{"id":20514,"date":"2013-05-05T18:07:17","date_gmt":"2013-05-05T17:07:17","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=20514"},"modified":"2013-05-05T18:07:17","modified_gmt":"2013-05-05T17:07:17","slug":"jerseys-sham-trusts-what-philip-ozouf-denies-and-montfort-tadier-rightly-said","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2013\/05\/05\/jerseys-sham-trusts-what-philip-ozouf-denies-and-montfort-tadier-rightly-said\/","title":{"rendered":"Jersey’s sham trusts: what Philip Ozouf denies and Montfort Tadier rightly said"},"content":{"rendered":"

Much of the fury in Jersey as a result of the comments made by Deputy Montfort Tadier <\/a>has focussed on the issue of sham trusts.<\/p>\n

Senator Philip Ozouf says there are no sham trust in Jersey. He is simply, and\u00a0straightforwardly, wrong. I made clear in 2006, right at the start of the\u00a0history\u00a0of this blog<\/a>, that what\u00a0would in English law be considered sham trusts were made legal in Jersey in that year. At the time I said it was vital to\u00a0understand\u00a0just what a trust is:<\/p>\n

Trusts are an instrument normally only available in Anglo Saxon common law.\u00a0Wikipedia<\/a>\u00a0describes a trust as:<\/p>\n

\u201ca relationship in which a person or entity (the trustee) holds legal title to certain property (the trust property) but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more individuals or organizations (the beneficiary), who hold \u201cbeneficial\u201d or \u201cequitable\u201d title\u201d<\/em><\/p><\/blockquote>\n

I summarised that like this:<\/p>\n

To put it another way, one person says to a second \u201cplease look after this asset for me, but when doing so make sure (for example) that the income goes to this third person during their life and when they die the remaining property goes to another, fourth person\u201d. All trusts are meant to incorporate this split of roles, responsibilities and entitlements. If they did not then there would be no need for a trust. The property would be owned absolutely by one person for their own benefit.<\/p><\/blockquote>\n

It's really important that this be understood. A person has to give property away for a trust to exist. If they don't give it away then there's a mere nominee arrangement or blind trust. They have their role (e.g. when\u00a0politicians\u00a0are in office and do not want, and are not able, to manage their investments without conflicts of interest) but they have no tax effect, so are not the issue we're looking at in Jersey. I stress, if an asset is not given away there is no trust.<\/p>\n

And the trustee must be wholly independent\u00a0of the person (called the settlor) who gives the asset away. If not then the asset has, again, not been\u00a0given\u00a0away so there is no trust as there is no trustee.<\/p>\n

And\u00a0last, whoever benefits from the assets it cannot be the settlor, or again they haven't given them away and there is no trust.<\/p>\n

In any case where the assets aren't given away by the settlor, or where the trustees don't really manage the assets and the\u00a0settlor\u00a0does, or where the settlor can\u00a0benefit\u00a0from the trust there's\u00a0either\u00a0a\u00a0nominee\u00a0arrangement or, if it's represented that there is a rust, then there's a sham. Now a sham is, at it's kindest, a charade. To put it another way, it can easily be a fraud and that will always be the case if something is represented to be a trust when in practice it is no such thing but the\u00a0advantages\u00a0of a trust are secured none the less.<\/p>\n

That's a long introduction, but it's vital, because in 2006 Jersey made\u00a0legal\u00a0trusts with reserved powers. \u00a0As local law firm Appleby says<\/a>:<\/p>\n

A reserved powers trust allows a third party to the trust (usually but not necessarily the settlor or other\u00a0instigator of the trust) to retain certain powers in respect of the trust. These powers may deal with\u00a0any aspect of the trust, ranging from how the trusts\u2019 assets are invested through to who may benefit\u00a0from the trust and in what circumstances. Trusts of this type offer a flexibility which appeals to many\u00a0prospective settlors, although in each case care will need to be taken to ensure that the reservation of\u00a0any particular power or powers does not give rise to any adverse tax consequences.<\/p><\/blockquote>\n

Another local trust company says<\/a> of the powers that may be reserved that they include:<\/p>\n

- To add, remove or exclude beneficiaries<\/p>\n

- To appoint or remove a trustee, enforcer or protector<\/p>\n

- To revoke, vary or amend the terms of the trust deed<\/p>\n

- To advance, appoint, pay or apply income or capital of the trust property or to give directions\u00a0for the making of them<\/p>\n

- To give investment directions \u2014 binding directions to the trustee in connection with the\u00a0purchase, retention, sale, management, lending, pledging or charging of the trust property or\u00a0the exercise of any powers or rights arising from such property<\/p>\n

- To appoint or remove a director of any company wholly or partly owned by the trust<\/p>\n

- To appoint or remove an investment manager or investment adviser<\/p>\n

- To change the proper law of the trust<\/p>\n

- To restrict the exercise of any powers or discretions of a trustee by requiring that they shall\u00a0only be exercisable with the consent of the settlor or any other person as may be specified in\u00a0the terms of the trust<\/p><\/blockquote>\n

To put it another way, there is nothing the settlor cannot do. They can do anything from revoke the trust (that is claim all the assets back, meaning that the trust is cancelled), which is not an often advertised feature but which is clearly allowed (see here<\/a>), to sacking all trustees, naming themselves as the beneficiary, move the trust to another\u00a0jurisdiction and make all trustee decisions.<\/p>\n

Now as this second trust firm says<\/a>, in\u00a0their\u00a0defence:<\/p>\n

Reserved powers trusts are popular with settlors for whom the primary objectives of the trust are neither mitigating\u00a0tax nor asset protection.<\/p><\/blockquote>\n

And they add:<\/p>\n

Onshore legal and tax rules may limit the nature and extent of the powers that can be reserved by a settlor before\u00a0they compromise or negate the advantages of a reserved powers trust. As such it is essential that onshore tax, legal\u00a0and risk mitigation advice is taken by the settlor prior to the establishment of the trust.<\/p><\/blockquote>\n

But the point is, that as this wording makes clear, Jersey permits what it calls a trust\u00a0something\u00a0that is blatantly not a trust in the law of\u00a0countries\u00a0like the UK - or France, come to that. Such trusts are shams, and in my opinion when the trustees know that they can be replaced at any time, can have their discretion over-ruled\u00a0and can have the\u00a0beneficiaries\u00a0changes at a moment's\u00a0notice, or simply see the trust be moved to another jurisdiction, then whatever they wish to say of their role it seems to be that of a pure nominee, whatever is claimed.\u00a0\u00a0Indeed, when Trident Trust say the attractions of the\u00a0arrangement\u00a0are that:<\/p>\n

The advantages of a settlor reserved powers trust include:<\/p>\n

- The settlor is able to retain a level of control that allows him or her to provide direction in investment and\u00a0administration decisions<\/p>\n

- The settlor is able to eliminate his or her concerns over transferring full control to institutional trustees<\/p><\/blockquote>\n

I think it must be concluded that it is known that such\u00a0arrangements\u00a0disenfranchise\u00a0the\u00a0trustee.<\/p>\n

Now, if this were never to be used to abuse tax that would be fine. And I am sure that happens so I am casting no aspersions against anyone for creating such a trust or managing it.<\/p>\n

But with the best will in the world, such an\u00a0arrangement\u00a0could easily be abused. That's especially likely when there is no trust register of any\u00a0sort\u00a0in Jersey, and so the\u00a0existence\u00a0of any trust, its management arrangements and what it actually does has to be disclosed to no one on the island. The possibility that in that case even a local trustee could be abused by their client and the trust that they notionally manage on behalf of their client who has reserved powers for themselves might\u00a0facilitate\u00a0fraud must exist.<\/p>\n

This abuse is what I drew\u00a0attention\u00a0to in 2006<\/a>. And when I did so a strange thing\u00a0happened. Out of the blue an email exchange between Jersey\u00a0politicians\u00a0and civil servants arrived at the Observer\u00a0newspaper<\/a>, and was then shared with me. The whole\u00a0exchange\u00a0is here<\/a>. What was very apparent from this exchange was that Jersey knew that their trusts were being abused at that time (and that's not so long ago). It was said that:<\/p>\n

I imagine that a large number of wealthy people all over the world (including Jersey) do just the thing you fear in your e-mail - place assets in trusts in another jurisdiction, define themselves as excluded persons for the time they are resident in a specific jurisdiction, have assets returned to them when they cease to be resident in that jurisdiction, and then receive all the gains\/rolled-up income tax free.<\/p><\/blockquote>\n

So Jersey knew it was being used for sham\u00a0<\/span>trusts\u00a0in 2006. And rather than stop it, as I noted at the time it was said in the email exchange that:<\/span><\/p>\n

The changes to the Trusts Law are intended to give statutory certainty to a practice that is already widely carried out. Currently, it is common for assets such as shares in a family company to be placed in trust, but for the settlor to wish to retain control over how the company is operated. Or an investment portfolio may be placed in trust, but the settlor may wish to manage the investments.<\/p><\/blockquote>\n

In other words, rather than seeking to stop the tax evasion that was going on, Jersey was seeking to endorse it.<\/p>\n

No wonder Malcolm Campbell (then\u00a0Comptroller\u00a0of income tax in Jersey) \u00a0said to the Observer that there was nothing in the proposed changes that would \u2018make tax avoidance or evasion more likely than under the present statute.\u2019 I\u2019m sure that was true.\u00a0What Jersey was seeking to do was to pass statute that endorsed the evasion that it knew was already taking place. Indeed, as one participant in the emails said:<\/p>\n

\u2018What [these new laws] will do is allow Jersey to compete more effectively for international work'.<\/p><\/blockquote>\n

As another said<\/p>\n

'As Jersey is squarely pitching itself at the expert\/sophisticated\/ultra-high net worth end of the market, we need settlor reserved powers in order to offer an attractive product to international clients.'<\/p><\/blockquote>\n

To put it another way (as the quote in the Observer makes clear) Jersey knew its clients would, and had been, evading\u00a0anyway\u00a0so it passed law to allow that to happen, legally, within Jersey.<\/p>\n

And Jersey did not stop there as when it came to create a law permitting foundations it repeated the trick, in 2009. As I have noted on this blog<\/a>,\u00a0an article in the\u00a0Jersey & Guernsey Law Review<\/a>\u00a0from 2010 by \u00a0Filippo Noseda \u00a0discussed The Foundations (Jersey) Law 2009 under the title \u2018A Civilian Perspective:\u00a0Not so plain vanilla and possibly a tad wacky\u2019 and concluded:<\/p>\n

From a civilian perspective, the policy statement that a [Jersey] foundation may accord more control to the creator of the structure than a trust appears quite bewildering, given the amount of powers that a settlor of an ordinary Jersey trust may retain for himself under art 9A of the Trusts (Jersey) Law 1984 (2007 revision) without turning it into a sham or nomineeship.<\/p><\/blockquote>\n

and:<\/p>\n

\u00a0Even without any prior knowledge of foundation law principles, it is difficult to imagine a wealth management structure under which the\u00a0founder may retain more powers than those described under art 9A TJL without exposing such a structure to an attack based on sham.<\/p><\/blockquote>\n

In other words, even in the local learned legal press it has been suggested that the\u00a0arrangements\u00a0I have described can be considered either a sham or nominee\u00a0arrangements\u00a0- and foundation law is even more open to abuse. It's not just me saying so.<\/p>\n

So, to come back to the debate between Monfort Tadier and\u00a0Philip Ozouf, \u00a0Ozouf has said this on his blog about sham trusts:<\/span><\/p>\n

Sham trusts are illegal and would be struck down by the courts. He fails to say that Jersey, unlike most European countries regulates all Trust companies in Jersey. The regulator would expect licensed providers not to administer sham trusts<\/p><\/blockquote>\n

He makes much of this point - indeed, it seems to become almost the heart of the issue in this television interview between the two<\/a>. Well, with respect Philip, what's a sham in Jersey is not a sham\u00a0elsewhere. And that's the whole point of this, and why Tadier is right and Ozouf is completely wrong.<\/p>\n

What Ozouf is playing is sophistry. Of course there are no sham trusts in Jersey: that's because Jersey knowingly\u00a0legalised\u00a0the sham in 2006, as the correspondence\u00a0disclosed\u00a0then revealed. But that does not mean that these trusts are not shams according to the laws of other\u00a0jurisdictions as, in fairness, the local lawyers and trust companies point out. They are shams in the UK, and\u00a0elsewhere. Even the local legal journal recognises that. But Ozouf, playing\u00a0strictly\u00a0by the rules of the Jersey goldfish bowl where, candidly, if it suited the local finance industry a law would be passed saying black is white and Ozouf would argue forever that this was then the case, denies this because he refuses, absolutely, to recognise what Tadier is saying, which is that when viewed from another\u00a0jurisdiction there really is a sham.<\/p>\n

And it is Ozouf who shows he does not know the reality of Jersey's finance industry in the process, although he repeatedly accuses Tadier of not doing so. Tadier is recognising that Jersey is \"offshore\". That means it exists to\u00a0service\u00a0clients\u00a0from other places: the term has nothing to do with being an\u00a0island. In that case it is the law of those other places and whether or not they think a Jersey trust is a sham or not that matters. Ozouf denies this and sticks rigidly to Jersey law,\u00a0which\u00a0as the 2006 correspondence shows, was passed to legitimise something that was very obviously illegitimate\u00a0elsewhere and in the process let it continue in Jersey which could then\u00a0claim\u00a0it was well\u00a0regulated, none the less.<\/p>\n

Ozouf's claim on this issue is at best\u00a0disingenuous. Tadier's is completely honest, and correct. Jersey allows sham trusts. It does so knowingly. Tadier was right to say so, because it is true. It is something it\u00a0should\u00a0stop doing. Ozouf should agree. Instead he condemned Tadier. It says a lot about Ozouf that he did so.<\/p>\n","protected":false},"excerpt":{"rendered":"

Much of the fury in Jersey as a result of the comments made by Deputy Montfort Tadier has focussed on the issue of sham trusts.
 Read the full article…<\/em><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,13,1],"tags":[],"class_list":["post-20514","post","type-post","status-publish","format-standard","hentry","category-jersey","category-trusts","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/20514","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/comments?post=20514"}],"version-history":[{"count":0,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/20514\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/media?parent=20514"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/categories?post=20514"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/tags?post=20514"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}