Global PowerPoint Template (Title Master - Arial Black, 36

International/Offshore Trust &
Wealth Services
Fiduciary & Investment Risk Management Association
21st National Training Conference
April 18, 2007
Thomas G. Kennedy
Frederick Yorke, III
Director, Compliance
Citigroup Global Wealth Management
Citigroup Trust Fiduciary Advisory
Chief Compliance Officer
Global Hedge Strategies, LLC
Intended for use by FIRMA Conference attendees only.
The views and information presented herein
are the views of the presenters and do not necessarily represent
the views of Citigroup. The information contained herein should
not be considered tax, legal or investment advice.
Determining the role your bank will assume in international trust and
wealth services.
Outline of international trust and wealth services.
Outline of a franchise risk framework for banks in the international
Review of specific risks and mitigants in onshore and off-shore
structuring, investing and sales, tax, custody, contingency planning,
and corruption and privacy.
Business Scope Selection in
International/Offshore Wealth
Legal and Business Factors:
 Fiduciary liability versus agency liability differences.
 Business competency.
 Stability of markets, saturation of markets, sovereign risks.
 Legal and regulatory complexities.
Different Wealth Management
Roles Carry Different Risk Profiles
Investment manager
Broker, custodian or other agent
Wealth Advisory Services
Can Carry Higher Risk
Provision of advice flows from the provision of trust and asset management
services. If you stray into the world of trust, you are getting pushed to
differentiate yourself:
 Philanthropic services, art advisory, farm advisory, estate planning.
 Incremental product differentiations with exponential variable roles.
 High net worth only generally to make it relevant and role/cost effective.
 Will the bank provide advice on asset protection and/or taxes?
 Will the bank provide cross border investment strategies and wealth advisory
 Understand your business in order to understand its risks.
Offshore Banking Services
Using an International Banking Facility (IBF).
 What are the benefits?
Using your own offshore branches & offices.
 Selection of jurisdictions.
Using agents.
Encourage Inclusion of
Considerations in All Aspects of the
Client, product, and country programs (business strategies).
Policies and procedures.
Risk management and Compliance programs.
Audit coverage.
Include International Considerations
in Franchise Risk Framework
Your overall wealth management risk framework applies.
 Develop a Client Risk Framework – Determine the types of clients and
special risks.
 Develop a Country Risk Framework – Competency of services provider
capabilities and risk can vary by jurisdiction.
 Develop a Product Risk Framework – services and products can be
mixed and developed for certain segments.
 Develop a Fiduciary Risk Framework – policies, procedures and talent
to meet requirements of law and remain competitive.
 Develop Governance, Self Assessment, Reporting, and Independent
Oversight Functions.
Know What Governing Laws and
Regulations Will Apply
U. S. laws and regulations.
Non-U. S. laws and regulations.
U. S. and non-U. S. reporting requirements.
International Laws and Treaties.
Understand the differences in AML laws and regulations in particular, and apply
a global standard where possible.
Establishing Complex Trusts/Entities
for Non-U. S. Clients
Trust & Estates Planning, Drafting and Advice
Personal Investment Companies (PIC’s)
Personal Trading Companies (PTC’s)
“Hedge Funds”
Limited Liability Companies, Limited Partnerships
Examples: Issues in Trust
Civil Law Countries: Many do not recognize common law succession
trusts. Even in England, a U.S. living trust with a settlor –trustee may
be invalid as an improper testamentary disposition. A selling point for
big-bank trustees, as creditors of a bankrupt small trust company might
take trust funds.
Forced Heirship Laws: Non-U.S. settlors may not have legal capacity to
fund a trust if they violate these laws, and years later the trustee may
be attacked by heirs claiming ownership of the trust fund.
Investing in Non-U.S. Markets
for U.S. Customers
Using ADRs.
Using mutual funds and ETFs.
Investing directly in the markets.
 Using agents.
 Investing yourself.
Foreign exchange considerations.
Investing in Non-U.S. Markets
for U.S. Customers (cont.)
There are ways to get international exposure without having to build out
Investing in funds can be one way.
Due diligence in these investments can be different.
Investing directly requires a full build out of international investing.
Sales Practices Risks
Selling Investments Overseas
Sales practices in a cross border wealth management business can be
your biggest reputation and regulatory risk.
US companies being censured by US regulators is one thing, censured
by overseas regulators can be worse.
Jurisdictions maintain complex laws concerning eligibility, disclosure,
licensure and dollar limits on business activities.
Jurisdictions maintain limits on the number of clients or visits a foreign
company or sales agent may conduct in a country.
Sales Practices Risk Management
Rules of Engagement
Onshore legal and compliance resources in offshore sales may not be
equipped to handle the issues, and need to ensure local legal and
regulatory expertise is obtained.
Develop rules of engagement for sales persons who travel to
jurisdictions in which they are not resident.
 Examples: limits on entertainment, travel, requirements for
licensure, disclosure, translation, and jurisdictions may require
specific training and supervision.
Providing Custody
for Non - U.S. Assets
Using agents.
 Initial on-going due diligence.
Using your own network.
 In some ways, harder than going external.
Tax Structuring, Withholding and
Reporting Issues
IRC Section 1441 Non U.S. Withholding Rules and Qualified
Intermediary Audits.
Tax Structuring Issues.
Paying agency risks as being an agent of the U.S. here and abroad can
be onerous.
Tax issues can be complex domestically, international complexities
raise the bar.
Specific International Tax Risks
Black lists: From Mexico to Italy, new legislation is squeezing out
traditional tax havens (and for Mexico, Delaware LLCs) by putting them
on black lists that subject connected settlors to taxation of controlled
foreign corporations, and trustees to taxation as deemed residents.
A fiduciary can (a) stay out of the foreign tax advice business and
supply “tax neutral” services, or (b) restrict itself to only being a trustee
for “compliant” structures that require the trustee to be involved in
interpreting tax advice. Both tracks pose risks.
The Onshore-Offshore Debate
The risks here are whether you are seen by the clients’ home
jurisdiction to be complicit in a client’s attempt to evade taxation
in his or her home country (avoid, not evade).
 For your clients, there are issues of sovereign risk and proper
tax structuring, which they demand your help with.
 Money laundering is also a concern for the home jurisdictions,
but less so from the perspective of the bank if you see what you
believe to be the whole picture.
 South and Central America, and Europe as well.
Country Risk Management
Techniques for Wealth Management
For the bank, understand at all times where your bankers are, where
your bank is, where your clients are, and the situs of all client account
structures and understand what this all means to the jurisdictions
For clients, consider shifting risk using the following strategies:
 buying insurance,
 selling equity, sharing the risk,
 use of derivatives.
For clients, consider reducing risk using the following strategies:
 foreign trust/entity construction to reduce home country risk,
 bi-lateral protection treaties.
Contingency Plans/
Exit Strategies
Brick and mortar asset exposure is obvious, but this is sometimes more
than continuity of business, you have human assets potentially at risk.
Guard against economic exposures including:
 foreign exchange,
 asset seizure and currency controls,
 liquidity.
Ensure bank licensing and corporate requirements are met.
Monitor for protection of firm and client asset risks related to:
 stability of financial markets,
 infrastructure and regulatory environment.
Corruption & Privacy Risks
Wealthy international clients are targets.
Kidnapping the wealthy remains a threat to settlors in undeveloped
Hold All Mail policies, for example, become necessary for the protection
of your customers.
Privacy considerations always important, when you consider its impact
not only to identity theft, but the safety of your clients and their families.