New regulations and lower costs for offshore finance

New regulations

In the last 15 years many countries have come together to crack down on the use of foreign accounts and entities for tax evasion and laundering proceeds of crime. This has been a confrontational process at times, e.g. around 2009 the US Department of Justice launched a large-scale attack on 'banking secrecy' especially in Switzerland.

There is now more developed regulation of cross-border finance, in particular regarding the checks financial entities have to do on their customers and the sources of the money their customers transfer to them, and regarding the disclosures financial entities have to make to foreign tax authorities.

The checks financial entities have to do on their customers and the sources of the money their customers transfer to them are often referred to as AML (Anti-Money Laundering), CFT (Counter Financing of Terrorism), KYC (Know Your Customer) or KYT (Know Your Transaction) checks.

The disclosures financial entities have to make to foreign tax authorities are often made through FATCA (Foreign Account Tax Compliance Act) forms (for reporting to US authorities) or CRS (Common Reporting Standard) forms (for reporting to about 120 opted-in countries).

In addition, journalists and civil society groups have pushed for greater corporate transparency, arguing that the identities of people who own and control corporations should be public information. The Panama Papers scandal around 2016 highlighted how foreign accounts and entities can be misused. Different countries have taken different approaches to this subject, with counter-arguments to public disclosure being the importance for individuals and for businesses of a certain degree of privacy, as well as the possibility of misuse of information, e.g. large-scale 'scraping' could reveal sensitive national economic information. Many countries maintain a paywall for all but the most basic information about corporations; the UK companies registry is free to access but discloses only holdings larger than 25%; Israel's registry carries a small fee and details all shareholdings. Also, some types of registries are declaratory only and may not always be accurate. In Europe, every country must maintain a register of the beneficial owners of companies. These registers were closed to the public following a controversial ruling by the European Court of Justice (ECJ) in late 2022 which found that public access to such registers was incompatible with business owners’ privacy rights enshrined in the general directive on data privacy (GDPR), but European countries are now legislating wider access, e.g. for journalists.

Lower costs

In parallel to new regulations to increase transparency and combat crime, recent years have also witnessed a decrease in costs.

• There is competition between countries to offer the most efficient corporate regimes; in Luxembourg in particular financial services are central to the economy, and the government makes great efforts to maintain an up-to-date and high quality legal framework for financial business. In 2022 Luxembourg updated its Securitisation Law to permit active management for securitisations of debt instruments, and in 2024 it clarified ATAD interest limitation rules in relation to securitisations held by orphan structures, confirming that there is no limit on the amount of tax free profits permitted, from debt and non-debt underlying assets.

• There is of course competition between law firms and corporate administrators to use processes automation, remote working, outsourcing, AI, etc. to reduce costs.

• Banks are continually investing in cost-reducing technologies. Banks already use blockchain technology (e.g. https://hqlax.webflow.io/ ). Applying blockchain for Securitisation transactions could further greatly increase efficiency and reduce costs, as could further automating compliance checks banks must perform on accounts held by investment vehicles. (Currently, using banks or other permitted payment providers (e.g. Electronic Money Institutions) remains generally more expensive for small Securitisation products than using a paying agent and investment via the international clearing system.)

Tentative prediction 1: tailored offshore investment structures will become viable for smaller and smaller investment amounts. This is relevant for developing countries and social applications, but will also allow investment professionals to offer tailored products to smaller or fewer clients, removing a barrier to entry and increasing the reach of offshore financial products.

Tentative prediction 2: low cost offshore investment structures will lead to more and more individuals working with offshore managers in order to pay less tax. This may cause tax authorities to look more close at the subject of tax substance, and in particular whether the investment structure really is managed by the foreign manager, rather than by the client who is saving tax. For example, if the client can communicate with the manager and express investment preferences and share ideas, and require advance notice and approval of the manager's actions – at what point does this mean the manager is merely implementing instructions rather than managing?