OFFSHORERISK REVIEW

| M A R C H 2 0 1 3 | I S S U E 1

VIEWS & REVIEWS OF THE RISKS FACING TODAY’S FINANCE INDUSTRY

PRODUCED BY CORPORATE RISK SOLUTIONS LIMITED

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Managing riskin a rapidlychanging world.

In these challenging times it is more important than ever to identify and manage risk within your business.

Corporate Risk Solutions Limited provides seamless support to financial organisations, delivering a wealth of expertise and knowledge in risk management and compliance, saving you valuable time and resources so that you can focus on your core business.

To find out more, please contact Darren Wadley.

Welcome

Well here it is – the first CRS Risk Review hot off the press!

If you have got this far, you might be wondering what this is all about. So a few words of explanation and welcome…

This publication has been something on my wish list to produce for quite some time. The thinking behind it was to create a platform where people involved with any aspect of risk management within our industry can read interesting and thought provoking articles on current issues and problems we face on a daily basis. Equally we will update you on any key changes in legislation or regulation that will have direct impact on the local financial services industry.

Don’t worry - this isn’t a CRS sales brochure and I certainly won’t be writing all the content. As you will see we have four guest scribes in this first issue voicing some interesting and at times controversial opinions about aspects of the market in which we are operating. My personal thanks to them for being part of the inaugural issue and for helping us get the project off the ground.

I appreciate that there are lots of publications out there and innumerable websites that purport to tell you all you ever want to know about risk and more. What Risk Review aims to do however is to focus on issues that affect the offshore and specifically Channel Islands financial sector.

Our intention is to produce a Risk Review on a quarterly basis. This means that we are already working on the next one and would love to hear from you either with suggestions for topics you would like to read about or even better, an article on that topic for inclusion in a future issue.

We will happily credit you and your company and even include a picture! If you would like a few hard copies of this and future issues, please contact us and we will arrange delivery.

You can find details of how to contact us below.

Darren Wadley

Managing Director, Corporate Risk Solutions

IN THIS ISSUE

2 WHERE’S THE RISK?

Sophie Jones, Robus Group Limited

4 THE INEVITABLE TREK TO TYRANNY

Toby Birch, Oppenheim

6 YOU CAN CHOOSE YOUR FRIENDS...

James Watchorn, Louvre Trust (Guernsey) Limited

7 THE CORPORATE FACE OF SOCIAL MEDIA

Darren Wadley, Corporate Risk Solutions Limited

8 DATACENTRES – ARE THEY PART OF YOUR PLAN? Richard Parker, Itex (Guernsey) Limited

12 MEET THE CRS TEAM

Editor

Trish Grover – TG Communications

trishcomms@gmail.com

Design and production

Joseph Smith - Mojoe

mojoecreative.co.uk

joe@mojoecreative.co.uk

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Risks may influence, positively or negatively, the objectives of an organisation and the management of such risks involves a continuous process of communication, consultation, monitoring and review, for which, ultimately, the Board of an organisation is responsible. In the event that risks cannot be avoided or mitigated, the Board will look to transferring the risk either through the conventional insurance sector, or by self-insurance in one way or another. Historically the typical options for this have been:

• payasyougo• createanin-housefund• maintainasystemofrecordinglosses, provisioning accordingly• formacaptiveinsurancecompany

Unsurprisingly, the merits of a captive over the various issues posed by the other options have elevated it to a higher standard of governance fulfilment, by virtue of the strength of control it imports, making the captive the financial tool adding substance to the awareness of risk.

However, the captive insurance model does not work for risks of a more esoteric or enterprise nature in respect of which, except for the captive funding mechanism, the analysis quantification and mitigation process applies just as it does for insurable risks.

It is from this position that the Risk Purpose Trust (RPT) was developed. It was felt that the RPT could be used as either an alternative to captive insurance, or could sit alongside an existing captive in

order to provide the parent company with more options, particularly when it comes to retaining profits and subsequently distributing capital and profit.

As part of the two year research and development process however, it became clear that the uses of an RPT were much wider than those originally envisaged. The potential applications extended to cover such things as:

• supportandprovisionfortheunforeseen expenses of a corporation generally• gratuitypayments,incentivepaymentsor sports bonuses• futurerepaircostsorreplacementcosts (ie foreseen expenses)•rentguaranteesforlandlordsoflarge property portfolios• potentialpensionshortfalls•de-commissioningcosts

How does it work?

Similarly to a Captive, an RPT acts as a repository for money which is being used to fund a Corporation’s risks, claims reserves and claims payments, receiving contributions from the Corporation to fund those risks.

These contributions are then used to support the Corporation’s risk management process.

The RPT provides the support by way of the Trust Deed. Taking a UK example, the UK Corporation is the Settlor of the RPT and it and its subsidiaries are the Beneficiaries. A Guernsey appointed Trustee acts as the Trustee of the RPT.

The level of financial support the RPT can provide to its Corporation Settlor is limited to the amount of funds it has within it, in other words the accumulation of its settled funds and any investment income received on them. However, additional funds can be introduced at any time.

However, the RPT, when used in this way, should be distinguished from a market captive Insurer. There is no contract of insurance or contractual rights to receive payments. Rather the RPT has a purpose, defined in the Trust Deed, for example to “fund for the foreseen or unforeseen expenses of the benficiary(ies)” and the Trustees then use their discretion and judgement to make funding available to the Beneficiary(ies) as appropriate when such expenses arise.

The concept of the Risk Purpose Trust is straightforward. For the element of its risk that a Corporation wishes to retain, an element can be funded and controlled through the set-up and formation of the RPT. Typically, as with captive insurers, the Corporation will retain the lower value elements of the risk for its own account and will insure the catastrophic elements of the risk in the insurance market. It is the less predictable, material but not catastrophic risks that the Corporation will be interested in retaining but controlling closely and funding appropriately.

Because of the nature of the RPT, these risks need not be limited to those which are traditionally ‘insurable’ or transferable to a third party. The risks can be of any nature, they need not fall into a particular period as with the necessity for most insurance policies to provide cover for 12 month periods. The Risk Purpose Trust is, by its very nature, a multi-year flexible solution. In addition, the RPT has the ability to be broader in scope than a traditional Captive. It can blend ‘unforeseen expenses’ and risks with ‘foreseen’ and be used as a budgeting tool.

At last the corporate risk manager has the opportunity to complete the circle and set up a funding mechanism for all risk scenarios and tick even more of the corporate boxes.

Sophie jonesRobus Group Limited

Where’s the risk?

UK Corporation

Risk Purpose Trust

Support for Risks

Trust Contribution

weakness will eventually generate significant inflation; temporarily masked by a lack of credit creation in the banking system. World trade thrives on currency and financial stability which is what the Gold Standard delivered for much of the Victorian Age, albeit with some crises along the way.

So why is this relevant today? If you mix the same ingredients together you will usually get a similar-tasting cake. In other words, by combining protectionist policies with political polarisation, tension and commodity-driven conflict are the likely end-result.

Many would argue that the lessons have been learned and that the prospect of a totalitarian era is incomprehensible.

After all, our children seem to study little else apart from Hitler in history lessons. While it is all well and good to analysethe end result of tyranny, unless one understands its cause then dictatorship is destined to be repeated. If anything we are in a worse position than the 1930s as we have the perfect infrastructure to control, monitor and isolate individuals both financially and physically.

The one-way extradition flow of Britons to America is a good example of such injustice where anti-terror legislation is routinely abused and applied to alleged financial, corporate or cyber crime. Our freedoms have been utterly subsumed under reams of legislation justified by the

War on Terror. Just as regulatory institutions are riddled with conflicted financiers, politics is dominated by the legal fraternity determined to legislate ad infinitum to the detriment of the law abiding and entrepreneurial class. Where it gets really scary is when one imagines a scenario under severe economic duress. This is when nationalist parties come to the fore of popularity and the apparatus of the state is hijacked and used to target whatever or whoever the common enemy happens to be.

The economic and social implications are likely to herald a period of greater self-sufficiency and isolation along national and lingual lines. The empha-sis will be on job creation through major infrastructure projects and a return to domestically-driven industries.

The inflationary implications of a de-globalised world are substantial with the physical aspect of scarcity and delivery plus the financial factor of money-printing to fund such projects.

This is where the Chinese and Russians have been so smart in dealing with

resource-rich countries over the last decade in return for funding infrastructure development. The western model has for many years centred on military dominance or a debt-dumping exercise, forcing countries to export their raw materials to pay usurious interest bills. It doesn’t take a genius to work out whom developing countries will supply in future. It will be fascinating to see what imagery will be paraded by future dictators. The word for fascism stems from a symbol of Roman power; a bundle of rods wrapped around a magistrate’s axe designed for punishment.

The illiterate Ghengis Khan was likewise famous for demonstrating that one arrow could be snapped whereas a combination of several was unbreakable.

The message in both cases is clear; unity is strength. In an era of government spin and media euphemism, we should be truly terrified at the prospect of despotic rule. While there is little any one of us can do in an age where demonstration has been sanitised by aggressive policing, we can at least take out some personal insurance. Not in the form of a policy from your friendly broker but by way of precious metals, offering a hedge against inflation, currency crises and catastrophe that is portable and globally acceptable.

This quote from Sir Winston Churchill is something of a surprise given that he was a lone voice opposing the appeasement of Nazi Germany prior to WWII. He did have a point about forecasting though.

Few leaders seem capable of considering the consequences of their actions - especially the unintended variety. Reaction rather than action appears prevalent. While we are not all blessed with investment insight or prophetic visions, we can at least take time to look at the past. Comparisons with the 1930s are highly valid but there is little reason to expect an exact repetition. A domino-effect is too neat and orderly a description for events over the last 5 years that more resemble a slow-motion motorway pile-up.

Others have kindly described my book as one of the most prescient predictions of the credit crisis when I published it in 2007 (The Final Crash: Addictive Debt and the Deformation of the World Economy). It compared the build-up of debt to drug dependency, dividing the phases into three parts, namely Party Time, Hangover then Detox and Rehab. With a little knowledge of history it was straightforward to run through a dress rehearsal of how the crash would evolve and escalate into other crises. At the time it was understandable to be belittled by doubters or worse still, ignored. At least one can hope that the author has credibility to make some comment on the future.The chapter entitled 2020 Vision ran through a scenario where a crash led to higher taxes, inflation and greater

protectionism. It made the case that in times of economic distress politics will tend to swing to the far left and right and of course a common enemy must be pin-pointed and persecuted. Leaders down the ages have used such tricks to crush dissent and unite the populace through scaremongering. Little has changed.

While President Roosevelt may justifiably be criticised for banning the public ownership of gold before devaluing the dollar during the Great Depression, he was at least correct in implementing banking reform, following the Wall Street Crash of 1929. Modern investigative committees appear to be a pale imitation of interrogators of the day like Ferdinand Pecora who exposed the double-speak of financiers with utter determination.

The subsequent implementation of the 1933 Glass-Steagall Act clearly delineated retail banking from its much riskier investment banking cousin. After many attempts this was repealed in 1999 with the naive tech-bubble view that modern folk were far more sophisticated than their ancestors. We can now appreciate the shallowness of this philosophy as banks once more mutated into speculative monsters. The lending mechanism is now broken; why should banks bother to lend money to real businesses when they can borrow cheaply from the central bank (a right not extended to governments) and use funds to buy bonds for a risk-free ride, funded by the tax payer. History shows us that the very act of allowing reckless

financial institutions to collapse is far healthier than allowing zombie banks to drag down the rest of the economy. Whether by lobby group pressure, Party funding or a simple lack of knowledge, politicians of all hues have fallen for the mantra that saving the banks will save the economy. This is best illustrated through humour rather than vitriol. In one episode of BBC’s ‘Blackadder’, an Elizabethan quack doctor recommends continued bleeding by leeches for a pallid patient. The doctor cites counsel from the highest medical authority, who just happens to own the largest leech farm in Europe.

A similar quality of financial advice has been provided for the last 5 years by a clique of central banks, regulators and ‘industry experts’ from the same stable. Interestingly, one of the best success stories of bypassing the banking system occurred in Guernsey, transforming the island from debt-trap penury into a model of prosperity. The States committee consisted neither of lawyers nor bankers but entrepreneurial merchants who used interest-free finance for the benefit of the Bailiwick.

Other echoes of the Great Depression centre on the emergence of trade tariffs and nationalistic behaviour. With the break-up of the Gold Standard, free-floating currencies caused chaos as every country adopted beggar-thy- neighbour policies of devaluation to gain a competitive pricing edge. Now, as then, the race to the bottom for currency

Our freedoms have been utterly subsumed

under reams of legislation justified by the War

on Terror.

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Toby Birch Oppenheim

The Inevitable Trek to Tyranny

“It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time.”

But where does this leave a Trustee when family assets are held in a Trust structure? It’s quite possibly one of the least preferable scenarios you can find yourself in the middle of and they can take significant time and resources to resolve.

Family disputes involving Trusts present their own specific problems. There is a number of reasons why family disputes can affect Trustees such as, when assets held in Trust are being disputed on the death of the Settlor by beneficiaries who believe that they have been unfairly excluded from benefit in favour of another family member.

Upon establishment of a Trust it is important that during the initial discussions with the potential Trustee the Settlor’s intentions are correctly translated to the Trust document.

These discussions should include who is to benefit, to what extent, under what circumstances and any restrictions or conditions that could potentially be applied to any distribution. The same applies to the investment strategy and the Settlor may see the appointment of a protector as favourable. Occupying a consenting role, the power granted to the protector could

involve the approval of distributions over a certain threshold. This may be beneficial in a scenario of a Trust established to restrict distributions to beneficiaries who are notorious spendthrifts, thereby alleviating accusations of mismanagement of Trust assets by the aggrieved beneficiary.

It is absolutely key to ensure that Trust records are comprehensive and Trustee decisions are documented accurately and precisely. As a rule, it is not normal practice to release such documents to a beneficiary. However should the Trustees see themselves undergoing litigation, they

James Watchorn Louvre Trust (Guernsey) Limited You might be surprised to hear that families don’t

always get on – siblings fall out, family feuds, accusations being made.

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may be requested to produce particular documentation including but not limited to minutes and file notes from Trustee meetings. Looking at recent Trust cases, the letter of wishes which, in recent years may not have been deemed part of the Trust documentation is now being considered a discoverable document.

The Trust business in general has the potential to be high risk if the proper checks and controls are not in place.

There is of course the issue of reputational risk to both the Trustees, whether corporate or individual and in high profile cases, a risk to the jurisdiction in which the Trustee

is situated. Cases which present a potential risk require specialist management and a careful hand, to ensure that the firm in question is not the headline story on the “News at Ten”.

Mediation and other alternative dispute resolution (ADR) methods can be put to good use in mitigating such risks. A pragmatic approach to such situations can be more effective in achieving a resolution. What do the beneficiaries seek to achieve from the dispute; is their motivation purely financial? ADR removes the traditional “winner” and “loser” distinction and moves more to a “win win” result.

At the same time legal costs are reduced, a big plus where the Trust assets are of a modest value and the beneficiaries are fighting a point of principle, which quite often is held in higher esteem than financial gain. All of the above issues require careful management by the Trustees. Any potential problems should be anticipated in advance and if seen necessary by the Trustees, specialist advice should be sought.

Good practice dictates that proper legal and strategic advice should be obtained from an independent specialist.

You can choose your friends...

I don’t claim to be a social media strategy expert. On a personal level I use Facebook sporadically, taking on a bit of a voyeuristic role watching what other people get up to rather than embracing the whole idea of updating the world on my favourite football team.

However no one can play King Canute against the tidal wave of digital communications we now face on a daily basis and for the corporate world this creates both issues and benefits probably in equal measure.

Networking has always been a favoured way of developing contacts, generating potential new business leads and generally building your company’s visibility. Now this arguably more “traditional” marketing tool has a massive digital dimension through social networking sites and communication channels.

The advantages are unquestionable - seemingly limitless access to vast numbers of potential clients for relatively low cost. Certainly more and more businesses are acknowledging that social media can constitute a valuable facet of their marketing communications. But to use it to its full advantage is usually too much for one individual so a natural progression is to open up participation to a broader employee base and therein lays the potential but not insurmountable risk.

Blogs, tweets, posts, forums (I think I even heard of vlogging the other day?) - your staff will already be participating and the issue is the blurring between personal and professional use. Whether or not you encourage or even require staff to employ social media to

assist with HR, marketing, sales etc., it is essential to have a clear and relevant policy in place that is fully understood by your team. This is particularly important in our sector where regulations around data security are increasingly tight.

According to research by the Advisory, Conciliation and Arbitration Service,one in 10 UK businesses doesn’t have a social media policy despite six out of 10 employees logging on at work every day. If this is your company you need to ask

yourself whether you know what your staff are saying about colleagues, about the company; are they posting on behalf of your organisation? If so, are they working within guidelines you have set?Another policy to write? Well it’s not that tricky and there is lots of help out there with companies willing to share how they have tackled this. But to get you going here is a short checklist I found – courtesy of inbound marketing specialist Kieran Flanagan.

1. Decide what the policy covers (and what it doesn’t) Clarity is key.

Employees need to know where they stand before they post or tweet anything. While you cannot cater for every eventuality, you can provide broad parameters about what is covered.

For example, you may decide thatemployees can comment on products but not on financial results.

2. Be clear on approvals

Some types of information are more sensitive than others. It is therefore a good idea to be clear about what types

of posts and comments will require approval prior to publishing. The obvious example is commentary relating to financial performance.

3. Be realistic and fair

There is something about creating a policy document that can make people go to extremes. Where policies fail it is generally because they attempt to regulate every aspect of employees’ online activ-ity. This in turn becomes both unworkable and demoralising. It’s important to strike the right balance between what’s fixed and what’s flexible.

4. Think about having different levels of policy

Not everyone will use social media in the same way. So why should everyone have the same policy? Certainly, there should be a relatively simple baseline that applies to all employees. But beyond this you may need to create separate policies for specific employees – e.g. those who comment officially on behalf of the company, customer service personnel, company executives etc.

5. Encourage disclaimers on personal communications

Where there is potential for individuals’ comments to be seen as coming from the company, it can be prudent to encourage the use of a disclaimer. This can be as simple as “The opinions expressed here are my personal thoughts and do not necessarily reflect those of my employer.” Likewise, however, if you have a corporate page or Twitter account, these shouldn’t be used for personal communications.

6. Employees should be transparent

Whenever an employee comments in relation to their company, its products, its services (or its competitors for that matter), they should always be clear about who they are. Companies regularly get into trouble when it’s discovered that employees are talking a product up or down while hiding behind anonymity. Social media is based to a large extent on trust!

I know that I regularly talk about policies and procedures, but it’s all part of a business’s corporate governance and so I make no apology for it.

Oh by the way I hate football.

Darren WadleyCorporate Risk Solutions Limited

Whether or not you encourage or even

require staff to employ social media to assist with HR, marketing, sales etc.,

it is essential to have a clear and relevant policy

in place that is fully understood by your team.

This is parcularly important in our sector.

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Is your social media strategy in the

Premier League?

According to recent research 92% of IT companies in the US increased their datacentre footprint in 2012– this can be largely attributed to the expansion of cloud adoption according to the survey.

In the UK, forecasts suggest that investment in datacentres will continue in 2013, stimulated by a combination of both new development and also refurbishment and upgrading of existing facilities. Estimates suggest that UK based datacentres fill a total of 7.59 million square metres with power consumption levels enough to run around six million homes!

Businesses have been under considerable pressure since the beginning of the economic turmoil in 2008. Freezing or reduction of headcount, decrease in

budgets, squeezing of profit margins have all been regular topics of conversation in the boardroom. Alongside this has been the increased regulation in many sectors – most notably in our own Financial Services sector – and therefore the growing importance for businesses to ensure that data is secure, that BC is in place so that risk is mitigated. Demand on IT departments to deliver improved efficiencies and increased productivity through improved use of technological solutions is a further contributory factor. Cue – growth of outsourced datacentre storage and hosting services.

Market driversThe large number of benefits a company can derive from moving part of its infrastructure to a datacentre facility offering state-of-the-art cooling systems and specialist security is unquestioned.

One of the more immediate effects is the savings to be realised for the IT department derived from improved operational efficiencies, as well as the re-deployment of key management time into other higher priority projects.

Data growth is recognised as one of the big challenges for IT departments. The employment of datacentres in this area is key. Data storage will continue to be a growing issue for companies – no matter what size they are – into the foreseeable future. Some estimates suggest that data storage is increasing at a rate of around 78% a year. With these types of figures, clients need secure and scalable solutions. Data has almost become a currency in its own right.

There is much debate in the public arena about the impact new technologies will

Building data centres has been a growth industry over the past few years as organisations seek to host their data and web services in a secure robust and risk-free environment.

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Are they part of your business plan?

DataCentres

have on datacentres in terms of their physical footprint. Virtualisation, enhanced server technologies and faster processing will reduce the physical space required to support the required computing power. Alongside this is the well documented rise in demand for and provision of Cloud computing, as businesses change the way they purchase and consume IT services. IT services will become more of a utility – the IT equivalent of ‘pay as you go’. Therefore, we would be forgiven for expecting a downward turn in the market.

But according to IMS Research (the leading independent provider of market research) this is not the case.

IMS maintains that the global market grew by 7% in 2011. And this figure is significantly more in the US market where the deployment of virtualisation technology

is even more commonplace.

So why? Commentators provide a number of explanations for these seemingly contradictory trends.

First ongoing computing demands seem to outstrip server consolidation. An IT department may successfully reduce the number of company servers by 60% but businesses are continuing to place new demands on capacity for the new applications they now require.

Secondly, the rapid pace with which server technology is evolving has led to much higher turnover of hardware in datacentres. Refurbishments and equipment replacement is now carried out on a more frequent basis – a situation no doubt exacerbated by pressure on the industry

to decrease energy consumption which to a limited extent can be achieved via more energy efficient servers. Emerging markets – particularly BRIC countries – are also creating increased demand.

Itex Itex operates from two geographically separate datacentres in Guernsey, offering a broad range of services to the offshore financial services sector. We are seeing continued demand for datacentre facilities in Guernsey which has encouraged us to extend our capacity by 50% with plans for further growth in 2013.

Richard ParkerItex (Guernsey) Limited

Meet the CRS team

Darren’s experience spans a wide spectrum of the financial services industry having held senior positions within both the insurance and fiduciary sectors. A skilled compliance and regulatory professional, Darren’s client base comprises predominantly of captive insurance, fund administration, investment management and fiduciary businesses.

Darren holds a number of qualifications in his field, including the International Diploma in Compliance and the International Diploma in Anti-Money Laundering.

Marc joined CRS from one of Guernsey’s largest private banks, where he was involved with overseeing new client take-on. With extensive experience in undertaking risk assessments on new and existing clients and client entities, Marc brings invaluable analytical skills to the CRS team.

Marc also assists Darren in the day-to-day management of the company and in the strategic planning of future company development.

Prior to joining CRS, Tina spent 10 years working for the Guernsey Branch of one of Europe’s largest captive insurance managers where she was responsible for the administration of one of the Company’s largest clients. Tina also supported the compliance team in new business take-on, drafting compliance reports and on-going monitoring.

Tina has a wide range of responsibilities including the role of personal assistant to Darren, general office management, human resources and company accounts management.

Darren WadleyFounder and Managing Director

Our philosophy is to build relationships with our clients to ensure that we have a clear understanding of their business needs, strategy and model. In this highly competitive world a “one solution fits all” approach is not enough – a carefully honed service offering, created around individual requirements, is the CRS way.

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Marc Guille Head of Operations

Tina Allen Manager

This publication is produced by Corporate Risk Solutions Limited (CRS). Editorial contributions made by third parties do not necessarily reflect the views of CRS Directors or staff but are merely re-produced for the publication. Any comments or queries should be directed to review@risk.gg