A Club for Groucho

In the recent May 2018 FT Wealth magazine distributed with the FT in early May, Matthew Vincent wrote a piece under the heading ‘At last, a Club for Groucho’.

Groucho was well known for resigning from Clubs with the words ‘Please accept my resignation. I do not want to belong to any club that will have me as a member’. Most Clubs he thought were a waste of time and money.

What he did not think was a waste of time, however, was visiting his broker. In fact, he saw him almost every day, and his holdings were worth in excess of $2.6m in later life through his active interest and management.

Vincent in his article mentions the launch of BConnect Club, which is the Club I set up for UHNWIs and Single-Family Offices.  

BConnect Club, Vincent says, ‘has openly declared an aim of bringing individuals together to do deals, rather than to invest conventionally’.

Other clubs, he says charge an annual membership fee of $30,000, presumably to weed out those who cannot pay, and to make a profit. BConnect Club, however, does not charge its UHNW members anything.

The begging question in his piece which Vincent does not address, is how do we weed out the rich from the poor if we do not charge a high fee?

The answer is simple. 

As a practising family governance lawyer, I am fully aware of the onerous obligations put upon financial institutions and the professions to ‘know their client’ and with the increasing obsession of Governments to stamp the laundering of ill-gotten gains, they are also obliged to ensure that the source of wealth is not from criminal activity.

Each of our members, to qualify, must be verified as an UHNWI, by a practising professional; lawyer, banker or accountant, who must also confirm that he/she is a client.

The second, and possibly more interesting question, is why would UHNWIs and/or their single-family offices want to invest direct – surely it is too risky to invest in private equity?

This answer is less simple.

In my book ‘When you are Super-Rich who can you trust?’ I point out that the ‘professional’ management of wealth flourished when interest rates and inflation were high. In such a climate, the investment manager invariably made money for his/her client. This was then cleverly weighted against an industry standard, so that irrespective of the fact that the investment may have made a loss – if it was above the industry standard it was a success and a high fee could be levied by the investment manager.

However, as interest rates and inflation fell, poor performance became more obvious. This coincided with a world-wide drive, for transparency in the investment management industry to stamp out hidden fees and disreputable practices.  Clients could now see how much it was costing them to invest with professionals.

This transparency will not ruin the investment management industry, there will always be wealthy people who want to outsource the management of their wealth to a professional. But to understand why investing direct for some is so desirable, it is necessary to understand what it is like to be rich.

Some rich people give to good causes – they are philanthropic, but others prefer to invest in good causes. The fact that some of these good causes or projects may fail is not a priority, they would  not be any better off if they they gave it away, but the added fun is that some investments will make a profit.

BConnect Club simply brings these like-minded people together and introduces them to investment opportunities, which they would struggle to find on their own or with a few friends.

Matthew Vincent in his article quotes me ‘There are a significant number of high-end investment clubs around the world’, but he does not ask why our Club is different?

Small investment clubs invariably struggle. If they get too large they attract ‘wannabe’s’ but without economy of scale they cannot attract quality deals. This is a drawback we have resolved.

Digital technology solves other drawbacks as well. No-one can enter our ‘deal room’ unless it wants the BConnect Club to find it deals. Furthermore, our deals are only teasers –if a member is interested he needs to contact one of our Account Managers for further details. In this way, we combine a people business with digital technology.

The other advantage of having a Club of verified UHNWIs is that we can open it up to luxury products and professional advisers for whom UHNWIs are their target audience. They can feature their products and services for as little as £100 a month, or meet our UHNW members by sponsoring our events.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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All seeing, all knowing

Just as we are being bombarded by Requests for Permissions to remain on mailing lists to protect our privacy and Facebook is being criticised for selling analytics on what we do and say, institutions dealing with asset owning rich people are being told to kiss and tell.

In July 2015, the then Prime Minister David Cameron announced his commitment to address corruption and the illicit flows of finance, by being the first G20 country to establish a publicly accessible central register showing who really owns and controls UK companies. The reason for this frank openness, he said was to tackle corruption more effectively – really?

The Government paper says ‘enhanced transparency and trust are good for business and good for growth. The Government wants the UK to be one of the most open countries in the world for good, clean investment’. Fascinating!

It also stated that it would consider ways to introduce transparency into foreign companies and would start by compiling a register of beneficial owners of UK properties owned by offshore companies as well as a register of the people who are beneficially entitled to the benefits of public contracting.

The World Bank has estimated that corruption adds up to 10% to business costs globally.

According to the OECD around 5% of global GDP is corrupt. Crime organisations and corrupt individuals frequently use companies to hide the proceeds of bribery, corruption and organised crime, which costs the UK, at least £24 billion each year. Lifting the veil of secrecy of who ultimately owns and controls companies can therefore expose wrongdoing and disrupt a key vehicle for illicit financial flows, including those derived from corruption – But surely won’t such a beneficial ownership register be avoided by criminals, and used by them to increase corruption and criminal behaviour?

The real driver behind creating beneficial ownership registers, I believe is for Governments to have access to information so that they can tax the estimated $7,600 billion offshore. They would appear to care little for those who may innocently be caught by criminals who would not otherwise suffer.

 The UK has put pressure on its Crown Dependencies in the Caribbean namely on the BVI and the Cayman Islands to create and maintain a register of beneficial owners of all their companies. And now, the Bahamas, which is independent, has followed suit.

On April 25th, the Register of Beneficial Ownership Bill was tabled in the House of Assembly in the Bahamas. This will contain beneficial ownership information on ‘all corporate and legal entities’ incorporated in the Bahamas. The register is considered necessary ‘to meet the anti-financial crime strictures of the Financial Action Task Force (FATF) and its affiliates, as well as the Organisation for Economic Co-operation and Development’s (OECD) and European Union’s (EU) fight against tax avoidance/evasion’.

Clearly the Bahamas was being put under pressure from the EU, which recently blacklisted the jurisdiction as well as the OECD to comply with the automatic exchange of tax information.

But there has also been pressure from the US. In 2017 the State Department published an ‘International Narcotics Control Strategy’, in which it said

‘The Bahamas does not disclose in a public registry information about trust and foundations, maintain official records of company beneficial ownership, require company accountants be placed on a public register, or require resident paying agents to tell the domestic tax authorities about payment to non-residents’.

If the US was really committed to stamping out corruption through transparent public register of ownership, it would first clean up its own back yard.

In Delaware, provided you appoint a resident representative in Delaware, you can set up a company without even giving your name and address. This opacity was stamped out in offshore financial centers years ago.

One commentator said ‘The US ought to push for a public beneficial ownership register global standard before seeking to impose it on this nation (the Bahamas) and others’.

The winners of these new double standards are the US States of Delaware, Alaska, and South Dakota, but there are downsides.

Information which is made available to the IRS, by any means, is subject to a myriad of Tax Information Exchange Arrangements. And unlike countries such as Switzerland, Cayman and the Bahamas which have had decades of dealing with international families, the US, by comparison, has not.

I have seen numerous examples where US trust administrators have filed returns on non-US citizens where it is not strictly necessary ‘because that is what we do for all our clients’! And once the information is in the arms of Uncle Sam – he will exchange information as readily as any other country.

There are solutions, for honest, hardworking, international entrepreneurs who want protection from an ever-increasing risk that the collection and collation of beneficial ownership puts them at greater risk personally of attack by the very people from whom they want protection.

GFOS sets up Family Headquarter Structures with good governance at its core. If a disaster were to strike which could just as easily come from within the family than outside, it can be sorted out quickly and efficiently so as not to lead to a catastrophe.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Wisdom from the Esteemed

Last week I was invited to join an Esteemed group of professionals in Pennyhill Park Hotel deep in the Surry countryside. Unfortunately, I was unable to stay for the entire two days, due to an ongoing dispute resolution, which is sapping my time, but I was there to lead the discussion on Family Governance and Family Office.

Carlos De Serpa Pimentel from Appleby in the Cayman Islands was my co-leader. Because the topic is so broad, we decided to limit the discussion to the Pugachev case. Carlos took us through the case to set the scene.

Pugachev, from the outset, wanted to protect his assets from the creditors of the Mezhprom bank. He set up five trusts in New Zealand but it was clear that he did not want his Trustee, which was a Private Trustee Company, to have control.

The line of argument I wanted the group to focus on and discuss was how the Pugachev case should affect our structuring and running of trusts, if at all. In this case Mr Pugachev was Settlor, Protector and Beneficiary, and as Protector he had wide powers. In essence, the Trustee could do nothing without his consent. The Judge held that this made the trust a nominee for Mr Pugachev and that his powers were personal and not fiduciary.

Good corporate governance I proposed hinges on accountability. Trustees were originally accountable with their pocket, having to make good personally any loss to the trust fund. However as trusts offshore became more popular, stronger and stronger indemnity clauses were introduced until now Trustees have very little financial exposure. The role of the Protector is therefore to make Trustees accountable with their office. If a trustee is not performing in the best interests of the beneficiaries it should be removed and replaced.

However, the mere presence of a Protector, instead of being seen as an office of good governance, is now likely to be challenged in the hands of tax authorities with information delivered under CRS. I asked the group what should trustees and Protectors do to maintain good governance, but avoid investigation by tax authorities?

The first response was that a Protector should charge an annual fee for his/her fiduciary services, and the Trustees should keep the Protector fully informed of the assets and circumstances of the beneficiaries. It was admitted that this did not always happen, and there were good and bad Trustees as there were good and bad Protectors.

It was suggested that the role of the Protector should be given to a professional who was independent and neutral. However, this was challenged. On some occasions, the Protector is chosen for his/her special relationship with the beneficiaries and/or the trust assets and is expressly made to be personal and not fiduciary. It was agreed that this of itself would not render the trust a nominee arrangement – far from it.

The question then arose as to whether if the Protector did everything the Settlor wished, would it make him/her a nominee. It was pointed out that, the Settlor is often the best person to know what should/could be done with the trust assets and when and to whom to make distributions.

It was proposed that there should be on record a situation when the Protector deliberately refuses to do what the Settlor wants, but this was criticised. If a refusal was deliberately orchestrated, it would be seen as such, and ignored.

I pointed out that in the manual on trusts and CRS, tax inspectors are required first to check whether the settlor is alive, then to see how substantial the trust is and finally to see whether the trust has a Protector. Then they are told to approach the Trustee to review the manner in which the trust was set up and the powers reserved to the Protector. Finally to calculate how much tax the settlor would have to pay if he/she had not set up a trust and put in a claim with interest and penalties.

The assembled group were agreed that litigation was inevitable and the law in this area would be further defined in particular with regard to Protectors. Clearly having a fully functioning Protector with power to remove the Trustees is an important aspect of good governance, but if this exposes the trust to investigation, maybe the structure should be reviewed to determine what other structure could be put in place, which provides for good governance – without the need for a Protector.

Such a structure I propose should also include a strong constitution, so that any Family Office held in trust has clear guidelines as to what is expected of it and who needs to be appointed and for what purpose. This structure we call a Family Headquarters.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Paulo and South America

Very often GFOS clients want to compare jurisdictions once they have their sights on setting up a Family Headquarter offshore; all the usual names appear on our comparison tables - Bahamas, Switzerland, Jersey, Monaco etc.

Monaco is very special for Brits - the weather, security and to be surrounded by like-minded people. But it is not as easy as it used to be to become a non-UK tax resident.

The law changed in 2013 (Finance Act 2013 Schedule 43) and the statutory residence test is about as complicated as the UK Treasury could possibly make it.

Let’s take Paulo. He came to the UK from Central America twenty-eight years ago, and has lived in Belgravia ever since. His first child was born before he and his wife immigrated and she is now 31. Paulo then had a further two children. His business is food imports to Europe from his home country and he travels extensively, in particular to Central America, where he has a home.

His eldest is now married and living in Notting hill Gate with two young children, Emily and Francis. His second child is pregnant and due to get married this year and will continue to live in London. The third is likely to go into Paulo’s business and is not settled.

Paulo is very concerned about how Brexit will impact his business and is considering whether to reduce his imports to the UK and concentrate more on Eastern Europe. He has a UK passport, and a passport from his home country, but now fears that he may need another passport so that he can move freely around Europe post Brexit.

He has a trust in Jersey which he set up twenty years ago, but is now also concerned that his trustees will report to his home country, given his close connections there.

When he came to see me, Paulo wanted to know first how easy it would be to become a non-UK resident and to set up a bolt hole in Monaco.

I explained to him that in any year he spends 183 days in the UK, he will be automatically treated as UK resident, and will be treated as non-UK resident if he spends less than 16 days in the UK. This he said was not going to be possible, he and his wife wanted to see their grandchildren growing up.

The next question was whether he would keep a home in the UK – yes, he was quite decided. His wife would want to have her own home to be close to her children, but he could not see either of them neither spending three consecutive months of the year in the UK, they would always come and go.

In these circumstance Paulo and his wife would need to work out how many ties, they would retain in the UK.

Firstly, he would have tax resident children in the UK, so this is one tie, secondly, he and his wife would have accommodation in the UK, which would be another tie, however it was unlikely that he would work in the UK, but could not be sure. If not he would not have a work tie in the UK, if he did he would remain UK resident.

If not, he would need to be very careful not to spend more than 90 days in the UK, with family and friends. If he did, he would be treated in that year as being UK tax resident, and would remain UK tax resident for the following two years.

With regard to acquiring a home in Monaco, I told him that we could put him in touch with all the right property developers and if necessary the bankers we work with locally can arrange finance for him.

He then wanted to know what to do about his trust in Jersey and his concern that his trustees would report on his offshore finances to his home country in Central America. I told him that while he was UK tax resident we can advise on positioning his affairs in a way not to expose him in other jurisdictions.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Not in my backyard

Thanks to all of you who took the time to reply to last week’s note – Pugachev to Assist Tax Authorities.

The most common feedback, which I would like to address in this note, was ‘the Pugachev case will not affect trusts governed by my jurisdiction’. This comment came from readers in Cayman, Jersey, and Guernsey.

These jurisdictions, as well as many more: Bermuda, BVI, Isle of Man and Bahamas, have enacted local legislation which states that any action against the validity of any trust due, for example, to the settlor’s reservation of powers or powers reserved to a Protector in the Trust Deed, will not invalidate the trust. Furthermore, any foreign judgement presented to a court within that jurisdiction will not be recognised.

This has been upheld. In fact, local courts have gone one step further, such as in the Cayman case of RBS Coutts Cayman Ltd v W [2010] which directed the trustees not to comply with such an order.

So the question is, for example, what will a tax authority do, armed with evidence from CRS that a  trust which was set up by a Settlor resident in its jurisdiction do when it has information that the trust

·      has a Protector,

·      owns family businesses and or private shares in one or more joint venture businesses, and

·      is governed by a jurisdiction which has ‘firewall legislation’

We know from the tax manuals written to tax inspectors that the first step for them is to approach the trustee for a copy of the trust deed on suspicion of tax evasion.

On receipt of the trust deed it will look to see if, in accordance with the Pugachev case, the trustee has any autonomous power. If consent is needed for the exercise of most of its powers it needs the tax authority could that the Protector’s powers are personal and not fiduciary.

On this basis, it could issue a claim against the Settlor direct, for tax on all the trust’s assets as if the trust were a bare trust.  This approach does not need to take the case to the jurisdiction in which the trust is resident or governed, thereby neatly by-passing any firewall legislation.

This is what is commonly done by a disgruntled spouse faced with a family trust in a jurisdiction which has ‘firewall legislation’.

In order to succeed the court in the jurisdiction in which the claim is brought will look at the terms of the Trust Deed, what powers were reserved and to whom. It will then look at the Letter of Wishes to see whether this sets out the purpose of the trust, and most critically it will look at the correspondence between the Settlor and the Trustee, in particular immediately before the trustees make a distribution or invest or dispose of trust assets.  – Is the Settlor using the trust fund as his/her own piggy bank?

Given that the many professional trustees owning, in whole or in part, family businesses or other private shareholdings, frequently rely on the experience and knowledge of the Settlor in making its decision as to which investments to keep and which to sell, this guidance could give the tax authority the evidence it needs to tax the underlying assets. The  order sought would be to tax the Settlor as if the trust assets were held by him/her personally on the basis that the trust was a bare trust and the trust assets were held to the order of the Settlor.

This has been a well-worn path trodden by many spouses seeking to claim against trust assets. If a spouse is then unable to pay without access to the trust fund, he or she is left to ask the trustee for a distribution. If the trustee refuses, then the Settlor could face bankruptcy or a custodial sentence for contempt of court.

It is what many call rough justice.

In my personal experience, most Settlors who find themselves in such a situation demand that the trustees make a distribution. If they do so, then that is proof that the trustees simply do what they are told, if however, they do not – could they be accused for not acting in the best interests of the beneficiaries by allowing him/her to go to prison for want of a distribution.

The fact that the trust may have a clause in the deed such that such an action will make the Settlor an excluded person may have some influence on the court but depending on the wording, that it is likely to be at the discretion of the trustees, will be unlikely to affect the decision of the court.

We live in an age where tax authorities now have the information they need to attack and they will use any and all the existing case law to – make the best possible case to secure their goal; to tax the underlying trust assets.

Trustees may wish to ignore how and when tax authorities will use the information they are about to or already have in their possession, but to do so when there are robust and safe alternatives is do so at the risk of alienating their best clients and business.

If you would like to hear about what we do for our clients or have comments about this article please get in touch below.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here: