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Print article2024: The Offshore View
December, 2023 - Anthony McKenzie, Michael Padarin
Anthony McKenzie (AM): Asia is the world's largest and most populated continent, comprised of many different economies, cultures and laws. The use of Cayman, BVI and Bermuda structures has a long track record throughout Asia and it is this familiarity which has contributed to their popularity. These offshore jurisdictions are tried and tested and provide a robust, flexible and clear legal framework for Asian investors to both establish and feed into international investment structures. The regulatory landscape in each of these jurisdictions has evolved to cater to the needs of both Asian clients and international players, ensuring that they remain central to regional and global deal flows.
In recent years we have seen new 'Cayman-style' structuring options (such as the Singapore VCC and HK open-ended fund company) together with global regulatory reforms and shifts in market preference that have resulted in offshore jurisdictions seeing competition from onshore and mid-shore jurisdictions. However, offshore's ability to complement such onshore structures, and its commitment to keeping pace with global standards will mean that Cayman, BVI and Bermuda will continue to be jurisdictions of choice for Asia-based clients.
On 23 October 2023, the Financial Action Task Force (FATF) announced that it had officially removed the Cayman Islands from its increased 'monitoring list' (often referred to as the FATF Grey list). The decision is welcome news, demonstrating Cayman's dedication to implementing the highest global standards, and it is expected that this will soon lead to the Cayman Islands' delisting from the EU's AML/CTF List.
In an increasingly complex and fluid regulatory environment, Asia-based clients require multidisciplinary, real-time solutions to their business challenges. Our Singapore and Hong Kong offices have continued to grow and evolve and are among the fastest growing in our global network. We have launched private client and fintech practices in Asia, welcomed several litigation and investment fund lateral partner hires, made a number of new promotions and we expect this to carry on into 2024 and beyond as we continue our growth trajectory in Asia.
Michael Padarin (MP): Regulation in the offshore jurisdictions in which we operate has increased in the past handful of years. Most clients see increased regulation as a positive development as it helps to minimise legal and regulatory risks and enhances shareholder protections. We have aimed to minimise the impact of such regulation on clients through seeking to the greatest extent possible to automate the necessary compliance tasks associated with such regulation.
Another development on the regulatory front has been the recent introduction of registration and licensing regimes for virtual asset service providers in the Cayman Islands and the British Virgin Islands (with Bermuda having a very long-established regime for the regulation of digital asset business). These regimes provide Asia-based clients in the digital asset space with additional options to consider in establishing business in this industry. We are working with clients on structuring their businesses to come within the scope of these regimes.
2. Given the ongoing global economic shifts and geopolitical dynamics, what trends do you anticipate in terms of Asia-based clients seeking offshore legal services in 2024, and how does your firm plan to align its services to meet their evolving needs and preferences?
AM: With China's economy slowing and geopolitical tensions rising between China and the US, we are seeing regional, international and offshore law firms fast expanding their footprint in Singapore or opening new offices there.
Singapore is considered a favourable destination for doing business due to its political stability, strong legal framework, well-regulated financial sector, competitive tax rates, excellent infrastructure and pro-business policies that attract foreign investment. Singapore is close to the next wave of fast-growing economies in Southeast Asia, is a stepping stone to the India market and is ideally situated as a regional Asian play for international businesses.
The Cayman Islands government's recent announcement to establish its first Asia office in Singapore is a positive development and underscores the importance of Singapore as Asia's leading asset management and private client hub. However, Singapore is fast becoming a crowded legal market, already saturated with offshore law firms of all shapes and sizes and fee-models. For clients and offshore law firms alike, the decision to base operations in Hong Kong or Singapore (or elsewhere) must be considered not only by looking at each city’s strengths and weaknesses, but also how they fit into a broader strategy for Asia. Unlike several of our competitor firms, we already have full-service offices in both Singapore and Hong Kong. A key distinguishing feature of Carey Olsen is its "one-Asia" model which sees our Singapore and HK based lawyers operate in full integration with each other - our Asia offices work as one team, bringing together capabilities across our practices and native languages/cultural knowledge.
MP: Particularly in the investment funds space where jurisdictions such as Hong Kong and Singapore have adopted domestic fund regimes aimed at competing directly with the Cayman Islands product, we have seen a strong trend towards clients doing thorough due diligence and comparing jurisdictional options before committing to a particular jurisdiction or regime. That said, having done their diligence, we are seeing the vast majority of clients continuing to domicile their funds in the Cayman Islands as it remains the global jurisdiction of choice for investment funds. Whilst we continue to assist clients on offshore fund formation projects, we are very aware that clients are coming to the process with a much more open mind set in terms of domicile, and part of our role now generally also involves facilitating introductions to domestic providers to allow clients to run their jurisdictional analysis and due diligence process.
3. Could you highlight any emerging sectors or industries within the Asia-Pacific region that you believe will drive demand for offshore legal services in 2024, and how is your firm preparing to meet the unique legal requirements of clients in these sectors?
AM: In Asia and across our wider network of offices we have seen a change in the nature of enquiries and a change in the attitude towards offshore regulation around virtual/digital asset services. There is now an increasing perception that in order to do business with reputable institutions and regulated clients, virtual/digital asset service providers themselves need to demonstrate credibility through reputable regulation. There are still some jurisdictions where you can operate a virtual asset/digital business without any significant oversight, but that number is shrinking as global pressure and appetite for risk mitigation and sound regulation increases.
There are variations in regulation and approach in each offshore jurisdiction, with Bermuda embracing the sector and being among the first jurisdictions to introduce specific laws relating to the provision of digital asset business services and the issue of digital assets. Both Cayman and BVI subsequently introduced their own specific legislation dealing with digital assets in the form of laws governing virtual asset service providers (VASPs), with Cayman introducing its version in 2020 and the BVI more recently this year.
We are increasingly working with Asian clients on Cayman and Bermuda registration and licensing applications involving novel, complex and innovative projects. On the BVI side we have assisted a large number of Asian clients apply for registration before the 31 July deadline and continue to see a significant increase in enquiries and instructions in relation to virtual asset services. As a result, we continue to invest in our fintech and regtech practices in Asia.
4. Given the increasing emphasis on sustainability and environmental considerations globally, how is your firm addressing the growing demand for legal expertise in sustainable finance and green investments from Asia-based clients, and what are your predictions for this aspect in 2024?
AM: Across all sectors, our clients are increasingly looking to transition their businesses to be more sustainable. Our own sustainability and environmental credentials ensure that we remain a credible partner to our clients who have similar goals and objectives. Carey Olsen was the first offshore firm to join the United Nations Global Compact (UNGC) in July 2022, the world's largest corporate sustainability initiative. Becoming a signatory goes beyond simply making statements about our corporate social responsibility and ESG credentials – it provides a framework for us to publicly report on our progress and allows us to embed its principles and values into our day to day business activities and future plans.
ESG issues such as greenwashing and environmental risk management have increasingly moved to the top of boardroom and investment committee agendas, and they are clearly affecting the way investors consider potential M&A deals and allocate capital. ESG regulation has been in sharp focus in 2023, with regulators in different countries across Asia taking divergent approaches towards investment funds that focus on sustainable and green investments. More ESG regulation is on its way in Asia, and although we are still in the early stages of seeing an ESG impact on Asian transactions, what is certain is that ESG will have an increasingly significant and long-term impact on offshore deal flows. As a result, I expect we will continue to see offshore law firms reinventing traditional practice groups to align with client sustainable investing and ESG needs.
MP: There have been more requests from clients for details of our internal ESG framework as part of on-boarding processes. It is therefore important that we demonstrate a robust attitude to ESG as a firm and align ourselves with the ESG initiatives and approaches that are fundamentally important to our clients and their businesses.
We are proud to support a number of clients making a direct impact on sustainability, and have in recent times assisted with green projects including the launch of a $1 billion climate tech fund, successful launch of a carbon credit trading fund, US$100 million launch of an Asia impact investment fund, advised on Australia's largest recent forestry acquisition, assisted in the setting up of Asia Greentech funds and with the structuring of a carbon capture project out of Mexico, to name a few.
5. Considering the advancements in legal technology and AI-driven solutions, how does your firm envision leveraging these tools to optimize service delivery and client experiences for Asia-based clients seeking offshore legal services in 2024, while maintaining a human-centric approach to legal advisory?
MP: We aim to strike a balance between ensuring the firm seeks to utilise available technologies to streamline the provision of legal services with the need from an overlay of reasonable judgment by our experienced bench of lawyers.
Current AI use cases are more focused on the administrative areas of the offshore world, and in particular the provision of corporate services to our clients' offshore entities. We believe that further integrating technology into the corporate services business will help to optimise service delivery and improve the client experience, whilst reducing administrative time and costs for clients.
Part of this interview originally featured in Asian Legal Business, November 2023
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