Trusts » Tax Research UK

The markets cannot cover their own risk

Bonds, Economics, Tax Havens, Trusts Comments Off

Nov 192007

I note that the FT has reported that:

The plan for a $75bn superfund to buy assets from cash-strapped structured investment vehicles appears to be gaining support among sceptical institutions, amid concern that SIVs might start dumping bank debt.

The planned superfund, which is being put together by Citigroup, Bank of America and JPMorgan Chase with the backing of the US Treasury, would buy assets from SIVs that are facing funding problems.

It’s a nice idea, but let’s contextualise this (without getting back into the debate on the difference between SPVs and SIVs which adds little here). Northern Rock has currently borrowed about £20 billion form the Bank of England – near enough $40 billion, therefore. How can $75 billion prop up the rest of the market in that case if any serious run were to occur?

It is obvious that the SIV / SPV scenario has created a crisis which we might get through with little harm, if we are very lucky. But it’s equally obvious that the markets cannot be allowed to create such a situation again.

In the 1930s massive regulatory change took place in the USA as a response to the 1929 crash. Whether or not we have a crash now the same response is appropriate.

So why aren’t politicians saying this, now, here as well as there?

There’s another question too. Why are these companies willing to bear this risk? Don’t they simply create the moral hazard that others will now be encouraged to take risk at their expense? Since this is almost inevitable, why don’t they seek regulatory control instead? Isn’t it the case that all the evidence suggests that this is the answer?

Trusts can be criminal activity

Tax Havens, Trusts Comments Off

Nov 162007

A promoter of offshore schemes in the USA looks very likely to go to jail. As Smartpros.com reports:

David Alan Struckman, co-founder of the “Institute of Global Prosperity” — an organization that sold audiotapes, CD’s and tickets to offshore seminars on “wealth-building” strategies — was found guilty in a federal court of tax evasion and conspiracy to defraud the United States.

As the report notes:

Struckman concealed the income earned from the sale of these products through the use of bogus trusts, nominee entities and related offshore bank accounts. He transferred funds from the offshore bank accounts back into the United States through wire transfers and the use of debit cards.

Eileen Mayer, Chief, Internal Revenue Service Criminal Investigation Division said:

Trusts established to hide the true ownership of assets and income for the purpose of committing tax evasion isn’t tax planning; it’s criminal activity.

That seems to sum things up pretty well.

Arctic Systems – and how to move on

Tax avoidance, Trusts 15 Responses »

Jul 262007

The Revenue have lost what has been called the Arctic Systems case in the House of Lords.

This case dealt with a husband and wife who co-own a company. They paid themselves very modest salaries and then split the remaining net income of the company (which was high in relation to salaries and also in relation to sales since this was a consulting business) between them as dividends. The problems were twofold:

1) As the House of Lords found, the Jones arranged their company in this way with the intent of saving tax. They said part of the income Mrs Jones received was gifted to her by her husband. It just so happened that the Revenue lost the case because there was an exemption in the law that allowed this to happen.

2) As a result of tis gift, and the fact that dividends rather salaries were paid, less tax was received by the Revenue from this company than might otherwise have been the case.

Now, as a matter of fact I think the House of Lords made the right decision in this case based on current legislation. It had been stated in parliament that the settlement legislation which was the basis of the Revenue’s claim would not be used for this purpose. As I believe in purposive legislation applied in accordance with the stated will of parliament it has to be right that litigation in contravention of the will of parliament should fail.

But, let’s move on. The government has announced that now it has lost it will introduce legislation to ensure that “income splitting” as they call the practice undertaken by the Jones (and several hundred thousand other couples, I suspect) is outlawed. This is going to be immensely unpopular. It’s also the right thing to do. They are quite right: this can be a straightforward abuse of the tax system. That happens when there really is a gift and low salaries exacerbate its value. I know it will make me unpopular, but since I believe in tax compliance, which means that the right amount of tax is paid at the right time in the right place, then this comment has to follow.

But, and I stress this very strongly, when the economic reality is that the partners do really contribute to the company, even if unequally, then they should be entitled to the return it generates, having allowed for reasonable (and no more) compensation for the time each has expended. If this is not the basis of new legislation then the law will not tax the economic substance of the transaction. That would be wrong. The economic substance of a transaction must match the taxation charge raised on it if tax is to be fair, which the Revenue say is their objective. This will challenge the Revenue, but anything less than this will harm small business in the UK. And that makes no sense.

Serious consultation, clear guidelines and ways of determining what is, and is not acceptable which are binding on all parties (assuming the truth is told) will be essential to make this work. The Revenue are trying to work in partnership with large business: they have to now show they can do the same with small business as well. Will they rise to the challenge? I hope so.

Jersey trust compnaies are feeling neglected

Ethics, Jersey, Trusts Comments Off

Jul 042007

I had to laugh at a report in the Jersey Evening Post on 2 July. It was reported (but not on the web) that:

Jersey’s trust industry has not been sufficiently recognised for its high standards, according to Julie Coward, who chairs the Jersey Association of Trust Companies (JATCo),

Poor Ms Coward has complained that:

the industry is suffering ‘disproportionate’ compliance costs but gaining little advantage

and that

the Island’s regulator the Jersey Financial Services Commission, has failed to stand up for the industry in the light of demands from the International Monetary Fund, in that trust and company services providers are not recognised as’financial institutions’ for compliance purposes in the same way as are banking and investment services.

She apparently added that:

the industry was mindful of the need for regulation to contain risk and protect the Island’s reputation. But regulation was a ‘dangerous burden,’ she said, eroding margins, distracting management and discouraging innovation.

I have a message for Ms Coward. Those of us beyond St Helier harbour wall think that we need protection from you because we think you provide abusive services. Sham trusts, nominee services for companies and a culture of secrecy are just the top of abuses that we count as crimes against other country’s tax systems and the world’s financial architecture whose credibility is undermined as a result. The least the IMF can do and will do is hold you to account. We’re asking it to do rather more. So if you think it’s tough now, I’d get out of the kitchen because the temperature will be rising.

Jersey – trying to have it both ways

Corruption, Guernsey, Ireland, Isle of Man, Jersey, Trusts Comments Off

May 252007

This week Jersey has tried to be all thing to all people. First it tells the US Senate how compliant its finance industry. Then it bangs it’s drum about winning the ‘Offshore Finance Centre of the Year Award’. Look at this stuff from the associated press release:

In winning the prestigious award, Jersey beat off competition from other international finance centres including Dublin, Gibraltar, Guernsey, the Isle of Man and Luxembourg, who were all short listed.

The judges commented that they were impressed by the innovation Jersey has shown during the past year, identifying opportunities and introducing initiatives to keep up with the fast pace of change occurring in offshore centres. These initiatives included the introduction of Incorporated Cell Company Structures, a review of the Island’s trust law and the introduction of the Listed Fund Guide.

Let’s be clear what the finance industry thinks of incorporated cell company structures:

Protected Cell companies have — in concert with other entities — been used to construct what has been called “an impenetrable wall” against creditors and prying eyes. Whilst these claims can only be tested by time, this novel use of a PCC for asset protection and financial privacy is an interesting approach and a valuable piece of intellectual property.

And,as the correspondence between Jersey’s own ministers and civil servants leaked to the Observer showed, Jersey’s new trust laws are so open to tax abuse they’re even worried they might be used against Jersey itself. To put it another way. They’re designed to allow sham trusts.

This is precisely why Jersey is on the list of abusive, secretive and threatening tax havens before the US Senate. Along with the other contestants.

PS But note where the award ceremony was held:

The Victoria Park Plaza Hotel, London.

Right there in the biggest finance centre of all.

Why the havens can’t be trusted to set standards

Corruption, Isle of Man, Jersey, Tax Havens, Trusts Comments Off

May 022007

The ITIO, and the Isle of Man in particular launched an attack on the money laundering and tax management standards of the world’s major economies yesterday. That was appropriate. But there’s good evidence to think that such places can’t be trusted to set the standards required to tackle money laundering or tax evasion. I know Jersey is not a member of the ITIO, but I have been looking at its proposed new money laundering rules that are expected to come into operation in June this year. I’ve also looked at the other papers on this issue on the Jersey Financial Services Commission web site.

Let me come straight to my point. Jersey’s new money laundering rules, supposedly designed to ensure compliance with FATF rules and the EU 3rd Money Laundering Directive are actually designed to facilitate tax evasion, and as such money laundering, by ensuring that effective information exchange becomes much harder to operate, especially under the terms of the EU Savings Directive, both as it now is and as the European Commission would like it to be.

That’s a big claim. I’m accusing Jersey of deliberately seeking to subvert the effective operation of an international agreement that is designed to tackle tax evasion. I’m doing so for two reasons. First of all there’s evidence that Jersey has willingly done this sort of thing before. Second, the evidence supports the claim. I’m not going to do a page by page analysis here. The following makes the case though.

First, under the new rules Jersey is changing its client identification procedures. It explains the reason for this as follows in the Money Laundering Draft Paper:

4.19 Ensure that it is clear that the objective of Article 27 is clearly communicated, i.e. that satisfactory customer due diligence be obtained for every customer, while permitting businesses flexibility in the way in which customer due diligence procedures are carried out according to a risk based approach.

Note that word ‘flexible’: it’s important because in the Jersey context what becomes clear is this:

1.11 Applicants for business and customers of financial services businesses will also be affected by the adoption of a more risk-based approach to customer due diligence on relationships. This will provide for reduced customer due diligence measures on “lower” risk relationships, including scope for reliance on a single document to verify identity, and enhanced measures in the case of “higher” risk relationships. In practice, this means the “customer experience” for many “lower” risk applicants and customers will be improved.

The effect of this is as follows:

A risk-based approach to customer due diligence is set out, that permits reduced or simplified measures in the case of “lower” risk relationships, and requires enhanced customer due diligence in the case of “higher” risk relationships. …..

Much more emphasis is placed on customer due diligence measures other than identification and verification of identity, and, in particular, on ongoing monitoring of unusual, complex, and “higher” risk activity and transactions.

More “customer friendly” ways of verifying the identity of applicants for business or customers, including scope for greater reliance on a single document to verify identity in “lower” risk circumstances. In the case of an applicant for business that is an individual and is assessed as presenting “lower risk”, identity will consist of just name, address, and date of birth, and just name and date of birth need be verified. This means that it will be possible to verify the identity of such applicants using just one document, e.g. a passport.

Note what that is saying: a person’s address need not be verified. This will apply to bank account opening. So, someone from the UK now tells their Jersey bank that they are indeed a UK citizen, but please send all correspondence on their account to their address outside the EU, which need not be verified, and hey presto, the whole EU savings Directive ceases to apply to them, and the Jersey bank can say they have still complied with all requirements. That’s what this is meant to achieve, I am sure.

What is more, the paper makes clear that serious attempts are to be made to ensure that a bank need not hold information on beneficial ownership if the business were introduced by another regulated company. So, for example, they need not have proof of identity for a company or trust if the business were introduced to them by an accountant of trust company, but can request it if needed. The advantage to the bank is obvious. If they do not know the beneficial owner of the funds, and have not verified that status how can they be liable if the EU SD is not properly applied? I am certain it is not chance that Jersey is embracing this option with such enthusiasm, and wants to extend it to trust business (which the FATF does not allow) and even to the holding of the pooled funds of such businesses, the ownership of which the banks would then have no idea about.

These developments are worrying. Information exchange can only work if there is information available to identify with certainty where a person is. Jersey is planning that its banks should no longer hold that data. This means the information required for information exchange will not be available. When linked to Jersey’s sham trusts and its plan that no company will be required to file its accounts with any authority once 0% corporation tax is introduced the data available for exchange in Jersey is rapidly diminishing just as the obligation to exchange it is increasing.

I do not think that a coincidence. It’s a deliberate attempt to support an industry that was built on tax evasion and still benefits from it to a considerable degree, whatever is claimed, and it’s the precise reason why the havens cannot be relied upon to uphold the standards required if we are to tackle money laundering and tax evasion. And it’s why the ITIO’s statements on this desire ring hollow, in my opinion.

You can trust a lawyer

Corruption, Isle of Man, Jersey, Tax management, Trusts Comments Off

Apr 132007

Lawyers are probably the greatest obstacles to justice in the world. No, that’s not an exam question (although it would be a good one if followed by the single word ‘discuss’), it’s a statement of belief. My belief.

Let’s start with the Law Society in England who have today issued a press release on money laundering and trusts. The EU is rightly seeking to enhance money laundering provisions across Europe. One of its key requirements in the Third EU Money Laundering Directive, which has to be included in UK law by December 2007, is to improve the identification of the beneficial owners of funds. The reason is obvious: serious money launderers (including those who undertake tax evasion, which is a money laundering offence) seek to hide their ownership of funds through the use of trust, foundations, nominee owners of companies and the like.

The EU Directive is clear on the issue of trusts. It says a

Beneficial owner means the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. The beneficial owner shall at least include:

‚Ä¶
b) in the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds:

i) where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25% or more of the property of a legal arrangement or entity;
ii) where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of person in whose main interest the legal arrangement or entity is set up or operates;
iii) the natural person(s) who exercises control over 25% or more of the property of a legal arrangement or entity.

Now, I applaud the EU for that. There’s a series of tests here that allow, on balance of probabilities a declaration to be made of who and where the likely beneficial owners of a trust are and reside. Any professional person could do this. A little judgement may be required in a few cases but in 99% (I mean that) of cases it will be obvious both who and where the “the class of person in whose main interest the legal arrangement or entity is set up” are.

But this obviously sensible law (because it is proposed that the above become UK law), required to tackle massive criminal activity is not good enough for the lawyers. They say the new law uses:

so vague a definition of beneficial owner – a legal concept uniquely created by English common law – that even lawyers may not know if they are contravening the law.

Rabinder Singh QC and Alex Bailin of Matrix Chambers, in an opinion commissioned by the Law Society, found: ‘The definition of “beneficial owner”‚Ä¶ is so inadequate as to create real uncertainty in the ambit of the associated criminal offences.

‘Lawyers, even those experienced in the relevant field, could not advise with confidence when the onerous anti-money laundering obligations will apply in a variety of commonplace situations.’

They also said the criminal offences did not meet community law, common law and European Convention on Human Rights requirements ‘of legal certainty and, accordingly, would be open to challenge’.

Let’s be clear:

Lawyers will know when they’re breaking the law. They’ll know exactly what they’re doing. What they’re worried about is that they might not be able to break the law (sorry – but see what lawyers do in Jersey with regard to running sham trusts, and in the Isle of Man as reported by the US Senate and you’ll see what I mean, and respectfully, they’re not so very different from English lawyers);
On the balance of probability they’ll be able to determine at any time who is intended to benefit from the trust – just ask the trustees for starters, and if in doubt err on the side of caution;
Almost no trust has real doubt on these issues in reality – or they fail for uncertainty anyway. Alternatively, the issue is overcome in 99.9% of cases by ‘letters of wishes’, which any lawyer can refer to.

So what’s the real objection? It’s that I think lawyers don’t want trusts to be subject to the EU Savings Directive, but once this law comes in there’s no reasons why they shouldn’t be subject to its provisions. After all, the beneficial owners of the funds and their location will have been determined. So the EUSD can be applied to the trust. Which, by the way will also be true therefore for trusts in Jersey and elsewhere. That’s what this is about.

The UK government should very politely tell lawyers that their objections are hollow, fabricated and deny the ability of a professional person to form a judgement within the boundary of law that ensures that criminal activity is prevented. By all means the lawyer required to make a declaration on beneficial ownership when a trust has several possible beneficiaries should be protected from liability if their reasonable assumptions on the issue turn out to be wrong e.g. because circumstances change in a way that could not reasonably be foreseen (such as the death of a child). I’m happy with that protection. But saying criminal action (including tax evasion) cannot be stopped because lawyers are not clairvoyant is just farcical. And I don’t think that’s far from what the Law Society is doing.

PS If you want evidence in support of my argument that this is really about tax, in their briefing note the Law Society say the main uses of trusts are:

- in a will to manage the disposition of the deceased’s estate
- in a family trust, to safeguard assets for future generations
- on someone’s death intestate, when statutory trusts are imposed
- on the acquisition of land by more than one person
- when establishing a pension scheme
- when effecting life policies for the benefit of a family
- in the creation of an individual voluntary arrangement to avoid bankruptcy
- in setting up a charity
- to manage investments
- to facilitate the holding of financial instruments – such as insurance, bonds etc

The fact they don’t mention tax once is both hypocritical, and a sure indicator that this is their real concern.

Register trusts, or expect abuse

Accounting, Jersey, Tax Havens, Trusts Comments Off

Jan 162007

Nichola Ross Martin has written one of her usual articles for AccountingWEB in which the logic is very hard to follow. This one is about trusts. She is commenting on data published by the Revenue on a survey of trusts they undertook to assist them in forming an opinion on the revision of trust tax law. In her report she says, based on the HMRC report, that:

There were problems contacting settlors within the survey, only some 1200 records out of 6000+ could be matched up to telephone numbers, and in the end only 246 records were usable. Even allowing for the fact that settlors have a tendency to die, HMRC seemed to hold insufficient and inaccurate trust data to allow a decent sample.

She also notes:

In fact the response was so bad that GfK Business, who completed the research, say that the sample surveyed may not be fully representative of the total trust population.

This Nichola seems to latch onto with glee, as if it invalidates the results. Those results suggested (she reports) that:

“The main motivation for setting up a trust appears to be related to control of assets, rather than tax planning as found in both the in-depth interviews and the survey of trustees. While tax planning is important for some, it is usually cited second, and in relation to organising a person’s affairs most efficiently, rather than as the main reason for setting up a trust.”

She argues as a result that reform to trust tax law was not necessary. That is not a tenable conclusion. There are reasonable conclusions to draw but they are:

1) That there should be a register of trusts in the UK, just as there is a register of companies. Unregistered trusts should not be considered to be effective. That way the data problem is overcome;

2) Those who answered the survey done on behalf of a tax authority felt they had nothing to fear from the questions raised: all the rest did and did not answer.

That leads to the obvious, and wholly tenable conclusion that tax is a major reason for creating trusts onshore and offshore. Onshore its a transparent motive: offshore the effect is achieved by the type of sham trusts that Jersey deliberately promotes and which are intended to be a blatant nominee mechanism for those who claim they have gifted assets into trust and who actually wish to retain full control of them. This action is, like so many of the practices promoted offshore, fraudulent of course.

But either way the result is that tax is a motive and the answer has to be clear. If trusts are necessary (and they are for the protection of children, the disabled and infirm and maybe for charitable purposes – although there a better mechanisms might be possible) then that’s fine. Allow them. And register them. But provide no tax advantages at all. They must be taxed transparently, and if that’s not possible at the highest marginal rates of tax to ensure justice is done. That would end the tax debate, and rightly so.

Trust me, I’m a trust company.

Ethics, Isle of Man, Tax Havens, Trusts Comments Off

Jan 042007

I’ve been accused on occasion of focusing too strongly on dubious practice in Jersey. I accept that it’s the haven I know best, but sometimes another needs attention. Take the Isle of man for example, and Lorne House Trust Limited in particular. I’ll ignore for now the complete nominee service they provide for running an Isle of Man company, which makes the arrangement an obvious charade, and will instead focus ion their trust services.

Their questionnaire for someone wishing to set up an Isle of Man trust is available on their web site. Please read it. It’s a staggering document. Then note:

Question (d) which allows for a nominee Settlor… or no settlor at all, if that’s more convenient and prevents inconvenient questions being asked.
Question (j) that asks which charity the real settlor would like to be a beneficiary (because it is normal for there to be a fake charity beneficiary for any offshore discretionary trust);
Question (m) that then asks who the real beneficiaries are to be (i.e. not the above charity);
The note on reasons for wanting a trust on page 5 which says regarding the avoidance of probate that trust assets do not form part of deceased person’s estate, which will not be true in many cases if they retain control over them, as is implicit in this document;
The note on page 6 concerning ‘Who do you wish to be a settlor?’ which provides a range of increasingly tenuous options, all of which are apparently acceptable to the company;

It is apparent that what is being supplied here is a sham. The trustees are clearly going to act on the real settlor’s instructions whoever is assigned that role on creation and in the future. In that case there is no trust.

What’s particularly interesting about this example though is that it has been subject to litigation before the Privy Council. If you’ve time the case is worth reading. What happened was that in the case that was appealed the true deceased settlor had allowed the Lorne House trustees to use the nominee corporate settlor, and those trustees then claimed, when challenged by the true deceased settlor’s son who wanted access to the trust property that the real settlor was not that person because the trust documents he’d authorised they create named the settlor as Pacquerette Limited, which was their nominee company. The court saw through this and said on page 4 of the opinion that:

It appears that Rosewood Trust Limited does not accept that Mr Schmidt was a settlor of either settlement. Certainly he was not named as a settlor. But (in responses filed in the High Court of the Isle of Man) Rosewood has described Pacquerette Limited (“Pacquerette”), the named settlor, as “simply a nominee” and has stated that Mr Schmidt “was involved in the setting up” of each trust. Rosewood also stated in its answer that its involvement was “simply to receive and pay out such funds as [Mr Schmidt] chose to channel through the Isle of Man”. In the absence of other evidence that justifies the conclusion that he was one of those who joined in causing the settlements to be made and funded, and was in substance a co-settlor.

To put it another way, the Privy Council said the Trustees were not telling the truth. It should be stressed that the opinion also notes that:

Lorne House (an Isle of Man company apparently controlled by the same persons as Rosewood Trust Limited) retired from the trusteeship of both settlements and Rosewood was appointed as sole trustee in its place on 3rd May 1997.

Which is pretty amazing stuff. The arrangements set up by the company have been found to be a mere front for Mr Schmidt and yet the company denied this to the Privy Council, somehow believing in its own facade of deception. And its still selling the same facade now.

Those who use offshore should beware. Their Lordships who opined in this case noted:

It has become common for wealthy individuals in many parts of the world (including countries which have no indigenous law of trusts) to place funds at their disposition into trusts (often with a network of underlying companies) regulated by the law of, and managed by trustees resident in, territories with which the settlor (who may be also a beneficiary) has no substantial connection. These territories (sometimes called tax havens) are chosen not for their geographical convenience (indeed face to face meetings between the settlor and his trustees are often very inconvenient) but because they are supposed to offer special advantages in terms of confidentiality and protection from fiscal demands (and, sometimes from problems under the insolvency laws, or laws restricting freedom of testamentary disposition, in the country of the settlor’s domicile). The trusts and powers contained in a settlement established in such circumstances may give no reliable indication of who will in the event benefit from the settlement. Typically it will contain very wide discretions exercisable by the trustees (sometimes only with the consent of a so-called protector) in favour of a widely-defined class of beneficiaries. The exercise of those discretions may depend on the settlor’s wishes as confidentially imparted to the trustees and the protector. As a further cloak against transparency, the identity of the true settlor or settlors may be concealed behind some corporate figurehead.

It’s clear their Lordship’s are not convinced as to the merit of this course of action. Nor am I. Caveat emptor – let the buyer beware.