The Sultan Wants Your Money

Its economy slowing, oil-rich Brunei wants to join the world’s offshore financial centres

By William Mellor

On a sultry Monday this past July, the monarch of the tiny, oil-rich country of Brunei threw himself a party. Sultan Has- sanal 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, party goers 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. 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.

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 nei- ther 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.

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.”

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 Athenée 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 Fi- nance 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. “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.

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 (markup or cost-plus financing), 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.”

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.

‘People say this is one heck of a time to set up a financial center,’ says the sultan’s lawyer, Robert Miller. ‘The reverse is true.’

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 nonroyal creditors $550 million, offered to settle claims for 17 cents on the dollar. 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 appointed 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 operation

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.

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