Ben Davies, Partner in the civil litigation team at Byrne and Partners, discusses with Lawyer Monthly the latest on tax havens, their role, precedents courts have set in recent years, and the risks that are possible.
So-called ‘offshore’ jurisdictions can offer legitimate tax efficiencies and confidentiality to investors. However, those same qualities leave them open to abuse, by those seeking to disguise ownership of their assets and frustrate the enforcement efforts of their creditors.
As the legal systems of such jurisdictions – many of which are based on English law – evolve to meet this challenge, a trend towards interpreting trustee duties widely and extending asset recovery powers is emerging. In such circumstances those operating lawfully offshore need to keep a careful eye on the changes – to ensure both compliance with their obligations and the effectiveness of the asset holding structures they employ.
It was at one point possible for nominees and trustees in many offshore jurisdictions to sit back and leave their clients to run things – but that is no longer the case. Such service providers now need to ensure that they are aware of and can justify any dealings with the assets for which they are responsible, or risk personal liability themselves.
By way of example, in hearing the case of Nolan v Minerva Trust the Royal Court of Jersey took the opportunity to set out the standards expected of trustees, which include a duty to bring “independent judgment to bear” when approving transactions. The case demonstrates that dishonesty findings can be made against a Jersey trustee who ‘turns a blind eye’ to dealings with trust assets, irrespective of his actual knowledge of any wrongdoing.
The recent decision of the Privy Council (on appeal from the Jersey Court of Appeal) in Brazil v Durant International Corporation further demonstrates the need for trustees and nominees to properly understand both the source of the monies which they hold and the purpose of any transactions entered into, and the consequences of failing to do so. There the court permitted the claimant to trace the proceeds of bribes into mixed funds, on the basis that a “camouflage of interconnected transactions” should not be allowed to obscure their real purpose.
The wrongdoing in the Durant International case appears to have been unambiguous – but it raises the possibility that mixed funds could also be at risk in a less clear cut situation, if a trustee or nominee is unable to properly explain where they came from.
The need to be able to explain the purpose of transfers into offshore holding structures was further emphasised by the English Supreme Court in the case of Prest v Petrodel Resources (which will be influential in the many offshore jurisdictions whose legal systems are based on English common law). In that case the court found that, while there were no grounds for piercing the corporate veil as between the defendant companies and their ultimate beneficial owner, the companies’ assets were held on resulting trust for him.
Such a finding might arguably have been avoided, had the original owner been able to conclusively demonstrate a contemporaneous intention to transfer equitable ownership of the assets, beyond his general tax planning objectives.
All of the above demonstrates a move towards interpreting trustee and nominees’ duties widely and a willingness to look through asset holding structures which have any appearance of artificiality. In such circumstances providers of offshore services need to ensure that the purpose behind the structures they set up is clearly evidenced and that they are properly engaged with any dealings with the assets which they hold – or they risk personal liability themselves.
At the same time the courts’ powers to freeze, trace into and recover against assets are becoming increasingly wide-ranging.
For example, in Khrapunov v JSC BTA Bank the English Court of Appeal confirmed that an individual in Switzerland who participated in breaches of a worldwide freezing order was susceptible to a claim for unlawful means conspiracy – notwithstanding that he was outside the jurisdiction of the English court (and therefore not bound by the freezing order or susceptible to an order finding him in contempt) and that the actions he took (moving monies on instructions from their owner) were otherwise lawful.
In addition, in the Durant International case the court allowed the claimant to depart from the usual first-in-first-out or last-in-first-out tracing rules and instead permitting what was effectively “reverse tracing” through mixed funds – prioritising the larger purpose of a series of transactions over the ability to identify the precise funds to which the claim attached.
Both cases illustrate the courts’ willingness to be increasingly inventive in ensuring that traditional barriers to enforcement are not used to frustrate valid claims. They are a further reminder that those operating offshore are increasingly susceptible to both cross-border enforcement and personal claims, and should therefore exercise an abundance of caution in meeting all potentially applicable legal obligations.
Finally, service providers seeking to mitigate their risk through client indemnities should proceed with care. Offshore courts keen to protect their local financial services industries may well be willing to uphold such measures (as was the case in Emerald Bay Worldwide v Barclays Wealth Directors – where the Guernsey Court of Appeal allowed nominee directors to rely on an indemnity, notwithstanding their breaches of fiduciary duty). However, with the law developing fast such measures will need to be kept under constant review, if they are to remain effective.
