No entrepreneur is an island these days
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Founding Island Records was easy enough for Chris Blackwell. Growing up in Jamaica, he loved reggae music and wished a wider audience knew the artists. So in 1962, he took a break from teaching water skiing and set up a record label that would go on to release music by some of the most influential bands of the next 30 years. He started with Jimmy Cliff and Bob Marley, two reggae greats, and by the 1980s he had signed U2 and helped to release the multiplatinum album The Joshua Tree.
Throughout this wild ride, he rarely thought about his finances or the value of the company he was building. “There was nothing I wanted to do than what I was doing,” says Blackwell, 69. “I was never thinking, I wish I could be hanging out in the south of France.”
From the start he was operating in at least three countries but was not concerned about tax or estate issues, one of the big worries of today’s global entrepreneurs. “[Island Records] was perfect in its tax structure,” he says. “It was organic. It started in Jamaica and the creative side was there. The fiscal side was in the Bahamas, with the operational side in the US and UK.”
Then 17 years ago he sold the company and his financial situation changed. A British citizen, Blackwell is still involved in the music business and is expanding his music publishing business. But he has also become interested in real estate. For a time he owned some of the top hotels in Miami’s South Beach and he is developing Golden Eye, a resort on the Jamaica estate of Ian Fleming, creator of James Bond.
With an increasingly complex web of business interests in various tax locales, Blackwell realised that he needed centralised advice. “Before, you’d get someone in America and you’d get on with him but you’d meet someone in England and you couldn’t connect,” he says.
Over the past six years, Blackwell has centralised his financial arrangements as a client of HSBC’s private bank. “In this situation, it is not the case. It is very much you meet somebody and you have a connection with them that is can spread across the Atlantic.”
Blackwell is the type of client HSBC is looking to target and has been making an effort to woo. Credit Suisse wants to do the same. It is turning its cloistered image into a platform to sell global advice just as HSBC is trading on its international roots, having been founded in Hong Kong 150 years ago.
The globally rich have very different needs from those of a wealthy man who has sold his business in Ohio and wants to retire to Florida. “There are general themes that apply on a cross-border, global basis,” says Gerard Aquilina, chief executive for the Americas at HSBC’s private bank. “Clients need good tax planning and advice. It applies equally to an American as well as someone in Asia.”
“The first question is, can we help them?” he adds. “We certainly don’t want to represent ourselves in areas where we don’t have capabilities. The idea is to be very specialised, not try to be all things to all people.”
Credit Suisse is focused on the international market for growth. “That is where we can make a huge difference,” says Walter Berchtold, the Zurich-based chief executive of private banking. “We cannot be the biggest. We need to focus on this value proposition.”
With more entrepreneurs producing goods in one set of countries and selling them in others, clients want strategic advice that takes the form of honest brokering in markets they do not know themselves. “We can put them in touch with people on the ground,” says Anthony DeChellis, head of private banking for the Americas at Credit Suisse. “It is tapping into our network to hand our contacts to these people.”
This was the case with George Altirs, a Lebanese-born US citizen, who in 1990 founded Capelli New York, a manufacturer of ladies’ clothing and accessories. The company’s sales picked up through the last 10 years – they now total $200m a year – and Altirs decided he needed to have companies in the producing nations as well.
When this meant opening an office in Hong Kong, he went to his HSBC banker who made introductions to several local lawyers, real estate brokers and accountants. Altirs still had to select from the names he was given but his banker’s vetting sped up the process, he says. In another instance, his bank matched him with another of its clients in Shanghai, who produced textiles he needed.
“This is good in a country where you don’t have a lot of knowledge,” Altirs says. “From a one-week trip to China it is hard to determine if this is a reputable fabric mill. If they recommend someone who is reputable it makes it easier.”
A Kenyan-born investor who asked not to be identified had a similar situation. Although he was culturally Indian, his family’s business interests – which range from oil to flowers – had always been in Africa. Yet as that continent’s political instability weighed more heavily on him, he enlisted the help of his private bankers in starting a low-cost airline in India.
“They guided us about the pitfalls of going into a new country,” he says. “They made sure we didn’t make mistakes. They weren’t willing to take on the lending risk for [the airline] but they directed us to someone who did.”
Below this level of strategic advice is basic financial planning, which is as applicable to the multinational entrepreneur as to the globetrotting executive. From a personal wealth standpoint, the primary concern of someone living and earning money in various countries was and is tax. How much is he going to have to pay and to whom, and what happens to what is left when he dies? But since the September 11 2001 terror attacks, the US has increased its reporting requirements for foreign nationals, complicating an already complex process.
For a foreign national coming to work in the US, income tax is almost unavoidable. “Upon establishment of US residency the foreign national’s worldwide investment income will be subject to US federal and state income tax,” says James Cassidy, senior tax manager at Rothstein Kass in New York.
The bigger question is always estate planning. A non-citizen could lose almost half his estate if he were to die in the US without pre-planning. One way to avoid this is to maintain a primary residence outside the US. This falls under the so-called 120-day rule: as long as you do not spend more than that amount of time in the US each year you will not be considered a US resident.
Whether it is strategic advice or financial planning, the consequences for someone who makes a mistake can be costly.
A person who did not sell the stocks in his portfolio before moving to the US could face steep capital gains taxes if he sells them after he arrives. Had he sold the stocks before emigrating, even if he bought them back, he would have received a step-up in basis for tax purposes.
Once you are in the US income tax system, extricating yourself from it can prove difficult. And, more costly, if you have been living in the US for a significant amount of time and you leave, you could still be subject to US estate tax. “You can’t give up your green card and think, the party’s over!” Cassidy says.
There are also limits to what a private bank will do, even for its top entrepreneurial clients. Credit Suisse’s Berchtold gave a typical example. An Asian or a Russian client – groups that often look to bank outside of their home countries – is running a company and wants to monetise a portion of it, which a bank can do. Then the client wants to invest the proceeds in London and a bank can give him a line of credit and advise on private equity options. If he wants to borrow money for a private jet or a yacht, a bank can facilitate this.
However, this is where the bank tries to get more of his assets to manage. “We will only finance it up to the amount he has with us,” says Berchtold. “If he wants a $100m yacht, he needs to have $200m with us.”
But mostly bankers try to be as accommodating as possible. “They’re very interesting clients,” he says. “You do everything for them.”