Offshore Jurisdictions – A Damoclean Sword?

The product intervention measures imposed by ESMA at the beginning of August 2018, have pushed European Investment Firms towards solutions that may eventually prove dangerous. In a previous article, we discussed the tactics employed by many EU entities after ESMA introduced its product intervention measures and how the Australian regulator (ASIC) is preparing to introduce product intervention measures. In this commentary, we will discuss offshore jurisdictions, the advantages and disadvantages of each.

Only a few years ago, an Investment Firm with an ‘exotic’ license was seen as suspicious firm by clients and competition, raising many questions regarding their business activities. More and more reputable firms acquired such a license over the years and last year proved a catalyst for even more. It was the year, 2018, that brought a big headache to the online trading industry participants. The initiative by ESMA to introduce significantly lower leverage under their product intervention measures forced many EU Investment Firms to search for solutions and in doing so, altering their business plans. As a result, all ESMA efforts for greater investor protection and a more transparent legal framework under MiFID II worked much differently than the regulator anticipated. The EU regulator, in essence, triggered an ‘exodus’ of EU firms. Acquiring or setting up a subsidiary entity licensed in an offshore jurisdiction became the preferred direction. The firm’s obvious incentive in doing so was to offer a higher leverage to the clients onboard in those offshore entities.

During the last 3 quarters, SALVUS has seen increased interest and demand from investment firms for an offshore entity acquisition from jurisdictions such as Australia, the Bahamas, Belize, Cayman, Labuan, Vanuatu, Mauritius, Seychelles and others. This is mainly because acquiring a licensed entity is in some cases faster than the process of licensing a new one, however not always.

Now back to the article’s premise; why can these exotic jurisdictions be considered a damoclean sword?

#1 Banking and Payment Solutions
First things first, baking and payment solution options.

These exotic offshore jurisdictions provide entities with different options as to the quality and reliability of their banking and payment solution providers counterparties. As nothing is constant, care is needed in deciding where to move and continuous oversight is required to avoid losing access to your funds.

#2 Big regulators will follow each other
Secondly, anticipation for uniformity across big regulators should be expected.

Until recently, ASIC was the most reputable regulator that had yet not introduce a leverage cap or any other sort of measures. As a result, some EU firms onboarded their EU clients to their ASIC entity securing their brand could not be hurt in the process of offering higher leverage. Those efforts towards this solution will soon be nullified as ASIC has requested firms to comply with non-provision of financial services to overseas clients and already started the process of introducing its own intervention measures.

#3 Smaller regulators will keep changing
Finally, exotic regulators are prone to adjustments.

Prior to 2017, Vanuatu was seen as an attractive offshore jurisdiction with a minimum capital requirement of only 2,000$. Now, this has changed to 50,000$, including stricter auditing requirements, insurance coverage of 45,000$ and the directors of the company must reside on the island for a minimum of six months every year.

In the past, the minimum capital requirements a Belize license demanded  were only 100,000$ and the annual regulatory fees amounted to only 5,000$ per year. Today, the requirements have been changed to 500,000$ and 25,000$ per year, respectively.

We expect changes to be even more dramatic according to the demand for each jurisdiction and proactively planning for changes similar to the ones described above is best.

A portfolio of licenses
It appears that the growing regulatory changes will have a domino effect across the globe and it will continue as long as bigger regulators pursue transparency on the online retail trading industry. Moreover, it seems that in the years to come, the offshore jurisdictions might enhance their practices and requirements to be seen more trustworthy, while striving to be seen as equally attractive as the more reputable jurisdictions. As the future seems predictable, many executives should consider wise the choice of having a set of licenses both in reputable and exotic jurisdictions.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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