Offshore Financial Services on the Net - Delivering on the Promise

Offshore financial services on-line! Sounds enticing, right? Ye - e - e - s, but what does it mean? Starting from the end and working backwards, at least 'on-line' is clear: you can access it, whatever it is, on the Internet. 'Financial services' is fuzzier: it means banking, almost certainly (a vague term in itself), brokerage (of what?), insurance, and a host of other types of service, according to who, what and where you are. 'Offshore' is quite hopelessly undefinable: if you are in Russia, it means anywhere else; if you are in Vanuatu, it means nothing.

There are several reasons why an on-line financial services provider might want to be offshore:

• because they are part of an existing offshore financial services cluster, eg in Hong Kong, where there is a substantial population of prospective clients;
  
• because they can offer tax-advantaged products to onshore and/or offshore clients, eg a roll-up investment fund manager in the Isle of Man;
  
• because they can themselves operate in a low- or no-tax environment, eg a mutual fund manager in the British Virgin Islands.
  

These reasons all existed before the Internet, but they apply with greater force now that telecommunications in general and the Internet in particular have made it so easy for a provider to set out his offshore stall. Despite the dotcom implosion during the last year, and the slow pace at which users have accepted the Internet as a tool for making purchases (of investments as much as books or music), on-line financial services are growing rapidly - and nowhere more rapidly than offshore.

The proponents of offshore e-commerce have made glittering predictions for the expected explosion of e-commerce activity offshore, and the fact that these predictions were hopelessly unrealistic (this writer was a guilty as anyone!) shouldn't obscure the fact that this new industry is growing up before our eyes.

Betting and gaming has been the offshore world's first 'killer ap' (we surveyed it in last month's special offshore-e-com.com feature), but financial services may be the next one. This survey looks at a range of financial services applications, examining what is already available offshore, and making some not very confident predictions about how these applications may grow over the next few years.

On-Line Offshore Investment Funds

On-Line Offshore Equity Brokerage

On-Line Offshore Banking

Although these categories cross over into each other through wealth management services and 'supermarket' sites, they still represent distinguishable investment categories, and are the most useful categories to use in approaching the market-place.

OnLine Offshore Investment Funds

The great majority of on-line investment fund sites are onshore, and offer the mixture of onshore and offshore funds that is permitted to be marketed according to the regulatory regime of the countries at which they are directed. That causes friction between the regulatory authorities and the managers of the sites, because an Internet site is available universally, and who can say what is 'directed' at whom? That's the reason for warnings such as 'This site is not available to citizens of XYZ state', an obvious mis-statement of the facts, but one which goes some way towards satisfying the regulators of XYZ state.

For the most part, the investors who buy 'regulated' funds, whether those funds are based onshore or offshore, are not the wealthy, who are more likely to participate in 'unregulated' offshore funds, often through offshore limited partnerships, which have quite high minimum investment limits. These investments are usually adviser-driven, which explains why the offshore fund sector has not seen much development of on-line investment sites, these being more suited to disintermediated transactions.

The historic divide between regulated (= small) investment and unregulated (= large) investment has of course begun to break down, with growing availability of hedge fund units and other alternative investments to onshore investors - and the Internet it is which has largely been responsible. Thus we find that most of the on-line offshore investment fund sites are for hedge funds - they have to be offshore, because no onshore regulator will have them, although even that situation is changing, as clever lawyers find ways of 'wrapping' unregulated products in a way which gets around the regulations.

It is a big and currently unanswerable question as to whether the growth of on-line fund investment among the so-called 'mass affluent' will take place predominantly through onshore or offshore sites. To some extent that is the same question as asking whether highly-taxed citizens onshore will be honest or dishonest towards their governments; but that doesn't make it any more answerable.

On-Line Sites

Bermuda has developed a strong position in offshore on-line hedge fund sales and trading. Bermuda-based company HedgeWorld Ltd, has introduced an online supermarket through which wealthy investors can buy hedge funds. The offshore (Bermudian) site, named HedgeWorld FundSelect, was due to start operations in the first quarter of 2001. It is similar to the onshore online mutual fund communities provided by big names Charles Schwab and Fidelity Investments.

HedgeWorld.com, a New York-based information site, offers online access to the performance of 2,200 alternative investment managers. Basic service is complimentary. Two other levels of service offer access to more detailed reporting. HedgeWorld has been adding 250 members a week, claims the company. Some 12,000 research reports have been downloaded in the last three months.

Commenting on the new platform, Johann Wong, President and Founder of HedgeWorld.com said: 'The development of HedgeWorld FundSelect is a direct result of the structural supply and demand constraints that face the industry today. Within the global asset management industry, the hedge fund marketplace is often described as fragmented and highly inefficient. We will leverage off of our existing market leadership position in content creation, content aggregation and industry specific electronic commerce initiatives to provide a total investor solution.'

HedgeWorld FundSelect is being developed in conjunction with several strategic partners, such as Tremont Advisers Inc, a US provider of information, consulting services and investment products to the hedge fund industry. Tremont plans to provide HedgeWorld.com with ancillary services not previously available online. Tremont's representatives intend to also participate on the manager selection committee to determine which hedge funds will qualify for eligibility in the supermarket.

Prior to the launch of HedgeWorld FundSelect, HedgeWorld and the Bermuda Stock Exchange (BSX) had developed the HedgeTrust Exchange (HTX), the first secure online trading facility for existing, non-U.S. domiciled hedge funds. Before the advent of the HTX, a hedge fund would normally have to redeem the interests of the selling investor out of the fund's own cash holdings. Assuming that the buyer meets the accredited investor terms of the subscription agreement, HedgeTrust Exchange provides a valuable capital markets service for the hedge fund.

By facilitating the matching of buy and sell orders of offshore hedge funds and the crossing of those hedge fund interests over the Bermuda Stock Exchange (BSX), HTX is providing increased liquidity and choice for the industry. HTX allows accredited investors to indicate expressions of interest to buy or sell a non-U.S. domiciled hedge fund or to place firm buy or sell orders by logging onto www.hedgeworld.com/htx .

In parallel with the HedgeTrust Exchange, the Bermuda Stock Exchange is currently launching its Plus Funds programme. This provides active trading of alternative investment products. Plus Funds screens the funds for legal integrity, financial solvency and price transparency. The funds have established market-makers such as Merrill Lynch to provide liquidity. BSX offers real-time trading and pricing of these alternative investment funds.

Unveiled in Dubai in April, 2001, was a new regulated, financial services website offering financial products and services compliant with Islamic law, the Shari'ah. The site, www.iHilal.com, allows Muslim investors worldwide to invest online in stocks and mutual funds. iHilal is designed to reach middle-income Muslims and the company believes the potential market for Shari`ah-compliant financial products and services amounts to around 140 million Muslim investors worldwide.

According to the Shari'ah, investments must be in ethical sectors, that is to say profits cannot be made from prohibited activities such as alcohol production, gambling and pornography. Additionally, all wealth creation should result from a partnership between the investor and the user of capital in which rewards and risks are shared.

iHilal.com is a joint venture between Accenture Technology Ventures, the venture capital unit of Accenture and Rasmala Islamic Finance Ltd, a subsidiary of Rasmala Private Equity Group, a consortium including Deutsche Bank, Saudi American Bank (a Citigroup affiliate) and a number of prominent institutional and private investors. The company has offices in London, Guernsey, the Dubai Internet City and Minneapolis in the US.

Ramzi Abu Khadra, iHilal's chief executive, said: 'Investors throughout the Muslim world want credible financial products and services that comply with the teachings of Islam. Now, for the first time, Muslim retail investors have the ability to invest online in over 1,000 Islamically screened stocks (US, Canada and foreign companies), traded on US markets, as well as Shari’ah compliant mutual funds.'

iHilal is currently developing additional financial products and services. These include Islamic insurance, mortgages and pensions.

A recent survey by the Hong Kong Investment Funds Association (HKIFA) found that 33 member companies had fund websites, around half of these sites having been launched only last year. Those that existed prior to 2000 saw an significant increase in visitors from the previous year (1999). These increases ranged from 10 per cent to 50 per cent. howed that more investors used the Internet last year to seek information on mutual funds available in the SAR. However, whilst more investors were logging on, the parallel significant increase in online transactions one would expect did not in fact occur.

However, of those companies which saw an increase in the number of visitors to their sites, 85 per cent said no sales were conducted online last year. Of the remainder, the percentage of sales conducted online was less than 5 per cent of their total sales.

HKIFA Chairman Paul Chow said in a statement: 'While more fund investors are going to the Web to obtain information, many still prefer to have face to face interactions with the investment professionals when it comes to executing transactions. Investors generally are still concerned about the security of the Net.'

Most of those companies participating in the survey do not see the situation changing in the near future. Traditional channels for distributing mutual funds, such as banks, financial advisers and insurance companies, are expected to maintain their dominance, although the convenience of using the Internet to garner information on mutual funds looks likely to retain its appeal.

Of course, in Hong Kong investors have access to a wider range of investments than do their equivalents in onshore countries, so that they providers have no particular incentive to create sites to offer alternative investments. However, as a world-wide market develops alternative investment, we can expect to see Hong Kong used as a base by international investment managers to offer their alternative products on-line.

An early indication of this likely trend came right at the beginning of May, when, two Exchange Traded Funds (ETFs) were launched in Hong Kong. Hong Kong Exchanges and Clearing (HKEx) has developed a new market structure for this relatively new type of investment fund, which investors can buy or sell like ordinary stocks through brokers.

The first two ETFs, the iShares MSCI Taiwan Index Fund and the iShares MSCI South Korea Index Fund, are based on MSCI indices that represent investment opportunities in Taiwanese and Korean companies available to investors worldwide. These two ETFs can be traded in US dollars on the HKEx's third generation automatching system (AMS/3) continuously between 10 a.m. to 4 p.m.

Real-time data on the underlying indices for the two iShares is available through the Stock Exchange's trading system, Bloomberg and Reuters. In addition, end-of-the-day data on the two indices is available in the daily quotations on the HKEx website - http://www.hkex.com.hk - and the data is also distributed to the news media.

iShares are part of a family of over 70 ETFs developed by Barclays Global Investors, the investment management arm of UK-based Barclays PLC. The iShares MSCI Taiwan Index Fund and iShares MSCI South Korea Index Fund, which are already trading in the US, are not authorised by the Hong Kong Securities and Futures Commission.

Lawrence Fok, Deputy Chief Operating Officer of HKEx, said at a press conference that the two funds were selected because of their suitability to conditions in the Hong Kong equity market: 'After much consulting and discussion, we decided that the two funds would be most suitable for Hong Kong and they should draw healthy trading interest,' he said. He added: 'ETFs, particularly index trackers and sector baskets, have become popular in some markets. This is a global trend and so we have developed a new market structure that enables ETF sponsors to introduce a wide range of products in our market. The end result will be more choices for investors.'

In fact, trading in the two ETFs got off to a muted start when they were launched in early May.

Other offshore, or anyway, low-tax, centres in which on-line investment fund sales are developing include Ireland, Switzerland and Luxembourg.

On-Line Offshore Equity Brokerage

Rather similar arguments apply to offshore equity brokerages as apply to investment funds (see above): most onshore retail investors have historically bought what is available to them in their local markets, so it is such onshore equities that have initially been the subject of on-line offerings; the more adventurous institutions have bought more widely, but that professional market is not initially suited to on-line dealing.

It is very recent indeed that equity investors have begun to realise that they can and even should invest more widely, and there are almost no sites, onshore or offshore, which cater to this nascent demand.

Somewhat differently from investment funds, most equities are based onshore, for historical reasons - that's where the pools of liquidity built up which turned into functioning stock markets. Share issues tend to follow brand loyalty, as far as retail investment is concerned.

In fact there are 12 offshore or low-tax stock exchanges, but they tend to list domestic equities, alongside the investment funds which make up the biggest part of their capitalisation. So there is little in the way of offshore equity to interest international investors. But that doesn't stop the development of offshore brokerages, which have the advantages of any offshore investment channel in terms of privacy and tax-efficiency.

Another factor that has slowed the development of offshore brokerages, whether on- or off-line, has been the relatively primitive state of offshore trading systems, back-offices and depositories. The exceptions to this problem are Switzerland, Ireland, Hong Kong and, quite recently, Bermuda. These are the jurisdictions in which one would expect to see on-line brokerages setting themselves up, at least until 'virtual' back offices and depositories come into existence on the Internet. Even then, a brokerage can only offer those equities that are traded in the jurisdiction in question. Otherwise, the brokerage has to be a member of the exchange on which the desired shares are traded.

This antediluvian system will be swept away in due course, but at present it is far from having been swept away, and this accounts for the paucity of full-service on-line offshore brokerages and their limited offerings.

In a recent survey of on-line offshore brokerages, www.investorsoffshore.com rated a number of brokerages on the basis of their sites' user-friendliness and the breadth of their offerings (not in other respect!). The brokerages, in descending order of their ratings, were as follows:

Segoes are based in the Cayman Islands, and offer a range of stocks, bonds, options, US mutual funds, and private placements for the international or offshore investor. There are also plans to provide online trading access to a variety of offshore mutual funds in the near future. The Segoes website, recently revamped, is very intuitive and user friendly, with an extensive FAQ section, and offshore and online investment advice available for the newbie.

Based in Bermuda, Directrade offer a fairly comprehensive range of investment opportunities and services for self directed investors, with portfolio management an option for premium account holders. Their website is very user-friendly, and more accessible than many.

Trading-Offshore.com are an independent company, registered in the Bahamas, with offshore offices in the Cayman Islands and Costa Rica. Clients can presently trade online in stocks, mutual funds and options in US markets, but there are plans to offer commodities, currencies and bonds in US markets, and a wider array of financial products world-wide in the near future. Their website is quite well constructed, although those with a linear mind may find it easier, at least initially, to navigate through the site map. A revamped and more user friendly site is promised soon, however.

CSFB direct e-union is located in Dubai, and provides access to US listed stocks, options, and mutual funds, as well as services such as research, real-time quotes, and real-time balances and portfolio holdings. Their website is fairly easy to use, and has an excellent feature allowing you to chat to an advisor live online.

Hutch CSFB direct is based in Hong Kong, and is owned by Credit Suisse First Boston Holdings, Inc. and the Hutchison Whampoa Group. The service was launched in 2001, and allows Hong Kong investors to access a range of financial products in the local and global markets. Their website is easy to use, and although there are not the general articles and advice usually to be found on online investment sites, there is an interactive trading demo. Telephone, fax, and e-mail contact details are made available, as well as the Hong Kong office's address.

Schwab Cayman is an international subsidiary of The Charles Schwab Corporation. Based in the Cayman Islands, they offer a wide range of investment choices, and are well attuned to the needs of international investors. Their website is easy to navigate and reasonably user-friendly, although there are certain sections of it only available to Schwab Cayman clients. In the Mutual Fund Centre, they also provide links to articles and interviews of interest to beginning investors.

OGF Online are based in the British Virgin Islands, and allow international investors online access to a range of US and offshore investment opportunities. Their website is logically put together, concise, and easy to use, if somewhat uninspiring.

BahamaQuote are based in Nassau, in the Bahamas, and will establish an IBC for you there, through which you can trade an international portfolio of stocks, shares and bonds. Purchase and sales orders are effected through Montaque Securities Ltd, also based in the Bahamas. Their website is a little frustrating, but does the job well enough, providing information, advice, and access to account applications and a 30 day free trial of their trading service. Their address, fax, e-mail address, and telephone number are available on the site.

Offshore-Investors.com are a subsidiary of Fidelity Bank (Grenada), and are based in St.Kitts. They offer a range of US listed and non-listed investment options for investors and brokers alike. Their website is certainly extensive, and provides a multitude of research tools, advice, and articles on offshore investing and online trading.

On-Line Offshore Banking

Banking was the first financial services sector to recognise and make use of offshore: money is what rich people have, and when they move it offshore they first of all have to put it in an offshore bank. Then they invest it onwards.

As with offshore in general, so with offshore on-line, and it is in banking that we find the greatest development of on-line offshore financial services.

That said, successful 'on-line' requires more than just a telephone line, and it is those offshore jurisdictions that have been most successful in e-commerce generally that are leading the way in on-line offshore banking. Almost all offshore jurisdictions would like you to believe that they are leading the offshore e-commerce race, but in fact in banking terms this means primarily Bermuda, Cyprus, Dubai, Hong Kong, Ireland, the Isle of Man and Switzerland.

Actually, Bermuda, which has some claims to be the most advanced offshore e-commerce jurisdiction, has only recently begun to offer Internet banking, due to its long-term insistence on exlcuding international banks. Just last month, the Bank of Butterfield has launched its fairly basic Internet banking service, on which account holders can view their accounts in most currencies and make basic account transactions. The new service also enables registered users to access their account information via different categories such as chequing, savings and loans. They can use the service to pay bills, transfer funds and request cheque books. Bulk payments, electronic data interchange functions and 'dual authorisation' which authorises transactions online are among the services available for the bank's corporate clients.

Laiki eBank, launched by Laiki Bank in September 2000, was the first bank in Cyprus to allow banking and stock market transactions via the Internet. Laiki eBank customers are allowed to trade securities on the CSE, track developments on the CSE and have a live update of their portfolio. Laiki promises fast access to its customers, who need only to fill in a "simple" form; once the application is processed, customers receive a special card together with their personal pin number in order to enter Laiki eBank in a secure environment.

Emirates Bank Group announced that it will be the first Bank to open a branch at the Dubai Internet City. The Branch will offer all the traditional banking services to the major corporations located at the City, as well as offering its portfolio of existing and upcoming electronic banking facilities. The bank has been awarded the 'Best Local Bank in the UAE' by Euromoney magazine for the past two years, due, amongst other things, to its various innovative and leading technological initiatives. These have included being the first to launch Internet Banking service (BankNET), the first mobile banking service (BankGSM), the telephone banking service (Bankline), as well as the first financial website in the region.

As a further development of its electronic bank, Emirates recently unveiled its 'MeBank' cafe-style banking concept. Emirates Bank managing director and chief executive, Anis Al Jallaf, said: 'Online banking is the future. Our idea was to offer customers a way to conduct their banking themselves in a relaxed atmosphere, while sipping coffee, through MeBank. It has multiple hi-tech outlets featuring ATMs, PCs with telephones, and touchscreen Internet machines to carry out a range of operations 24 hours a day, seven days a week.'

Customers have online access to products and services of Emirates Bank International and Middle East Bank, including account opening and enquiries, fund transfers, bill payments, remittances, foreign exchange and deposit rate information. John Critchley, head of retail banking and group operations, said more outlets would be opened in the future.

All services are free, as is the coffee, said Anis Al Jallaf. He added: 'These services can actually be accessed through the Internet from anywhere in the world by any Net-connected device, but not everyone may have ready access to the Web, hence the MeBank outlets.'

N M Rothschild & Sons (C.I.) Ltd in Guernsey, part of the N M Rothschild private banking group, has an online wealth management service geared towards high net worth investors with a minimum of £100,000 of assets to invest. The ArrowOnline service offers transactional banking as well as a secure messaging system but no trade execution capability for now. The firm sees the service as helping to develop its private banking business: 'We are primarily concerned about delivering a better private banking service for our clients. Clients increasingly demand Internet services to manage their wealth,' said an executive.

In Hong Kong, there are a number of on-line banking operations directed at the consumer or the HINWI (high net worth individual) markets. In some cases a wide range of services is offered including share trading and investment. HSBC and Citibank both have sites with a wide range of functionality, and a number of local or regional banks have more limited offerings. Most local banks, however, if they have a Web presence at all, have constructed simple 'brochureware' sites that provide little more than basic marketing information.

Hong Kong banks have been slow to equip themselves with Internet payment processing systems. The banks initially claimed to be uncomfortable about processing payments received from outside Hong Kong via the Internet because of the additional credit risk. Banks in Hong Kong charge about 2.5% for credit card payments but charges for payments received on the Internet shoot up to 4-10%.

The Hong Kong Monetary Authority (HKMA) intends to bring virtual banks under its supervision and has given a draft of guidelines to bankers for comment, but these have not yet been implemented. The most contentious proposal is one that would restrict the virtual banking playing field to existing lenders. Dah Sing Financial Holdings, which plans to create a stand-alone on-line bank, welcomed the draft guidelines, saying that they provided the 'relevant parameters and factors we can now discuss with the HKMA.'

Hong Kong's Dah Sing Financial Holdings launched a new bank in April 2001 which offers both Internet and branch services. The bank's original plans were for Hong Kong's first stand-alone e-bank, announced in March, but instead the newly-launched bank, called Mevas, provides banking services through a 24-hour hotline, the Internet, a telephone banking system, electronic teller machines, three Mevas service centres, and branches of Dah Sing Bank.

Executive Director Derek Wong said that as far as the original plans were concerned, the group was merely hoping to set up a bank with electronic delivery channels. He said: 'As far as Mevas bank is concerned, we announced this project at a time when a lot of Internet banks were appearing in other countries....I have already tried to clarify that what we are trying to build isn't a single channel Internet bank, but a multichannel e-bank.'

In Ireland, First-E was one of the first e-banking operations anywhere, but it has had its problems. A plan to merge with Spanish Internet bank Uno-e was scrapped as volumes dropped for both banks during 2000. The merger, originally valued at more than $2.4 billion (euro2.66 billion), was announced in March 2000 but failed to achieve regulatory approval from the Spanish authorities.

Mr Gerhard Huber, chief executive of Enba, said last night the merger had ended after "carefully analysing the details of the operation and due to current market conditions". "We have reached the conclusion that both our companies need to focus on our respective core markets before undertaking any further expansion," said Mr Huber.

Ms Manuel Cantalapiedra, a banking analyst at Banesto in Madrid, said the announcement was no surprise. "Since the deal was announced a year ago we've had no news on how it was coming along . . . now BBVA [Uno-e's parent bank] is taking a more careful approach to the Internet."

The aborted merger raised doubts about the future viability of First-e, which employs almost 400 people in Dublin and has almost 215,000 customers in Germany and Britain. First-e had received a euro100 million line of credit from BBVA, as part of the proposed tie-up. However, First-E's owner, Enba, said the firm was well supported by a range of high-profile investors. It is understood that in February the company raised up to euro 30 million from these investors to give it breathing space if the Uno-e deal went sour.

There are a number of e-banking operations in the Isle of Man, and in March 2001 Singer & Friedlander (Isle of Man) announced another. The new service is fully transactional and available to corporate accounts as well as individual account holders 24 hours a day, every day.

Singer & Friedlander is an independent financial services group offering merchant banking, investment management, stockbroking and property services. The Isle of Man offshore branch offers a range of banking services tailored for overseas residents, expatriates or those clients that require gross income.

Online banking is free of charge for all customers and uses state-of-the-art technology to provide top-notch security. Singer & Friedlander say all information is encrypted to the highest degree possible for a non-military organisation.

In November 2000 the IOM banking sector seemed set fair when WISekey, a worldwide leader in certification authority and public key infrastructure, announced that it had created WISeOffshore, an internet initiative to provide specialized services and applications for offshore jurisdictions and their financial institutions. But in the spring of 2001 the Manx-based service was put on hold much to the disappointment of the Island's e-commerce sector.

The aim of the website was to enable offshore financial institutions to improve their transaction efficiency and comply with "Know Your Client" requirements. WISekey said it had received 'unprecedented immediate support' in achieving its objectives through take up by financial institutions such as the Royal Bank of Scotland International, FsharpBank (Bank of Ireland), Abbey National Offshore, Isle of Man Assurance, Bank of Bermuda, Isle of Man Business School, Skanco and Cains Advocates. All the institutions, via WISeOffshore's services, would have been given the opportunity to issue digital certificates and use Mail Secure to secure transactions.

Switzerland can also boast a number of on-line banking services, and in early 2001 Swiss bank UBS and Germany's T-Online joined forces to offer selected financial services via the Internet portal www.t-online.de. The portal, operated by Europe's largest Internet service provider, covers over 50 per cent of all German-speaking Internet users. The venture will mean international private clients can access information and services provided by UBS which are specially tailored to their needs.

UBS's new German Internet venture is aimed at clients domiciled outside Switzerland. Its pages on T-Online include information on the domestic private banking services UBS provides in Germany. On top of this, UBS Quotes supplies comprehensive stock exchange and financial market information. Clients who wish to invest in Switzerland can also access the UBS e-banking platform directly via www.t-online.de.

Gabriela Payer Fruithof, UBS Switzerland's Head of E-Channels and Products, said in a statement: 'T-Online is the ideal partner to help us raise our profile among private clients all over Europe and make them aware of what we stand for - security, reliability and trustworthiness. In addition, our presence on T-Online will allow us to give an entirely new audience access to our products and services.'