T2 WEEK 3 Offshore world

Why do people use offshore trusts?

Schmidt v Rosewood Trust Ltd [2003] UKPC 26; [2003] 2 AC 709 per Lord Walker at [1]

“It has become common for wealthy individuals in many parts of the world (including countries which have no indigenous law of trusts) to place funds at their disposition into trusts (often with a network of underlying companies) regulated by the law of, and managed by trustees resident in, territories with which the settlor (who may be also a beneficiary) has no substantial connection. These territories (sometimes called tax havens) are chosen not for their geological convenience (indeed face to face meetings between the settlor and his trustees are often very inconvenient) but because they are supposed to offer special advantages in terms of confidentiality and protection from fiscal demands (and sometimes from problems under the insolvency laws, or laws restricting freedom of testamentary disposition, in the country of the settlor’s domicile)”

Key advantages

• Low tax regime

• Minimal disclosure requirements

• Well established professional trustee industries

• Bespoke trusts law

Bernie Ecclestone (former owner of Formula 1) case

Facts

• Pleaded guilty to tax fraud, after failing to declare a £400m offshore trust in Singapore because he “forgot about it”

Held (after guilty plea)

• Ordered to pay £652m in 18 years’ worth of back taxes, interest and penalties.

• But only sentenced to 17 months imprisonment, suspended for two years. As long as he didn’t do anything further wrong he woudln’t go to jail

Other cases to compare to Bernie’s case (prove how lightly he got off)

• On 14 December 2023 a homeless man who stole a handbag and used a bank card within it to buy £100 worth of vodka was sentenced to 4 years and 8 months imprisonment.

• In November 2022 a woman who stole £138,000 from her employer over 5 years was sentenced to 20 months imprisonment.

• In November 2022 a man who stole £604 of alcohol from Sainsbury’s by ‘de-tagging’ the security tags was sentenced to 12 weeks imprisonment.

• In August 2022 a young man who stole £15,000 worth of iPhones was sentenced to 1 year imprisonment.

What is Jersey’s trust law?

Trusts (Jersey) Law 1984

Re Weston’s [1969] 1 Ch 223

Facts

• English businessman tried to move a family trust to Jersey in the face of changes to English Capital Gains Tax

• Physically moved his family to Jersey but, since the beneficiaries included his minor children, he had to seek the Court’s permission to vary the trust under the Variation of Trusts Act 1958

• The court could only supply that permission if it regarded the variation as being “in the best interests” of the children

Held

• The Court refused to approve the export of the trust ro Jersey, finding that it was not in the best interests of the children

• Lord Denning weighed the financial advantages of moving the trust to Jersey against the social and educational harm of uprooting the children

• “The avoidance of tax may be lawful, but it is not yet a virtue. The Court of Chancery should not encourage or support it

Re Windeatt’s [1969] 1 WLR 692

Facts

• English father created a will trust for his wife, daughter and her children

• The father and wife died. Their daughter, her husband and their two children had lived in Jersey for the last 19 years

• The daughter sought to export the trust to Jersey, again requiring the Court’s permission in respect of her minor children

Held

• Permission was granted to export the trust to Jersey

• Re Weston’s was distinguished on the basis that “the whole object of moving to Jersey was to escape a particular fiscal liability”

• “Here, the family has been in Jersey for 19 years and has made a genuine and permanent home in Jersey

Freezing orders (mareva order)

In Babanaft v Bassatne [1990] Ch 13 the High Court first recognised its own power to “freeze” assets not only in England and Wales but anywhere on earth.

Freezing orders are not typically sought ex parts, before a claim is commenced, in order to stop the defendant from disposing of their assets in order to frustrate any eventual judgement against them.

Ways of seeking to shield wealth against freezing orders

1. Discretionary trusts

Mehzprom v Pugachev [2015] EWCA Civ 139 = Russian bank sued Pugachev, an oligarch for $2bn+. At the outset of proceedings, the English High Court made a worldwide freezing order, freezing Pugachev’s assets including “any interest under any trust” and requiring Pugachev to disclose such assets. Pugachev was a beneficiary of 5 discretionary trusts. The bank claimed that Pugachev had an interest under these trusts and so had to disclose information about them pursuant to the freezing order. An interest as one of a class of beneficiaries under a discretionary trust could not be enforced against. But such an ‘interest’ was still an ‘interest under any trust’ within the meaning of the freezing order. Consequently Pugachev did have to disclose more information about these 5 discretionary trusts. The Bank later used this information to show that the discretionary trusts were in fact controlled throughout by Mr Pugachev, such that he remained the beneficial owner of the assets (or alternatively, they were shams)

1. Revocable trusts

TMSF v Merill Lynch [2021] 1 WLR 1721 = Mr Demirel defauded a bank and failed to pay a court judgement for US$30m. But he had squirrelled $24m away into two Cayman Island discretionary trusts. Usually, by the terms of the trust instrument Mr Demirel had reserved to himself an express right to revoke the trusts. The power to revoke the trusts was tantamount to ownership of the trust assets, because Mr Demirel retained the right to get them back at any time. Mr Demirel was ordered to delegate his power of revocation to receivers, who would exercise the power and make the assets of the trusts available for enforcement

1. Loan agreements

JSC BTA Bank v Ablyazov [2015] UKSC 64 = Bank sued its former chairman, alleged to have embezzled $6bn from the bank. English High Court made a freezing order which defined assets as including any asset which he had the power, directly or indirectly, to “dispose of or deal with as if it were his own”. Ablyazov entered into a number of loan agreements, pursuant to which he had the right to draw down sums. He did borrow large sums but had them paid directly to third parties (rather than to himself). Ablyazov’s rights under those loan agreements were not assets which he owned, legally or beneficially. But they did constitute assets within the meaning of the freezing order because he had the power to deal with with those funds as if they were his own. consequently, the freezing order also froze Mr Ablyazov’s rights under the loan agreements, preventing him from avoiding the effect of the freezing order itself

Public registers of beneficial ownership

• The 4th Anti-Money Laundering Directive (Directive (EU) 2015/849) required Member states to ensure that information concerning beneficial ownership of companies is held on a central register available for public inspection.

• Luxembourg established a “Register of Beneficial Ownership” pursuant to a 2019 law. The beneficial owner of a company captured by the Luxembourg law challenged the validity of that law and of part of the EU Anti-Money Laundering Directive

• In Case C-37/20 Luxembourg Business Registers [2023] Bus LR 61, the European C court of Justice ruled that the requirement to maintain publicly accessible registers of beneficial ownership contravened the right to respect for private life and to the protection of personal data (Articles 7 and 8 ECHR)

• The Court of Justice took issue not with the existence of the register per se, but rather with the requirement that it be publicly accessible

• While public access could assist in creating an environment in which obscure ownership structures are harder to use for abusive purposes, that access was not strictly necessary in order to a achieve those objectives (and so constituted an impermissible interference with the beneficial owner’s Article 7 and 8 ECHR rights)

• English law has created similar registers (pursuant to the Register of People With Significant Control Regulations 2016 and the Economic Crime (Transparency And Enforcement) Act 2022)

• Post Brexit, the IK is not bound by ECJ judgements. But it must still comply with the ECHR,a nd it seems likely that challenged to (at least some) of these registers will be brought in the coming years.

• Some offshore centres (eg BVI) quickly made use of the ECJ judgement in refusing to provide publicly accessible registered of beneficial ownership, having previously committed to implement the same standards as required by the EU Anti-Money Laundering Directive.

• Guernsey, jersey and Isle of Man have also resolved not to make information accessible to the general public, but to develop mechanisms through which entities with a legitimate interests can access these registers.

• Jersey now (as of 1^st March 2025) has a register of beneficial owners or controllers of Jersey companies, but the register can only be access by permitted individuals within Jersey entities regulated under its Money Laundering Order and access can only be for the purpose of conducting customer due-diligence checks. Accessing the register (or using its information) for any other purpose is a criminal offence.

• In 2024 the European Parliament passed Directive (EU) 2021/1640 (the 6th AMLD) which sough to address this issue

Summary

• Pugachev, TMSF and Ablyazov all demonstrate the willingness of the English courts to interpret the language of court orders in a way which combats the defendant’s attempts to shield themselves.

• In Pugachev, his powers as self-appointed ‘Protector’ meant that he retained ultimate control over the assets, defeating the false impression of discretionary trusts.

• In TMSF, the settlor’s power to revoke the trust again meant that he retained ultimate control over the assets.

• In Ablyazov the court order itself froze anything which the defendant had the power, directly or indirectly, ‘to dispose of or deal with as if it were his own’. This included mere personal contractual rights under loan agreements!

• Equity’s greatest invention, the trust, has increasingly been used to shelter assets offshore in search of fiscal advantages, secrecy and asset protection.

• Equity itself has sought to combat this, carefully scrutinizing the true effect of the settlor’s arrangements and crafting its own powerful injunctive relief (freezing orders) to fight back.

• But it remains the case that a valid trust can move, hide and even suspendbeneficial ownership of assets. Offshore jurisdictions have tailored their trusts laws to facilitate the settlor’s ability to do so.

• Legislation has sought to encourage greater transparency, but the ECJ judgment in Luxembourg Business Registers presents a set back, holding that publicly accessible registers contravene individual human rights.