In some regards, the respective development of offshore finance in the Americas and Asia occurred in parallel, and four of the jurisdictions that investors perceive to be among the world's most important offshore centers - the Cayman Islands, the British Virgin Islands, Singapore and Hong Kong - are all connected by a common thread: British colonialism.
Cayman Islands.
In the early sixties, long before the advent of tourism, the Cayman Islands was little more than a mosquito-ridden backwater. Devoid of piped water and lacking a reliable power supply, it had scarce chance of becoming one of the Caribbean's wealthiest territories - or so it seemed. But within a few decades, the Cayman Islands' destiny changed, as a chain of events which would lead to its emergence as a major offshore private banking center began to unfold.
Jamaica's decision to become independent of the UK in 1962 was one such event, and is believed to have been pivotal to the Cayman Islands' success. Rather than join Jamaica and several other Caribbean territories in opting for independence, the Cayman Islands - which had previously been under Jamaican administration - decided to remain a British Crown colony. The uncertainty caused by Jamaica's split provoked a number of business people to relocate to the Cayman Islands, where they invested their money and expertise instead. Their arrival, the territory's tax neutral status and its English common law system all set in motion the creation of a private banking center which was also able to capitalize on the development of international finance in an era of post war financial liberalization.
The Cayman Islands saw the establishment of its second commercial bank in 1963, when the Royal Bank of Canada followed in Barclays Bank's footsteps. Other international banks soon followed suit, including the country's first trust company, the Bank of Nova Scotia Trust Company (Cayman). With important infrastructural development and the enactment of The Banks and Trust Companies Regulations Law, the Cayman Islands was on its way to becoming a major player in the financial services sector.
When instability came to the neighboring Bahamas, the Cayman Islands' found itself the new jurisdiction of choice for several US-owned banks which had previously been domiciled in the Bahamas, where offshore finance was already well-established. The decision to relocate afforded these foreign bankers the peace of mind that political stability brings, along with the convenience of being based within the same time zone as New York, and just an hour's flight from Miami. North American clientele began to overtake Britons and, with the influx of US and Canadian businesses, the country soon experienced a construction boom, giving both the financial services industry and tourism a considerable boost. The years that followed saw the Cayman Islands diversifying its range of financial services, which - after the Mutual Fund Law was passed in 1993 - grew to include fund management, in addition to the private banking services which had initially helped to establish the jurisdiction.
Since then, the Cayman Islands has gone from strength to strength and today - along with Switzerland - the jurisdiction dominates the global market for offshore banking, in terms of total deposits, and is considered to have the world's fifth largest financial services sector. While the fruit of the country's boom years is still evident in that the majority of its business comes from the US, the jurisdiction is increasingly looking to Asian markets. China, in particular, where the number of high net worth individuals is growing faster than ever before, is certain to become a more and more important source of business for the Cayman Islands.
In addition to advantages like its tax neutral status and English common law system, the jurisdiction has succeeded in attracting Chinese business by virtue of the fact that Cayman Islands companies can be listed on the Hong Kong Stock Exchange. According to Chief Officer of Financial Services for the Cayman Islands Government's Ministry of Finance, Dr. Dax Basdeo, Cayman Islands companies accounted for 37 percent of all listings on the Hong Kong Stock Exchange at the end of 2010.
The September 2011 signing of the 26th agreement for exchange of information for tax purposes between the Cayman Islands and China is yet another reason that an increasing number of Chinese investors are taking advantage of the jurisdiction's range of offshore financial services. "Signing this TIEA (Tax Information Exchange Agreement) is a significant step in enhancing the relationship between the Cayman Islands and China," the Cayman Islands Premier, McKeeva Bush, recently told press. "With China being one of the fastest growing economies in the world, we are confident that this TIEA will contribute positively to economic activity between the two countries."
British Virgin Islands.
The Cayman Islands may have had a head start in the offshore finance sector, but the British Virgin Islands was quick to catch up. The country incorporated its first American company in the mid-seventies and, within a few years, hundreds of other companies had followed suit, transforming the British Virgin Islands' agricultural economy beyond recognition. But it wasn't meant to be - not yet, at least. When, in 1981, the United States government revoked a double taxation treaty that, essentially, had been the British Virgin Islands' major draw, the jurisdiction lost much of its offshore business, and was forced to alter its course. Legislation introduced in 1984 that offered offshore companies certain tax exemptions was only partly successful, and it wasn't until the United States' invasion of Panama in 1991 that the British Virgin Islands' luck changed. Panama watched as many of the businesses in its thriving financial services industry relocated to nearby territories; the British Virgin Islands was one of them.
Two decades later, the British Virgin Islands is a tour de force, where a reported 41 percent of the world's offshore companies are formed. Chinese investors are no stranger to the jurisdiction's vitality. Indeed, Ashley Davis, a partner at the Walkers Group - an international law firm specializing in corporate and fiduciary services - wrote in a recent report that "No other offshore corporate vehicle has had quite the impact in Asia as the British Virgin Islands' BVI Business Company Today there are hundreds of thousands of these companies utilized in a broad range of transactions across the continent and particularly so in China and Hong Kong."
The history of offshore centers' development in the Americas is, unsurprisingly, different to the way in which Asia's own financial hubs rose to prominence. But the four offshore centers that investors perceive to be the world's most important - the Cayman Islands, the British Virgin Islands, Singapore and Hong Kong - all share one common trait: a British colonial past.
Singapore.
Singapore's first steps toward developing into a financial center were taken in the late 1960s, shortly after the jurisdiction gained independence from Britain. Lee Kuan Yew, the then-Prime Minister, requested advice from the Bank of America on creating a Eurodollar market within the new city-state. Not long afterwards - and with the help of considerable US dollar spending in Southeast Asia during the Vietnam War - Singapore had established itself as an offshore Eurodollar market hub, focusing on South Asian business. Singapore's strategy was calculated, and included introducing such benefits as the abolition of withholding taxes on interest earned by non-residents and an absence of exchange controls and reserve requirements. In this sense, its history and development were different to its counterpart further East, Hong Kong.
Hong Kong.
The development of Hong Kong's wealth management industry is often described as largely market driven: Its growth can be more accurately attributed to market participants, and market forces themselves. While Britain did take steps to develop Hong Kong's financial industry - with Swiss firms UBS and Credit Suisse, as well as international banks such as Standard Chartered bank and HSBC present in the jurisdiction from the early 1900s - many maintain that China's Open Door Policy is where the credit is really due.
Although Hong Kong was still under British rule in 1978 when Deng Xiaoping initiated China's game-changing reforms, it was this period of time that marked the island's emergence as a financial center. Since then, Hong Kong's competitive tax rates and wide range of offshore services have made it the destination for plenty of mainland capital, as China's experiences a proliferation of wealth like never before. The fact that Hong Kong - like Singapore - is a trade hub in its own right, with its own robust onshore financial industry, is believed to have only strengthened its position as an offshore destination, and both jurisdictions have been dubbed "bridges" between onshore and offshore, giving them a unique competitive advantage.
Naturally, when it comes to winning business from the mainland, geography is on both Singapore and Hong Kong's side, and the growth that Hong Kong's private wealth industry has seen in recent years is a direct result of an economically booming China. The lack of mainland private wealth management facilities, too, has made Hong Kong - with its abundance of private banks - an obvious destination for Chinese investors' funds. Offshore vehicles have made it possible for mainland Chinese to use renminbi for investment purposes, and increased access to renminbi-denominated products in Hong Kong has driven significant growth within Hong Kong's financial sector too.
Singapore may not enjoy as large a proportion of mainland investment, but the city-state's offshore sector far surpasses Hong Kong, which holds just US$200 billion in private banking assets, compared to Singapore's US$500 billion, according to estimates by the Boston Consulting Group. But regardless of how much catching up does happen between Asia's two largest destinations for offshore finance, there's no need for guesswork when it comes to which country has the fastest growing market of high net worth individuals looking to safeguard their wealth by investing offshore. Whether they choose to do so in the Cayman Islands, the British Virgin Islands, Singapore or Hong Kong, China is certain to be the source of more and more wealth during the days, months and years to come.
