Sultan of Brunei Sees Offshore Banking as Successor to Oil
2002-09-26 21:13 (New York)
(Published in the October issue of Bloomberg Markets.)
Bandar Seri Begawan, Brunei, Sept. 27 (Bloomberg) -- On a
sultry Monday this past July, the monarch of the tiny, oil-rich
country of Brunei threw himself a party.
Sultan Hassanal Bolkiah -- 29th head of a royal dynasty that
dates back 600 years and by many counts one of the world's richest
men -- was turning 56.
In celebration, the sultan, his two wives and more than 4,000
guests assembled in the two gilded banquet halls of the monarch's
1,788-room palace on the island of Borneo, in the South China Sea.
To the strains of a 20-piece orchestra, partygoers dined on
seafood bisque with lobster ravioli, ostrich curry and camel meat
in a spicy rendang sauce. Near midnight, fireworks lit up the
jungle.
Amid such splendor, the sultan is facing a painful truth:
Brunei Darussalam -- the Abode of Peace -- needs cash.
The trouble started in 1997, when falling oil prices and
Asia's economic collapse battered Brunei's economy, which depends
almost entirely on the exportation of oil and natural gas. That
same year, a company run by one of the sultan's brothers, Prince
Jefri, collapsed under the weight of $3.5 billion of debt.
`Warning Signals'
Alarmed, the sultan asked another brother, Prince Mohamed, to
assess his kingdom's economic prospects. The findings stood in
sharp relief to the royal trappings on display in July: ``Although
Brunei Darussalam still has the appearance of great affluence,
there are warning signals of fundamental economic problems which
threaten to undermine the prosperity and, with it, the social
stability of the people,'' Mohamed's committee concluded in 1999.
By 2001, Brunei's per capita gross domestic product had
fallen to $12,600, down 44 percent from $22,600 in 1981. That
year, the sultan sued Jefri in Brunei's High Court, saying his
brother had misappropriated $15 billion earmarked for investment
overseas. The royal brothers eventually settled out of court, and
Jefri promised to return the money.
The sultan -- who's not only Brunei's monarch but also its
prime minister, finance minister and defense minister -- now
realizes that his kingdom's natural wealth won't be enough to
ensure prosperity forever, says John Perry, chief executive
officer of the government's Economic Development Board. While the
monarch's 345,000 subjects still pay no taxes and still enjoy free
medical care and education, Perry says, the sultan wants to reduce
Brunei's dependence on oil and gas, which account for 94 percent
of exports.
Going Offshore
The sultan's unlikely plan is to transform Brunei, a country
roughly the size of Delaware, into an offshore financial center
akin to Bermuda or the Cayman Islands.
In the finance industry, offshore refers to legal
jurisdiction rather than geography. People typically invest
through such centers -- otherwise known as tax havens -- to avoid
taxes in their home country or to ensure banking secrecy.
According to Standard & Poor's, investors have poured more than
$1.7 trillion into investment funds operating in just 10 of the
world's 65 tax havens. In order of assets, those centers are
Luxembourg, Ireland, the Cayman Islands, Bermuda, the Netherlands
Antilles, Guernsey, the British Virgin Islands, Jersey, the
Netherlands and the Isle of Man.
Brunei is starting from scratch. It has neither a domestic
stock exchange nor a bond market. Not one of its companies is
publicly traded anywhere in the world, including its largest-
Brunei Shell Petroleum, a 50-50 joint venture between the
government and Royal Dutch/Shell Group. The kingdom has no central
bank; it pegs its currency, the Brunei dollar, at 1:1 to the
Singapore dollar.
Dwarfed by Rivals
Three domestic banks and seven foreign banks operate in
Brunei. Together, their assets in the country total $6.6 billion
-- a third of the assets of First Tennessee National Corp., the
smallest member of the Standard & Poor's Banks Index. While 40 of
the world's 50 largest banks are registered in the Caymans, just
two of them -- Citigroup Inc. and HSBC Holdings Plc -- currently
do business in Brunei. While Luxembourg is home to 7,818
investment funds with a combined $1.34 trillion in assets,
according to S&P, Brunei has a branch office of one fund that has
$1.5 billion in assets. One rival offshore center -- Labuan,
Malaysia -- lies just 30 miles away across Brunei Bay.
``Does the world need another tax haven?'' asks Chong Yoon
Chou, who helps manage $4.5 billion in assets at Aberdeen Asset
Management Ltd. in Singapore. ``The answer to that is probably
no.''
Royal Riches
The sultan is unbowed -- and he has billions of dollars to
spend. Today, the monarch is probably worth $30 billion, says Marc
Faber, whose Hong Kong firm, Marc Faber Ltd., manages $150
million. Outside Brunei, the royal family owns six grand hotels:
the Hotel Bel-Air and the Beverly Hills, in Los Angeles; the
Dorchester, in London; the New York Palace, in New York; and the
Plaza Athene and the Meurice in Paris.
The monarch has moved quickly. In January 2000, he hired
Robert Miller, a lawyer with experience in Bermuda, to lay the
legal groundwork for his Brunei International Finance Center. As
head of supervision, Miller, 62, has drafted laws aimed at
ensuring Brunei complies with international laws against money
laundering and tax evasion. The sultan, who rules without a
legislature, has imposed those laws by royal fiat.
Brunei awarded its first offshore banking license to Royal
Bank of Canada. The so-called restricted license allows Toronto-
based Royal Bank to accept deposits only from people living
outside the country and to provide those people with investment
services such as money management; the license doesn't let RBC do
investment banking. The Canadian bank opened its Brunei branch on
Aug. 2.
`To Make Money'
``We aren't just doing this for goodwill,'' says Trevor
Wynn, managing director of global private banking in Asia at Royal
Bank of Canada in Singapore. ``We are doing this to make money.''
The International Brunei Exchange, meantime, is scheduled to
go into operation in October. Yong Boon Chung -- chief executive
of Nesdex Ltd., the Singapore Internet company the sultan has
hired to set up and run the electronic bourse -- says the initial
plan is for people to trade futures contracts on individual U.S.
and Asian stocks, such as shares of Microsoft Corp. and Taiwan
Semiconductor Manufacturing Co. By 2004, investors will be able to
trade through IBX the shares of companies listed on various Asian
exchanges, the executive says.
Stock exchanges in established Asian financial centers such
as Hong Kong and Singapore are hardly trembling at the prospect of
the new rival.
``We welcome competition,'' says C.K. Chan, a spokesman for
the Hong Kong Securities and Futures Commission.
Asia's Millionaires
Miller says Brunei will target the growing number of rich
people in Asia. In 2001, the combined wealth of Asia's
millionaires rose 7 percent to $5.1 trillion, according to figures
compiled by Merrill Lynch & Co. and Cap Gemini Ernst & Young.
Asia's millionaires now control 20 percent of the assets of
wealthy individuals worldwide.
As a Muslim country, Brunei may also be able to lure business
with investment products that adhere to what many Muslims regard
as Islam's ban on paying and receiving interest, Miller says. To
comply with this view of Islam, banks typically incorporate fees
into transactions to replace interest costs. In an Islamic banking
technique called murabaha, for example, a bank buys goods and
sells them to a customer at a markup. The bank then defers the
customer's payment until a future date, thereby avoiding interest
payment.
Worldwide, financial institutions manage $225 billion in
assets in accordance with this teaching of Islam, according to
HSBC. Those assets are growing at an annual rate of 15 percent.
``Brunei gives our clients another option,'' says Royal
Bank's Wynn. ``If you are Muslim, you may feel more comfortable in
Brunei. And if you live in Asia, the Cayman Islands or Isle of Man
may seem a long way away.''
Islamic Finance
Emerging Markets Partnership (Bahrain) EC, a Washington-
based money management firm with assets of $5.7 billion, has
opened a regional office in Brunei in part because of the
country's commitment to Islamic finance, says EMP chairman and CEO
Mumtaz Khan. The firm, founded by Donald Roth, a former European
chairman of Merrill Lynch, manages $1.5 billion for the Islamic
Development Bank, based in Saudi Arabia. The IDB, with 53 member
countries, was established in 1973 to foster economic development
in the Islamic world.
``We found a convenient location, a stable political
environment, a stable currency and very strong commitment to
Islamic finance,'' Khan says of Brunei.
In Brunei's own backyard, Malaysia has made the first move.
Prime Minister Mahathir Mohamad established Labuan in 1990 as a
tax haven specializing in Islamic finance. Lately, banks haven't
profited from their business there. The 49 banks registered in
Labuan lost a combined $153 million in 2001, according to the
Labuan Offshore Financial Services Authority, which administers
the tax haven. To strengthen its foothold in Islamic finance, the
Malaysian government issued $600 million of bonds through HSBC's
Labuan office last year.
Prince's Playground
In Brunei's capital, Bandar Seri Begawan, the gold-domed
Omar Ali Saifuddien mosque is a constant reminder of this
kingdom's Islamic traditions. Twenty kilometers (12 miles) west,
in the royal playground of Jerudong, stand monuments to the
billions of dollars spent by the sultan's brother Jefri.
Before Jefri's company, Amedeo Development Corp., collapsed
in 1997, the prince built a royal polo ground in Jerudong complete
with air-conditioned stables for 2,000 ponies, and the giant
Playground amusement park, with an array of rides. Jefri erected
the Empire Hotel and Country Club, which boasts a golf course
designed by Jack Nicklaus. The resort cost $800 million, says its
architect, Peter Burke. Jefri also built a $150 million marina to
house his 50-meter (164-foot) yacht, Tits. The yacht had two
tenders: Nipple 1 and Nipple 2.
During this time, Jefri was chairman of the Brunei
Investment Agency, which invests the kingdom's oil wealth
overseas. After the collapse of Amedeo Development, which Jefri
had named after Amedeo Modigliani, an Italian painter and sculptor
who was a contemporary of Pablo Picasso, the sultan dismissed his
brother as head of the BIA.
In February 2001, the sultan sued Jefri, demanding that he
return $15 billion he'd taken from the BIA. The following month,
Chief Justice Denys Roberts said Jefri, who has four wives and 17
children, had spent $2.7 billion on planes, cars and jewelry. The
brothers eventually settled the case, with Jefri agreeing to pay
back the money he'd taken from the BIA.
Meantime, Amedeo, which owed its non-royal creditors $550
million, offered to settle claims for 17 cents on the dollar.
Marble Jacuzzis
Amedeo's liquidators later auctioned off possessions that
had furnished Jefri's palaces and guest houses, including marble
Jacuzzis, gold-plated toilet brush holders and an Airbus A340
cockpit simulator. The August 2001 auction raised just $6 million,
says Allan Widdows, who was approved as Amedeo's liquidator by
Brunei's High Court.
Widdows says the international publicity that the auction
generated prompted the sultan and Jefri's advisers to offer
creditors more favorable terms. Hyundai Engineering & Construction
Co., for example, received $21 million of a $54 million claim,
says Ho-Yung Kim, executive vice president of overseas sales at
the South Korean company. Jefri had contracted Hyundai to build
the marina for his yacht.
``The auction was a catalyst,'' Widdows says. ``Both sides
realized that this was not sending the right message to foreign
investors.''
Businesspeople in Brunei, eager for foreign investment, say
the nation has put the Jefri scandal behind it.
``That's old history,'' says Perry, whom the sultan
appointed in July as chief executive of the government's Economic
Development Board. Perry had previously been managing director of
TotalFinaElf SA's Brunei operations.
Says Brunei businessman Timothy Ong, ``To anyone thinking of
investing in Southeast Asia, Brunei deserves a second look.'' The
challenge for the sultan is to get investors to take a first one.
--William Mellor in the Hong Kong newsroom, 852 2977-6642, or
wmellor@bloomberg.net Editors: Gillen, *McCabe |
