Taking the family to a next level…
Family Offices are a structure used by wealthy individuals as a vehicle for wealth preservation, succession planning, reducing family dispute and ensuring smooth management of family affairs.
The emergence of Family Offices in Mauritius is far from being a recent innovative practice in the financial services sector. In 2016, the Financial Services Commission (“FSC”) launched the Family Office (Single) Licence (“SFO”) – which provides for the day-to day management of financial affairs of a single family and the Family Office (Multiple) Licence (“MFO”) – which allows for the daily management of financial affairs of multiple families.
It is of interest to highlight that family members can also apply for work and obtaining residence permits in Mauritius through the acquisition of immovable assets. Furthermore, Family Offices in Mauritius enjoy a 5-year tax holiday based on substance criteria such as minimum employment and expenditure requirements.
Updates in Family Office Rules
On 6th March 2021, The Financial Services Commission (“FSC”) issued the Financial Services (family office) (Amendment) Rules 2021 to guide families in the operation of Family Offices and strengthen the framework around their AML/CFT regime in line with the updates to the wider AML /CFT framework of the jurisdiction.
Prior to considering the changes brought forward by the Financial Services (family office) (Amendment) Rules 2021, the paragraph below provides an overview of the existing rules governing the management of Family Offices in Mauritius.
Core features of the Family Office Rules 2020 in Mauritius
The Family Office (Rules) 2020 states that the Family Office may be wholly-owned by family clients and exclusively controlled by family members/entities.
Section 3(3) stipulates the application for a Family Office Licence (SFO and MFO) must be made by a person with appropriate experience in the field of wealth management, private banking, investment management (and/or any relevant field as deemed appropriate by the FSC).
Section 4(2) states that – A Family office cannot have clients other than “family clients”. Schedule 1 of The Family Office (Rules) 2020 defines family as “ persons who are connected to individuals within the entity”.
They include – spouse; descendants of the individual and their spouses; parents, including step-parents; grandparents; parents-in-law, including step parents-in-law; brother, step-brother, sister, step-sister and their spouses; spouse’s grandparents; spouse’s brother, step-brother, sister, step-sister and their spouses; spouse’s grandparents, spouse’s brother, step-brother, sister, step-sister, and their spouses and children, parent’s brother, step-brother, sister, step-sister and their spouses; children of the brother, step-brother, sister or step-sister of the individual’s parents, both present and future, including stepchildren, and their spouses; and children of the individual’s brother, step-brother, sister or step-sister, both present and future, including step-children, and their spouses.
For any relationship as outlined above that may be established by blood may also be established by adoption.
“Descendants of the individual” as mentioned above means the individual’s children, the children of that individual’s children, the children of those children, and so on.
According to section 5, the activities covered by family office include the following:
- administration and management of investments, assets and/or estate(s);
- administration and management of concierge services;
- management of accounting and reporting;
- administration and management of philanthropic services;
- providing training and development to the incoming generations;
- administration and management of disaster recovery planning;
- administration of risk management;
- provision of administrative support;
- ensuring compliance with domestic and international legislations;
- establishing family governance, wealth strategies, family board(s) including family charter(s);
- providing tax advisory and compliance services;
- advising on wealth planning and protection; and
- any other activities as may be approved by the Commission.
Further to the above, section 5(2) states that the value of the assets and/or the investments of each family under SFO and MFO management must be more than USD 5 million.
The requirement refers to the minimum asset base of the Family and not of assets to be managed by the MFO/SFO.
Each family office shall, at any cost, appoint a Money Laundering Reporting Officer(MLRO) and Deputy Money Laundering Reporting Officer(DMLRO) duly approved by the financial services commission(“FSC”) in line with section 7.
And a Family office (Single) shall, at all times maintain a fully paid minimum stated unimpaired capital of at least USD 35,000 while a Family office (Multiple) shall, at all times maintain a fully paid minimum stated unimpaired capital of at least USD 70,000 as per section 8.
Updates brought by the Financial Services (Family Office) (Amendment) Rules 2021
Rule 4(2) of The Financial Services (Family Office) Rules 2020 stated that
“the family office must have no clients other than family clients as defined under Schedule 1. The Family office whether it is a holder of a Family Office (Multiple) Licence (MFO) or a holder of a Family Office (Single) Licence may be wholly-owned by family clients or exclusively controlled by family members/ family entities”
has been replaced by Rule 3(2)(a) and Rule 3(2)(b) of The Financial Services (Family Office) (Amendment) Rules 2021 which now state that
“the family office must have no clients other than family clients as defined under Schedule 1 and for the purpose of this Rule and Schedule 1, family clients also extend to legal arrangements, companies, partnerships, foundations or other similar structures”.
The distinguishing feature between The Financial Services (Family Office) Rules 2020 and The Financial Services (Family Office) (Amendment) Rules 2021 is that the scope of “family clients” under Schedule 1 of The Family office rules 2020 were limited to individuals who are connected in relation to an individual within the family office while under The Financial Services (Family Office) (Amendment) Rules 2021, the definition of family clients also encompasses trust, companies.
This has the effect of updating the regime governing Family Offices in Mauritius as well as providing more flexibility with the diverse types of structures that are typically part of ring fencing of assets or structuring of investments over time.
From a compliance perspective what this also entails is that Family Offices now have the potential of becoming much more complex structures than previously. Licence holders must be able to demonstrate a tailor-made method of management that puts forward identification and proportionate prioritisation of risks, as well as good governance and accountability.
Risk Based Approach in action
It must be recalled that as FSC licence holders, single or multiple Family Offices are subject to anti-money laundering (AML) regulation. Risk Management and controls should be devised and implemented for Family Offices and the family they serve, with the ultimate aim of preserving the family’s wealth while meeting all regulatory consideration. The potential risk areas for Family Offices are include:
- Cyber Risk – The exposure to such type of risk can occur through the use of digital platform to conduct business. It may take the form of personal identity fraud or impersonation. The reputation of the family office, investment accounts and other business transactions are also subject to cyber risk with the use of technology.
- Fraud Risk – Fraud is an important risk factor. This is because there is close proximity between the family office and the assets (including financial assets). Moreso, the risk is enhanced when a single individual has control over the financial activities and act on behalf of the family members.
- Financial Risk – There may be exposure to Financial Risk through improper authorization of a particular transaction by a single individual who acts on behalf of other family members. Family Offices may thus attract financial sanctions in the event of breach of AML/CFT regulatory framework. Another key risk for Family Offices is around the limitation of liability. Different company structures have different approach to liability. For instance, if the entity is set up to operate as sole trader business, the shareholders may be exposed to unlimited liability in the event of default.
Risk Assessment and relevant factors
A risk assessment exercise is carried out by those in charge of Family Offices to identify, assess and understand the specific risks to which they are exposed. The relevant factors to be taken into account when carrying out the risk assessment exercise of Family Offices should include inter alia:
- the size of the office,
- level of experience of its personnel,
- the state of development of the office.
Irrespective of the Family Office size, it is imperative to have an effective risk management framework in place to meet regulatory requirements
Policies and controls
Once the risks have been identified, Family Offices must develop policies and procedures to mitigate risks identified. They include, inter alia, the following:
- Authorisation limits – This can be achieved by requesting for the signature of more than one authorised signatories prior to initiate any transaction.
- IT controls- This can be achieved through the use of passwords, more strict access to data and data encryption.
How can Temple Consulting assist you?
Temple Consulting Ltd (‘TCL’) established in 2007, has been assisting financial entities in meeting their regulatory and legal requirements through various compliance exercises, including application of the risk-based approach and support with regulatory inspections. If any of the issues mentioned in this article are of interest to your organization, get in touch! We are happy to assist.
Sources
- https://www.fscmauritius.org/media/3652/fiamla-updated-august-2020.pdf
- https://www.fscmauritius.org/media/99168/38_fs_family-office-amnd.pdf
For more information, please contact us on:
Tel: +230 210 3588
Recent Comments