STEP Guernsey Trusts in the spotlight: when things go wrong Jamie - PowerPoint PPT Presentation

STEP Guernsey Trusts in the spotlight: when things go wrong Jamie Toynton and Ben Rhodes 12 January 2017 STEP Guernsey: Trusts in the spotlight STEP Guernsey: Trusts in the spotlight

Introduction • The types of things that can and do go wrong in practice • Potential consequences • Tell-tale signs and red flags • The concept of an “insolvent trust” • Considerations for avoiding problems STEP Guernsey: Trusts in the spotlight

Simple Trust Structure STEP Guernsey: Trusts in the spotlight

Complex Trust Structure STEP Guernsey: Trusts in the spotlight

Things that go wrong • Potential problems can include: - Fraud - Compliance failures – highest incident - Dispute between parties e.g. Trustee and beneficiaries - Litigation and legal disputes - Mistakes - Tax enquiries - Asset value reduction/LTV calls by lenders - Insolvency STEP Guernsey: Trusts in the spotlight

Compliance & MLRO Meeting One Director/Trustee Trust Co Limited Director/Trustee Trust Co Limited Director/Trustee Trust Co Limited Nothing to worry about. I am sure it is a misunderstanding. An administrator has We performed all of alerted me to a problem. I know the Asset our due diligence – There is serious doubt as Managers really didn’t we? I will well – they’re good the value/integrity/ review and notify the guys. There must be existence of assets. This Regulator of a a mistake. came as a complete surprise potential breach if to me! necessary. STEP Guernsey: Trusts in the spotlight

Compliance & MLRO Meeting Two Director/Trustee Trust Co Limited GFSC/Regulator Advocate We have identified significant failings in due diligence and controls. There are serious concerns over the integrity of the Trust and its management. Our intelligence is that the principal is being investigated in other jurisdictions. STEP Guernsey: Trusts in the spotlight

Asset Verification • Has the trust invested within the trust objectives? • Have the settled assets been identified/verified? • How are they valued and by whom? • Has anyone seen the assets? • Are accounts regularly produced? • Beware unexplained complexities STEP Guernsey: Trusts in the spotlight

Director – Compliance & MLRO It’s the Commission – Insolvency Meeting Three they don’t understand – Practitioner I hope they all gung-ho.. size 12 have PI policies... boots etc! Trust Manager Director/Trustee – How did my Trust Co Limited team deal with Bloody hell – at least Director/Trustee – the asset Beneficiaries I only joined Everyone in Trust Co Limited valuations? recently! We’re also victims of here sucks! this fraud. We couldn’t have known. Advocate Trust disputes can be Asset Manager Not sure I have any Director/Trustee – very costly! problem here – just Trust Co Limited W e don’t have hold the assets and Administrator – have a look at the enough money to Trust Co Limited meet liabilities stats from time to Settlor/Beneficiaries I didn’t know it time. Who is responsible would create this and how can I much fuss! recover my money?!? STEP Guernsey: Trusts in the spotlight

Too many hats? • Trustees; directors; administrators; advisors – make all decisions • Conflicts of interest must be disclosed • Does the conflict matter? Warning signs • Bossy, aggressive, domineering • Evasive/economical with truth • Delayed/no response to queries STEP Guernsey: Trusts in the spotlight STEP Guernsey: Trusts in the spotlight

Potential consequences • Legal actions for asset recovery - Wrongful trading/fraudulent trading in respect of Directors of underlying companies - Misfeasance/breach of duties to beneficiaries Targets of legal action: • Trustees – misfeasance and breach of duty • Directors • Advisors, Administrators • Anyone with PI Cover • Easiest to pursue – local? STEP Guernsey: Trusts in the spotlight

Potential consequences – cont. • Regulatory sanctions - Loss of regulatory license/penalties - Disqualification of Directors • Costs unrecoverable by Trustees • Insolvent subsidiary companies • Insolvent trust (e.g. guarantees and other liabilities) • Difficulty exiting situation - Regulatory matters will need fixing - Replacement trustee needs commercial rationale - Indemnities unlikely to be given/received by incoming/outgoing trustee STEP Guernsey: Trusts in the spotlight

Protection of Trustees • Implied indemnity • Trust instrument – express provisions - Indemnity - Exoneration/exculpation clauses - Possible attack e.g. gross negligence; willful misconduct; bad faith; dishonesty; fraud - Make Settlor aware • Structuring e.g. underlying corporate entities for limited liability status; corporate trustee • Insurance • Prevention better than cure! STEP Guernsey: Trusts in the spotlight

General considerations • On-boarding considerations: - High risk jurisdictions - Risk rating of clients – GFSC handbook - Business risk – controlling the assets - AML risk – KYC • Understanding purpose and strategy of Trust • Structuring (e.g. underlying companies) • Usual considerations of own competence, expertise • Borrowing risks – leveraging • Professional advisors and external directors STEP Guernsey: Trusts in the spotlight

Insolvent Trusts • Topical issue – “insolvent trusts” Problems: • No insolvency regime • No clear remedy for creditors and beneficiaries • Difficulty replacing incumbent trustee • No independent scrutiny • £££ in fees and costs of litigation Solutions: • Too difficult pile? • Watch this space… STEP Guernsey: Trusts in the spotlight

When it goes wrong Fraud perpetrated by a trust officer • Trust Company suffers a fraud • Involved senior member of staff • Determined fraudster • Disguised the fraud from others • Lack of segregation of duties • Quantify losses and seek recovery • Consequences: - Criminal action against perpetrator - Unrecoverable fees, costs, time STEP Guernsey: Trusts in the spotlight

Trustee company liquidation Corporate Trustee enters liquidation • Managed solvent wind-down or insolvent Trust Company • “Stuck” client relationships - No commercial benefit for new trustees - Frozen or arrested/confiscated assets • “Insolvent” trust - who pays? STEP Guernsey: Trusts in the spotlight

Concluding tips • It is all about the assets - Identify, verify, value, protect, insure • Compliance is not just about KYC – it is about protecting interest of beneficiaries • Make sure questions on assets are answered with evidence • Beware dominant parties • Be wary of lack of information and evasive responses delaying accounts or other regulatory returns STEP Guernsey: Trusts in the spotlight

Contact details Jamie Toynton Ben Rhodes Director Director T +44 (0)1481 753431 T +44 (0)1481 753426 E ben.rhodes@gt-ci.com E jamie.toynton@gt-ci.com STEP Guernsey: Trusts in the spotlight STEP Guernsey: Trusts in the spotlight