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Middle EastAugust 1 2004

Going offshore without baggage

Brunei’s relatively new status as an offshore financial centre has enabled officials to pass quickly the necessary legislation to make it a world-class location. Simon Montlake reports on the country’s attractions for foreign banks. Brunei is among the newest entrants to the competitive field of offshore financial services. In the last four years, it has introduced legislative and regulatory reforms to position the oil-rich sultanate as an attractive tax-free jurisdiction for international banks and other financial companies.
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Officials at the Brunei International Financial Center (BIFC), an institution housed in the gleaming tower block of the Ministry of Finance, say they are confident of attracting more clients in the coming years.

They intend to leverage on Brunei’s role as on offshore centre for financial services in east Asia where banks can operate in the same time zone as both their head offices and their customer base.

Latest arrivals

It’s a strategy that’s beginning to pay off. The latest to arrive is Hong Kong’s Sun Kung Hai International Bank, which set up its operations earlier this year. With its extensive asset base in Hong Kong, particularly in property, and an established track record there, Sun Kung Hai was keen to find a secure tax-free location within easy reach. It became the third bank to receive a licence to provide offshore services in Brunei, joining HSBC and Royal Bank of Canada.

“Time zone is definitely important,” says Robert Miller, head of supervision at the BIFC. “Getting up at 3am to speak to a lawyer in London is all right, but it’s not what you would call convenient.”

High standards

However, Brunei’s pitch for international banks has coincided with heightened awareness around the world of the system’s vulnerability to criminal and terrorist activity. On the surface, it might seem that the last few years have been a difficult time to enter the offshore market, but BIFC officials say they have turned it to their advantage by quickly introducing legislation that meets international benchmarks.

“We started at a time when the standard expected was very high. As we are a new [offshore banking] jurisdiction, we don’t have any of the old baggage. We know what standards people expect and what they’re looking for,” explains Yusuf Haji Mohamed Abun, senior supervisor at the BIFC.

Local bankers agree that Brunei has passed anti-money laundering laws that are backed by a solid commitment to root out any possible wrongdoing. By setting a high standard, the country’s regulators have received acknowledgement from global watchdogs that are demanding far more transparency than in the past when it comes to offshore financial services. The BIFC also points to an independent judiciary that is adept at handling international legal issues – another factor in its favour when courting foreign banks.

Islamic finance

One market segment that Brunei is anxious to develop is banking products for the fast-growing international Islamic financial sector.

Its conservative Muslim traditions give the BIFC an incentive to offer offshore service to banks in the Middle East that want to diversify and shift their operations.

Until now, it’s an opportunity that hasn’t translated into a solid commitment, though officials say they see a huge international demand for Islamic banking that Brunei is well placed to capture, given its own domestic financial orientation. An estimated 30% of bank deposits in the country are in Islamic instruments based on Shariah-approved methods.

There are four types of offshore licences for banks in Brunei, ranging from full service operations to international investment banking and Islamic banking; all fall under the aegis of the BIFC. However, perhaps the biggest surge of interest has been from other financial institutions. Asked to place Brunei in the global scene of financial centres, officials draw comparisons to the dynamic hubs of east Asia and the Middle East. “A modest version of Singapore with a dash of Bahrain,” offers Mr Miller. Or put in another way, the aspiration is to be global, even if the current profile is regional.

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