International/Offshore Trust & Wealth Services

Thomas G. Kennedy

Director, Compliance

Citigroup Global Wealth Management

Chief Compliance Officer

Global Hedge Strategies, LLC

Frederick Yorke, III

Member

Citigroup Trust Fiduciary Advisory Council

Fiduciary & Investment Risk Management Association21st National Training Conference

April 18, 2007

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.

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Agenda

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

space. Review of specific risks and mitigants in onshore and off-shore

structuring, investing and sales, tax, custody, contingency planning, and corruption and privacy.

Q&A.

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Business Scope Selection in International/Offshore Wealth

Management

Legal and Business Factors:

Fiduciary liability versus agency liability differences.

Business competency.

Stability of markets, saturation of markets, sovereign risks.

Legal and regulatory complexities.

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Different Wealth Management Roles Carry Different Risk Profiles

Trustee Investment manager Advisor/Counselor Broker, custodian or other agent Administrator Banker Lender Mortgagor

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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

services? Understand your business in order to understand its risks.

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Offshore Banking Services

Using an International Banking Facility (IBF).

What are the benefits?

Using your own offshore branches & offices.

Selection of jurisdictions.

Using agents.

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Encourage Inclusion of International/Offshore Considerations in

All Aspects of the Business

Client, product, and country programs (business strategies).

Policies and procedures.

Risk management and Compliance programs.

Audit coverage.

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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.

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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.

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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

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Examples: Issues in Trust Construction

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.

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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.

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Investing in Non-U.S. Markets for U.S. Customers (cont.)

There are ways to get international exposure without having to build out overseas.

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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 involved.

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.

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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.

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Corruption & Privacy Risks

Wealthy international clients are targets.

Kidnapping the wealthy remains a threat to settlors in undeveloped countries.

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.

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QUESTIONS?