December 19, 2009 was a red letter day for Seychelles: The IMF came through with a US$31 million loan facility to support the country in its ongoing economic reforms. While the money was important, the statement made through this agreement was invaluable. It was a clear signal to the international community that Seychelles has come through its debt crisis and is back on an even keel.
The country’s offshore finance sector has been largely insulated from the difficulties of the last two years – the majority of tax-efficient structures are non-residential – but industry participants were celebrating nonetheless.
"Seychelles had the offshore instruments but the domestic environment was not necessarily that appealing," said Conrad Benoiton, managing director of the Seychelles office for international law firm Appleby. "Offshore business requires an affinity with institutions such as the central bank and the judiciary. The significant shift in monetary and fiscal policy amounts to a guarantee that the offshore sector is viable."
Benoiton, who recently left a job at the Seychelles central bank to head up Appleby in the jurisdiction, cites the IMF’s support – and the confidence it engendered – as the clinching factor in the law firm’s decision to open an office.
Its arrival is significant. Seychelles boasts two international banks (Barclays and BMI), two international accounting firms (KPMG and BDO), but until Appleby set up shop it had yet to attract one of the "magic circle" offshore law firms to its shores. It is hoped that the presence of one of the industry’s top names will draw in more high-end clients keen to use the sophisticated portfolio of products that Seychelles has spent the last two years developing.
"The arrival of Appleby will certainly raise the profile of the jurisdiction and we hope to see more business coming in through the presence of such a substantial law firm," said Neil Puresh, director of Intercontinental Trust (Seychelles), a corporate services provider.
Seychelles made its name in the offshore industry as a location for International Business Companies (IBCs). The lowest common denominator product available, IBCs are popular because they are quick and cheap to set up, involve minimum disclosure and incur no tax.
Jurisdictions measure success in this field by volume and Seychelles went from 2,617 IBC incorporations in 2002 to a peak of 13,751 in 2008. The typical source of demand was Europe, but Seychelles’ efforts to market itself in Asia, and particularly China, appear to be bearing fruit. Martin Crawford, CEO of Offshore Incorporations Limited, says his firm saw Chinese demand for Seychelles structures (the bulk of them most likely IBCs) jump by more than 60% in the calendar year to December 2009.
"The growth was from a pretty low base, but given the troubles of 2008 and 2009, a 60%-plus increase is impressive," Crawford said.
Seychelles has much to recommend itself to Chinese investors – unlike Caribbean jurisdictions, it has its own Chinese embassy, which expedites the process if company documents require official certification – but the advantages are not restricted to setting up an IBC in double-quick time. Seychelles also offers a Companies Special License (CSL), the principal attraction of which is that it allows investors to take advantage of a string of double taxation agreements, including one with China.
The CSL is more expensive and more complex than the IBC, and it requires a larger amount of administration. Alongside trusts, foundations, mutual funds and hedge funds, it is the kind of value-added product the jurisdiction wants to promote.
A total of 202 CSLs have been set up in Seychelles since the structure was introduced in 2004. Trusts have been around for 15 years and there are 368 of them, while foundations, the legislation for which was only passed at the end of December, have yet to get off the ground. There are two funds, both domestic in origin, and about half a dozen licensed fund administrators in one form or another. Other parties are interested but the global economic crisis forced many funds to reassess their priorities.
If Seychelles is to gain momentum in these value-added areas, Appleby alone is not enough. The local industry consensus is that further steps must be taken to improve the jurisdiction’s infrastructure so it meets the requirements of international bankers, lawyers and accountants.
Top of the list is an amendment to existing rules that prevent foreign lawyers from practicing in Seychelles unless they retrain in the local system.
"Seychelles is not going anywhere as an offshore center without building expertise and capability," said Simon Mitchell, a consultant to Mayfair Trust, a corporate services provider. "Most local lawyers aren’t experienced in corporate and finance matters, but if a Seychelles structure is being used in a transaction overseas, legal opinion is required."
Under the proposed Legal Practitioners’ Bill, foreign lawyers would be able to operate in Seychelles provided they are limited to finance-related work. In addition, all lawyers – foreign and domestic – would qualify for certain tax breaks, much like those already enjoyed by corporate services providers.
Measures have already been put in place to cultivate a new generation of international-standard local lawyers. The University of Seychelles, which was only founded in September of last year, will offer a three-year Bachelor of Laws program in conjunction with the University of London. "What the community still needs is a pool of well-qualified locals who can slot neatly into firms in Seychelles," said John Esther, senior corporate manager at Barclays Bank Seychelles and an alumnus of the University of London’s law program.
Leading by example?
All kinds of incentives and encouragement can be offered to attract foreign expertise, and Seychelles is exploring possibilities, particularly on the banking side where capacity is limited. It need only look at fellow Indian Ocean financial center Mauritius for an example of how savvy marketing and strong infrastructure can deliver the goods.
"You have all the established tax managers and banks in Mauritius, and our clients say the telephones are better and the internet is better," said a Seychelles corporate service provider who asked not to be named. "I have a lot of respect for what Seychelles has done so far, but it needs to get an undersea optic fiber cable in place as soon as possible."
Crucially, Mauritius also appears to have succeeded in making the transition to value-added products. According to Puresh of Intercontinental Trust, where once Mauritius relied on GBC II companies (an equivalent of IBCs) as its primary business, in the last two years the GBC I structure, which is much like a CSL, has exhibited stronger growth.
Not everyone is complimentary, though. Jacques Scherman, managing director of Sovereign Trust (Hong Kong), says the jurisdiction’s desire to climb the value chain has led to a build up in unnecessary bureaucracy. While service levels remain high, legislation has been introduced with little forethought about implementation, and the cost of compliance has rocketed. He believes that Seychelles is in a position to capitalize on these shortcomings.
"We have clients with Mauritius companies who want to move out, but they need a place with the same level of service and in the same time zone, and without the higher fees and levels of administrative complexity," Scherman said.
Striking a balance between regulatory and market requirements is the ethos on which much of Seychelles’ offshore legislation is based. The process of introducing a new product starts with a careful analysis of the jurisdictions that have been most successful with the structure in question. Seychelles then takes those ideas and tries to develop them further.
The Seychelles foundation, for example, draws heavily on the structure used by Panama with a view to mirroring its robustness under attack. However, the minimum capital requirement to set up a foundation is much lower than in Panama to appeal to a wider client base. Similarly, the Seychelles funds legislation is modeled on that of Cayman, but Hong Kong, Singaporean, Australian and South African nationals, as well as locals and citizens of the US, UK and Canada, can serve as auditors. This is intended to make the product more Asia-friendly.
Mitchell of Mayfair Trust is the architect of several recent pieces of offshore legislation, but he believes Seychelles would be best served now by perfecting its existing product portfolio rather than adding to it.
"The core products will remain companies, trusts and foundations; and then you have mutual funds, insurance and securities," he said. "I don’t think we’re missing anything, it’s more a case of refinement. The devil is in the details."
Regardless of the relative strength of Seychelles’ structures, selling them into the international market is a challenge. The offshore world is largely governed by preconception and habit: To win over a fund manager, for example, you must not only convince him of the merits of Seychelles, but also that these merits are worth more than tried and trusted Cayman. It is a lengthy process.
Appleby’s Benoiton believes the decade will be one of specialization as Seychelles shifts away from IBCs towards more substance-based products, led by the CSL. Puresh of Intercontinental Trust, on the other hand, is tentative, stressing that much remains to be done.
"The government has to get more bilateral agreements in place and modernize existing legislation, while the private sector needs to educate staff so they understand products and are able to promote them better," he said. "We are at a critical point where we must decide where we want to go."