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Russian clients are increasingly turning to the Channel Islands when it comes to placing business offshore. Nick Ward explains why
Twenty years ago, driven by a desire for confidentiality, if not secrecy, and a need to protect newly acquired assets from a political and economic system in turmoil, the emerging new order in Russia looked beyond its borders to ’offshore structures’.
Tax sheltering, tax mitigation, tax avoidance, whatever you want to call it, and the availability of Russia’s extensive network of double tax treaties were also important drivers. It is fair to say that, in many cases, those who used offshore centres went for the cheap, quick and quite basic option: nominee shareholders, nominee directors, bare trusts, very few questions asked.
It is not surprising, then, that Jersey and Guernsey did not feature significantly in the early days. But as local and overseas assets were accumulated and foreign investors began pouring in, needs changed. Of course, confidentiality and asset protection remained important, but other factors came into play. Risk diversification, succession planning, access to foreign capital, reputation, stability, substance - the list goes on.
This is when offshore jurisdictions such as Jersey and Guernsey really started to come into their own. Today they are the jurisdictions of choice for many looking to hold their personal assets, their joint venture or investment vehicles or their corporate holding or financing structures offshore.
There are no statistics available to back up this claim, but talk to those in the finance industry in the Channel Islands and the picture soon becomes clear: Russians (or at least their businesses) have arrived, in large, and increasing, numbers.
So what’s the attraction? The Channel Islands may not at first seem an obvious choice, given that there are no double tax treaties in place with Russia or any other CIS jurisdiction. But do not fall into the trap of thinking that offshore is all about tax. It is not, and tax benefits are not even on the menu for Russian clients. From a tax perspective, the Channel Islands simply offer neutrality. That is, using the Channel Islands will not add to your tax bill.
No, for Russian clients, the attraction of the Channel Islands is mainly about the non-tax benefits. It is an additional layer. Individuals and businesses want a jurisdiction that offers more, and this does not just mean high standards of international telecommunications and infrastructure, modern legislation, respect for legitimate confidentiality - although the Channel Islands have all of these. Add a level of long-term political and economic stability that few other jurisdictions can match, an independent, sophisticated and robust court system, a convenient time zone and you see the options begin to narrow.
Deciding on which offshore jurisdiction to use is likely to be influenced by the nature of the proposed structure and the requirements of the parties involved, but one overriding and common theme among Russian clients is reputation. Russia still suffers from its reputation as a high-risk business environment. While no one is claiming that everything has changed for the better, it is true to say that most Russian business has caught up with what we in the West would feel generally comfortable with.
This tends to mean that Russian clients will often be more sensitive than others to reputation. That is, having tried hard to distance themselves from their immediate predecessors, they do not want to be tarnished by association with any sort of disreputable offshore jurisdiction.
Instead, they want to be associated with a jurisdiction that has the highest reputation for transparency, for combating international criminal activity and cooperating with the international community on all levels. Jersey, for example, was rated as the top offshore jurisdiction in the most recent Global Financial Centres Index and was among the first jurisdictions to be placed on the Organisation for European Economic Cooperation’s ’white list’. There is no doubt that the reputation of Jersey and Guernsey is one of their greatest strengths.
Delivering the goods
Of course, the jurisdiction has to be able to deliver. The Channel Islands have a very large and experienced body of professionals, more than 20,000 people involved in the finance industry, with a proven track record in all aspects of offshore services. The ability of the Channel Islands to support such a large industry speaks for itself, but if specific examples are needed, consider the fact that there are nearly 100 Jersey companies (including a number in the FSTE100) listed on about 12 stock exchanges throughout the world. That is a real endorsement of Jersey’s ability to deliver.
The range, flexibility and innovation of products available in the Channel Islands mean that they are open for all kinds of business. The particular needs of Russian clients and the characteristics that distinguish the Islands mean that whether businesses are looking at long-term IPO strategies, joint ventures or investment structures, or if it is an individual wanting to protect or manage their private wealth, the Channel Islands and Russia are a perfect match.
Nick Ward is a partner and head of Ogier’s Russia/CIS cross-jurisdictional practice group