The recent local currency turmoil in many emerging markets has led to renewed interest among wealthy families in socking away assets in another country. With longtime safe harbors like Cyprus hit by negative macroeconomic forces and increased regulatory scrutiny, the U.S. has become the destination of choice for many high-net-worth individuals from emerging markets.
There are many reasons for choosing the U.S. First, points out Tom Williams, managing director of investments at Aligned Independent Advisors in New York, a fee-based wealth management advisory affiliate of New York–based broker-dealer Aegis Capital, “the fundamentals are in place for the U.S. dollar to strengthen further in 2014.”
That sentiment is echoed by other money managers. “I think a lot of private money will pour [into the U.S.] during the coming years,” says Robert Savage, CEO and co-founder of CCTrack Solutions, a New York–based hedge fund firm launched in January that focuses in part on serving investors in developing economies who wish to manage currency exposures. “The last decade built tremendous wealth in the emerging markets, and many of these investors know that their governments are willing to throw their currency under the bus to keep order.” CCTrack Solutions is backed by Citic Capital Holdings, which in turn is backed by the sovereign wealth funds of China and Qatar.
For reasons other than the strong dollar, overseas investors want to allocate to U.S. funds because of America’s solid regulatory framework. “With a global perspective on asset management and a much more fully developed legal and administrative infrastructure, the ecosystem you have here in the U.S. for wealth management is much more developed than in other nations — even Europe,” says Ignacio Pakciarz. He is the CEO and founding partner of BigSur Partners, a Miami-based registered investment advisory firm established in 2007 that oversees close to $1 billion including its assets in Latin America, according to the company. Pakciarz and the firm’s other founding partner, COO Rafael Iribarren, who are from Uruguay and Argentina, respectively, managed relationships with wealthy Latin American families for international private banks before starting BigSur.
Even as investor interest among offshore wealthy families has been growing, so too has the red tape involved in managing their assets.
“It’s true that there has always been a natural desire for offshore investors to hold assets in the U.S. due to the regulatory transparency and the strong financial system, but it’s harder to do so today than in years past,” says Shama Zehra, CEO of Aligned Independent Advisors and head of investment strategy and family office services for Aegis Capital. She has 17 years of financial sector experience in the U.S. and her native Pakistan, including with the personal wealth management unit of the Pakistan branch of U.K.–headquartered Standard Chartered Bank. She notes that an issue of concern for some offshore investors is the U.S. government’s expansion of financial reporting rules. “In recent years the increased scrutiny of tax authorities and security agencies combating terror have made some investors in developing markets concerned that the U.S. is overly invasive,” she says.
Pakciarz agrees that the present regulatory environment may mean that those seeking to park assets in the U.S. may have to jump through more hoops, but he insists that overall the rules are easier to navigate than those of other jurisdictions popularly known as safe harbors. “It’s probably significantly harder to open a Swiss bank account from Brazil today than to open one from the U.S.,” he says.
The heightened push for tax reporting in the U.S. has worked its way into the regulatory framework of other jurisdictions. The U.S. Department of the Treasury presently has income tax treaties, protocols and tax information exchange agreements in force with 40 jurisdictions. Signatories include common offshore harbors, such as Bermuda and Jersey, as well as countries home to a large number of U.S. expatriates, like Canada. According to Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth Management in Calgary, which specializes in providing financial services to investors with taxable assets in both the U.S. and Canada, the two countries’ governments have been working together closely for years to share tax residency data. To streamline tax information exchange efforts, many countries that have signed on to U.S. tax treaties have in turn put in place their own rules that largely mirror those of the U.S., as is the case with Canada. “It’s an increasingly complicated process of dealing with property and passive income issues, and it is only going to become harder as more new regulations come into play,” says Ritchie.
For some families, the desire to hold assets abroad includes a desire for legal residency. A growing number of upper-class families in emerging-markets nations have been seeking investment-qualified immigration status that would allow their adult children to live and work in the U.S. Under the EB-5 Immigrant Investor Program of the U.S. Department of Homeland Security’s U.S. Citizenship and Immigration Services, foreign individuals can gain the legal right to reside and work in the U.S. if they invest $1 million (or a lesser amount in a high-unemployment area) in a business that will create at least ten new full-time positions for U.S. workers. A cottage industry has subsequently sprung up in which specialized advisers help families in developing economies that are newly wealthy — and thus may lack political clout — to secure employment for family members with U.S.-based multinationals while having the opportunity to keep assets out of reach of their home governments. The practice is not without controversy.
Such a practice can lead to abuse of the visa program. “It boils down to buying a green card,” says James Sheldon, CEO and co-founder of Cardinal Point in Toronto. “I don’t really have faith in the nature of qualifying investments in many of the cases that we have seen.” Cardinal Point occasionally works with investors seeking an EB-5 visa or the Canadian equivalent but, as Sheldon maintains, only in cases of legitimate cross-border entrepreneurs.
Ultimately, the ability of U.S. advisers to secure more offshore assets may lie in how they relate on a cultural level. “A lot of the emerging-markets wealth accumulated in recent years is entrepreneurial by nature,” observes CCTrack’s Savage. “Entrepreneurs still ‘get’ America and will be willing to hold assets there.”
