The Best of Both Worlds - Featured Articles

“As a midshore IFC we hope to offer the best of both worlds”

In this interview, International Investment’s Pedro Gonçalves talks with Labuan IBFC CEO Farah Jaafar-Crossby about some of the unique solutions the financial centre offers, particularly in the world Islamic finance, how it is attracting fintech startups and how it is using its privileged location to act as a conduit for entrepreneurs and investors across Asia and beyond.

How does Labuan IBFC make use of its strategic location in the heart of Asia to tap into what is one the fastest growing regions in the world?
Being at the heart of Asia is ideal for an international business and financial centre such as Labuan IBFC, due to it being geographically close and within similar time zones with most Asian countries. It is also easily accessible through flights. The jurisdiction is further fuelled by robust business and tax policies, in a currency and tax neutral as well as proportionate regulatory environment.

Such advantages have given Labuan IBFC the edge in connecting Asia’s economies though the intermediation of trade, investment and asset intermediation. Hence it is not a surprise that Labuan IBFC is growing in prominence as a regional financial intermediation centre, as witnessed by market growths in 2018.

The growth experienced by the jurisdiction has been consistent and constant over the close to three decades it has been in existence, and in fact over the last couple of years we have seen a surge in interest in Labuan IBFC mainly due to the flight of quality precipitated by the changes in global tax rules and standards.

In a way, the fact that Labuan IBFC has retained and maintained its global gold standard in terms of international business companies, as well as the range and breath of corporate and wealth management solutions available in the Labuan “toolbox” has created a go to midshore financial centre in the centre of Asia.

Looking forward we are not resting on our laurels. The ethos running through the jurisdiction is clear: it is to facilitate inter/intra Asia’s financial, investment dealings. Our focus will always be on Asia. For businesses, investments and risk management entities looking for a currency and tax neutral, cost-efficient operating environment, coupled with a one stop regulator with an open mindset exercising proportionality in regulations – the answer is Labuan IBFC. We intend to grow with and facilitate the growth of Asia.
Labuan IBFC introduced the world’s first omnibus legislation governing all Shariah-compliant businesses in an IFC. Are your shariah-compliant offerings still spearheading in the region?
Overall, Malaysia has always played an important innovative role in Islamic financial services, boasting a comprehensive regulatory framework for Islamic banking, finance, Takaful and asset management.

In extension, to our knowledge, Labuan IBFC is the only jurisdiction that offers an omnibus legislation that govern all Shariah-compliant businesses in an IFC. In effect, all the licenses, structures and solutions available in Labuan are able to operate in an Islamic option. This approach benefits from the fact that we have this omnibus legislation purely focussed on this, as well as having a strong Shariah Supervisory Council which consists of international leaders in Islamic jurisprudence and theology.

We have been an innovative hotbed for Islamic financial products, such as the introduction of Waqaf embedded within a private foundation, set up as a wealth management structure. We are also home to the world’s first US dollar-denominated exchangeable sukuk, contributing towards Malaysia’s position as the global leader in Sukuk issuance.

We are also the world’s only jurisdiction that offers Takaful captives, an in-house reinsurance company as another example of how the jurisdiction is in the forefront of innovation in Islamic finance

So clearly there is a tendency to push the envelope in the Islamic financial services, and we intend to continue with this innovative approach.
What sets Labuan IBFC apart from other financial centres, both in the region and globally?
Labuan IBFC offers a range of sophisticated financial solutions of which some are unique in the region, such as the Waqaf foundation, Protected Cell Companies structures, private client foundations, captive insurance, as well as an extensive range of digital/fintech related licenses, which keeps us in good stead in the region and abroad.

In addition, the fact that there is a one stop regulator in Labuan FSA, which is a progressive regulator which practices proportionality in regulation is also a key success factor. Of course having said that, the overarching principal of adhering to international standards of compliance, transparency and anti-money laundering is never mitigated. Collectively, this approach provides greater confidence and peace of mind to investors.
What is Labuan IBFC’s role in the Malaysian economy and which links does it share with Singapore?
As an island proclaimed as a Federal Territory by the Malaysian Government back in 1984, Labuan has evolved and later
re-branded as Labuan International Business and Financial Centre (Labuan IBFC). It was established to complement Malaysia’s capital, Kuala Lumpur, as a financial centre, in addition to develop the island and its surrounding vicinity.

Since its establishment, international financial activities have contributed to the island’s economic growth and employment opportunities. For example this year, with the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 in place, job opportunities on the island will be boosted further, as the regulation requires a Labuan entity to have adequate full-time employees on the island as well as adequate amount of operating expenditure.

Labuan IBFC was initially set up to assist Malaysian companies branch out to the region and has been successful in executing this mandate. There are numerous home-grown companies such as Air Asia which have benefited from the policies of the Malaysian Government facilitated through Labuan IBFC.

Over the years, regional corporations and high net worth individuals have also discovered the benefits of Labuan and it has become a regional IFC with links across the globe, represented and evidenced by the 55 international banks and close to 200 global reinsurance/insurance license holders in the jurisdiction.

In addition, there are now close to 60 trust and corporate service providers with links to other jurisdictions facilitating the growth of Labuan.

With regards to Singapore, we strongly believe in a win-win relationship with Singapore as an IFC. Very much like the links between the two countries, the links between the two IFCs are just as co-joined. Singapore’s continued success as an IFC, ensures that Labuan IBFC also continues to grow and we welcome their continued robustness as well as expansion.
Is the midshore centre concept a game changer?
Being midshore is a pragmatic approach in the face of an evolving business environment. Labuan IBFC adopted the approach in order to further combine regulatory upscaling with business dynamism to ensure suitability, stability and vibrancy. We have continuously striven to adhere to international requirements such as on substance and transparency, and are compliant to both domestic and international requirements. For example, we are a signatory of the BEPS Multilateral
Agreement, compliant with FHTP tax standards and AEOI/FATCA, and independently assessed by IMF, FSAP, APG, OECD, FATF, IOSCO as compliant or largely compliant.

It is with the midshore banner that Labuan IBFC will continuously strive for the right equilibrium to balance its market stability agenda vis-à-vis business growth. The hope is that, as a midshore centre, Labuan IBFC will scale greater heights to be on par with leading IFC brand names.

As a midshore IFC we hope to offer the best of both worlds, i.e. the innovative dynamism of a typical offshore offering married with the prudent and compliant approach of a more traditional onshore financial centre.

After all, isn’t the best and most pragmatic approach lie somewhere in the middle? As such we are hoping to continue to straddle this position for the benefit of the jurisdiction and the economic growth of Labuan island.
There was a call for fintech to tap into Labuan for foreign funding. Can you give us a bit of insight into what is happening with that?
As a progressive jurisdiction, we are constantly working on ensuring we are in step with the changing business landscape. Needless to say, catering to the digital aspect, which encompasses fintech, has been on our agenda in recent years, and demand has been gaining traction. As of June 2019, approximately 20 licenses related to the digital market have been approved by the regulator, LabuanFinancial Services Authority (Labuan FSA), in areas such as digital assets trading, digital token, e-wallets, insurtech, and robo-advisory.

Labuan FSA is currently working on a more extensive digital framework and guidelines, in order to further develop this area.

The approach to digital finance including all things related to DLT and fintech has been pragmatic and prudent.
With the expansion of global agreements and coordination in areas such as tax harmonisation and regulatory upscaling, privileges such as tax incentives and secrecy are no longer key competitive differentiators. What’s Labuan IBFC’s value proposition under this new reality?
Labuan IBFC offers a transparent regulatory framework and conducive business environment have enabled and continued to facilitate market forces to operate effectively where business innovations can flourish. Only legitimate businesses are permitted to operate in Labuan IBFC, emphasising quality over quantity and our bespoke approach to licensing allows us to take the time to best understand each and every business plan put forth as part of the licensing application.

Labuan FSA has continuously stressed on international compliance, which enables the financial sector to engage in trade and services in a competitive global market. Thus the Centre has been vigilant in enforcing prudential safeguards where needed.

With that said, it has to be emphasised that a complex balance has to be maintained in order to be able to attract and nurture a robust business environment. A lighter regulatory touch does not necessarily mean a more relaxed approach for example, but rather having the right regulations to maintain high standards of integrity and transparency to foster greater confidence in the market as well as prospects beyond.
Labuan IBFC’s business sectors experienced a 12.5% growth. What is behind this success?
This was made possible by a facilitative business regime in a well-regulated environment and supported by the Centre’s professional service providers.

Efforts continue to enhance Labuan’s legislative framework to ensure regulatory and business relevancy as well as introduction of forward-looking policies that enable the jurisdiction to offer innovative financial services to meet
sophisticated market needs.

Overall it is the commitment that the jurisdiction has to ensure global relevance and compliance, that has seen it through its continuous progress. As mentioned, we have benefited from the global flight to quality the whole industry is experiencing as a result of the changes to the global tax landscape and the need for substance.
The turmoil surrounding Hong Kong seems to be boosting Singapore status as a safe haven. Are you experiencing something similar in Labuan?
As a strategically located and progressive IFC, we welcome any legitimate businesses to be domiciled in Labuan IBFC.

We believe in growing the “Asian pie” so all IFCs can enjoy growth on the back of sustained growth in Asia. While in the short term, it may be perceived there are benefits for other neighbouring IFCs, in the longer term, all three IFCs in Asia, Hong Kong, Labuan and Singapore will not benefit from continued excessive turmoil in Hong Kong.

It must be stressed though that even prior to the turmoil, Labuan was already experiencing an overall upwards trajectory. As we continue our focus to be an integrated financial and economic regional hub, we look forward to continuous favourable business growth, especially with a progressive business and regulatory environment.

This interview was first published by International Investment under Special Report: Asia's rising IFCs - Spotlight on Japan and Malaysia in August 2019. Reproduced with kind permission from International Investment.