Once upon a time the postman on Sark was the symbol of offshore farce: rumour had it he held more than 2,000 directorships and quite clearly knew little or nothing about any of them, each being held as a pure nominee to supposedly locate the company of which he was a director for tax purposes on that once idyllic and now rather troubled Channel Island.
Then the 'Sark lark' was brought to an end, the postman went back to the day job and examples of such farce, where nominees were so blatant that the sheer lack of likelihood that they really undertook the task supposedly entrusted to them was harder (not not impossible) to find.
Today the FT reveals the practice of nominee directors holding far more positions than they can possibly manage is alive and well and riddles the Cayman hedge fund industry, which claims to be resident in those islands even though it is very obviously likely that real decisions must be made elsewhere. As they report:
A small group of Cayman Islands “jumbo directors” are sitting on the boards of hundreds of hedge funds as demand for independent directors booms in the Caribbean tax haven.
At least four individuals hold more than 100 non-executive directorships each, and 14 have more than 70 — each worth as much as $30,000 a year.
One has been listed as on the boards of 567 Cayman entities, almost all of which were hedge funds.
The revelation of the figures, in a Financial Times investigation, comes amid calls from some of the world's leading hedge fund investors for greater transparency in the Caymans as part of a global effort to improve fund governance.
This practice suggests three things. First of all, as I have often argued, the supposed centre of decision making that suggests these funds are located where their directors are is little more than a charade in many cases.
Secondly, any directors who can believe in this charade must have suspended their judgement: if you can believe in these structures it is highly likely that sound governance has flown out of the window.
Thirdly, and as I have again argued, often, the time for a change in the rules regarding the determination of residence on the basis of where the directors of an entity supposedly meet is more than overdue for reform. As is likely in these cases, real decisions are almost certainly taken in places like London and New York but ta x is not paid there as a result of playing games in Cayman. That has to stop. Pretending we can determine residence on rules written for the era of the steam ship and telegram when we live in the age of the internet is just madness, and is giving companies the most massive loophole to abuse the tax rules and revenues of major democratic states. The objections of business have to be ignored and such schemes have to be looked through now wherever possible.
Is this a case for the proposed GAAR? I think it should be, but I fear the hurdle has set been too high for it to be used in such cases. If so then specific legislation is needed. Either way, reform is possible and overdue.
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Richard
Those examples in Cayman are an absolute disgrace and its mindboggling to understand how it was ever allowed there. But perhaps not, for those of us who understand how relaxed Cayman is.
But thankfully not all offshore jurisdictions are anywhere near as negligent about the number of fund directorships which can be held by individuals and in Guernsey and Jersey the regulators are rightly tightening this up, albeit from a far lower ceiling than is obviously the case in Cayman!
And respectfully – I don’t buy your white wash of the Crown Dependencies…..
No need for a whitewash re. directorships Richard – it has been identified and has been getting addressed for several years now although there are probably still a couple of fund directors in Guernsey who have just north of 50 directorships (and that’s been deemed to be far too many – rightly so). Nothing remotely near the Cayman scale though.
Cayman didn’t even require its funds to appoint an AML officer until a year or so ago – what does that tell you? No wonder Cayman has been the domicile of choice for so many hedge funds – compliance costs have been very cheap and directors have not asked any questions (i.e. the Weavering case).
Times are a-changing.
50 is still a charade
Enough to expose the reality
Times aren’t changing
Methods of hiding the truth are changing, that’s all
There aren’t even 567 collective investment schemes operating in the Isle of Man, I think there are only about 125, and probably less than 100 currently accepting investments.
I would be surprised if there was any single director with more than 20 fund directorships in the Isle of Man,
It wouldn’t be hard to work this out though, would only take an afternoon at the companies registry.
If someone undertook an analysis, would you publish it, in the interests of transparent reporting?
But think about it – how can you be a director of 20 such funds and a) not be compromised in terms of competition b) have time c) know what you are really doing
Of course I would publish the findings though – happily
And neither does anyone at the PSG defend this nonsense – or indeed anyone else in the world with the exception of the City of London and errr …. other tax havens!
It’s facile, bogus, hypocritical, disingenuous low quality PR!
And nobody is buying it!
@John you note:- “There aren’t even 567 collective investment schemes operating in the Isle of Man”
Well the world can be very thankful for that.
On the Isle of Man “collective investment schemes” were often designated as unregulated funds for “experienced investors” only. One of which is the Premier Low Risk Fund plc which did not prevent the directors from receiving bank transfers from hundreds of inexperienced pensioners by means of misleading claims and by concealing a punitive exit penalty unlimited in both amount and duration. The pensioners lost half their life savings and since November 2007 it has not been permissible to establish new “experienced investor funds” on the island.
Curiously the Isle of Man Financial Supervision Commission (FSC) has recently elected to suspend trading in shares of the Isle of Man based collective investment scheme trading as “Foundations Program plc” (FPP) until the fund is in compliance with its regulatory obligations, prior to hearings for winding up the company.
The FFP (like the Premier Fund) “borrowed” money/ life insurance policies to speculate in volatile assets. This was described as having a “reasonable level of risk” — but fails to define “reasonable” relative to “low” and like Premier lost a considerable amount of “investors” money.
Never, ever bank or invest a cent on the Isle of Man
Personally, I think this is a key issue that needs tackling not just in the Cayman Islands but worldwide. Irrespective of the tax issues here, this is just basic corporate governance issues here. How can anyone acting as a director for many multiple active companies claim to know enough to act as director?
I’m not sure that the tax issue will deal with this on its own…there is a much more pressing reason why folk may want to reconsider the amount of directorships etc. The recent court case of Weavering v Peterson & Ekstrom found that the two directors were negligent in discharging their duties as directors and were summarily fined over US$100m each. A few more cases like these around the world should send out a message that no one should ever take on directorships thinking them to be an easy way of earning money without little liability.
Some commentary on the case can be found here
http://www.stuartslaw.com/blog/legal-updates/legal-commentary-on-the-landmark-decision-of-the-cayman-islands-/
I’m very aware of the case Richard. I understand that it has caught the attention of many company directors (not just in the fund industry or in Cayman but much further afield).
We are talking about non-executive directorships of funds. The clue is in the name. “Non-executive” means “not executive”. The non-executive directors are not running the funds on a day to day basis. They are providing corporate governance oversight. Separate fully-regulated fund administration companies, often consisting of 100 staff or more, are doing all of the day to day operational work of the funds, including taking in new investor monies, dealing with redemptions, making and recording underlying transactions, all liaison with investors, bookkeeping, accounts preparation, NAV calculations, statutory compliance etc. That is NOT what the non-executive director is involved with.
The non-executive fund director is required to take a “helicopter view” of the fund, ensuring that the fund managers and the fund administrators are doing their jobs correctly, reviewing risk management of the fund, ensuring that any administrative error reports have been addressed and are not due to systemic failures (and making sure that they have been, if they are), etc
This typically requires attendance at quarterly board meetings of the fund, plus significant reading of monthly and ad hoc fund reports in between such meetings and in advance of such meetings.
Non-executive fund directors are (in the Channel Islands at least) invariably retired financial and other business professionals with appropriate professional qualifications. They are expected to obtain professional director qualifications through attending relevant and widely-accepted corporate governance courses before they accept any fund directorships. Many of them do nothing other than act as fund non-executive directorships.
How many are appropriate for one director to hold? Very simply, it varies depending on the nature and size of the fund. It will be obvious that a fund which owns a couple of investment properties and has say half a dozen investors, with half-yearly dealing days for units, is considerably less complicated than a retail fund with thousands of investors, hundreds of holdings and daily dealing. Most retail funds these days are not run out of the Channel Islands because they require high staffing levels and so tend to be run out of larger population jurisdictions such as Ireland.
Assume that a professional fund non-executive director had 30 fund directorships of a relatively non-active nature (i.e. non-retail). That’s 30 quarterly board meetings over around 65 days (91 days per quarter less 26 weekend days). Typical fund board meetings last half a day, leaving plenty of time to do all the intervening reading of reports and attending to any other fund matters which require the non-executive director’s input. That is highly feasible for a professional director doing his non-executive role responsibly and professionally for relatively non-active funds. If there are some very large and active funds in the portfolio of directorships, then the number of directorships which the director could hold and do his job properly would be considerably fewer. I know many who have a maximum of 6 quite active fund directorships, which sounds about right.
I cannot see how any director could feasibly hold more than 30 non-executive fund directorships, in any circumstances, and do his/her job properly and responsibly. I believe that the Guernsey and Jersey regulators will eventually conclude that even 30 would be too many. 15-20 would be my guess, and the licensing of such directors will become even more tightly controlled than it is at present.
That’s the reality of the Channel Islands fund industry. Poo-poo it if you like but that’s how it is. Cayman is clearly very different by the looks of things.
I candidly do not admit, as someone who has been a non- exectlive, see how anyone could undertake such a vital role on more than 10 at most funds without conflicts arising and without insufficient time and attention being dedicated
The role is important – too important by far for investor protection and to ensure integrity of action to be extended as far as you suggest
Cayman as made a farce of it. On tha we agree
@Steve. You note:-
“Most retail funds these days are not run out of the Channel Islands because they require high staffing levels …”
PSG suggests that by the same argument those who “invest” in “experienced investor funds” have the acumen and ability to understand the minutiae of a fund designed for professional investors ONLY without requiring additional advice — thereby reducing or cancelling the need/expense for the “fund” and/ or the “fund manager” to employ additional expertise …
So how come the Isle of Man based Premier Fund was sold as a retail product to hundreds of inexperienced pensioners? And why were the pensioners tricked into assessing their “experience” as sufficient for a “fund” advertised by the directors as offering “Capital security and Guarantees” and a risk rating associated with a building society?
Tax havens are a joke.
And very sick ones.
Richard
Where does any conflict arise? Funds are very rarely competing with each other!
PSG
I disagree. Just because a fund is open only to “expert investors” does not mean that independent non-executive directors shouldn’t be appointed to protect the investors. The word “independent” is the key word. Its a corporate governance role, not just a paid nominee role (although the evidence of Cayman might suggest otherwise!).
I don’t know anything about the Isle of Man fund to which you refer but it seems obvious to me that your issue is more with the way in which the fund was marketed by its promoters and intermediaries, than anything else. Did you not pay an independent financial advisor who carries PI cover to carry out the assessment of the investment for you? You could then have sued him/it if had been mis-sold to you.
We don’t believe BEDs to exercise corporate governance
How can we know when you hide behind secrecy?
@Steve
PSG members did not pay any IFAs to advise them. It was unqualified, unregistered and unregulated “introducers” chosen by Premier to assist in publicizing the fund who received payments from Premier. The size of these payments were never made known as they were made via a Caribbean company that produces no annual accounts — and has no known directors or beneficial owners.
Premier produced glossy brochure which were also distributed by the incompetent “introducers” to persuade pensioners to transfer their money directly to the fund; and the pensioners relied on information published by Premier to make their “assessment” of the fund.
The “introducers” who Premier describe as “professional” investment advisors have now disappeared.
what is your suggestion as to how to determine residence? If you propose an incorporation test (ie where a company is incorporated) you will probably find less UK companies being used (and consequently less tax paid – eg stamp duty on sale of shares).
the current test (management and control) allows HMRC to actually bring non-uk companies into the UK tax net – are you proposing abolishing this rule and taking this ability away from them? alternatively (and this seems to be a theme) are you suggesting that HMRC simply enforce the rules that they currently have at their disposal?
your example with the cayman nominee company would suggest that management and control is exercised in the UK (as the individual cant possible exercise the degree of control required given the number) – the UK can already combat this. your critiscism should surely be against HMRC not applying the rules. Whats to say that they wont apply any new rule?
A) Incorporation, of course (as now)
B) Where real management and control is – which rarely has anything to do with directors
C) In groups it is by default in country of head office unless it can really be shown to be otherwise
the current test is a “central management and control test” – it is not necessarily anything to do with Directors, although where they meet and consider matters in board meetings is evidence to support where a company is managed and controlled from.
Under the current rules it is possible for a company to be managed and controlled by an individual who is not a director – and im sure HMRC have taken this point before.
my point remains the same – the rules currently exist to deal with this, you should be asking why HMRC arent using them, rather than propose more new rules that presumably they wont bother to enforce either
Same thing happens in Channel Islands…
And what do you base your opinion on?
I’d be interested to see your evidence of that, especially as most funds in the CI are long only and not hedge funds.
All of the NEDs that I know and work with fulfill all their required duties and attend all board meetings.
Having lunch is a long wa from fulfilling your duties
Whilst the funds industry pretends, like the CIty, that tame non- execs who are all mates of mates does in anyway represent protection we will all rightly laugh at the sheer stupidity of your claim
And candidy, having lunch is most all any of these people do – except banking the cheques
First-rate long lunch with the very best wines, perhaps followed by an equally lavish dinner and an over night stay in a five star hotel with all (in)appropriate expenses (including first class rail or generous mileage allowance) comfortably massaged up into a “good-little-earner”.
All paid via a Caribbean shell company which never publishes accounts.
And then there are the Bored Meetings where ordinary shareholders are not allowed to open their mouths …
No one (Mark Field excluded) can put forward any rational argument as to why tax havens should be allowed to exist
Every NED I know attends all board meetings as a bare minimum of their duties. You have very outdated knowledge of what actually happens in the real world.
Whether NEDs really have any power is another thing. But that’s a different topic.
I think my view very accurate
I think I, like the 99%, have a very accurate and precise perception of what goes on
I have the advantage of having been a NED
Really? On what possible basis do you make such a bold statement? How many non-executive fund directors do you know then? I reckon I know 30 here in the Channel Islands and not one of them fits your description remotely. I’ve seen many of them in action. Many of them are, quite frankly, a pain in the ar*e with the questions that they ask, but they ask them for good reason and they are just doing their job.
And by the way, lunch is rarely even offered these days!
And now pull the other one
You won’t even admit who you are – such is your commitment to transparency
Instead you’re yet another ‘Steve’
Yeah. Of course
The “Sark Lark” never died it is still alive and well — although metamorphed into a considerably more sophisticated, circuitous and obscure “lark”.
Just out of curiosity PSG, how did an experienced investor fund suck in inexperienced pensioners to invest on a retail basis? I don’t know the IOM’s EIF requirements, did they have some sort of very substantial minimum investment level?
Quite easy:-
First register an IoM company and designate the fund as EIF and raise short term bank loans, combine these with “investors” capital (in the case of the PSG elderly people’s life savings) and “invest” in long term TEPs.
Then disregard due diligence by recruiting unqualified, unregistered and unregulated “introducers” to assist in flogging (sometimes jointly in Hotels) the fund to pensioners. To give the incompetent “introducers” some sort of kudos represent them (in writing) as “professional” investment advisors.
Print glossy brochures advising the pensioners that the fund offers “Capital Security” and Capital Guarantees” and regular (quarterly) distribution (income). Associate the risk rating of the fund with a building society account and disguise in the most complicated technical gobbledygook possible an exit penalty unlimited in both amount and duration.
This is sufficient to “persuade” the pensioners into believing that they have the required level of “inexperience” to invest in this particular EIF.
Receive the pensioner’s savings (£10,000 minimum) direct into the fund bank account, wait for a few months and than slap on a 30% redemption penalt and watch the fund nose dive and the pensioners lose half their savings and receive no income.
This fulfills all IoM government regulatory requirements. Simples.
Overlooked one item ….
Reward the “introducers” undeclared commissions via a Caribbean registered company that produces no accounts.
£10,000 minimum?
That is surely too low, how on earth one is “experienced” just for investing £10,000? It sounds like very lax regulation.
At first sight this should not have been distributable in the UK, did someone commit an offence under FSMA?
Richard,
Your comment – But think about it — how can you be a director of 20 such funds and a) not be compromised in terms of competition b) have time c) know what you are really doing…
If for a) You mean not have a conflict of interest, what if those funds were all part of the same marketing group (i.e. promoted by a single institutional promoter) for example?
b) That depends on the infrastructure in place – the day to day decisions of most funds are delegated to an investment manager, the role of a director is direction and oversight, and if there are appropriately qualified investment managers in place then the directors can direct
c) Knowing what your doing – thats nothing to do with the number of directorships, thats ‘about this skills, knowledge and experience of the individual directors
And given these people are likely to be doing more than these directorships – I doubt all those answers. Sorry
Well it seems like you have reached your conclusions in advance of the analysis!
I have offered to publish it
Why not try to change my mind
I do