No man is an island - as we all know from the poet, John Donne; which is why global offshore financial centres such as those in Bermuda and the Channel Islands have felt the effects of the recession as much, if not more, than their onshore counterparts. But it is not only the recession which has affected offshore. The jurisdictions are evolving with new products and services to match a changing world.

A global financial crisis would not be a global financial crisis if it did not affect everyone - and offshore law firms are no exception, particularly when quite a few of the $50 trillion worth of assets which were lost in the wake of the crisis were managed offshore.

This has been the case in the Caribbean and European offshore centres. In the Caribbean, domiciles such as the Cayman Islands, synonymous with hedge funds and where firms such as Maples and Calder, and Walkers, are based, have keenly felt the effects.

European offshore centres such as the Channel Islands are also holding their breath while problems in the eurozone remain unresolved; as Paul Wilkes, group partner in the corporate department at newly merged Channel Islands firm, Collas Crill, says: ‘Our biggest source of clients is the City of London, so of course we are affected.’

Expansion projects have been put on hold for the first time and this is in stark contrast to the 2000s when firms were growing fast. As John Collis, chairman of Conyers Dill & Pearman, the well-established, Bermuda-based, multi-jurisdictional firm, explains: ‘There’s certainly a contrast between now and what we had before.’ Indeed, there was much talk of Conyers Dill’s plans to merge with a firm in the Channel Islands during 2010, but that has not happened. Collis says: ‘We don’t think the possibility of moving into the Channel Islands is over, we are just dealing with more immediate issues at hand.’

Offshore jurisdictions tend to feel the effects of a downturn later; there is a ‘delayed reaction’, according to Peter Bubenzer, group chairman of Appleby, one of the offshore ‘magic circle’: ‘So if it was in 2007/08 when everything became unstuck, it was not until late 2009 and 2010 that we were really affected and we are still affected. So we see problems later.’

Of course, like onshore, different practice areas have been hit in different ways: almost all the firms to which the Gazette spoke reported a slump in areas such as corporate, M&A work and debt capital markets, which are only just starting to re-emerge.

Structured finance transactions have, according to Bubenzer, ‘completely disappeared’, particularly so in the Cayman Islands, where so much of that type of work had been done. Collis agrees. He says: ‘Whole lines of business such as securitisation have vanished in the recession because it was so closely associated with the financial crisis.’

In terms of funds, a core component of offshore work, they were also plunged into the doldrums. As Collis says: ‘Funds have been in a state of upheaval. Many funds were redeemed to deal with all the debt problems of the global financial crisis and so have disappeared. For a while there were no new funds. Formation of new funds has now started a slow recovery.’

On the other side of the office, however, where the dispute resolution teams sit, workflow is high. Kathryn Purkis, a commercial litigator at Collas Crill in Jersey and also the Jersey office’s managing partner, explains: ‘We are very busy indeed. We were perhaps initially surprised by the lack of activity in insolvencies and bankruptcies. But this might have been to do with the delay that there is between effects onshore and offshore. Things are different now. Our Guernsey litigation practice has had its best year ever.’

One of those busy areas of dispute resolution is funds litigation. Because so many of the funds which collapsed were based in these jurisdictions, this is often where the litigation has been. In contrast, there are also cases where the funds are based offshore but the litigation is taking place onshore, in the US and the UK, because the relevant contract is governed by those jurisdictions. Bubenzer says that this has led to UK and US onshore law firms ‘looking to capture work from clients based offshore’, having been exposed to them in big litigation cases.

Because of the nature of offshore law, much of the litigation is also trust-related, a highly complex and specialist area of dispute resolution. Purkis believes that jurisdictions like Jersey are building jurisprudential credibility as a result of this specialism.

If litigation is on the rise and securitisation have been knocked out of the water, private client and wealth management have remained steady throughout the period. Russell Clark, deputy managing partner in the Guernsey office of Carey Olsen and part of its fiduciary law group, explains: ‘Private wealth management is less affected and we are continuing to see many significant trusts being set up. Life goes on and the reasons for setting up a trust, protecting beneficiaries, providing a platform so that an international family can centralise and co-ordinate its affairs, carries on through a recession. Wealthy families still need to have their money managed.’

Debt crisisInsurance, which is a key component of offshore practices, particularly in Bermuda and, for captive insurance, in the Cayman Islands, has been living through harder times. However, there has recently been some activity through the growth of catastrophe, or CAT, bond transactions by insurers. These are high-yield instruments which have been one of the responses to catastrophes such as Hurricane Katrina, and the earthquakes in Haiti and Japan.

But almost all practice areas in offshore jurisdictions have been affected by what has emerged as one result of the global debt crisis, namely increased regulation from Dodd-Frank in the US, to the new super-regulators and directives in the EU. These response measures could have as significant an impact as the crisis itself.

Take the Alternative Investment Fund Managers (AIFM) Directive, which was finally approved by the EU a year ago and imposes tough requirements on AIFM managers such as capital requirements, and requirements relating to remuneration and disclosure of information. Though it is not yet law it soon will be, probably within the next two years. For offshore firms and their clients, the most important aspect of the directive is its applicability to ‘third country’, non-EU managers. Clients will only be able to operate in the EU if they can demonstrate ‘equivalent’ regulatory regimes.

Offshore centres are therefore keen to understand exactly what ‘equivalence’ means and are ensuring that they are part of the process that works that out (by being involved in the debate in Brussels as the implementation measures to the directive are thrashed out). The ‘race to equivalence’ (as it has been dubbed) has sharpened competition between jurisdictions in the offshore market in respect of their ability to meet the test.

Wilkes says: ‘In the race to equivalence, the Channel Islands believes it is well placed. Having regulatory substance is seen as something positive. Although it raises challenges, we can see the upside for us as opposed to our competitors. Our target market is fund managers who want credible regulation but regulation that is still flexible. All offshore regions need to jump through some hoops to keep their space but we believe we can offer something which other jurisdictions cannot match in terms of equivalence.’

On the other side of the world, lawyers appear not unduly concerned. Collis takes the long view: ‘Both from Bermuda and the Cayman Islands we do have delegations working with Brussels as we don’t yet know what it means by equivalence. But there were always restrictions. An American fund manager has always had restrictions, it is just getting used to different ones. We’re not particularly worried.’

Similar to the AIFM Directive for financial services is Solvency II for the insurance market. Another EU creation, Solvency II introduces a ‘solvency capital requirement’ whereby capital has to be aligned with risk, which will mean that insurers will have to hold much more capital than at present. Solvency II has the same ‘third country’ implications in that companies wanting to do business within the EU will have to have equivalent laws and capital requirements relating to the various classes of insurance.

Again, this raises issues for offshore jurisdictions. The relevant authorities have sought to ascertain whether their regimes withstand EU scrutiny. Bermuda, for instance, has just been reported on by the European Insurance and Occupational Pensions Authority, which found the Bermuda Monetary Authority’s laws to be equivalent in some classes of insurance but not in others.

But there is a balance to be struck, according to offshore lawyers, as Bubenzer says: ‘Bermuda has had to adapt to this greater level of regulation and is seeking equivalence, but at the same time needs to keep its regulatory regime appropriate to those clients who are not operating within the EU framework and so do not need that equivalence.’

It is not only regulation but also enforcement that has changed during the financial crisis, and many offshore practitioners report a more vigorous regulator. In Guernsey, for instance, according to Wilkes: ‘There has been a marked shift by regulators (since late 2007) to take a black letter approach to regulation. Some say that that is a knee-jerk overreaction. Of course we still try and find a common-sense approach for our clients.’

Other offshore practitioners take a more positive line on regulation and enforcement and see them not as threats to their attractiveness but as ways of enhancing the image of offshore centres. Certainly, that image matters as the public perception of offshore does appear to fluctuate. Some say that the reputation of offshore financial centres has been tarnished by the global crisis and has brought back onto the agenda concerns about banking secrecy, and ‘below the radar’ financial centres.Robin Smith, a corporate and finance partner in Carey Olsen’s Jersey office, observes that there is ‘increased political focus’ on such centres.

Dangerous move

But if there is greater regulation, then part of the rationale for offshore centres is put into question, as another practitioner put it: ‘Equivalence is a way of forcing third countries to regulate. It is dangerous for offshore because our edge is not having regulation.’

Even the favourable tax regimes, the star at the top of the offshore Christmas tree, may be losing their sparkle. Recently, the Swiss changed their tax laws so that residents of Germany and Britain with Swiss accounts will, in essence, have that money taxed. And laws are being introduced which indirectly threaten tax havens, such the US’s Foreign Account Tax Compliance Act (FATCA). This law requires companies and individuals outside the US to provide information on assets held by US residents to the US authorities or face the wrath of the Internal Revenue Service. This sort of ‘long-arm’ law which reaches out across jurisdictions challenges the way offshore tax regimes work.

Is a combination of heavy regulation and long-arm tax law going to mean that offshore is no longer distinctive? Was Forbes magazine right when it told its readers last year in an article on FATCA that ‘tax havens’ days are numbered’?

Pure hyperbole, say the practitioners. As Collis says: ‘The offshore industry is difficult and complicated, but this market is going to continue to exist. The regulations will not make any difference. This isn’t anything we haven’t seen before. Our clients will go and do their homework. They are not going to turn off the tap.’

Collis has a point. There is no evidence that offshore financial centres are threatened. Instead, offshore firms are reinventing themselves, shedding some of the products of the past and embracing new ones, while finding new regions in which to sell them.

The most obvious and long-term shift has been to focus on Asia – and China in particular. Ogier has just opened an office in Shanghai, the first firm to do so in mainland China. Of Shanghai, Ray Wearmouth, managing partner of the BVI office of Ogier, says: ‘You just cannot ignore the likely impact that the region will have on fund flows.’ And offshore can be a conduit for east to meet west, as Wearmouth observes: ‘Offshore is neutral ground between China and Russia or China and the US.’

Although the Caribbean offshore market has traditionally had stronger ties to Asia (Conyers Dill & Pearman last year celebrated 25 years of being in Hong Kong), even the European offshore financial centres are getting involved and Collas Crill has recently opened an office in Singapore.

Jason Romer, managing partner of Collas Crill’s Guernsey office, explains: ‘We had been thinking about moving into Asia for quite a while and once we did the merger we could offer Asia the Guernsey and Jersey product together. We looked at China and India and felt that Singapore was best placed to deliver to these regions in terms of corporate, funds and private wealth planning. Hong Kong is a saturated market from an offshore point of view and we believe Singapore has a more international hub feel.’ It is not only corporate work which is becoming more Asia-focused, but also the private client offering, as Clark explains: ‘We are seeing a lot of new wealth in Asia and they want to keep their wealth somewhere politically secure - and offshore is still the best conduit for them to achieve this.’

Offshore firms have also explored the Middle East with firms such as Maples and Calder, considered the largest offshore law firm, Conyers Dill, Walkers and recently merged Mourant Ozannes opening up in Dubai. But the attractiveness of offshore for those doing business in the Middle East is less obvious because taxes are so low in many of the jurisdictions there. And although some firms have branched out into Islamic finance, practitioners admit to only limited success.

Alongside this geographical shift, there are other changes too. The offshore jurisdictions are keeping themselves competitive by evolving their own laws and regulations to keep up with the industries they serve and the countries in which they are operating.

Image rights

Racing driver Damon Hill pioneered the protection of his image rights by registering certain images as trademarks, particularly one of him glaring through his F1 visor. Many footballers and celebrities have followed suit.

Now, however, Guernsey has become the first jurisdiction to introduce legislation to allow people to protect (and exploit) their image rights not by registering a trademark but by registering the image right itself. Jason Romer, director of Collas Crill IP, says: ‘This is giving people an additional remedy. The company or trust holding the image rights will have an additional cause of action if someone misuses the image.’

The attraction of this new offering is that it combines the image right with a favourable tax arrangement. Instead of having to pay high rates of tax on income from the image rights in all the jurisdictions where an individual might be, the image right stays in Guernsey, as does the income, and that is where the tax is levied. As Romer puts it: ‘It disassociates the player from the image.’

Foundations law

For instance, a new foundations law is being introduced in Guernsey as it was in Jersey in 2009. Foundations law offers an alternative wealth management structure or corporate structure to trusts. By offering foundations, sometimes referred to as ‘companies without shareholders’, as well as trusts, offshore jurisdictions can appeal to a wider client base. As Clark explains: ‘It is another way of selling our expertise as wealth managers.’ Bermuda and other Caribbean centres have done the same.

Another offshore success story is the development in recent years of the non-charitable purpose trust. This is a trust without beneficiaries and without charitable purpose (as its title may suggest) and has a wide range of corporate and private wealth management uses, such as setting up trusts with a political or philanthropic (but not charitable) dimension.

Guernsey is the latest to introduce these sorts of trusts, which it did by changing its trust law. Other centres had already done this, such as the Cayman Islands, which brought in STAR trusts, and the BVI which has VISTA trusts.

Across offshore jurisdictions, these centres continue to update and change their laws and regulations to meet their clients’ needs. Guernsey has introduced new image right registration legislation (see box, above) and Bermuda is making over 30 amendments to its company law.

As Collis says: ‘Everyone is looking at their products, the company law, the regulations, their trusts, and asking themselves: how can we make them more attractive? In Bermuda, those 30 amendments to our company law are to make it more appealing and flexible for doing business.

If you have a flat time like this where some products have just completely gone, then you need to modernise and pick up the best thinking in each of the jurisdictions we operate in.’

It is also about being quick to see what the client is into. Recently, offshore jurisdictions have made capital out of the new fashion in special purpose acquisition companies. As Wearmouth puts it: ‘Across the board, offshore law firms like us continue to be involved in ground-breaking deals and products which the onshore companies are driving.’

Offshore centres watch the tide turn and ride the waves.

SPACs

Who would write a cheque to invest in a company when they had no idea what the company was going to do or what it was going to acquire? Well, that is what investors do when they buy shares in a special purpose acquisition company. Some people use the acronym, SPAC, others call them ‘blank-cheque companies’. They are increasing in popularity in the investment world and offshore financial centres are the places where SPACs are being created.

A SPAC is a company which is incorporated specifically and solely in order to raise money through an initial public offering (IPO) and then, later on, acquire something. But what this something is and when the acquisition is made is not known at the time of the offering. The most famous SPAC is that run by Tony Hayward, he of BP fame, who teamed up with Nat Rosthchild to launch Vallares plc, which raised £1.3bn through an IPO this year.

Many offshore firms have got into this work; Ogier has acted on a number of high profile SPACs such as Justice Holdings Limited which listed on the London Stock Exchange in 2011. Carey Olsen was involved in the first Guernsey SPAC relating to Germany1 Acquisition Ltd, a SPAC listed on the Amsterdam market.

Polly Botsford is a freelance journalist