A QUESTION OF TRUST

International Money Marketing, 13 July 2003 [EXTRACT]

Trusts and trustees have always been in the firing line of tax authorities, but the stakes have risen in recent years following the launch of the Financial Action Task Force campaign against money laundering and the Organisation for Economic Co-operation and Development's efforts to persuade financial jurisdictions to embrace transparency.

In its July 2001 Report on the Misuse of Corporate Vehicles for Illicit Purposes, the OECD cites the risk that settlors attempting to evade taxes "may transfer assets into a trust and falsely claim they have relinquished control over the assets". The report argues that trusts pose a particular problem to law enforcement efforts because they "enjoy a greater degree of privacy and autonomy than other corporate vehicles".

Says the OECD: "Virtually all jurisdictions recognising trusts have purposely chosen not to regulate trusts like other corporate vehicles, such as corporations. This means that... there are no registration requirements or central registries, and no authorities charged with overseeing trusts. In most jurisdictions, no disclosure of the identity of the beneficiary or the settlor is made to authorities."

The organisation singles out offshore trusts, which it says can be used by settlors, "in order to keep them out of the reach of creditors and other claimants. Once the assets are transferred into an offshore trust, it is very difficult and expensive to locate them and to identify their beneficial owners. Even if the assets are found, creditors will incur considerable time and expense in the attempt to repatriate the assets".

According to Canadian law firm Stikeman Elliott, many of the OECD's complaints are ill-founded, irrelevant or apply just as much to its own 'rich country' members as the offshore jurisdictions it cites. Last year the firm's London office conducted a review of the regulation of corporate vehicles (including trusts) in cross-border transactions on behalf of the International Tax and Investment Organisation, a group of small, mostly Caribbean countries with international financial centres, and the Society of Trust and Estate Practitioners.

In its report, entitled Towards a Level Playing Field, the law firm argues that the OECD's criticisms of the way trusts, corporations, limited partnerships and other entities are regulated in international financial centres could easily be applied to corporate entities and fiduciary arrangements within member states such as Delaware trusts or Luxembourg holding companies. For example, trusts with unlimited duration are not limited to the Cook Islands and St. Kitts & Nevis but exist in a number of US states and the Canadian province of Manitoba.

Stikeman Elliott questions the OECD's apparent targeting of discretionary trusts, which formally provide trustees with absolute discretion in disposing of trust property, on the grounds that settlors generally provide trustees with a letter of wishes to guide them in exercising their discretion. These letters, the firm says, do not require the trustees to accept instructions from the settlor or any third party and is not binding upon them, and "trustees who follow letters of wishes blindly without independent consideration of the issues do so, under general law, at their peril".

Duckworth describes the Stikeman Elliott conclusions as "measured", adding: "My own comments are less polite. The OECD report demonstrates at several points a profound misunderstanding of laws and practices onshore as well as offshore." He argues that its inconsistencies regarding provision of information "call into question whether the author of the report has any concerns about the prevention and detection of crime or is consumed entirely by the wish to make smaller financial centres uncompetitive."

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