedge Funds Oversight – Final Report of the Technical Committee of IOSCO is available on IOSCO’s website.

Hong Kong: Central management and control of an offshore Fund

The Inland Revenue Department has clarified the meaning of "central management and control" in the Departmental Interpretation and Practice Notes No. 43 to address the industry's concern about the residency requirement for directors of the management committee of offshore funds in their applications for profits tax exemption.

The “central management and control” test is a well-established common law rule adopted in many jurisdictions, such as Singapore, the UK and Australia, in determining the residence of a company and other non-individual entities. The common law rule was enunciated by Lord Loreburn in De Beers Consolidated Mines, Limited v. Howe (5 TC 198 at page 213):

“… a company resides, for purposes of Income Tax, where its real business is carried on. … I regard that as the true rule; and the real business is carried on where the central management and control actually abides.”

The central management and control refers to the highest level of control of the business of a company. The exercise of central management and control does not necessarily require any active involvement. The place where the central management and control is exercised is not necessarily the place where the main operations of the business are to be found, though the two places may often coincide. Further, the place of registration or incorporation of a company is not in itself conclusive of the place where the central management and control is exercised, and is therefore not conclusive of the place where the company is resident (Todd v. Egyptian Delta Land and Investment Co. Ltd., 14 TC 119).

The location of central management and control is wholly a question of fact. Each case must be decided on its own facts. Factors that are decisive in one case may carry little weight in another. In general, if the central management and control of a company is exercised by the directors in board meetings, the relevant locality is where those meetings are held. In many cases, the board meets in the country where the business operations take place, and central management and control is clearly located in that country. In other cases, central management and control may be exercised by directors in one jurisdiction though the actual business operations may take place elsewhere. It should be noted that the residence of individual directors is generally not relevant in determining the locality of a company’s central management and control (see, however, the comments in paragraph below). Therefore, the mere fact that the majority of the directors of the management board of a company are resident in Hong Kong does not of itself mean that the company is centrally managed and controlled in Hong Kong, and hence would not adversely affect the application of the tax exemption.

The place of board meetings also is not necessarily conclusive. It is significant only in so far as those meetings constitute the medium through which central management and control is exercised. In cases where central management and control of a company is in fact exercised by an individual (for example, the board chairman or the managing director), the relevant locality is the place where the controlling individual exercises his power. As central management and control is a question of fact and reality, when reaching a conclusion in accordance with the case law principles, only factors which exist for genuine commercial reasons will be accepted.

24 February 2010

PwC Fund Domicile Matrix

A fund domicile comparison matrix of some of the main fund jurisdictions (Ireland, Luxembourg, Malta, Cayman and the UK)

Good, Better, Best : The race to set global standards in tax management

KPMG International survey, Good, Better, Best: The race to set global standards in tax management, shows that those companies who get the basics right are better able to manage risk and create value.

With governments around the world seeking increased tax revenues, and tax authorities stepping up efforts to improve global cooperation, reduce tax avoidance and evasion, and improve the efficiency and effectiveness of their approaches to tax audit controversies, a new survey from KPMG International shows that those companies who get the basics right are better able to manage risk and create value.

In 2009, as businesses continued to respond to the global recession, KPMG International commissioned a survey of tax directors in 20 countries throughout Europe, Asia Pacific, and the Americas to find out how tax departments are adapting to current challenges. We believe this is one of the largest global surveys of its kind, gathering the opinions of people in charge of tax policy and day-to-day tax operations in 890 companies. The research consisted of 890 blind telephone surveys of tax professionals world-wide, followed by more in-depth interviews with several KPMG member firms clients and tax professionals.

Download now

Eversheds named the number 1 legal Superbrand of 2010

International law firm Eversheds has been ranked first in the legal industry category of Superbrands independent research. Judged on quality, distinction and reliability, Eversheds rose to first place from third last year and beat off competition from the magic circle including 2009 winners Linklaters, and runners up Clifford Chance. Superbrands considers thousands of brands from over 50 sectors and Eversheds was the highest ranking law firm ranked 214 overall, up from 241 last year.

Superbrands commissions independent research to identify the strongest brands. The annual survey is compiled by The Centre for Brand Analysis (TCBA), on behalf of the Superbrands organisation, and examines the views of a panel of Experts and over 1,700 business professionals.

Bryan Hughes, Eversheds chief executive said:

"We provide high quality legal expertise and use innovative methods to deliver client service excellence around the world. A business Superbrand has to establish the finest reputation in its field and our position as number 1 in the legal industry category is a testament to all our people who are committed to delivering quality, distinction and reliability."

Mauritius Institute of Directors (MIoD) : New CEO

The Mauritius Institute of Directors (the MIoD) has announced the appointment of Mrs Jane Valls as its Chief Executive Officer with effect from 1 April 2010 to take over the position of the present CEO who has resigned and will be returning to South Africa at the end of February.

In making this announcement Pierre Dinan, the Chairman of the MIoD says: “Whilst we regret that Pat Mahony decided to leave us earlier than at the end of his contract we wish him well in his retirement. We are delighted to have recruited Jane Valls to take over the reins from Pat. Jane has lived in Mauritius for many years and is well known in the corporate world, having occupied positions of seniority within the Rogers group and also in the travel and leisure industry. Most recently Jane has established an excellent reputation as a trainer, having run her own consultancy practice in this field. As such Jane is well qualified to lead the MIoD in promoting its objectives which can be summarised as ‘excellence in corporate governance'.

Mr Dinan has made it clear that although there will be a short gap between the departure of the current CEO and when Jane Valls takes office this does not mean that there will be a lack of service on the part of the MIoD. Our offices will be relocating to Raffles Tower in Ebene in the course of April and we will provide details of our new contact numbers in due course.

Commenting on her appointment, Jane had this to say: “I am excited about taking on this challenge and playing a leading role in promoting Corporate Governance in both the public and private sectors. Mauritius is a small country but this does not mean that we have to take a back seat in encouraging the adoption of internationally recognised best practices in the way we conduct our enterprises.

23 February 2010

FSA : Assessing possible sources of systemic risk from hedge funds

Assessing possible sources of systemic risk from hedge funds

A report on the findings of the hedge fund as counterparty survey and hedge fund survey

Report Emphasizes Connection between Property Rights and Economic Well-being

The Property Rights Alliance is proud to announce the release of the 2010 International Property Rights Index (IRPI), which measures the intellectual and physical property rights of 125 nations from around the world. This year, sixty-two international organizations partnered with the Property Rights Alliance and its Hernando de Soto Fellowship program to produce the fourth annual IPRI.

The IPRI uses three primary areas of property rights to create a composite score: Legal and Political Environment (LP), Physical Property Rights (PPR), and Intellectual Property Rights (IPR). Most importantly, the IPRI emphasizes the great economic differences between countries with strong property rights and those without. Nations falling in the first quintile enjoy an average national GDP per capita of $35, 676; almost double that of the second quintile with an average of $20, 087. The third, fourth, and fifth quintiles average $9,375, $4,699, and $4,437 respectively.

With regard to private property rights, PRA continues to champion the idea that physical and intellectual property are equally important in nature, and must be protected” states Kelsey Zahourek, PRA executive director. “Property rights contribute to increased levels of stability and provide people with the knowledge and comfort that their property will remain theirs.

Hernando de Soto, whose work in property rights lead to the inception of the IPRI, commented on the 2010 publication: “The fourth edition of the IPRI reveals encouraging signs of improvement in some countries, while also bringing attention to disturbing trends in others.

The International Property Rights Index will provide the public, researchers and policymakers, from across the globe, with a tool for comparative analysis and future research on global property rights. The Index seeks to assist underperforming countries to develop robust economies through an emphasis on sound property law.

Click here to view the report in its entirety

New ITU report shows global uptake of ICTs increasing, prices falling

Prices for information and communication technology (ICT) services are falling worldwide, yet broadband Internet remains outside the reach of many in poor countries, ITU says in its Measuring the Information Society 2010 report released today.

The report features the latest ICT Development Index (IDI), which ranks 159 countries according to their ICT level and compares 2007 and 2008 scores. "The report confirms that despite the recent economic downturn, the use of ICT services has continued to grow worldwide," says Sami Al Basheer Al Morshid, Director of ITU’s Telecommunication Development Bureau (BDT). All 159 countries included in the IDI have improved their ICT levels, and mobile cellular technology continues to be a key driver of growth. In 2010, ITU expects the global number of mobile cellular subscriptions to top five billion. "At the same time, the report finds that the price of telecommunication services is falling — a most encouraging development," said Mr Al Basheer.

The IDI combines 11 indicators into a single measure that can be used as a benchmarking tool globally, regionally, and at national level, as well as helping track progress over time. It measures ICT access, use and skills, and includes such indicators as households with a computer, the number of fixed broadband Internet subscribers, and literacy rates.

The world’s Top 10 most advanced ICT economies features eight countries from Northern Europe, with Sweden topping the IDI for the second year in a row. The Republic of Korea and Japan rank third and eighth, respectively.



Figure 1: Source: ITU

The United Arab Emirates and Bahrain top the list of Arab States, with Russia and Belarus leading ICT development in the CIS. In Africa, only the Seychelles, Mauritius and South Africa are included in the top 100. Given the close relationship between ICT uptake and national income, most poor countries rank at the low end of the IDI. In particular, the Least Developed Countries – many of which are in Africa — still have very limited access to ICTs, especially in terms of broadband infrastructure and household access to ICTs.



Figure 2: Source: ITU

Mobile still king

Mobile cellular technology continues to be the main driver of ICT growth, especially in the developing world, where average mobile penetration surpassed the 50 per cent mark in 2009. Today, over 70 economies worldwide have surpassed the 100 per cent penetration mark, with developed countries averaging 113 per cent by the end of last year.

While high-speed Internet access is now available in almost all countries, fixed broadband penetration in the developing world remains as low as 3.5 per cent, compared to 23 per cent in developed countries.

Prices are falling but broadband remains outside the reach of many

The report shows that globally the price of telecommunication and Internet services is falling. The 2009 ICT Price Basket, which includes 161 countries, combines the average cost of fixed telephone, mobile cellular, and Internet broadband services. Fixed broadband services showed the largest price fall (42 per cent), compared to 25 and 20 per cent in mobile cellular and fixed telephone services, respectively.

Despite this significant drop, ICT services, especially fixed broadband access, remain out of the reach of many people. In 2009, the ICT Price Basket corresponded on average to 13 per cent of Gross National Income (GNI) per capita, ranging from 1.5 per cent in developed countries to 17.5 per cent in developing countries. In other words, countries with high income levels pay relatively little for ICT services, while countries with low income levels pay relatively more. For example, an entry-level broadband connection costs on average as much as 167 per cent of GNI in developing countries, compared to only two per cent in developed countries. Economies with the lowest price of ICT services relative to income include Macao (China), Hong Kong (China), Singapore, Luxembourg, Denmark and the UK.



Figure 3: Source: ITU



Figure 4: Source: ITU

Within the UN system, ITU is the main source of internationally comparable data and statistics on ICT. The Market Information and Statistics Division of the Telecommunication Development Bureau (BDT) collects, harmonizes and disseminates more than 100 telecommunication and ICT indicators from over 200 economies worldwide.

Download Executive Summary

Alter Domus opens an office in Mauritius

Alter Domus, an independent provider of outsourced administration services, announces the opening of an office in Mauritius as from February 1st, 2010. Alter Domus (Mauritius) LTD is a joint-venture established between the Alter Domus Group and Altima Group, a Mauritius-based conglomerate. The new office will provide corporate management services and fund administration services to multinational corporations and alternative investment funds in the region.

The addition of this new country allows Alter Domus to be present in nine of the principle jurisdictions worldwide, offering its clients services that support accounting, regulatory and compliance requirements of legal entities locally established.

Dominique Robyns, CEO of Alter Domus Group, commented, “Always guided by the evolving needs of our portfolio of clients, we pursue our international development. Mauritius is an important jurisdiction for many of our clients, and therefore, it was important for us to have the possibility to help them in this region too.

Victor Seeyave, Managing Director of the new entity observes that “Mauritius is gaining increasing prominence as an ideal platform for investment in Africa, the Middle East and Asia. In line with the Group’s vision and core principles, we will spare no efforts to provide the same standards of quality, responsiveness and confidentiality in this new endeavour.

About Alter Domus:

Established originally in Luxembourg, Alter Domus has expanded to Cyprus, Guernsey, Hong Kong, Hungary, Jersey, the Netherlands, a representative office in New York, and now to Mauritius. An independent firm, Alter Domus has a dedicated team of over 350 professionals with strong expertise in both corporate and management services and fund administration.

22 February 2010

Malaysia "White Listed" by the Organisation for Economic Cooperation and Development (OECD)

The Organisation for Economic Co­operation and Development (OECD) has last week listed Malaysia in the “White List”. The White List refers to a list of jurisdictions deemed to have substantially implemented OECD standards for transparency and exchange of information between countries.

Malaysia is committed to internationally agreed standards and practices governing international financial services and transactions, especially in the area of exchange of information. The white-­listing is a testimony to this fact”, said Dato’ Seri Ahmad Husni Hanadzlah, Minister of Finance II. He added that in relation to the Labuan International Business and Financial Centre (LIBFC), the white­-listing, in tandem with the new eight acts of legislation that have recently been passed by Parliament, sets a higher platform for Labuan Financial Services Authority to position LIBFC as a major regional and global offshore financial centre.

Since April 2009, Malaysia has signed enhanced Double Taxation Agreements (DTAs) in regards to the sharing of information with twelve following countries – Belgium, Brunei, France, Ireland, Japan, Kuwait, Netherlands, San Marino, Senegal, Seychelles, Turkey and United Kingdom. Malaysia will continue to enhance its DTAs with other countries so as to ensure it is always in line with internationally agreed standards and practices on exchange of information (EOI).

FATF Chairman's Summary, Abu Dhabi, 17-19 February 2010

The first joint FATF-MENAFATF Plenary meeting was held in Abu Dhabi during the period 14-19 February 2010. The meeting included a joint session that was presided by the MENAFATF, in which a number of issues were discussed. Such issues included:

(i) a review of the initiatives taken by the MENAFATF and MENAFATF countries and the challenges in the fight against money laundering and terrorist financing;
(ii) a review of an example of the challenges that face countries of the region (SR.IX: physical cross-border movement of currency) with a regional showcase (Tunisia’s experience in compliance with SR.IX requirements); and
(iii) a MENAFATF perspective on the current review by the FATF of the international AML/CFT standards being conducted in the framework of preparing for its 4th round of evaluations.

FATF Decisions

The FATF Plenary has taken important new steps to protect the international financial system from abuse by:

Producing two documents:
FATF Public Statement
Improving Global AML/CFT Compliance: On-going Process

Adopting evaluations of the anti-money laundering and counter-terrorist financing systems in Germany and Luxembourg.

Publishing a detailed examination of the money laundering vulnerabilities of free trade zones.

Publishing New Best Practice Papers on Confiscation and the Detecting and preventing the illicit cross-border transportation of cash and bearer negotiable instruments.

Germany and Luxembourg: Evaluation of anti-money laundering and combating the financing of terrorist (AML/CFT) regime.

The FATF discussed and adopted two mutual evaluation reports assessing compliance of Germany and Luxembourg against the international standards for combating money laundering and terrorist financing – the 40+9 Recommendations. Summaries of these comprehensive assessments are available soon be on the FATF website and the full reports will be released in the coming weeks.

Although the regimes of these countries present some features that are not fully in line with FATF Recommendations, both countries have made clear commitments to further strengthen their national systems for the prevention, detection and suppression of money laundering and terrorist financing.
Mutual Evaluation of Germany
Mutual Evaluation of Luxembourg

AML/CFT Improvements in Uzbekistan

The FATF welcomes Uzbekistan’s significant progress in improving its AML/CFT regime and notes that Uzbekistan has addressed the AML/CFT deficiencies that the FATF had identified in February 2008. Uzbekistan is no longer subject to the FATF’s enhanced monitoring process. The Eurasian Group will continue to work with Uzbekistan in strengthening its AML/CFT regime.

Typologies Report: Money laundering vulnerabilities of free trade zones.

Free trade zones are designated areas within countries that offer a free trade environment with a minimum level of regulation. The number of free trade zones have increased rapidly in recent years, today there are approximately 3 000 FTZs in 135 countries around the world. FTZs offer many incentives and benefits to the companies that operate within it, such as the exemption from duty and taxes and simplified administrative procedures. However, the absence of strict regulations and transparency of the FTZs which is beneficial for legitimate businesses, also make them highly attractive for illicit actors who take advantage of this relaxed oversight to launder the proceeds of crime and finance terrorism.

The FATF finalised a comprehensive report on money laundering vulnerabilities of free trade zones. Through a series of cases studies, this report aims to illustrate the ways in which FTZs can be misused for money laundering and terrorist financing purposes.

New Best Practice Paper on Confiscation.

The ability to effectively trace and confiscate the proceeds of criminal activities or funds destined for terrorist financing is essential to a truly effective anti-money laundering and terrorist financing regime. Confiscation prevents criminal property from being laundered or reinvested and stifles the criminal organisation’s ability to carry out its illegal activities. Additionally, the prospect of losing the benefits of their crime might deter some from engaging in money laundering or terrorist financing activities.

FATF Recommendations 3 and 38 address these issues, and provide for measures that will allow for a more effective international co-ordination to identify property which could potentially be confiscated. FATF Recommendations 3 sets out the measures that a country should put in place to enable their authorities to trace and confiscate benefits from criminal activity. FATF Recommendation 38 requires countries to have the authority to respond to requests by foreign countries to co-ordinate the freezing, seizing or confiscating of criminal assets.

This Report provides best practices which will assist countries in implementing the necessary measures in their regime to strengthen legal frameworks, minimise structural obstacles and streamline processes and procedures for effective tracing and confiscation within their jurisdiction and in the international context.
Best Practices: Confiscation (Recommendations 3 and 38)

New International Best Practice Paper: Detecting and Preventing the Illicit Cross-Border Transportation of Cash and Bearer Negotiable Instruments.

One of the main methods used to move criminal assets, launder money and finance terrorism is by physical transportation of currency and bearer negotiable instruments from one country to another. This can be done by cash couriers, postal service or containerised cargo. Special Recommendation IX sets out the measures that countries need to put in place to detect and prevent this physical cross-border transportation of illicit funds in the form of cash or bearer negotiable instruments.
Experience has shown that it is not easy for countries to implement Special Recommendation IX because of the complexity of requirements to cover all incoming and outgoing cross-border transportation for the various transportation methods used. This Best Practice paper is based on the experiences of countries who have implemented Special Recommendation IX. This Best Practice paper complements Special Recommendation IX and its Interpretative Notes. It does not cover all aspects of Special Recommendation IX, but provides best practices for the areas that have proven most challenging.
International Best Practices: Detecting and Preventing the Illicit Cross-Border Transportation of Cash and Bearer Negotiable Instruments

Combating Proliferation Financing: Status Report on Policy Development and Consultation.

The FATF mandate was extended in 2008 to include new and emerging threats such as proliferation financing, meaning financing the proliferation of weapons of mass destruction.

The FATF’s efforts in this area are consistent with the needs identified by the relevant UN Security Council Resolutions (UNSCRs) and in recent years, the FATF has published guidance to assist jurisdictions in their implementation of these resolutions. FATF also published a Typologies report which identified the issues surrounding proliferation financing and highlighted issues for further consideration.

The Plenary welcomed the draft document titled Combating Proliferation Financing: A Status Report on Policy Development and Consultation prepared by the Working Group on Terrorist Financing and Money Laundering Project Team on Proliferation Financing. The Plenary adopted the report, subject to consultations with major stakeholders in order to finalize and publish the text before the next FATF Plenary.

Guernsey : IoD seminar to debate responsibilities of directors

The Institute of Directors’ next seminar will consider the responsibilities of directors in an increasingly uncertain and ever changing business world.

This, the third of four seminars in the Yorkshire Guernsey sponsored series, will briefly discuss the GFSC’s recently published Code of Corporate Governance consultation paper for the island. However, it is intended to focus more broadly on the behaviour of directors, the decisions they make and the growing pressures they face.

Events over the past 18 months and the current vulnerability of the financial market have made it clear that corporate governance can no longer be sidelined. The debate will explore the risks confronting directors and how well equipped they are to manage them. With reputation a key influencer of business, directors and their boards need to be sure they are taking the right advice whilst maintaining a high level of professionalism and integrity.

It is important that lessons are learnt, and the seminar will look closely at what effect greater governance will have on boards and directors in the island as well as investors. While Guernsey’s draft Code of Corporate Governance seeks to be a formal expression of good practice and guidance, there is a fear that globally this will result in more regulation and legislation as opposed to a change in behaviour.

Chairman of the Guernsey branch of the IoD, Mark Thompson felt that given the huge response to the GFSC working party’s draft code, this was clearly at the forefront of directors’ and practitioners’ minds, proving to be an emotive subject.

The economic downturn has certainly brought corporate governance into sharp focus and is yet another test for the island, but the real challenge for us is the action we choose to take. This is not about ticking boxes,” he said.

The panel line-up is a reflection of the seriousness this topic holds for the island. Chairing the session will be Carol Goodwin, author of the recent Guernsey Code of Corporate Governance consultation paper.

Tim Copnell, is the founder director of the KPMG sponsored UK Audit Committee Institute (ACI). He specialises in advising UK boards on corporate governance matters and, through the ACI, delivers 40 non-executive director professional development events each year.

Mr Copnell will be focusing on what lessons have been learnt from the fallout in the financial markets, and more specifically, the impact of the Walker Review and The Combined Code. He will review what these changes mean for directors and how their behaviour and responsibilities impact globally.

Advocate Ian Kirk heads up the Commercial Department at Collas Day and was also a member of the Code of Corporate Governance practitioner working party. Ian has been involved in many of the largest and most complex corporate transactions in Guernsey in recent years and is a regular speaker on company law, corporate governance, directors' duties and financial services regulation.

Advocate Kirk will look at how the downturn has put good governance under the spotlight. He will concentrate on the risks directors face and how they can best mitigate the risks they face.

Sitting alongside him will be Paul Meader, Chief Executive of the Corazon Capital group and Chairman of the Guernsey International Business Association. Mr Meader acts as an independent director of a number of investment management companies and investment funds. Mr Meader will seek to focus on the practical implications of good corporate governance in Guernsey, what that means for organisations and what that means for directors and shareholders, drawing on his experience as a director of companies in Guernsey and elsewhere, finance and non-finance.

The seminar will take place at the Duke of Richmond Hotel on Friday 26th February from 12pm to 2pm. To book a place, please contact Mark Palfrey on 01481 254262

19 February 2010

Global Pension Assets up 14% in 2009 as Real Returns on UK Pension Funds Reach 15%

• Global pension assets rise 14% to $29.5 trillion in 2009 after 18% drop in 2008
• Record pensions deficit of £96bn provides challenge for FTSE100 companies
• 15% real return on UK pension funds in 2009 but only 1% average over decade
• UK employment in those of retirement age up 70,000 in first 11 months of 2009

The total value of pension assets managed globally rose by 14% to an estimated $29.5 trillion in 2009, recovering from an 18% drop in 2008. The Pension Markets report from International Financial Services London (IFSL), the independent organisation promoting financial services throughout the world, notes that the sharp rise in pension liabilities globally over the past two years poses a major challenge to the funding of defined benefit (DB) pensions. In the UK the pensions balance for FTSE100 companies reached a record aggregate deficit of £96 billion in mid-2009.

UK private sector DB schemes are increasingly being replaced by defined contribution (DC) schemes. The share of UK DB private sector schemes that remain open to new members has fallen to 22% in 2009 from 35% in 2006. Over the long term, membership of such schemes has halved to 2.6 million since the early 1990s. Contributions to DC schemes, at 9% of salary, are running at less than half the 20% of salary in open DB schemes.

Duncan McKenzie, Director of Economics at IFSL, said: “The real rate of return on UK pension funds reached 15% in 2009, the highest since 2005. But four years of negative returns over the past decade mean that real returns during that period have averaged only 1.1% a year, well below the long-term average real return of 4.2% a year over the past half century.

In recent years, more people of pensionable age have been supplementing their pension by staying in work. UK employment amongst those of pension age has been rising: by 70,000 in the recession-hit first 11 months of 2009 and by over 500,000 in total since 2002 to reach
1.4 million in November 2009.

The UK, with pension assets totalling $2.3 trillion, remains the second largest market, accounting for 9% of total assets worldwide. UK assets are only exceeded by the dominant US market where assets of $15.6 trillion make up 60% of the global total.

Click here to view PDF of Pension Markets report

18 February 2010

Bahamas : Investment Funds (Amendment) Act 2010

Proposals relating to various amendments to the Investment Funds Act, 2003 have been tabled in Parliament. Some of these amendments more broadly define Bahamas-based and non-Bahamas-based investment funds so as to remove restrictions adversely affecting Bahamian investment managers/advisors, and to bring the legislation in line with industry standards.

Other amendments extend the definition of a professional fund to avoid certain restrictions on the category of persons to whom a professional fund may be offered, and remove the minimum regulatory capital requirement for a broker dealer or investment securities advisor to invest in a professional fund.

Specific amendments:

Removal of the investment advisor/manager nexus to Bahamas-Based Funds: To ensure that a fund established in another jurisdiction would not inadvertently require licensing under the Investment Funds Act due to the nexus created when this foreign fund secures the services of a regulated Bahamian investment manager. Non-Bahamas-Based Funds would be required to appoint a registered representative in The Bahamas, with that registered representative being required to register with the Commission.

Expanding the Definition of Recognised Foreign Funds: To allow funds to become RFFs provided they are incorporated or established in a prescribed jurisdiction. Effectively, the requirement of a fund to be licensed or registered in a prescribed jurisdiction would be repealed.

Amending the Definition of Professional Funds: To remove the requirement for bank, trust, insurance or investment fund companies to be licensed in a prescribed jurisdiction, provided they are duly licensed (or registered in the case of investment funds) in another jurisdiction; (b) to allow eligible investors to include any registered firm under the Securities Industry Act or licensed in another jurisdiction; (c) to remove the minimum regulatory capital requirement for a broker-dealer of securities investment advisor to qualify to invest in a Bahamian professional fund; and (d) to include entities with net assets in excess of $5 million.

Amending the Annual Audit Filing Deadlines: To change the filing period of annual audited financial statements of investment funds to six months.

The Amendment Bill also empowers the Securities Commission of The Bahamas to publish guidelines made pursuant to the provisions of the Act or any regulation or rule made under the Act.

Islamic Financial Services Industry Stakeholders to Discuss New Financial Architecture and its Challenges in 7th IFSB Annual Summit in Bahrain

As the world emerges out of recession, financial authorities the world over are in the process of developing and implementing a comprehensive infrastructure to address the new challenges confronting the international financial system. Given the scale and scope of the crisis, confronting these new challenges would inevitably involve discussions and actions for an integrated crisis management framework. The G20 for example has launched an agenda to reform financial regulations, the key areas of which include the strengthening of international frameworks for prudential regulation, the review of the scope of regulation, the revision of accounting standards, and more effective oversight of credit rating agencies as well as strengthening risk management.

These new challenges are also relevant to the global Islamic financial services industry, which needs to ensure its resilience, as well as how it might contribute to global financial stability and sustained economic growth. This is most pertinent as the financial crisis has stimulated greater international interest in Islamic finance and its potential role in shaping a future sustainable global financial system.

The Islamic Financial Services Board (IFSB) is at the forefront of international efforts to increase regulatory cooperation and to introduce common prudential and supervisory standards for the global Islamic financial services industry (IFSI). Professor Rifaat Ahmed Abdel Karim, IFSB Secretary-General, emphasised that any new financial architecture or financial reforms must also accommodate the specificities of Islamic finance. “Since the distinctive characteristics of Sharī`ah-compliant financial transactions raise a number of issues related to the risks borne by institutions offering Islamic financial services (IIFS), and failure to adequately recognise and manage these risks could impose systemic risk to the entire financial system and jeopardise the stability and soundness of the industry,” he added.

As such, the need to develop uniform prudential and best practices standards that are tailored to the specific characteristics of these IIFS is vital.

Against the above backdrop, the theme of this year’s 7th IFSB Annual Summit “Global Financial Architecture: Challenges for Islamic Finance” could not be more pertinent. The Summit is due to be held on 4 - 5 May 2010 at the Ritz-Carlton in Manama, Bahrain, which the Central Bank of Bahrain is hosting.

It will be attended by key regulators in global IFSI, who have all confirmed their participation. These include, among them, the participation of the Central Banks of Bahrain, Kuwait, Lebanon, Mauritius, Nigeria, Saudi Arabia, Singapore, South Korea and Sweden. The participation of the regulators from new markets in Northern Europe and Africa is indicative of the growing worldwide interest in the industry.

For instance, Stefan Ingves, Governor, Central Bank of Sweden and Rundheersing Bheenick, Governor of Bank of Mauritius will both be making their debut participation at an IFSB Annual Summit. Similarly, Sanusi Lamido Aminu Sanusi, the new Governor of the Central Bank of Nigeria, has also confirmed his participation. Bank of Mauritius became a Full Member of the IFSB in November 2007, and the Central Bank of Nigeria in April 2009. Both are on the IFSB Council. On top of these regulators, several international organisations including the Bank for International Settlements, International Organisation of Securities Commisions, The World Bank, and market players from various industry segments, including financial institutions, advisory firms, international credit rating agencies and law firms have also confirmed their participation.

The main issues of this year’s Summit are reflected in the five session topics which are:

The Changing Landscape of Financial Regulation: Implications for Islamic Finance
Macro-Prudential Surveillance Issues for Islamic Finance
New Architecture for Liquidity Management for Islamic Financial Instruments
Balanced Growth of Islamic Finance - the Sectoral Composition of the Islamic Financial Services Industry as a Contributor to Growth with Stability
New Islamic Financial Architecture: Challenges Ahead

The main proceedings will be preceded by two traditional pre-Summit events – a Public Hearing on IFSB Exposure Draft and the IFSB Country Showcases, both of which have proved popular and informative in the past.

This year the Public Hearing will be on the IFSB Exposure Draft on Solvency Requirements for Takāful Undertakings. The Public Hearing is held within the Public Consultation period of a proposed draft standard, which is part of the due process in the IFSB preparation of standards. Under Article 4 (a) of the IFSB Articles of Agreement a key objective of the standard-setting Board for global Islamic finance is "to promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Sharī`ah principles, and recommend these for adoption."


The main proceedings will be preceded by two traditional pre-Summit events – a Public Hearing on IFSB Exposure Draft and the IFSB Country Showcases, both of which have proved popular and informative in the past.

This year the Public Hearing will be on the IFSB Exposure Draft on Solvency Requirements for Takāful Undertakings. The Public Hearing is held within the Public Consultation period of a proposed draft standard, which is part of the due process in the IFSB preparation of standards. Under Article 4 (a) of the IFSB Articles of Agreement a key objective of the standard-setting Board for global Islamic finance is "to promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Sharī`ah principles, and recommend these for adoption."

There will also be a number of country showcases organised on 3rd May 2010. These IFSB Country Showcases are an effective platform for selected countries to portray their Islamic finance initiatives and experiences in adopting and promoting the growth of a sound and stable Islamic financial services industry, and presented to a high profile, focused group of potential investors and stakeholders. It is also an excellent opportunity for networking and opening doors to potential investments and business partnerships - from among the IFSB members as well as the local, regional and international financial community - specifically those attending the Summit.

The 7th Annual IFSB Summit aims to harness the latest developments and issues in the regulation, prudential standards, current market practices and future challenges. It aims to keep participants informed about the developments of the global Islamic financial services industry; to provide a platform for dialogue among peers; and to provide participants a platform to contribute to the future direction of the industry!

17 February 2010

India : Finance Minister inaugurates International seminar on transfer pricing

The Finance Minister Shri Pranab Mukherjee inaugurated an International seminar on transfer pricing, here today. Transfer pricing is a major international tax compliance issue as multinational entities tend to set transfer pricing on cross-border transactions to reduce taxable profits. Being organized by CBDT and OECD from 17th to 19th February 2010, the seminar is a part of capacity building of transfer pricing resources in India and aims to discuss various important issues of transfer pricing like intangibles, cost sharing arrangement, etc.

In his inaugural address, Shri Mukherjee stated that special set of Transfer Pricing Rules created among developing countries with the assistance of the Organization for Economic Cooperation and Development (OECD) help to prevent companies from using transfer pricing to avoid taxes. The framing of Rules for transfer pricing purposes, which allocates profit to tax jurisdictions is an important area which needs cooperation and consultation amongst south-south countries and also amongst north-south countries to have a broad guideline to prevent tax disputes amongst the countries, said the Minister. The Finance Minister expressed hope that by increasing its dedicated transfer pricing resources and by improving their specialists capabilities, the Central Board of Direct Taxes (CBDT) will be able to meet emerging challenges in administration of transfer pricing regulation and would augment government’s effort to mobilize more revenue for the development work.

Shri Mukherjee noted that the Indian economy has seen a remarkable turn-around. A carefully-designed stimulus packages announced by the government in the wake of economic slowdown enabled the country to weather the crisis better than many other countries. The IIP figures for the month of December 2009 suggests that we may end the year 2009-10 with a growth rate of 7.5% and next year growth at over 8%, said the minister.

Following is the text of the Finance Minister’s inaugural address:

My Colleague Shri S.S. Palanimanickam, Shri Sunil Mitra, Secretary (Revenue), Shri S.S.N. Moorthy, Chairman CBDT, Members of CBDT, Ms. Caroline Silberztein, Head of the Transfer Pricing Unit, OECD Centre for Tax Policy & Administration, Mrs. Michelle Levac of Canada Revenue Agency, Senior Officers of the Income Tax Department and participants.

I am happy to know that Central Board of Direct Taxes and Organization of Economic Cooperation & Development (OECD) are jointly organizing this Seminar where senior officers of the Income Tax Departments from all over country and dealing with transfer pricing issues are participating to deliberate on complex issues of Transfer Pricing, which is one of the most critical tax issue for both tax administrators and taxpayers.

This kind of seminar provides an opportunity for the officers to have a uniform approach on the issues across the country, which are in line with the International standards and best global practices. Further the discussion on contentious issues in a forum like this give a finality to the view of Department, which is very useful in defending cases before various appellate forums and also in developing a view from national perspective for international forum.

The globalization of Indian economy with the rest of the world has created an opportunity as well as challenges. The opportunity is in terms of a global market for movements of capital, goods, services and human resources but at the same time it has offered challenges in terms of sophisticated tax planning tools for avoiding the tax liabilities. The cross border transactions within the group are not exposed to the same market forces as transactions between independent enterprises and so potentially give rise to transfer pricing issues. The advent of e-commerce, the global structure of enterprises and the dramatic expansion of trade and investment by multinational enterprises in recent years confirms absolute importance of transfer pricing in terms of tax revenue at stake.

As you know, the Indian economy has seen a remarkable turn-around. During the year 2008-09, there has been a dip in the growth rate of GDP from an average of over 9% in the previous three fiscal years to 6.7%. In the face of these difficulties and in the midst of the economy’s slowdown, the Government put together a carefully-designed stimulus packages. This enabled us to weather the crisis better than many other countries. The IIP figures for the month of December 2009 suggests that we may end the year 2009-10 with a growth rate of 7.5% and next year growth at over 8%.

The Government of India has provided a fiscal stimulus at 3.5% of GDP at current market price for the year 2008-09 amounts to Rs.1,86,000 crore. The tax concessions to industry are more than Rs. 42,000 cr. The transfer pricing regulations have to play special role in ensuring that profits are not shifted from India through cross border transactions. The tendency to shift profit from India would be more prominent as India is among few countries exhibiting a higher growth leading to more opportunity for profitability to corporate sector than other countries. This tendency for portability of profit will get further accelerated due to enhanced transfer pricing scrutiny by the other jurisdictions. The other jurisdictions are looking to generate more revenue from overseas investments particularly jurisdictions like India, which offers highly attractive returns on investments.

Being aware of the transfer pricing practices, India introduced the transfer pricing legislation in the year 2001. The transfer pricing regulations have come of age in India - both in terms of quality of audits as well as the revenue generated for the Government. Till date, the Directorate of Transfer Pricing has made an adjustment of Rs. 23,000 crore (approx. US $ 5000 million), which is a great achievement in a small period of time. For this, I appreciate the Income Tax Department.

Integration of the world economies has forced companies to develop new business models which are efficient, have wider geographical reach, and last but not the least, tax efficient in structure. The business models of the modern multinational enterprises have developed in such a way over the years that two-third of the international trade is within the multinational enterprises. This shows the enormous capacity and flexibility of the big multinational enterprises to design the pricing policy within the group in such a way that they can make their cross border transactions tax efficient. The structure and the location of the group entities of the multinational enterprises exploit the favourable tax regime offered by the low tax jurisdictions and tax havens. This has lead to accumulation of wealth and shifting of intellectual capital to these jurisdictions. The role of tax havens and low tax jurisdictions has become an area of great concern for a country like India which is putting its all acts together to mobilize resources to attack on poverty and illiteracy.

The financial crisis faced by us has been unprecedented in recent history. It is widely believed that the tax havens and low tax jurisdictions were an important actors in the crisis. The opaque system of Exchange of Information in these tax havens and their non-compliant behavior has been a matter of concern not only for revenue base but also linked to financing of activities which are detrimental to national security interest.

Post G-20 London Summit, there seems to be consensus that the tax heavens need to adhere to the established norms of transparency standards set by the global Forum, which is also continuously monitoring the compliance by non-cooperative tax jurisdictions. The global pressure seems to be working and many tax heavens and low tax jurisdictions have already signed and many have proposed to sign Exchange of Information agreements for transparency in cross border transactions. These agreements were resisted in the past on the pretext of secrecy. The persuasive guidelines of the UN/OECD for exchange of information and also listing of Un-cooperative tax heaven never brought, these tax jurisdictions to follow International practices of transparency. The emerging global financial architecture where G-20 is a driving force is leading to compliance of international standards of transparency. It is in our mutual interest to maintain a healthy global fiscal system which is self-sustainable and all important actors including the tax havens comply with the established norms of transparency and fiscal discipline.

The UN expert group have been studying and developing ways in which to establish fairer transfer pricing practices to protect developing countries from losing profits from its tax base. Whereas a special set of Transfer Pricing Rules have been created among developing countries with the assistance of the Organization for Economic Cooperation and Development (OECD). These rules prevent companies from using transfer pricing to avoid taxes. The framing of Rules for transfer pricing purposes, which allocates profit to tax jurisdictions is an important area, which needs to be decided by countries in consultation. This is one area, which needs cooperation and consultation amongst south-south countries and also amongst north-south countries to have a broad guideline, which can prevent the tax disputes amongst the countries.

Effective and efficient administration of Transfer Pricing provisions has a policy and an administrative dimension. The tax policy reform can be achieved in much shorter time frame and it is also generally easier to manage with less resource than reform of revenue administration. This is the reason why we tend to focus more on the design of a modern tax policy system. However, in the long run for guaranteeing the fair and efficient application of provisions of international taxation and Transfer Pricing the administrative set up needs to be properly oriented to administer regulations. For this specialized skilled manpower is mandatory. In general, transfer pricing resources have increased or are increasing in most of taxing jurisdictions. India, relatively a newcomer to transfer pricing enforcement, is tending to “gear up” its capabilities quickly by increasing the number of experts to 39 from 12 in 2006 for administration of transfer pricing. The increase in transfer pricing resources has opened new challenges of development and training of skilled manpower.

I am very happy to learn that CBDT is making all efforts to improve technical skill of the manpower posted in Directorates of Transfer Pricing. I am sure that CBDT by increasing its dedicated transfer pricing resources and by improving their specialists capabilities will be able to meet emerging challenges in administration of transfer pricing regulation and would augment government’s effort to mobilize more revenue for the development work.

I take this opportunity to wish the participants and organizers a happy learning experience through exchange of ideas and views.

Ground Breaking New Labuan Financial Laws Passed

New laws which will dramatically improve Labuan’s already competitive edge in international financial markets came into effect on 11 February 2010. A total of four new Acts, together with radical amendments to a further four existing laws will completely change the way in which the Island carries on its financial services business. With the enactment of the new laws, Labuan Offshore Financial Services Authority (LOFSA) will be named as Labuan Financial Services Authority (“Labuan FSA”).

Dato’ Azizan Abdul Rahman, Director-General, Labuan FSA said “These far-reaching changes cover all financial activities in Labuan IBFC – from banking, insurance, leasing and company incorporation right through to the creation of Islamic financial products and services. Apart from that, the changes have taken into consideration all aspects so that we are ahead of accepted international standards and practices.

The new Laws allow for the creation of Labuan foundations, limited liability partnerships, protected cell companies (insurance and mutual funds), shipping operations, Labuan special trusts and financial planning activities. These complement the existing range of products and services readily available and to provide investors with a wider choice of financial products to maximise investment opportunities.

Labuan has always been seen as an effective and user friendly jurisdiction”, said David Kinloch, CEO of Labuan IBFC Inc., the sales and marketing unit for the Island, “but these new provisions will make it possible for us to attract and welcome many new categories of clients.

With the new Legislation now firmly in place, Labuan IBFC is well positioned to develop further as a vibrant and active International Business and Financial Centre.

PwC : Political interference ‘now the greatest risk facing the global banking industry’

Banana Skins’ poll identifies top threats to banks

The greatest risk now facing the banking industry is not financial but political, according to the latest ‘Banking Banana Skins’ survey conducted by the CSFI in association with PricewaterhouseCoopers.

The annual poll of banking risk puts “political interference” at the top of a list of the 30 most serious risks to banks during this period of financial crisis. The poll is based on responses from 450 senior figures from the financial world in 49 countries.

Respondents, who include practising bankers as well as close observers of the financial scene and regulators, said that the “politicisation” of banks as a result of bail-outs and takeovers posed a major threat to their financial health.

This view was shared by all types of respondents in all the major banking regions, though for different reasons. Bankers saw politics distorting their lending decisions. Non-bankers said that political rescues had damaged banks by encouraging reckless attitudes. Regulators worried that governments would withdraw their support from banks before they had time to rebuild their financial strength, precipitating another collapse.

“Political interference” has never appeared as a risk in 15 years of “Banana Skins” surveys.

The top risk is closely linked to the No. 3 risk, “Too much regulation”, and the concern that banks will be further damaged by over-reaction to the crisis.

David Lascelles, survey editor, said: “It is ironic that politics should emerge as a risk when the banks had to be rescued in the first place. But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust. Until it is, banks will operate under a financial handicap.

This year’s survey is a well timed warning that the cumulative effect of current regulatory initiatives may have unintended consequences. The need to rebuild trust between banks and regulators is therefore more acute than ever,” he added.

Many of the risks identified by the survey – notably credit risk at No. 2 - stem from concern about the effects of the recession on the banking industry. The bulk of respondents were gloomy about the outlook, fearing a “double dip” recession with a further wave of bad debts hitting the banks. The mood was particularly dark in the Asia Pacific region where respondents are worried that a new asset bubble may burst, bringing about a collapse of confidence in the credit markets.

The poll also reflects concern about the banks’ ability to manage themselves safely. “Banana Skins” such as the quality of risk management, corporate governance and management incentives all feature prominently as potential sources of risk.

But some risks are also seen to be easing as the world pulls out of the crisis. A number of financial risks - liquidity, derivatives, credit spreads and equities – are down on the previous poll in 2008. A striking fall is the risk from hedge funds, down from No. 10 to No. 19, as their threat is seen to diminish. “Financial plumbing” risks are also seen to be low: back office, payments systems etc. All performed well in the crisis. Environmental risk is at an unchanged No. 25 position despite the heat generated by the Copenhagen Summit.