Wealth Management – The Global Trends

By Michael Olesnicky, Partner, Baker & McKenzie, Hong Kong (01/07/2011)

Much of the writing that is done by lawyers on the subjects of wealth management and private banking tends to focus on technical legal and tax issues.  This article will take more of a bird’s eye view of the industry and discuss some general trends that, taken together, have led many to conclude that there are some major shifts taking place in the industry. 

What are these trends?


Global Transparency

Without a doubt, the biggest change over the last few years has been the shift towards so-called ‘global transparency’.  What this means is that customer secrecy is now effectively dead, or should at least be assumed to be dead.  To the extent it continues to exist, it will gradually disappear.  Both wealth management managers and their customers must from now on assume, and behave on the assumption, that everything they do will be known to the tax and other regulatory authorities in all relevant jurisdictions.

There have been highly publicized cases involving Swiss, Liechtenstein and even Asian banks suffering the embarrassment of customer information being turned over to foreign tax authorities who subsequently investigated the behaviour of both the institution concerned and their customers. 

Added to this, the growing plethora of both comprehensive double tax treaties and stand-alone taxpayer information exchange agreements, which are increasingly being entered into between developed countries and offshore financial centres, has added to the arsenal of weapons available to tax and other regulatory authorities to gather information about customers.  So far it is questionable how much information has actually been exchanged through the use of such treaties, but inevitably this process will accelerate.  Spontaneous and automatic exchanges of information have become common in Europe and North America, and inevitably will spread elsewhere.

Money laundering rules are also growing more teeth.  The Financial Action Task Force has now required countries to make tax evasion (including foreign tax evasion) a predicate offence in money laundering terms (ie, a reportable crime), so inevitably more information will be routinely gathered (and presumably exchanged) through this avenue over the coming years.

What does this trend mean for institutions and their customers?  Although these changes might appear to be gathering momentum only slowly, the trend towards full transparency is clear.  Even if tax evasion and other regulatory breaches are detected many years after the event, customers remain exposed to penalties as do the institutions that assisted them (depending of course on the circumstances of each case). 



This leads to the second global trend, which is more compliance. 

The fundamental concern now is “stay out of trouble”.  The only way to meet the challenge of greater enforcement is to ensure that everything is done above board and in compliance with all legal rules.  Compliance is now the key.  For those customers who are not compliant, the mantra for all institutions that deal with such customers must now be - “don’t make the customer’s problem your problem”.  Institutions can’t afford to become entangled with criminal investigations into their customers’ behaviour.   The costs, both monetary and reputational, would exceed the benefits of such business.

With respect to customers who are not willing to be fully compliant, the trend now is for most institutions to distance themselves from such customers by closing their accounts and turning away their business.

It is of course one thing for an institution to resolve to “do things right”, but it is a much more complicated exercise to ensure that this is translated into practice.  The flip side of the trend towards compliance is that institutions are developing new products that are fully compliant, above board and disclosable.  More diligence is now being paid to how products and services are structured and – importantly - marketed.  Because wealth management is inherently a cross-border business, this means having to comply with rules and regulations in many jurisdictions.  Proper compliance means devoting more resources (that is, money) to product design and compliant marketing. 

In this context, I am not referring just to tax compliance.  Securities regulations are being enforced more tightly across the globe as countries impose clampdowns on the marketing of securities related products to their residents.  In particular, the marketing of US securities, and marketing to US persons, raises additional issues of the potential offshore reach of the US securities laws.  The marketing of insurance related products is also attracting more regulatory attention.  Institutions must be aware of these regulations and must take steps to understand precisely what they may and may not do with respect to marketing in each jurisdiction.

The first issue in ensuring compliance is to instil cultural change within institutions.  This requires internal training and a weeding out of staff who will not adapt to the new culture.

The second step is to put in place proper procedures to ensure that things are in fact done properly going forward.  This in turn has led institutions to review their procedures and product offerings, with respect to all countries where their customers are located, to ensure that there is full compliance by both institutions and the customers concerned.

Significantly, many institutions are drafting and preparing detailed compliance manuals to educate their staff about proper procedures.  Although this is seemingly an unwelcome bureaucratic trend, it is an inevitable response to the need to keep matters above board and to limit potential risks and penalties.

In terms of compliance from a tax perspective, it is US tax that has been most prominent, at least at this stage.  Although many recent transparency, disclosure and compliance initiatives have been driven by the OECD, it is the US authorities who have been the most aggressive in pushing the trend towards tracking down tax defaulters and ensuring tax compliance.  Highly publicised initiatives have been undertaken against major offshore banks which have resulted in penalties being imposed in the range of hundreds of millions of dollars.  These have caused many institutions to move towards full compliance in order to avoid the risk of conflict with the US tax authorities.

The US aggressiveness, coupled with the introduction of the FATCA rules that replace the Qualified Intermediaries (or QI) rules, has resulted in many institutions now simply resolving not to do business with Americans.  To some extent, this has forced Americans to either hide their tax status from institutions, or to increasingly turn to banks within the US to tend to their wealth management needs.  My own prediction is that this state of affairs cannot continue, because offshore institutions are simply cutting their noses off to spite their faces by adopting such a knee-jerk response.  US customers represent a significant portion of any major financial institution’s business, and institutions cannot afford to simply turn away customers on such a scale. 

In any event, what the US is doing is likely only a precursor to what other countries will be doing in the future.  Will institutions seriously respond by eventually turning away German, French, UK, Australian and other customers simply in order to avoid potential entanglements?  Clearly, a counter trend, which has already started, is for institutions to embrace US customers and to take proper steps to ensure that these customers will be fully compliant.  In terms of product offerings, this means designing products that are fully compliant and disclosable.   


Growing Tax Enforcement

Tax rates have reached a glass ceiling and governments have generally become reluctant to increase notional tax rates.  Yet, the need for tax revenue continually increases, and this has forced tax administrators to become more ingenious at balancing these two seemingly competing features.

Tax administrators have now realized that one simple way to achieve revenue growth is to enforce the tax laws more diligently, because this will inevitably result in an increase in revenue without the need to seemingly raise taxes. 

This explains to some extent the growing enforcement of tax laws, sometimes in reasonable ways and other times in what might appear to be excessive ways.  It is also the key driver behind initiatives to gather more information and to share such information with other tax administrations.


Tax Administration Outsourcing

Part of this process is the recognition by governments (at this stage, principally the US) of the benefits of outsourcing tax administration. 

For example, the fact that the US routinely pays significant ‘whistle blower’ fees to informants who report tax evaders avoids the need for the IRS to spend additional money on increasingly its own investigative resources.  Needless to say, the availability of such fees will encourage people to report customers, colleagues and business associates.  Most of the highly publicised disclosures of bank customer data have resulted from IT personnel copying customer data and submitting this to the tax authorities. 

The FATCA rules are another example of outsourcing of the tax administration function.  FATCA effectively moves much of the information-gathering burden from the IRS and passes it on to foreign non-governmental institutions.  It is such an obvious and successful initiative that is likely to be repeated over coming years by other governments when they review the efficiencies of the American model.  Of course, this does not bode well for institutions outside the US who have to bear the costs of such compliance and who will not be compensated by the US government.  It is an inevitable and inexpensive way for governments to enhance the collection of their tax revenues. 


Criminalisation of Tax Offences

Another trend is the use by tax administrations to prosecute tax offenders criminally, resulting in the imposition of substantial fines and jail sentences on defaulters and their advisers.  Previously, tax offences tended to be dealt with through the imposition of penalties alone. 

Tax administrators have over recent years increasingly realised the value of highly publicised criminal investigations and prosecutions as a means to force other taxpayers and institutions into compliance, and have carefully selected cases that have generated maximum publicity.

This trend will continue.  Sadly, such posturing is creating more of a rift between taxpayers and some tax administrators who are perceived to be over bearing in their responses, notwithstanding calls for there to be more cooperation and openness between them.


Tax Amnesties

As the trends towards transparency and compliance continues, many taxpayers who previously were not compliant now face a dilemma.  Most people recognise that the world has changed and that compliance is now essential, but how do they move seamlessly from darkness into light?  Becoming compliant will inevitably expose their past history to the scrutiny of tax officials, and result in substantial penalties and possibly even criminal prosecutions. 

As a result, many errant individuals wish to become compliant, but are reluctant to do so because of these risks.

Many countries recognise this dilemma, and also recognise the benefits of encouraging their taxpayers to become transparent.  As a result, they have offered amnesties to taxpayers who voluntarily disclose their past affairs.  Such amnesties are typically accompanied by reduced tax charges and zero or minimal penalty requirements.  These amnesties, to varying degrees, have encouraged compliance.

Some governments refuse to adopt such measures and resist conceding their full tax entitlements.  In some countries, they remain politically unacceptable.  As a practical measure, however, tax amnesties offer many benefits to tax administrators.  They bring taxpayers into compliance mode who otherwise would remain hidden, and this will generate additional tax revenues going forward.  They reduce the resources required for further investigation.  Most importantly, they help to close the book on the sorry chapter of past tax transgressions and help people to get on with their lives.  There is a lot to be said for tax amnesties on a very practical level.


Confidentiality of Information

The most spectacular leaks of customer information have occurred when IT personnel have downloaded and copied customer data on to disks, and handed this over to tax authorities.  This example highlights the need for institutions to review their security and access procedures to minimise the risk of this happening.  Needless to say, the existence of data privacy legislation cannot in and of itself prevent data theft.

Information leaks occur when spouses divorce and business associates fall out.  Sadly, we are heading towards a more paranoid society in which spouses will be less willing to confide in each other, and business associate will keep more secrets from one another. 

But of course, the counter-argument is that, if institutions and their customers were all compliant, this would not be such a sensitive issue, would it?  Yet one can’t help but bemoan a George Orwell 1984-type society in which Big Brother tracks our behaviour and knows everything that is happening in our daily lives.


Evolution of Offshore Financial Centres

Whether you call them ‘tax havens’ or ‘offshore financial centres’, the fact is that governments of developed countries are looking increasingly more suspiciously at such jurisdictions and the opportunities that they allegedly provide for their users to evade tax and hide their funds.

It was for this reason that the OECD, aided by the EU and US, commenced their crusades against offshore financial centres and gradually cajoled the havens into agreeing to minimum standards of conduct relating to customer identification, information exchange and general transparency. 

For political reasons, it is easy for government to ‘bash’ the offshore financial centres to divert attention away from more domestic issues, and such centres have been increasingly demonised in the eyes of many people to hysterical degrees.  This is unjustified in most cases, but it is a reality that the centres now have to deal with.

Although the actual practices at the moment may not live up to the ideal standards to which these jurisdictions have committed, it is inevitable that over time more and more pressure will be applied on offshore financial centres to ensure that this happens.  The issue that this raises is that such centres can no longer compete with each other for business on the basis of secrecy.  They need to reinvent themselves in order to continue to operate in the world of offshore services. 

The Cayman Islands, for example, is a good example of a jurisdiction that has developed into a significant and reputable fund centre.  More offshore financial centres are reengineering themselves in order to continue to remain popular and relevant.  Inevitably, some will lose their edge and will suffer economically.

At the same time, the ‘taint’ of offshore financial centres has led planners to look at the use of entities in jurisdictions that are not overt havens, eg, the use of (ironically) US LLCs, Malaysian companies and New Zealand trusts. 


The Growth of Asia

The growing compliance trends in the US, Europe and Latin America has resulted in a massive flow of funds from those areas to Asia, principally to Singapore and Hong Kong.  Indeed, much of the recent growth of Singapore as a major offshore trusts and funds management centre is arguably due to this trend.

Of course, many customers and institutions who have moved their funds to Asia are fully compliant with their local tax and other regulatory rules, and are seeking the benefits of using a simpler and more reputable jurisdiction than the offshore financial centres with which they previously dealt.  Needless to say, however, one can’t help but suspect that among these customers and institutions are some who labour under the perception that, given the trends in the rest or world, it is easier to ‘hide’ their funds in Asia.

If there is a perception that Asian centres do not subscribe to global compliance standards, this is incorrect.  Singapore and Hong Kong do not perceive themselves to be tax havens, and are very conscious of the need to comply with OECD and other standards of compliance and transparency in order to avoid suffering the types of publicity and sanctions that other tax havens have endured or been threatened with.  To the extent that there is a benefit, it is short-lived as both jurisdictions have rapidly evolved their standards.

That said, Asia has without doubt become a key player in the global wealth management industry, sustained both by wealth within Asia and other regions.  Its infrastructure has developed rapidly, and key personnel within major global institutions have been increasingly relocated there. Expect to see more of this in the future.



Once upon a time, the wealth management and private banking industries were sleepy backwaters where little changed.  The last five years or so have demonstrated that these industries are being shaken up and fundamental trends are developing.  It is important for players in those industries to be aware of what is going on and to adjust accordingly.  As in other situations, nothing is more constant than change.