Trust Survey – reputational risk for clients being associated with structures in offshore jurisdictions – Lexology

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As part of our recent trust companies survey, we asked the participating trust companies what risk and compliance issues pose the greatest challenges to their business.

Reputational risk as a business challenge

As we reported in our previous publication on the results of the survey, the respondents identified beneficiary disputes as the least pressing issue. Reputational risk for clients being associated with structures or offshore jurisdictions was identified as the second least challenging issue (out of a list of seven), behind other matters such as (listed in alphabetical order, so as to continue not to give anything away) Anti-Money Laundering (AML), Cybersecurity, Data protection, Regulatory compliance and Tax compliance.

Although it is impossible to identify a single explanation for this result, the following observations may go some way in explaining why trust companies identified the reputational risk for client being associated with offshore structures as a relatively low priority issue:

The English High Court commented in a decision in April 2020: The use of complex offshore corporate structures or trusts is not, without more, a ground for believing that they have been set up, or are being used, for wrongful purposes, such as money laundering. There are lawful reasons privacy, security, tax mitigation why very wealthy people invest their capital in complex offshore corporate structures or trusts.

Future changes

In recent years, the OECD and a number of jurisdictions have become particularly focused on increasing transparency of offshore investing, and are in the process of introducing more laws that may significantly increase regulatory scrutiny. These often include new reporting regimes and registers that record the names of ultimate beneficial owners, which may have a significant effect on potential reputational risks if anonymity is a major concern.

Enhanced transparency regimes and increasing disclosures of offshore holdings might have the effect of pushing reputational risk further up the risk scale for trust companies in future years, in jurisdictions where offshore investments are perceived negatively.

However, it is perhaps more likely that increasing transparency will demystify the offshore world, thereby having quite the opposite effect. Trustees report that the majority of their clients (and particularly the next generation) are accepting of transparency and information exchange as features of the modern world and, increasingly, clients wish to align themselves with jurisdictions that have internationally recognised regulatory frameworks, sophisticated court systems and advisory networks as well as reputable fiduciary and corporate service providers.

This is the flight to quality that Lydia Essa reports to be more noticeable now than ever. Clients are, in her experience, generally attracted to those offshore jurisdictions which have a global reputation for quality, security, and meet international standards on transparency, and information exchange, even if that comes at a slightly higher cost. Whether these enhanced regimes will assist in reshaping public opinion in time and reducing (or perhaps even eliminating) the reputational risk of an association with the offshore world is yet to be seen but early signs are that certain jurisdictions may be well placed to thrive in these conditions, whilst others may well find the going a lot tougher. Only time will tell.

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Trust Survey - reputational risk for clients being associated with structures in offshore jurisdictions - Lexology