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Article Courtesy from
Trust Services S.A.
OFFSHORE PILOT QUARTERLY
Commentary on Matters Offshore
June, 2006. Volume 9 Number 2
The Bloody and Invisible Hand
The former United States of America associate justice of the Supreme Court,
Louis Brandeis, thought that privacy was “the most comprehensive of rights, and
the right most valued by civilised man”. Conversely, the word for privacy is
yinsi in Chinese and the characters that make up the word are associated with
shady dealings and selfishness. I am sure that this will partly explain why the
Chinese government is looking askance at Hong Kong with its western ways,
private bankers and high-profile commercial connections with the British Virgin
Islands, a British overseas territory, famous for both its offshore companies
and, in the view of many Chinese, its secretive, capitalist activities.
China is, in fact, helping to fuel a growth in offshore activity in places such
as the British Virgin Islands because of its economic relationship with the US
which many Americans feel threatens their dollar. Americans, of course, already
have several compelling reasons to look offshore, not the least of which is
asset protection from litigation. As the Spanish proverb says: It is better to
be a mouse in a cat’s mouth than a man in a lawyer’s hands. Then there is
protection from predatory forfeitures, more privacy and access to a broader
international selection of foreign investments free from the constraints imposed
by the US Securities and Exchange Commission.
What’s new, however, is this concern about the fate of the US dollar which has
spurred the search for an alternative and if moving into other currencies is
considered the prudent thing to do, then offshore financial services centres are
a beacon for access to foreign currencies.
Being introduced to offshore bankers also brings with it an awareness of other
services beyond foreign currency opportunities. Match this with a desire to
separate as many offshore investments from one’s domestic economy as possible,
including perhaps the consequences of probate, and you will create a healthy
interest in offshore companies, trusts and foundations.
What started out, then, as preservation of capital – without any regard for
privacy or tax mitigation – might result in something completely different; it
is a classic case of what economists and other social scientists have come to
know as the law of unintended consequences.
Adam Smith made famous the phrase, “the invisible hand” and argued that each
individual, in pursuing his own interests, “is led by an invisible hand to
promote an end which was no part of his intention”. The phrase, in fact, comes
from Shakespeare’s play, Macbeth, and was used in the context of Macbeth’s
devious scheming to cover his murderous tracks. As the appointed hour of the
planned murder of Banquo approaches, night descends to cover up
“the tender eye of pitiful day,
And, with thy bloody and invisible hand,
Cancel and tear to pieces that great bond,
Which keeps me pale.”
In today’s world, “that great bond” can also refer to US Treasury bonds; but how
long the Chinese will see them in that light and continue to invest heavily is
another matter.
Buying Suits, Heating the Stove
Why has the greenback started to turn some Americans green? Last year, America
ran a record current-account deficit of $805 billion, up from $668 billion in
2004. The deficit rose to 6.4% from 5.7% as a share of GDP and America’s trade
deficit with China (its biggest) was over $200 billion. China, for its part, has
certainly greased the wheels of commerce with America by, firstly, permitting
foreign firms to invest in Chinese factories where cheap labour produces greater
profits and, secondly, by investing much of its export earnings in US Treasury
bonds, helping to finance America’s current-account deficit. In this Byzantine
way, China is buying US dollar assets to guarantee that Americans can afford to
continue buying its exports. In the words of Jacques Rueff, a French economist,
“If I had an agreement with my tailor that whatever money I pay him returns to
me the very same day as a loan, I would have no objection at all to ordering
more suits from him”.
At the same time personal debt in America has grown and it’s as if households
are impervious to its downside. Perhaps the American consumer’s cavalier
disregard is underpinned by the rise in house prices which, it should be said,
has been an (almost) international phenomenon. Today there are more than 1.3
billion credit cards in circulation in the US and Americans are saving less than
1% of their disposable income, which means that the national savings rate is
below 14% of GDP. The equivalent savings rate in the euro zone is over 20% and
since 2000, China’s overall savings rate (the world’s highest) is almost 50% of
GDP.
How things change. Between 1820 and 1950 GDP in China per capita fell by around
a quarter and by 1973 Chinese income per head was worse than in parts of Africa.
But since the reforms initiated in the late 1970s by Deng Xiaoping the country
has seen its economy turn around. According to Niall Ferguson, author of
Colossus, although only limited political changes have been made, China has
concentrated on modifying its economic institutions.
India and China make up almost two-fifths of the world’s population. America’s
National Intelligence Council has compared their emergence in this century to
the rise of Germany in the 19th century and America’s in the last. But even
although India, unlike China, is a democracy (the world’s most populous), it
does not follow that its relationship with America is plain sailing. M. J. Akbar,
editor of the Asian Age, comments: “The Indian street has been nourished by the
view that America is a democracy at home and a dictatorship abroad… Indians do
not make good stenographers. They simply do not like taking dictation.” This
perspective, unfortunately, is not limited to the streets of India.
It is, however, communist China which has caught the interest more of American
businesses because, when compared with India, its economy is two-and-a-half
times bigger, it is growing faster and it is more integrated with the rest of
the world. In fact, in each of the past four years, the annual increase in
China’s foreign trade has exceeded India’s total merchandise trade. And last
year China received approximately ten times as much foreign direct investment as
India did.
All of this sits uncomfortably with Washington because China has befriended
countries such as Venezuela, Zimbabwe, Sudan and Iran that the US (and many
other countries) considers pariahs. China’s motive, however, in choosing strange
bedfellows has been its search for resources (13 years ago it was a net exporter
of oil and today it is the world’s second biggest importer).
But if Americans appear (if not literally) to be killing themselves with debt,
China is using cars to achieve the real thing in alarming numbers. The death
rate on its roads is the highest in the world and the World Health Organisation
estimates that about 680 people die and 45,000 are injured every day. Americans,
even although they have far more cars, are better drivers; there are some 115
people killed each day in road accidents.
Americans just need to steer their economy like they do their cars and putting
agreements with tailors to one side, it would be wise for them to heed the words
of Ludwig von Mises, an early 20th century Austrian economist, when considering
America’s current state of borrowing: “It may sometimes be expedient for a man
to heat the stove with his furniture. But he should not delude himself by
believing that he has discovered a wonderful new method of heating his
premises”. Cold comfort, indeed.
Name-Calling
Carl von Linné, a Swedish naturalist, invented the modern system of naming
living creatures nearly 250 years ago. Taxonomists (this word, for the
uninitiated, has nothing to do with taxes) have named a beetle Ytu brutus and a
snail Ba humbugi; clearly, every profession has its humourists. The fact is that
millions of animals are needing to be formally named so the ancient science of
taxonomy is looking for all the inspiration it can find.
But there are cases where one name appears not to be enough for some living
creatures. I was reminded of this when I recently received the regular statement
from my bank in the United Kingdom. As it has for the past 30 years or so the
bank addressed the envelope to D. R. Sambrook, Esq. An American lawyer reading
that envelope address would assume I was a lawyer but would be uncertain,
because initials were used, of my gender. The clerk at the bank in the UK, on
the other hand, would not assume that I was a lawyer but would know my gender.
Unlike the American lawyer, I was familiar with the adjunct to my name from
growing up in the second half of the last century in the former British colony
of Southern Rhodesia. Similar to many distant British colonies, the settlers (do
you remember when there were such people?) usually tried to retain as best they
could the traditions, customs and conventions (as well as the memory) of the
country which they had left. These were people who identified with Harold
McMillan’s belief: “Tradition does not mean that the living are dead, it means
that the dead are living”. Unfortunately, some British settlers who chose to
retire “back home” got a rude awakening when they set foot once again on
Albion’s shores many years later and entered a changed world.
Esq. is an abbreviation of esquire which is a title of courtesy sometimes put
after a gentleman’s name, particularly in letters, in the UK. (The subject was
briefly mentioned in the December, 1999, issue of the OPQ). Its original
intention was to denote a chivalrous, well-bred man and usually one of good
position. The appellation, however, has been appropriated and specifically
earmarked for use by the American legal profession – of either gender – as an
appendage after their name. That’s why the American lawyer could be easily
misled by my envelope and it’s a good illustration of the importance of, what I
term, cultural communication. Its significance, when it comes to the management
of offshore financial services, is often underrated and yet the last thing
needed in offshore business affairs is misinterpretation and misunderstanding.
(See the next section).
I confess that, for me, courtesy from another era induces a delicious feeling of
nostalgia. It harks back to the British Empire which is no more – despite once
having covered 12.7 million square miles with the UK, at its centre, comprising
less than 1 per cent of that total. In essence, some 430 million people were
taxed and governed by one small island in the east Atlantic that controlled
territories on every continent except Antarctica. M. J. Akbar’s Indian
subcontinent was ruled at one time by less than a thousand British civil
servants, which supports my long-held belief that good administration of
offshore financial services is always down to staff competence regardless of
staff numbers.
This December the word bachelor will disappear from official wedding records in
England when it will be replaced by the word single which will apply to either
gender. It has been decided that the word bachelor – once used to depict a young
knight – belongs to a bygone era. Perhaps it does and I agree with W. Somerset
Maugham that tradition should be a guide and not a jailer; but thinking of my
bank statement, any title symbolizing courtesy should not suffer such a fate in
a world becoming rapidly devoid of it.
Rules of the Game
It should be remembered that those UK dependencies prominent in offshore
financial services are imbued with, and influenced by, British history and
tradition. In practical terms, this means that the business approach can run
counter to the habits and attitudes of other nationalities.
Not having been natural travellers, preferring the familiarity of home, many
Americans have conducted business in British dependencies in the Caribbean which
is not far away and in many instances has not even required the production of a
passport. The statistics covering American passports are somewhat vague but
seems to support this stay-at-home approach because the number issued hovers at
around 20% of the population. Only a minute percentage of America’s population
(around 4 million) are, in fact, non-resident.
So sharing common law doesn’t always mean people share common ground and this
has presented problems for the client as well as his domestic advisers. One
corporate leader has said that if someone is doing business in the Middle East
and doesn’t understand the difference in values, “they’re operating on a
baseball field by football rules”. Those using the new financial services centre
of Dubai take note.
When civil law replaces common law, the problems can be compounded for both
businessmen and bureaucrats. Take the Financial Action Task Force (an
inter-governmental body) as an example. The FATF has played a prominent role in
the way that offshore centres have been viewed by the industrialised nations and
one would expect it to have a firm grasp of all the fundamentals. At its
conference in Rio de Janeiro in 2005, whose attendees included representatives
of national governments and international bodies, one subject title was “The
Misuse of Corporate Vehicles, including Trusts and Company Service Providers”.
Those attending from civil law jurisdictions displayed little apparent surface
knowledge of trusts or their uses – especially those who were representing law
enforcement, regulatory and financial investigation authorities who should be
concerned about their misuse. Not for the first time do I have to grit my teeth
over the FATF and then, afterwards, repeat “nil desperandum” several times.
The national game in America may be baseball, but Americans should forget all
about its rules when they board their international flight, whether or not their
destination is Dubai. And offshore practitioners, for their part, should also
exercise tolerance and make allowances. There must be give and take and I don’t
just mean that clients dip in their pockets and practitioners take
Offshore Pilot Quarterly has been published since 1997 by
Trust Services, S. A.
which is a British- managed trust company licensed under the banking laws of
Panama. It is written by our Managing Director who is a former member of the
Latin America and Caribbean Banking Commission as well as a former offshore
banking and insurance regulator. He has over 35 years private and public sector
experience in the financial services industry. Our website provides a broad
range of related essays.
Engaging an offshore representative is an important decision and we advise all
persons to seek appropriate legal and tax advice from professionals licensed to
render such advice before making offshore commitments.
Article Courtesy of Trust Services S.A.
Physical Address: Suite 522, Balboa Plaza, Avenida Balboa, Panama, Republic of
Panama.
Mailing Address: Apartado 0832-1630, World Trade Centre, Panama, Republic of
Panama.
Telephone: +(507) 269-2438 – Telefax: + (507) 269-4922
E-mail: fiduciary@trustserv.com
Website:
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