The expanding offshore universe and colliding moral galaxies

By Andrew De La Rosa, Barrister and Attorney-at-Law, London and Chicago

The offshore wealth management and legal services industries are always in some stage of transition, sometimes in synch and sometimes not. I am not sure whether the developments I am going to comment on fall into the category of harmonious parallel advancement or, perhaps more likely, the uneven stop-start or incremental process which has long characterised Anglo-American legal culture. What I am sure of is that some historic frontiers are being breached and re-defined. To illustrate this I will take as my theme three matters; two are obviously related but I will have to make good the case for connecting them to the third.

The past few years have seen a marked expansion in the presence of a number of leading offshore law firms outside their "home" jurisdiction or indeed geographical region. In part, this has come about by reason of mergers between firms established in different offshore financial centres, eg, the Channel Islands and Cayman. Other instances have involved the establishment of branch offices in London but more recently also much farther afield, in Hong Kong and Singapore. It is not difficult to see the basic commercial logic of these developments. Offshore firms wishing to expand existing trust or corporate business, or extend the range of their practices into specialised areas which certain jurisdictions effectively dominate (such as Cayman for mutual funds, or the Bahamas for insurance) need to be represented where the work and money is. The mechanics of these exercises have a particular professional interest for me; however, the point of mentioning them in the present context is to draw attention to where the new frontier is, or at least where one can have a shrewd idea it is emerging.

It may come as no surprise that the location I refer to has no shortage of sand and beaches, and that Western offshore bankers got there somewhat before their offshore legal counterparts. But the region in question presents a whole new array of challenges on a different scale of magnitude than those posed by expansion into jurisdictions which are essentially offshoots of the English common law tradition. It is that part of the Persian Gulf area which comprises six Gulf Co-operation Council ("GCC") Arab Islamic law states, Bahrain, the U.A.E., Kuwait, Saudi Arabia, Qatar and Oman.

At least one of these states (Bahrain) is currently in the process of preparing legislation to provide for what practitioners from common law jurisdictions would recognise as a form of trust of the offshore variety. This development is still at an early stage and what is being mooted strikes me as a curious fusion of Islamic law or Shari'a concepts with American trust drafting. In other GCC states (in particular Saudi Arabia and the U.A.E.) there has been a substantial growth in interest in sophisticated but Shari'a-compliant investment vehicles alongside more conventional financial arrangements.

The important point is that the post-September 11th repatriation of Arab capital from the US, coupled with economic growth within the region, has created a vast reservoir of funds looking so to speak for new channels of investment and wealth management, and regional interest in offshore vehicles has never been higher than at present. My firm belief, based on dealings with Middle Eastern clients over a number of years, is that to service the new regional demand for legal and wealth management expertise two things are essential: one is a sustained presence in the region itself and the other is knowledge of and respect for the religious heritage which forms such a large part of the basis of Gulf political and legal institutions.

In the past, Muslim Arab clients with large international financial interests have not consistently opted for Shari'a-compliant investments or wealth management structures. The point is perhaps graphically illustrated by some figures currently doing the rounds, inexact as they are. The total value of Shari'a -compliant investments by such clients is estimated to be between USD200 and 500 billion; non-compliant investments are estimated to total some USD1.2 trillion. But the Shari'a underpins the succession, family and other personal status laws of all of the Gulf jurisdictions, and even in the context of establishing offshore trust structures outside the Gulf, one increasingly finds that Muslim Arab clients are not satisfied with, eg, fairly standard forms of discretionary trust but wish to have structures which comply with Shari'a principles, or indeed the individual client's own idea of them.

Something like that last point may be familiar to readers who have had dealings with one or another of the Shari'a advisory boards which have emerged in response to the need of Western advisors for guidance on Shari'a law principles. Their answers may not be consistent or readily understandable to advisors used to working in the realms of Western legal principles.

This is one reflection of the most basic difference between Shari'a and Western legal ideas. The Shari'a is derived from Islamic religious beliefs; Islam is not merely a religion in the sense we use the word in the West but a complete code for living of which the legal principles are an inseparable part and, indeed, many of the principles governing succession (to which I will refer again below) are laid down in the Quran itself and taught as part of basic Islamic religious education.

That, however, is not to say that the Shari'a is a uniform, monolithic or immutable system of law; contrary to the impression one might gain from the periodic press reports of Shari'a sanctions for crimes, the very opposite is true. In many respects the Shari'a has become severely fragmented. Even within the majority (some 90%) Sunni branch of the world-wide Muslim community, there are no fewer than four main schools of jurisprudence, the Hanifi, Maliki, Shafii and Hanbali, each named for the scholar on whose writings it is based and each having its own distinctive character. The Hanbali school, eg, forms the basis of the Wahhabi beliefs that hold sway in Saudi Arabia and is particularly moralistic in its approach. The Maliki has a significant paternalistic element (eg, in placing restrictions on lifetime gifts by females not recognised by the other schools).

What is perhaps surprising, at least to a non-Muslim observer, is the extent to which ideas from one school may be borrowed by legislators or practitioners who adhere to another to fill in gaps in their own system of principles or to deal with novel issues. That by itself makes it rather difficult to predict how a Shari'a law issue not precisely and exactly covered by the Quran itself, the Sunna or record of the Prophet Mohammed¹s own acts and decisions, or the ancient learning of the schools will be answered. In other words, on difficult questions, the results may be up for grabs so to speak as opposed to being certain as a matter of orthodox religious belief.

At least when one comes to the area of family wealth dispositions there are several well-established principles common to the Sunni schools of thought. But to state some of them is itself to show the chasm between Shari'a and Western legal ideas which advisors have to attempt to bridge when framing Shari¹a-compliant trusts and wills. It also shows that while the Shari'a does not form a different moral universe it is something of a different moral galaxy which, in the context of the developments I have referred to, is destined to collide with our own.

The Shari'a recognises a concept called waqf which has some similarities to a trust. In Arabic, waqf literally means to prevent or restrain, the term signifying the permanent dedication of property to a pious purpose. From its origins as a form of charitable endowment, the waqf was recognised as a means for an individual permanently to devote property to the benefit of his descendants with an ultimate benefit for charitable purposes, the whole being regarded as dedication of property to God and therefore a proper religious object. But, consistent with the Shari'a principles governing wills that I describe below, a waqf may not be made to benefit a purpose (or person) disapproved under Shari'a.

Under the traditional Shari'a a waqf is perpetual, but legislation in some Arab Islamic states limits the duration of a family waqf to a fixed number of generations. There is no concept of split legal and beneficial ownership; the waqf constitutes a legal person represented by an administrator (the mutawali) who is merely a manager. The settlor must altogether divest himself of ownership of the assets and the dedication of the assets must be irrevocable, but the settlor may be the first administrator.

Given other Shari'a principles, it seems strange (again, at least to a non-Muslim observer) that a waqf may be used to avoid the strict application of the Shari'a succession rules and that, unlike those rules, the position of male and female beneficiaries, in default of a specific direction to the contrary, is one of equality. Those rules, which are part of what the Prophet Mohammed described as the greater part of the sum of learning, have in Sunni jurisprudence some basic features:
1 Testamentary freedom is limited to one-third of an estate if there is an heir or heirs entitled under the Shari¹a forced heirship rules; the balance of the estate passes under those rules.
2 Under the Shari'a forced heirship system, only Muslims are entitled as "heirs"; non-Muslims are altogether excluded and, indeed, in some Islamic law jurisdictions, a Muslim may not inherit from a non-Muslim.
3 There are three categories of heirs, the primary category being near relatives of the deceased (including women) who had no rights of inheritance under pre-Islamic Arabian tribal law.
4 In many circumstances where there are both male and female primary heirs, the share of a male is twice that of a female, this often being justified on the basis of the tradition that a male takes his share subject to the obligations to provide for the maintenance of the family. This basic rule has its most obvious impact in relation to the respective shares of husband and wife and son(s) and daughters(s). For example, under the Sunni rules, the husband will inherit half of his wife's estate if there is no child and one-quarter if there is; a wife's share is half of these.
5 In contrast to the strictures of the forced heirship rules, apart from the overriding principle mentioned below, there is nothing to prevent a Muslim testator from making a bequest of property (in Arabic a wassiyah) to a non-Muslim.
6 To be valid, a wassiyah must not offend against basic Islamic beliefs, as by being given for a purpose or object which is contrary to the Shari'a. A will in favour of a mistress is often instanced as an example of a breach of this prohibition.
7 Nor may a bequest be made in favour of a person entitled to take as an heir, although if there are other heirs they may effectively ratify the bequest in whole or in part.
8 Although a non-Muslim wife may not inherit from her husband under the forced heirship rules, provided that she is a Christian or a Jew, ie, one of the kitabia or "People of the Book", who believe in revealed scriptures, she may take under a will.

The last rule produces the curious result that it is theoretically possible for a Christian or Jewish wife to inherit one-third of her Muslim husband's estate, while a Muslim wife would be restricted to a quarter share (or one-eighth if the deceased left one or more children) under the forced heirship rules. For an illustration of the extreme consequences that can follow, see the Al-Bassam case, [2004] WTLR 757, C.A., a true collision of the kind I have mentioned.

Anyone who has tried to frame a Shari'a-compliant trust or will, where there are beneficiaries subject to US or UK capital taxation, will know what complications there are in trying to reconcile legal concepts and language that arise out of very different traditions.

That brings me to my third and final point. I fear that the language barrier between lawyers from the English, American and Islamic legal backgrounds is one of the most difficult aspects of this particular expansion of the offshore horizon. I am not confident that English and American trust lawyers speak the same language anymore, at least when it comes to tax issues, or that we will make ourselves clear when it comes to dealing with Shari'a law issues. It certainly will take practice; it would assist if there were more forums (such as STEP) for discussion. In any case, I am sure that all our skills at translation are about to be severely tested.

Offshore Investment - current issue - commentary (main)