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Palladium Newsletter - Winter 2018

In November 2017, we held our autumn/winter event at Langans in Mayfair which was attended by about 50 professionals from the tax, legal, investment, real estate, aviation, technology and accountancy industries (amongst others!).
 
It was a success and below is a round-up of the topics presented on.

2018 poses enduring questions for clients on optimization of trusts and funds. The legal and regulatory changes have forced practitioners to review the jurisdictions and what is on offer and how the subtle differences could work best for you.
 

The Common Reporting Standards

With 60 jurisdictions having gone “live” over the summer of 2017, the exchange of information for the early adopters is nearly complete.  Palladium considered the following during the November 2017 event:
 
•    Was the process as onerous as anticipated?
•    Are there any positive aspects to the CRS?
•    Have any concerns we had about the CRS materialised?
 
The most difficult part of the CRS process arguably concerns the classification stage, particularly whether an entity is classed as a  financial  institution.   We  have  identified  some 


“grey” areas over the summer and are also aware that some entities may not realise they are financial institutions – for example, a trust with lay trustees and an investment portfolio.

Once an entity is classed as an FI, however, most of the information required to register the entity and complete the reporting should already be held on record.  Passive NFFE’s have no obligation to register as anything themselves, but are required to disclose details on controlling persons to any financial entity with which they have any account.
 
The CRS has provided a good opportunity to review structures and check that everything is up to date.  For example, whilst reviewing structures for “reporting persons” or “account holders”, it has allowed us to have conversations with our clients about parties connected to the entity and whether we need to consider implementing any changes for estate planning or tax efficiency. 
 
One could also argue that the CRS is positive for the image of offshore financial centres.  The barrage of negative media continues with the latest leak of the “Paradise Papers”, but at least this time, the likes of the Isle of Man, the British Virgin Islands and Singapore can hold their heads high and state that they are tax transparent and cooperative with onshore authorities - they are all CRS participating jurisdictions.   
 
There are many reasons why our clients use offshore structures – for example, peace of mind, ease of administration, asset protection, confidentiality and estate planning.   It is very rarely about tax.  
 
Whilst the reporting and registration process has not been too onerous, we can not ignore the fact that the full implications of this loss of privacy are unknown.  A large part of the private wealth client base derives from countries which are deemed to be systemically “corrupt” or “unstable” – their financial information could have devastating consequences for those families if the information is leaked to nefarious third parties in their home states.

 
The CRS is, however, here and there are things you can do to make it easier such as:
  • Making sure accounts are prepared annually
  • Enlist the services of a professional for the classification stage 
  • Review your structures and help clients analyse their tax positions (and make disclosures if necessary)
We can assist with the above and should be happy to provide further information on any of these services!
 

Cryptocurrency – are they for everyone?
With the tax authorities clamping down hard on wealth management structures across the globe, alternative forms of investments and commodities are on the rise. One of these is the phenomenal upsurge of cryptocurrencies flag-shipped by Bitcoins. So, Palladium asked the question from participants of the seminar – are cryptocurrencies for everyone?

Is it a bubble?

Some describe the spike of cryptocurrencies as a “bubble” drawing parallels to the “Tulip Bloom” in the 1600s, others argue that some cryptocurrencies will establish as the virtual-gold and offer more transparent payment systems than what the banks offer. Whilst Bitcoins with current market cap around $200 billion keep growing, others such as Ethereum have evolved specifically to enable Escrow or Smart-contracts
where multiple signatures can be verified by the network in completing deals. However, the high volatility of cryptocurrencies as a traded commodity has in fact deterred the use of cryptocurrencies as a payment or money transfer method.

Whilst in the virtual world, cryptocurrencies maintain its decentralization appeal, in the real-world collusions between the developers and miners, political stands of countries such as China, USA and Russia can diminish the freedom of the decentralized systems. The Chinese ban on Initial Coin Offerings (ICOs) had plunged the price of Bitcoins twice during 2017 and Russia maybe on the verge of introducing a government-backed cryptocurrency of its own. Other hindrances to wider acceptance of cryptocurrencies have been the emergence of the cyberthreats, Invisible Internet Protocols (I2P) and darknet markets where exchange of pirated material, illegal information and contraband sales have been prevalent. The cases of ongoing investigations into the online black market known as “Silk Road” in 2013 and the Japanese coin exchanges – Mt Gox getting hacked in 2014 and more recently around £400 million heist of Coincheck are prime examples.
What are the risks?
 
As cryptocurrencies are only beginning to get legal recognition and due to the lack of regulatory attention, the frontier of cryptocurrency transactions and investments remain open to frauds and high risk. A recent STEP journal article had warned that “the novice should not participate in these activities without expert guidance” referring to the risk of tax laws that can get triggered as capital gains can get realised within the network or when cryptocurrencies are 
exchanged into Fiat currencies. The FCA Consumer warning about the risks of Initial Coin Offerings state that one “should be conscious of the risks involved (highlighted below) and fully research the specific project if you are thinking about buying digital tokens…
  • Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.
  • No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
  • Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.
  • Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
  • Inadequate documentation: Instead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.
  • Early stage projects: Typically, ICO projects are in a very early stage of development and their business models are experimental. There is a good chance of losing your whole stake.”
However, with companies such as Paypal, Microsoft and Dell having started accepting crypto-payments; Mastercard and IBM incumbent with blockchain-technology instead of the conventional swipe system; and Japan legalising Bitcoin as a form of legal tender – the horizon looks optimistic for blockchain technologies in general and cryptocurrencies specifically. 

How can Palladium help?
 
We are experienced and equipped in providing structuring advise and competitive high-value-for-money corporate services in several jurisdictions worldwide. Our tight-knit network of tax advisors, accountants, bankers and financial advisors can provide the right guidance for clients to successfully navigate through the misty waters of offshoring – and Palladium Advisors are happy to source and introduce clients within our P2P-likeness network.

In conclusion, there appears to be enough interest and confidence by investors and entrepreneurs for at least some cryptocurrencies to establish as the commodities and legal tender of the future. No one knows which ones will survive and which may succumb to the speculation, political influence and cyber-threats. As such it can be said that the industry remains in its early days. So, are cryptocurrencies for everyone? Palladium argues that whilst it may not yet be for everyone, it is certainly for anyone with a clear vision, a robust strategy and backed by the right structure – and Palladium is here to help.

 
Incubator funds

Incubator funds are ideal alternatives for savvy private investors as a stepping stone toward building registered or regulated funds whilst testing their strategies or establishing track records. Incubator funds are suitable provided the compliance risks associated with the traded commodities or currencies are mitigated e.g. as must be expressed in the offering documents. 

Whilst it may vary between jurisdictions generally funds can be incubated for periods between 3 months to 2 years with the possibility of extension by obtaining approval of the regulatory body. In the BVI, the incubation period is 2 years with potential extension up to 3 years.

Under the BVI Securities and Investment Business Act, 2010 ("SIBA"), sophisticated private investors who have been invited to invest, may make initial investments not less than US$20,000 in an incubator fund provided the following conditions are met:
     1.  Total number of investors is 20 or less.
     2.  Minimum investment capital of US$ 20,000 (per investor).
     3.  Net assets of the fund is US$ 20 million or less (or the equivalent in any other currency)

This type of funds is less costly for the managers as it does not require a fund manager, administrator or custodian to be appointed nor is it required to carry out audits.

Palladium fees for setting up and administration of a basic BVI incubator fund are below:
  • Preparation and submission of fund application USD 6,150;
  • Incorporation of a fund entity with one or more classes of share using standard M&AA and coordinating the application for licensing USD 2,200;
  • Application fee payable to Financial Services Commission for Fund License USD 700;
  • Provision of an authorized representatives USD 2,250;
  • Renewal fees for Recognition of Fund License or Annual Fund License Fee USD 1,150;
  • Annual fees for provision of Registered Office and Registered Agent USD 1,850.
Please feel free to get in touch with us by email to stephen@palladiumadvisors.net should you require a specific quote or more information about our services.
 
BVI Limited Partnerships Act of 2017 - A Limited Partnership Structure For Your Investment Fund
The Limited Partnership Act of 2017 (the Act) of the British Virgin Islands was gazetted on 6th February 2018 bringing into force a comprehensive, pragmatic and modern piece of legislation which is easy to adopt.

The main features of the Act in relation to the constituent elements of the limited partnership (LP) structure are -


Its objectives 
  • A LP may be formed for the purpose of carrying on any lawful business or activity, whether or not for profit, in the Virgin Islands or elsewhere.
Interestingly, the corresponding Part VI of the old Partnership Act of 1996 pertaining to Limited Partnerships prohibited a LP from carrying on banking, trust, insurance, the business of company management, unless licensed or exempt form being licensed under the Company Management Act No. 8 of 1990.  However, the current Act has done away with this limitation and so, a LP can be formed and carry on business for any lawful purpose.

Legal standing
  • A LP is conferred legal personality, unless the general partners elect otherwise; having legal personality does not however grant it the status of a body corporate.
Legal personality entails legal rights and obligations before the law. Under the Act legal personality translates to having full capacity to carry on or undertake any business or activity, do any act or enter into 
any transaction and to enable this, full rights, powers and privileges. 
It is worth bearing in mind that, if the general partners wish to opt out of having legal personality, a declaration signed by or on behalf of each general partner to this effect must be made in the statement to be filed when application is made for registration of the LP, and such a statement then stands irrevocable, whilst also a failure to make such an election being final.
Partners
  • A LP shall have at least one general partner and at least one limited partner, each of whom must consent in writing, but it must be stressed here that this requirement cannot be used interchangeably where there is only 1 partner.
  • A registered agent of the partnership may become a limited partner, so too a body corporate.
Constituion
  • LPs are given freedom and flexibility to adopt their own LP Agreement or adopt the model provisions within the Act
Setting up a LP
  • An application to register a LP can be submitted only by a Registered Agent, by filing a statement containing the following information:
    • Name of the LP, and its foreign character name, if any;
    • Address of the registered office;
    • Name and address of the registered agent;
    • Name and address of each general partner;
    • The term for which the LP is entered into, and if it is for an unlimited duration, a statement to that effect;
    • If the general partners have elected that the LP shall not have legal personality, a declaration signed by or on behalf of each general partner to that effect;
    • Document by the proposed Registered Agent signifying his consent to act; and
    • Any other particulars that may be prescribed.
Certain incidental but relevant matters to bear in mind in setting up a LP is that the name of the LP should contain the words ‘Limited Partnership’ or the abbreviation ‘L.P.’ or ‘LP’ at the end, the LP must have a registered office in the BVI at all times, and if that address be that of the registered agents’ that fact must be stated in the application for registration.
General partners - features
  • A general partner (GP) may, but is not required to, contribute to the capital of the limited partnership.
  • Each GP is jointly and severally liable for the unpaid debts and liabilities of the limited partnership incurred whilst being a general partner and, subject to the LP agreement, liability is only to the extent that the limited partnership cannot pay those debts or liabilities and no more.
  • A GP enjoys the same rights and powers and is subject to the same restrictions and obligations as a partner in a general partnership. 
  • It is the GP who is responsible for the management of the limited partnership and is deemed to be an agent of the LP for the purposes of its business and activities.
Limited partners
  • A limited partner too may, if he so wishes, contribute to the capital of the LP.
  • A limited partner is not permitted to take part in the management of the LP, transact the business of, sign or execute documents for or otherwise bind the LP.
  • It is however noteworthy that in being so excluded, the activities which actually set out the parameters within which to be guided in not being construed as taking part in management are very wide, affording the limited partner to participate in many other ways and safely retain their role of limited partner without being construed as partaking in the management of the business.
  • A limited partner owes no fiduciary duty in exercising any of its rights or authorities or otherwise in performing any of its obligations under the LP agreement, to the LP or any other partner.
  • A limited partner is not liable for the debts and liabilities beyond the amount of his contribution or unpaid commitment to the LP.
  • A limited partner shall not cease to have the benefit of limited liability by reason only that the LP does not have a general partner.
  • A limited partner is not the agent of the LP as a GP is.
Registration of charges
  • A LP with legal personality is entitled to create a charge over its assets whilst a LP without legal persona can be the subject of a charge whether or not the GPs or any of them are BVI Companies or other types of bodies corporate.
  • A register of charges needs also to be maintained either at the registered office or at the LP’s Registered Agent’s office.
Merger, consolidation and arrangements
  • LPs with legal personality are given the right to merge or consolidate and a consolidated partnership will have legal personality.
Transitional provisions

An existing limited partnership, whether a local LP or an international LP, may be re-registered under the Act.

An existing LP that has not made an application to be re-registered during the transition period will be deemed to be automatically re-registered on the day after the transition period expires and the Registrar will enter the name on the register of LPs and allot a unique number to it but will not be required to issue a certificate of re-registration unless the partnership applies for registration and pays the appropriate fee, the LP shall within two years after being re-registered have in place a partnership agreement in accordance with section 7 of the Act and act in compliance with the provisions of the Act.

Limitations to carrying on business as a LP

Overall, the LP structure is ideal in terms of operating under a less formal structure in relation to formality of hierarchy, management, decision making processes and regulatory matters. However, in the event of issues arising with regard to the day to day management and decision-making processes, the recourse for guidance is the Partnership Agreement, which although can be a bespoke document providing for many situations and eventualities, the ultimate resolution may not necessarily be contained therein making it necessary for consensual resolution of issues between the partners.

Also, due to the fact that both forms of partners are not required to contribute towards the capital of the LP, it will then be necessary to borrow from lenders. Financially this may be less cost-effective and/or prudent
.

So how will the new Act facilitate setting up incubator/approved funds for investment activity?

Incubator and approved funds by their very nature, are not subject to supervision by the Financial Services Commission, thereby rendering them high-risk. For this reason, incubator funds are recommended for sophisticated high-net worth investors knowledgeable enough to know and be responsible for determining the suitability of their investments. However, even for such sophisticated investors, investing on a lone basis carries the obvious risks and drawbacks. To overcome this high-risk nature of the fund and mitigate risks, and at least some of the drawbacks associated with being a single investor, potential high-net worth investors who group together in partnership can pool their funds and collectively invest in different portfolios, thereby being able to spread the risk in a variety of different investments, whilst also sharing in and drawing from the knowledge and expertise of different partners within the business and minimising costs.

Investors who opt to join the partnership as limited partners, can continue to benefit from rendering their expertise in many other ways without being deemed to be participating in the day to day management of the partnership business by reason of the wide range of activities permitted to limited partners to participate in without fear of losing their status as such.

Features inherent to incubator and approved funds which render them a viable option for sophisticated and other investors, such as the minimal time taken for obtaining approval to commence business and minimal administrative matters, coupled with the flexibility and freedom for those investors that is afforded by the LP structure and the tax-efficient nature of a partnership could only go towards endorsing it as a popular choice for those looking to set up an investment fund through a limited partnership. 

Palladium can assist with exploring the suitability of a LP structure for your business, be it for a commercial venture or incubator or other fund, as well as setting up such a structure
.
 
Averting another financial crisis?
Those of you carrying out investment activity as a trade and those who have investments in financial instruments will be aware that the European Union’s regulatory law on markets in financial instruments came into effect on the 3rd of January this year. Known as the Markets in Financial Instruments Directive (2004/39/EC) or MIFID II, its approach is two-pronged, consisting of the EC Directive and the Regulation.

What does MIFID II seek to achieve?

Having identified the complex and ever-evolving nature of financial instruments, trading methods and the trading venues, the EU has sought to bring a degree of harmonisation of investment services by strengthening the regulatory framework and increasing transparency of financial markets in the jurisdiction.

How does it achieve this?

By establishing requirements in relation to the following:
    (a)    Authorisation and operating conditions for investment firms;
    (b)    Provision of investment services or activities by third-country firms through the establishment of a branch;
    (c)    Authorisation and operation of regulated markets;
    (d)    Authorisation and operation of data reporting services providers; and
    (e)    Supervision, cooperation and enforcement by competent authorities.

What products does MIFID II apply to?

The provisions apply to financial instruments which include, amongst others, transferable securities, money-market instruments, units in collective investments undertaking options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields etc. which may be settled physically or in cash, as well as such contracts relating to commodities.

How do the regulations apply?

The scope of the regulations that accompany the directive is to establish uniform requirements in relation to -
     (a) disclosure of trade data to the public;
     (b) reporting of transactions to the competent authorities;
     (c)  trading of derivatives on organised venues;
     (d) non-discriminatory access to clearing and trading in benchmarks; 
     (e) product intervention powers of competent authorities;
     (f) provision of investment services or activities by third-county firms. 

So, is this the panacea for all ‘problems’ with financial markets? Time will tell.

 
The GDPR is about to kick in!
The General Data Protection Regulation (GDPR) imposed by the EU on all its member states kicks in on the 25th May 2018 with anyone and everyone being classed as either a data controller or a data processor and in some cases both. We are all busy ensuring information audits across various facets of the businesses are completed.

The accountability principle of the GDPR requires that businesses are able to validate how they comply with the regulation. The requirements are more arduous if the organization has more than 250 employees. It lays onus on organizations to inform individuals on the lawful bases for processing their personal data. Whilst a majority of these are addressed through legal notices and published privacy policies it also requires sending out notifications to clients, staff, suppliers and other third party contacts about what data you store and how the data gets processed or remitted.

There is currently provision within the regulation for soft-consent. For example if someone has shared their business card with you and you have been in touch with them using the information on the business card, it may be deemed that they have given a soft-consent if you have provided an option for opting-out and the communication is related to a specific product.

The ICO will start applying a data protection fee from May 2018.

Personal Data hoarders such as Facebook have recently updated their “privacy principles” and have launched awareness campaigns to inform users such that users feel secure and do not cause a logistical havoc to Facebook in deleting or added protection to their personal data.

We would love to hear about your thoughts on the themes discussed above.

Below are some article links for updates on these and other subjects.

Wishing you a wonderful year ahead,
 
Stephen

Our Vision

We strive to deliver excellence at reasonable cost.
 

Commercial ethos

While the offshore world faces challenges and is subjected to more scrutiny than ever before, Palladium’s commercial ethos is centred on due compliance as well as efficiency and robustness in the delivery of its services.

Learn More

We hope that you find our website a helpful and informative introduction to our services. Please contact us if you have any questions.
 

More articles:

Guernsey: Guernsey playing a key role as UK financial services prepare for Brexit:
http://www.mondaq.com/article.asp?articleid=674386&email_access=on&chk=1354020&q=679634

Gibraltar launches regulation to protect cryptocurrency value and reputation:
https://news.bitcoin.com/gibraltar-launches-regulation-to-protect-value-and-reputation/

Ten years out – from massive migration to prying governments, businesses will have to weather startling changes over the next decade:
https://ig.ft.com/special-reports/ten-years-out/

 

Read More

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with the offshore fiduciary market, and our onshore commercial background in the City, have convinced us that we provide a unique and valuable service.

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