Bridging the Gulf

From private trust companies and market listings to Sharia compliance and property structures, the Channel Islands are mining a rich seam in the Middle East, as Dave Waller discovers

Since 1981, the oil-producing states of Saudi Arabia, the United Arab Emirates, Bahrain, Oman, Qatar and Kuwait have formed the Gulf Cooperation Council (GCC) - working together in matters of economics, science and business. Imagine the net worth in the room for those meetings. These are some of the richest states in the world - the GCC supplies a third of US oil and owns up to $225bn of US debt.

But while the GCC"s purse is clearly plugged into an oil pipeline, anyone looking closely at the region will encounter a diverse range of business - everything from shipping, construction and real estate, to aircraft finance and retail. For financial services providers, this naturally creates a range of requirements, particularly in the management of private wealth.

The region"s generally benign domestic tax laws ensure tax mitigation tends not to be a priority among the super wealthy. Individuals and families are instead motivated primarily by asset protection and succession planning - ensuring, for example, that a family company isn"t broken up with the death of the patriarch.

Given these needs, it"s only natural that the Channel Islands have long held links to the region. According to Jersey Finance, Jersey-based banking institutions are currently home to £21bn in Gulf deposits, a figure that represents 14 per cent of all deposits on the island. And there are certain areas where Channel Island expertise seems to be especially in demand.

The trust, for example, is a vehicle that has transcended cultural barriers. “They"re similar to the Islamic waqf, a very old arrangement,” explains Kathy Gillen, Head of the trusts and corporate division at Moore Stephens. “These days, family businesses in the Gulf will be on to the second or third generation, and they need to get to know the ropes. In a private trust company they can sit on the board, becoming familiar with the assets and activities, together with a regulated body like us - we"ll sit and ensure the necessary regulatory and legal issues are being addressed.”

Middle East clients are also beginning to see the appeal of foundations, which offer greater control of their wealth. Here the patriarch may be the guardian or sit on the board, with no requirement to provide information to the beneficiaries. Lots of clients don"t want their family to know too much about the foundation and its assets - whether that"s private jets, art, a business in Bangladesh or a mansion in Mayfair.

The latter is an interesting area. From April 2015, overseas property owners will join British citizens in paying capital gains tax on property sales. Yet despite such changes to the UK landscape, the idea of owning high-end property in areas like London still holds great appeal for the GCC"s super-rich.

“You may have thought the changing legislation would have affected interest in that area from the Gulf,” says William Simpson, Partner at Ogier in Guernsey. “It hasn"t. These are people who want a nice place in London and are quite well off, and they"re also happy to contribute to the UK economy.” These undaunted investors will often access the UK via a Channel Islands company - both for confidentiality, and to avoid UK inheritance tax.

Flexibility and breadth

The provision of Sharia-compliant structures is key for attracting GCC business. The good news for the Channel Islands is that they"ve not had to amend their laws to accommodate Sharia requirements, thanks to their tax-neutral status and flexible corporate legislation. Flexibility is particularly relevant in the context of Sharia-compliant financial products, because each school of Islam has its own interpretations of what is and is not compliant. Meanwhile the Channel Island"s legislation around forced heirship provides a robust firewall - often a huge comfort to Muslim families who are looking to achieve greater flexibility with their succession planning than the strict application of Sharia law would allow.

“The basic message is that the Channel Islands offer both Sharia and non-Sharia structures,” says Nigel Weston, Partner at Walkers Global in Jersey. “For example, a lot of real estate is held via Jersey structures by Russians, Chinese, Malaysians, Latin Americans and those in the Middle East - they all go to London to buy property, and the lawyers there recommend Jersey structures. So we have to be open to all sorts of cultural requirements. Lots of this work is financed by Sharia-compliant banks.”

One interesting upshot of Sharia-compliant work is that it creates documentation that"s far lighter than the legalese-laden documents that practitioners usually have to deal with. “Sharia documents have to be passed by a scholar who may not be legally trained,” says Weston. “So they take out everything that doesn"t have to be there. It"s quite refreshing to see a facility agreement that"s 40 pages as opposed to more than 200 pages.”

Of course, the work"s not solely in succession planning or asset protection. In March, Walkers advised in the IPO of Abu Dhabi-based Gulf Marine Services (GMS) on the London Stock Exchange - a deal that valued GMS at £471.8 million. GMS is one of the largest private companies from the UAE to look outside the Middle East for a stock market listing. The logic was that London provided access to a wider group of investors, and less stringent ownership rules than at home.

Private investment companies and limited partnerships have also proven popular, as have simple special-purpose vehicles. “Clients in the Middle East can use Channel Island holding companies for stock exchange listings, in London or the US,” says Gillen. “They may be raising capital for growth, creating market for their company shares, using it as an exit strategy, or simply enhancing the credibility of their business.”

But does it go both ways? The Channel Islands have some presence in the GCC in terms of funds, but not much in the way of other companies on the ground. Walkers, for example, is rare among Channel Island law firms in having an office in Dubai, but even here the work is mainly advising on non-Channel Islands affairs. “We don"t see a great deal of Channel Island work here - maybe one transaction every couple of weeks,” says Daniel Wood, a Partner at Walkers Dubai. “If it was significant we"d have more on the ground here. As such, this work is handled by our Jersey office, and in the Dubai office we advise on Cayman and BVI law only.”

Right now, Cayman is the preferred jurisdiction for institutional work, benefiting from the profile that came with being first to market in the funds space. Private clients, meanwhile, tend towards BVI for the convenience, simplicity and comparatively low cost. Both jurisdictions are also seen as a soft touch in terms of regulation, which also helps.

“Here people are always happy to go with the lower-cost option unless they specifically seek that regulatory stamp,” says Wood. “The work we see here that is going to the Channel Islands is where the clients actively want that regulation - which tends to be the larger banks. Take Abu Dhabi Commercial Bank - they do a fair bit of Jersey work.”

Yet this flow of work may well be changing. As those regulatory stamps become more desirable, and the likes of BVI are forced to respond to the same costly regulatory pressures as other jurisdictions to hold on to their clients, their own pipeline may soon start to suffer. “As the BVI becomes more expensive, why would you go there?” asks Gillen. “The Channel Islands offer the same products, but with the breadth and depth of a service provider equivalent to a mini City of London.”