With global economic uncertainty at a decades-long high – thanks to the impact of a once-in-a-century pandemic, geopolitical turmoil, market disruptions and more - Asian HNWIs are turning to offshore jurisdictions more than ever before to secure and grow their assets. And that growth is set to continue in 2023, say offshore lawyers.
The COVID-19 pandemic and geopolitical uncertainty are just two of the multiple factors that are impacting the wealth strategies of Asia’s high-net-worth individuals (HNWIs), forcing them to have rethink about their approaches to wealth preservation and growth.
“Few would disagree that in the last few years, we’ve experienced the most severe economic and geopolitical crises seen in most of our lifetimes from COVID pandemic shutdown and the difficult reboot of global economies exacerbated by political instability from the war and unrest in Ukraine,” says Peter Ch’ng, a Hong Kong-based partner at offshore law firm Conyers. “These factors impact not only the commercial businesses of HNWIs but also the management of their own wealth and investments as many search for a safe haven back-up for their families and their holdings.”
As a result of this uncertainty, an increasing number of wealthy Asians are seeking out offshore jurisdictions to safeguard their wealth. HNWIs from countries like China, India, Indonesia, Malaysia, Vietnam, Japan, and South Korea are being drawn to offshore destinations such as Cayman, BVI, Bermuda, Jersey and Guernsey to protect their assets, as these offshore locations offer stability, security and discretion. HNWIs use trusts and foundations for different assets in different jurisdictions to satisfy the tax or regulatory authorities’ preferences in common and civil law jurisdictions, say lawyers.
“Apart from traditional business such as trust and foundation setups, we are also busy with requests from Asian clients, overwhelmingly Chinese, to revisit and conduct health assessments on the families’ current wealth preservation tools and structures. In various cases, clients have asked us to dissolve outdated structures and devise exit strategies for jurisdictions which are no longer deemed favourable.”
- Rachel Yao, Carey Olsen
Rachel Yao, a Singapore-based trusts counsel at offshore law firm Carey Olsen, agrees, pointing out that relocating out of the country or moving assets to safe havens is increasingly becoming a crucial part of succession planning for many wealthy families across Asia. “As U.S.-China and other regional tensions in Asia remain high, wealth and succession planning will become equally important to Asia HNWIs as creating wealth. Affluent individuals are extremely mobile, and capital is moving faster than ever to safer destinations,” she says.
And it’s not just the capital that’s moving. Last year saw a record number of HNWIs, each with wealth of more than $1 million, leaving countries such as China and India, according to a report from migration consultancy Henley & Partners. The report said 10,800 HNWIs from mainland China, 8,000 from India and 3,000 from Hong Kong had moved out. “There is increasing demand from wealthy families in Asia to obtain a second passport or change their citizenship (for a different passport entirely) to enable them to move freely,” says Yao. “Migration flows are expected to increase in 2023 and beyond as families and investors prepare for the post-COVID world.”
“As older HNWIs are looking to retire and handing over the reins to the younger second- or third generation HNWIs, we’ve seen a greater need and reliance for top-line professional guidance and advisors to guide them through these uncertain economic and regulatory environments. Succession taboos are now examined more directly and with a clear, unsentimental eye with the goal to coming up with a long-term strategy for the family holdings.”
- Peter Ch'ng, Conyers
NAVIGATING THE TURMOIL
Whether individuals are planning to move themselves or their capital, the process can be mired in complexity, and would do well to utilise the services of legal experts in the wealth space. Requirements of most HNWIs during and post-pandemic have become more sophisticated than ever, and offshore law firms today are using innovative ways to help HNWI’s ringfence their assets.
One approach is that of private trust companies (PTCs). “There is great interest in PTCs, and we’ve established a considerable number for clients,” says Grace Gao, a Hong Kong-based senior legal manager focused on private wealth at offshore law firm Ogier. “When structured correctly, PTCs provide the traditional advantages of a trust structure while allowing an HNWI family to retain greater input in the management of assets and decision-making than appointing a traditional independent professional trustee.”
In several cases, innovative structures are also created where HNWIs wish to invest in certain assets that may be frowned upon in their country or face high taxation, such as cryptocurrency.
“For clients investing in innovative assets (including digital assets), offshore jurisdictions also offer innovative regimes to satisfy their needs. For example, Cayman Islands foundation companies are widely used as a flexible vehicle for decentralised autonomous organisations utilising blockchain technology,” says Gao. “Separate structures are used for risk diversification purposes and/or to benefit different family members or different branches of a family.”
Ch’ng echoes the rise in interest in Cayman foundation companies. “We have also seen interest in exploring trust alternatives such as the use of a Cayman foundation company which is a unique hybrid between a corporation and trust with enduring legal personality,” he notes. “They eliminate the need for a trustee and its governance/administration is run more like a company by a board of directors, with founder-reserved powers. These foundation companies are also well suited for charitable or philanthropic endeavours, which is an increasing focus of the younger HWNIs, given the widening income inequality and sensitivity to overt displays of wealth in this age.”
Yao adds that she also noticed an uptick in enquiries in relation to Jersey and Guernsey private wealth solutions, especially among clients seeking a perpetual trust structure. “This is a key selling point for Jersey and Guernsey trusts,” she notes.
Lawyers say Singapore, Hong Kong, mainland China, and Taiwan are the most active markets from where HNWIs are looking to explore offshore options. Other countries, including Japan, Malaysia, Thailand, the Philippines, and India too, have seen a growth spurt in the last two years.
“The needs differ widely across jurisdictions because of the geopolitical difference. For example, the Singapore and Hong Kong governments have launched incentivising schemes to attract investments from high-net-worth families, including competitive tax treatment and aggressive immigration benefits offered to family offices, the latter particularly attractive to wealthy Chinese families,” says Gao.
Legal experts say that the preference of jurisdiction for establishing an offshore structure depends on two aspects: the needs of the family and tax and regulatory aspects. “Asian families often find that BVI VISTA trusts, Cayman STAR trusts and Cayman or BVI PTC structures are desirable because they allow the family to retain effective control of the structure and may be used to complement local family office structures (such as the Singapore Variable Capital Company (VCC),” says Yao.
And HNWIs in the two Asian giants — China and India — often share similarities in how they approach offshore structures. “Needs for private client legal services are harmonising in the same way the tax and legal regimes of the PRC and India are converging and the challenges for preservation of global wealth and interests are similar, with India home-grown businesses playing catch-up in tapping into global capital markets,” says Ch’ng.
WHAT TO EXPECT IN 2023
Lawyers say that the next 12-months will see a huge spurt in HNWIs setting up offshore structures as the three-year-long pandemic eventually winds down, and China reopens its borders.
“The Asian private wealth market in 2023 will be incredibly exciting with many emerging themes in the industry. The next generation of wealthy individuals embrace alternative asset classes as they tend to think that traditional investments will not produce the required returns anymore. The trend of realignment of wealth will continue growing with strong momentum,” says Yao.
“With the re-opening of economies and borders and return of face to face get-togethers, I think there will be the resumption of the close-knit engagement between the HNWIs and the supporting private client industry of bankers, lawyers, account and advisors and also amongst each other in the service industry and an expansion of the menu of services across countries and cultures, with a hopefully a greater understanding and appreciation for what everyone bring to the table in creating better solutions for our HNWIs,” says Ch’ng.
Legal experts say that many HNWIS who have seen their wealth grow during the pandemic will also hedge their bets.
“The pandemic made HNWIs will consider carefully how putting all their eggs in one basket could expose them to greater risks. With more freedom to move around globally in the new year, it is time for many HNWIs to be putting their thoughts into action and execute plans. I look forward to seeing a robust and healthy private wealth market in Asia in 2023,” adds Yao.
“In 2023, wealthy families will be more eager to diversify the geographic location of their assets by increasing their overseas investments. Families also keep seeking emigration gates as a 'plan B' in light of the political risks,” says Gao.
Experts say that disputes between family members will also rise in 2023. With increasing trust restructuring and audits by younger family members operating in a more challenging environment, family disputes are spilling over into their business holdings and complicating issues.
“Our Disputes and Restructuring Group litigators have been involved with various stakeholders and business companies in the crossfire where we advise on particular features and remedies under Bermuda, Cayman Islands or BVI laws. We expect to see more of this trend in the medium term,” says Ch’ng.
There will also be other complications from the external environment, warn legal experts.
“There will undoubtedly be headwinds as well. Just as clients seek greater geographic diversification, some of the opportunities for that are reducing (for example, some of the citizenship by investment schemes are being restricted or closing altogether and anti-immigration rhetoric is on the rise in many western nations, and some forms of overseas investment are being restricted (such as the new Canadian prohibition on real estate acquisition by non-Canadians or the additional taxes on the acquisition of a real estate by foreigners instigated by some other countries),” says Gao.
“For clients investing in innovative assets, offshore jurisdictions also offer innovative regimes to satisfy their needs. For example, Cayman Islands foundation companies are widely used as a flexible vehicle for decentralised autonomous organisations utilising blockchain technology. Separate structures are used for risk diversification purposes and/or to benefit different family members or different branches of a family.”
- Grace Gao, Ogier
Additionally, some countries like the UK are making regulatory changes that could impact HNWIs.
“The increasing disclosure requirements (such as those now relating to UK real estate holding by non-UK persons) will doubtless continue. While these certainly present challenges for HNWIs and their advisors, we expect the continued mega-trend of robust economic growth in the Asian region will likely trump such issues and spur the search for solutions,” adds Gao.
Teams at offshore law firms are also busy restructuring outdated structures or putting additional checks and balances in place as HNWIs attempt to insulate them better from global regulatory changes, say experts.
“Apart from traditional business such as trust and foundation setups, we are also busy with requests from Asian clients, overwhelmingly Chinese, to revisit and conduct health assessments on the families’ current wealth preservation tools and structures. In various cases, clients have asked us to dissolve outdated structures and devise exit strategies for jurisdictions which are no longer deemed favourable,” says Yao.
Legal experts say that 2023 is linked to the macroeconomic conditions and how HNWIs fare in their business. Mature established HNWIs’ traditional “hardware” businesses may see more resilience compared to newer HNWIs in finance, fintech or cryptocurrency in the last year.
“As older HNWIs are looking to retire and handing over the reins to the younger second or third generation HNWIs, we’ve seen a greater need and reliance for top-line professional guidance and advisors to guide them through these uncertain economic and regulatory environments. Succession taboos are now examined more directly and with a clear, unsentimental eye with the goal to coming up with a long-term strategy for the family holdings,” says Ch’ng.