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

STEP Guernsey: Trusts in the spotlight

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

Meeting One

Director/Trustee

Trust Co Limited

Compliance & MLRO Director/Trustee

Trust Co Limited

Director/Trustee

Trust Co Limited

An administrator has alerted me to a problem. There is serious doubt as the value/integrity/ existence of assets. This came as a complete surprise to me! We performed all of

• ur due diligence –

didn’t we? I will review and notify the Regulator of a potential breach if necessary. I know the Asset Managers really well – they’re good

• guys. There must be

a mistake. Nothing to worry

• about. I am sure it

is a misunderstanding.

STEP Guernsey: Trusts in the spotlight

Meeting Two

Advocate GFSC/Regulator

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.

Director/Trustee

Trust Co Limited

Compliance & MLRO

STEP Guernsey: Trusts in the spotlight

• Has the trust invested within the trust
• bjectives?
• 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

Asset Verification

STEP Guernsey: Trusts in the spotlight

Meeting Three

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

STEP Guernsey: Trusts in the spotlight

• 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

Too many hats?

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 Director T +44 (0)1481 753426 E jamie.toynton@gt-ci.com Ben Rhodes Director T +44 (0)1481 753431 E ben.rhodes@gt-ci.com

STEP Guernsey: Trusts in the spotlight