Owen, Christopher: Offshore Survey Supplement – April 2013

  • Bermuda Court upholds trust deed on forum
    • 12 December 2012, the Bermuda Court determined that a clause in a trust deed that provided that “this Trust shall be governed by the laws of Bermuda and the forum for the administration of this Trust shall be the Courts of Bermuda”, did confer exclusive jurisdiction on the Bermuda Court to adjudicate disputes in relation to trust administration.

      In Re A Trust [2012] SC (Bda) 72 Civ., a settlement of a dispute between a son and his father in relation to the terms of an offshore trust worth some $1 billion established for the benefit of the father’s children and their issue had been agreed in November 2011. This represented about a third of a wider distribution of the testamentary trust established by the father, the authorisation for which was sought by the trustees in November 2009.

      The father sought injunctive and declaratory relief against the son in respect of his threat to bring proceedings in an onshore court to compel the trustee to disclose information about the underlying operating company, which is the principal trust asset. He also sought a variation of a proposal (Proposal No 4) to set aside 80% of a preferential payment made to the son and a direction that the trustee should remove the son as a director of two family holding companies, as a penalty for his alleged breach of the settlement terms.

      At the end of the hearing there was no serious dispute that the father was entitled to an injunction restraining the son from pursuing a claim against the trustee before the onshore court because the pursuit of such threatened claim would entail a breach of clause 18 of the trust deed, which selected Bermuda as the administrative forum for the trust.

      However, the father (supported by the trustee, the majority of the son’s siblings and the guardian) also sought a wider injunction in respect of any similar claims seeking to challenge Proposal No 4 (including claims against onshore companies and directors linked to the Trust). This wider injunction was sought on the basis of, inter alia, the cross-examination over two days of the son and the assertion that he was, in effect, committed to tearing apart the structure which he had reluctantly agreed to, having been unable to secure recognition for his most exorbitant distribution demands.

      The Court found that the father was entitled to a permanent injunction restraining the son from filing the onshore application and/or any other proceedings raising substantially similar issues or seeking substantially similar relief. This remedy was granted on the grounds that the son had breached the settlement terms, subverted and/or threatened to subvert Proposal No. 4 and/or because such proceedings are prohibited by clause 18.1 of the trust deed, which constituted an exclusive jurisdiction clause for the purposes of the relevant claims.

      Taking broader considerations into account, together with the fact that it was granting permanent injunctive relief against the son, the Court did not think it would be reasonable to deprive the son of all or some of his preferential payment nor to direct them to remove him as a director of the family holding companies.

  • Cameron calls for global action on tax avoidance
    • 24 January 2013, UK Prime Minister David Cameron told leaders at the World Economic Forum in Davos that cutting down on tax avoidance was one of the UK’s main priorities for its presidency of the G8 group of richest nations this year.
      “There are some forms of tax avoidance that have become so aggressive” that it is time for international co-operation to make sure that global companies pay their fair share of tax, he said. “This is a problem for all countries, not just for Britain … Acting alone has its limits … so we need to act together at the G8.”
      Those that avoid tax “need to wake up and smell the coffee”, he said in apparent reference to US coffee giant Starbucks, which was widely castigated for paying little tax in the UK but then pledged to pay millions of pounds in corporation tax after a publicity backlash.

  • Cayman commits to Model 1 FATCA agreements with US and UK
    • 15 March 2013, Minister for Financial Services Rolston Anglin announced to the Legislative Assembly that the government would adopt a Model 1 intergovernmental agreement (IGA) in response to the US Foreign Account Tax Compliance Act (FATCA). This model would also be used as the basis to negotiate a similar agreement on the automatic exchange of certain information with the UK. He said the territory expected to conclude final agreements with the US and UK promptly.

      Model 1 generally relies on government-to-government exchange of information to address concerns that foreign laws prohibit many Foreign Financial Institutions (FFIs) from reporting account holder information to the IRS. Model 2 provides an alternative solution to these restrictions, by providing another framework to allow reporting directly to the US under FATCA.

      “The global landscape in taxation is changing at an unprecedented pace,” said Anglin. “The modern cooperative and transparent jurisdiction will be one that uses automatic exchange of information mechanisms and multilateral approaches in tax matters, and that demonstrates effectiveness in the implementation of these measures.”

      The Cayman Islands has already concluded 30 tax information exchange arrangements (TIEAs), with further agreements either technically agreed or awaiting signature.

  • Dutch defer anti-abuse rule to Curacao holding companies
    • 21 December 2012, the Netherlands government announced that the new tax arrangement between the Netherlands and Curacao, due to be agreed during 2013, will not enter into force before 1 January 2014. It had been expected that the arrangement would be agreed on in 2012 and enter into force on 1 January 2013. This delay will affect Curacao holding companies with shares in Dutch companies because the Netherlands previously announced that it would not apply the domestic anti-abuse rule to Curacao holding companies until a new tax arrangement comes into force.

  • E&Y enters US non-prosecution agreement
    • 1 March 2013, accountant Ernst & Young LLP entered into a non-prosecution agreement (NPA) with the US authorities, under which the firm agreed to pay US$123 million and acknowledge a detailed Statement of Facts in which it admitted the wrongful conduct of certain partners and employees. E&Y also agreed to certain permanent restrictions and controls on its tax practice, including a prohibition against planning, promoting or recommending any IRS “listed transaction”.

      E&Y had admitted wrongful conduct by certain of its partners and employees in connection with the firm’s participation, from 1999 to 2004, in four tax shelters that were used by approximately 200 E&Y clients in an effort to defer, reduce, or eliminate tax liabilities of more than $2 billion. E&Y prepared tax returns reflecting tax losses claimed to have been derived from the tax shelter products and subsequently defended certain of its clients in connection with audits of those transactions by the IRS. The penalty equals the amount the firm received in fees resulting from the four tax shelters.

  • Gibraltar amends record keeping regime
    • 21 March 2013, the Companies, Partnerships and Trusts (Miscellaneous Amendments) Bill 2012, published on 11 October 2012, was brought into force. The Act makes provision for the enhanced keeping of full books of accounts, including underlying documents such as invoices and contracts, for five years, the maintenance of records identifying settlors, trustees and beneficiaries of all trusts without exception, also for five years, and the abolition of share warrants to bearer. The new legislation addresses the recommendations made by the OECD Global Forum’s Phase 1 Peer Review, which was published relating to the elimination of bearer shares and the extension to record-keeping requirements for companies, partnerships and trusts, the government published in October 2011.

  • Guernsey Court rules on applicable law
    • 7 December 2012, the Royal Court of Guernsey held that the law under which a mistake application would be determined should be established by considering the lex situs of the assets transferred to the trustee.

      In MD Events & Dervan v. Concept Fiduciaries Ltd & others, the applicants sought to set aside two dispositions into an employee benefit trust on the ground of mistake. The intention behind the trust structure was to make provision for the first applicant for the rest of her life but when the trust was established and the assets transferred, it was subsequently established that the first applicant was actually excluded from being a beneficiary.

      As a preliminary issue, the Royal Court needed to determine the applicable law under which the substantive application was to be decided. The trust was an English law trust, but the trustee was a Guernsey company and the trust was administered in Guernsey.

      After extensive review of relevant authorities the Court held that the law under which the mistake application would be determined would be established by considering the lex situs of the assets transferred to the trustee. As the assets were shares in an English company and monies transferred from that company, the Court determined that their lex situs was English and therefore the substantive mistake application should be determined under the law of England and Wales.

      In the final substantive hearing the Royal Court found that the first applicant had not properly understood what she was doing when she transferred her shares into the trust and that she was under a mistake of so serious a character as to render it unjust for the trust to retain those shares.

      The Court was satisfied that the disposition of shares into the trust resulted from a mistake of the type envisaged in the English case of Pitt v Holt. As a result, in its decision of 11 February 2013, the Court set aside that disposition of shares. However, it also found that, in relation to the transfer of monies into the trust by the second applicant, there had not been an equivalent mistake and that aspect of the application was not granted.

  • Jersey Royal Court rules on constructive trust claim
    • 16 November 2012, Jersey’s Royal Court delivered a landmark judgment concerning the circumstances in which proprietary claims may be established and when assets may be traced. The Court found that legal interests are subject to equitable tracing rules, that funds may be traced through “black holes” and into mixed bank accounts, that “backwards tracing” is permissible and that the “lowest intermediate balance” principle does not apply in Jersey.

      In The Federal Republic of Brazil & Anor v Durant International Corporation & Ors [2012] JRC 211, the Federal Republic of Brazil and the Municipality of Sao Paolo (the plaintiffs) claimed against approximately US$10.5 million that had been paid into bank accounts of the defendants in Jersey. The funds were alleged to have been the traceable proceeds of bribes received by the former Mayor of Sao Paolo, Paulo Maluf, and his son, during his time in office.

      The plaintiffs claimed that the funds had made their way to Jersey via unidentified black-market currency dealers in Brazil and an account beneficially owned and controlled by the Malufs in New York. The claim was for the recovery of the funds on the grounds that the defendants were constructive trustees of the funds received by them with knowledge of their tainted origin; alternatively on grounds of unjust enrichment or a proprietary claim to the funds.

      On the facts of the case, the Court found that the funds were sufficiently linked with the fraud perpetrated in Brazil to be traceable. It did not matter that it there was no evidence as to exactly how the funds made their way from Brazil into the New York account. Nor did it make any difference that the funds were mixed with unrelated amounts in the New York account, that the final three payments into the New York account occurred after the final payment was made to the defendants, or that payments to the defendants out of the New York Account at times exceeded the proceeds of the fraud that had been received into it.

      As a result, the Court found the defendants were liable to account to the plaintiffs for the funds on the basis of constructive trusteeship, unjust enrichment and the existence of a proprietary claim. Jersey’s law on asset recovery now differs significantly from England and the Court made it clear that it should not be burdened with historical limitations that may apply in England. The defendants indicated that they intend to be appeal.

  • New European AML directive to name beneficial owners
    • 7 February 2013, the European Commission adopted new proposals to amend the EU’s Third Anti-Money-Laundering Directive. The fourth version of the directive will require all companies, legal entities and trustees to maintain records of the identities of their beneficial owners. They must make this information available to persons conducting anti-money-laundering (AML) due diligence and to law enforcement officers, though not necessarily in a public register.

      The Directive recognises that the use of a risk-based approach is an effective way to identify and mitigate risks to the financial system and wider economic stability in the internal market area. The new measures proposed would require evidence-based measures to be implemented in three main areas, each of which would be supplemented with a minimum list of factors to be taken into consideration or guidance to be developed by the European Supervisory Authorities:

      Member States will be required to identify, understand and mitigate the risks facing them;
      Obliged entities operating within the scope of the Directive would be required to identify, understand and mitigate their risks, and to document and update the assessments of risk that they undertake. Ultimately, those adopting a risk-based approach would be fully accountable for the decisions they make;
      The proposal would recognise that the resources of supervisors can be used to concentrate on areas where the risks of money laundering and terrorist financing are greater.
      In the proposal, obliged entities would be required to take enhanced measures where risks are greater and may be permitted to take simplified measures where risks are demonstrated to be less. The provisions on simplified due diligence in the current (Third) AMLD were found to be overly permissive, with certain categories of client or transaction being given outright exemptions. The revised Directive would therefore tighten the rules on simplified due diligence and would not permit situations where exemptions apply. Instead, decisions on when and how to undertake simplified due diligence would have to be justified on the basis of risk, while minimum requirements of the factors to be taken into consideration would be given. In one of the situations where enhanced due diligence should always be conducted, namely for politically exposed persons, the Directive has been strengthened to include politically exposed persons who are entrusted with prominent public functions domestically, as well as those who work for international organisations.

      The revised Directive proposes new measures to provide enhanced clarity and accessibility of beneficial ownership information. It requires legal persons to hold information on their own beneficial ownership. This information should be made available to both competent authorities and obliged entities. For legal arrangements, trustees are required to declare their status when becoming a customer and information on beneficial ownership is similarly required to be made available to competent authorities and obliged entities.

      The revised Directive will further remove the provisions relating to positive “equivalence”, as the customer due diligence regime is becoming more strongly risk-based and the use of exemptions on the grounds of purely geographical factors is less relevant. The current provisions of the Third AMLD require decisions to be made on whether third countries have anti-money laundering/combating terrorist financing systems that are “equivalent” to those in the EU. This information was then used to allow exemptions for certain aspects of customer due diligence.

      In line with Commission policy to align administrative sanctions, the revised Directive contains a range of sanctions that Member States should ensure are available for systematic breaches of key requirements of the Directive, namely customer due diligence, record keeping, suspicious transaction reporting and internal controls.

      The amended directive will also halve the existing cash payment reporting threshold of €15,000 to €7,500, and member states, when transposing the directive into national legislation, will be free to lower the threshold even further. It will further extend AML regulations to all gambling businesses, not just casinos, and to letting agents as well as other estate agents.

      The proposed amendments will now be passed to the European Parliament and the Council of Ministers for consideration.

  • UK Supreme Court defines legal advice privilege
    • 23 January 2013, the UK Supreme Court ruled that legal advice privilege – whereby communications between a party and their legal advisor, made for the purpose of obtaining or giving legal advice, are exempt from the disclosure requirements – should not be extended to communications with accountants.

      In the case of R (Prudential plc) v Special Commissioner of Income Tax, the appellant submitted that it was entitled to refuse to comply with a notice under s.20 of the Taxes Management 1970 to disclose documents in connection with its tax affairs on the ground that the documents related to legal advice given by chartered accountants protected by legal advice privilege.

      Dismissing the appeal by a majority of five to two, the Court held that legal advice privilege is confined to cases where members of the legal profession give legal advice. Whether it should be extended to cases where legal advice is given from professional people who are not qualified lawyers raised questions of policy that should be left to Parliament.

  • US releases final FATCA regulations
    • 17 January 2013, the US Treasury and Internal Revenue Service issued the final regulations detailing how the Foreign Account Tax Compliance Act (FATCA) is to be implemented. The 544-page document is aimed at giving foreign financial institutions (FFIs) the information they need to make the final preparations for collecting data on their US account holders.

      The regulations will not directly affect FFIs in countries that have signed bilateral Intergovernmental Agreements with the US – to date the UK, Mexico, Denmark, Ireland, Switzerland, Spain, and Norway – but will help to clarify the way the IGAs are to be implemented and the time under which these regulations are to be phased in.

      The final FATCA regulations make clear that the registration (or foreign financial institution (FFI) Agreement execution) must be completed for all FFIs, within and without IGA counties, by 25 October 2013, in order for an FFI to be included in the IRS’s list of participating or registered deemed compliant FFIs by December 2013.

      FFIs not included in the December 2013 list may not be able to avoid withholding on 1 January 2014 for new accounts or contracts. Under FATCA, FFIs that fail to disclose information to the IRS on any US clients face a 30% withholding tax on US-source income.

      The US announced in October that it would delay the starting dates of key parts of FATCA for FFIs in countries not covered by an IGA with the US to 1 January 2014, rather than 2013. This brought the FATCA reporting timings of FFIs located in countries that have not entered into an IGA into line with those countries that have. More than 50 countries and jurisdictions are said to be considering FATCA IGAs, the US Treasury said in November.

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