Whether it"s protecting wealth from local instability, seeking Sharia compliance or taking a more modern approach to succession planning, Middle Eastern family wealth is changing - and the Channel Islands are playing a key role
Even for a region as familiar with upheaval as the Middle East, the past five years have been especially tumultuous. Ever since a shopkeeper in Tunis kicked off the Arab Spring in 2011, governments have fallen, new threats have emerged and the uneasy peace between the region"s power players has all but disintegrated into the conflicts we see today. And that"s not to mention an oil price collapse.
The effects of this are obvious to anyone with a TV screen, but one of the less visible consequences is playing out across the Gulf region. Middle Eastern families, accustomed to holding most of their wealth within their home country, are becoming more and more nervous about keeping large assets in such a volatile region.
At the same time, a growing number of these families are becoming familiar with western business and cultural factors, as they send their children to school or university in the US and Europe, and use London residences as their base outside the Gulf.
As a result, an increasing number are looking for a way of protecting their assets away from the Gulf region. As Ian Slack, a Director at Bedell Family Office in Jersey, explains: "A lot of these families are asking themselves: 'What happens if there"s an uprising in Saudi Arabia?' If that happens, they need to make sure their assets are in a secure, well-regulated jurisdiction with very good rule of law. So they look at Jersey and say: "If I put my assets in a Jersey trust, surely that"s a more secure way to do it?'"
"We"ve got clients whose wealth is being generated in the Gulf, and that represents a concentration risk," says Mark Biddlecombe, Client Services Director at Nerine Fiduciaries. "Take, for example, a Jordanian family, aware that they"re not too far away from the conflict zones in Iraq and Syria. For them, it"s all about the need to establish a "lifeboat'."
Jessica Morris, Head of the Middle East team at Carey Group, echoes this, and says she is seeing more Middle Eastern families now looking beyond simple assets, such as investment portfolios, at a wider range of vehicles with which to manage their wealth.
"Typically, they start off forming companies to hold assets that aren"t in their home jurisdiction. But now they"re starting to get more sophisticated and are looking at trust structures, and in particular private trust companies [PTCs]," she says.
PTCs are now the preferred vehicle for many wealthy Middle Eastern families looking to safely park assets outside the region. "A lot of Middle Eastern families like the PTC," says Slack. "In part, it"s a desire to attain a measure of control, and participating in the structure being created by the settlor of the assets. We also see PTCs used where, for example, there"s an asset that"s been settled into trust that"s got quite a high level of risk, or the trustees aren"t experts in the particular investment."
Sharia compliance
However, despite the well-established reputation of Jersey and Guernsey trusts as well-regulated wealth management vehicles, Morris says there remains a general misgiving about using such vehicles as they have been marketed in the past as a way of avoiding Sharia, which most families do not wish to do. Where there is a trust, there may still not be trust.
"They"re worried about seeing some strangers from Guernsey, this tiny little island they"ve never heard of, and saying: 'Here"s all my wealth, please look after my family'," she says.
Morris says she is working on several structures to satisfy Saudi and other clients" desire for both assurance and control. "These types of entity allow greater flexibility and may be drafted to afford successive generational planning and control in accordance with Sharia law, whilst ensuring a regulated entity is present with sufficient power to guarantee good governance and compliance," she explains.
A typical structure will involve a shared board on the PTC, with Sharia scholars or family members as an investment company on the side to advise the trustee. The trustee would then look after the trusts, with either investment companies or assets underneath. The Sharia scholar would be engaged in order to assess and rule on the compliance of the investments.
"Fortunately, a lot of Sharia concepts are perfectly aligned with trust law concepts," Morris explains. The basics of Sharia-compliant investments demand that no money be invested in companies that derive income from the sales of alcohol, pork products, pornography, gambling, military equipment or weapons.
In addition, a Sharia fund may not invest in any interest-bearing instruments. Nor may it invest in conventional derivatives (although there"s ongoing debate over this issue) or sell 'short'.
However, given that Sharia law is a huge field of study on its own, and is constantly evolving, one size rarely fits all. "Certainly every family is different, and there are differing levels of appetite for the application of Sharia principles to investments," says Biddlecombe.
"With that in mind, we have to be able to cater for the whole range. One lawyer I spoke to recently said a lot of clients want full Sharia-observant vehicles with clerical sign-off. At the same time, some just want compliance in spirit. Ultimately, some families are more observant and devout than others."
Niels Nielsen, CEO of Zedra, says his work with Middle Eastern families involves designing a lot of Sharia-observant structures, as well as others with more flexibility built in. "It depends on the families and their advisers,” he explains. "Typically, Middle Eastern families like control, so we offer that through reserved power trusts and Jersey foundations - vehicles that allow them to have influence over their wealth."
Succession planning
Nielsen also points out, however, that long-term concerns tend to trump short-term gain. "We find that for most patriarchs, when it comes to structuring their wealth, the principle concern is not getting the most tax-efficient structure; they are far more concerned with building something that endures after they"ve gone. They look at the next generation and focus on making sure the right governance and control is in place to preserve wealth."
That impression is strengthened, says Morris, by a number of patriarchs who are prepared to plan ahead of traditional Sharia heirship rules in order to put control over family wealth in the hands of daughters prior to their death.
While the role of women in the Muslim world is a controversial issue, it seems, anecdotally at least, that in some parts of the Middle East, women are beginning to gain greater influence and prominence in the running of companies.
"I"ve got one family who, even though they are Sharia compliant, do bring up their daughters to be able to run the business as well as the men. And they don"t stint on their education, which seems to be much more prevalent now than it was," Morris says.
"It"s an important part of Sharia to preserve wealth for the next generation, and where there is a general feeling of doubt about the future stability of the region, it"s sensible to broaden the skills of the family."
She adds: "Another client has only daughters. Under normal succession rules, his brothers would get the majority of the family wealth ahead of his daughters, meaning the business would be split up and diluted.
He doesn"t want them to get it, because his daughters are razor sharp - he wants them to take over the family wealth and manage it, which means planning now and obtaining approval from a Sharia scholar."
Morris says Sharia is a vast and complicated code of conduct for every aspect of Muslim life, which is intended to promote goodness and justice. Within such a comprehensive system, there is much room for interpretation. For instance, there exists within Sharia law a notion that if you gift to one child, you must be equally generous with all your children. "This means settling a trust if perfectly acceptable, because as long as you do it in your lifetime you can then gift money to each of your children," says Morris. "So that"s one way of making sure that a Sharia scholar will approve a proposed structure."
There seems little prospect of any immediate end to the volatility in the Middle East, despite the best efforts of the local countries and outside allies. And while the troubled times continue, the need for reassurance and stability from jurisdictions such as the Channel Islands looks set to continue.