Protection, Control and Privacy

Jose is resident in Argentina. In 2002 his father died while residing in Spain and left Jose an account in Switzerland of $120 million. He did not declare it in Argentina, because he was not sure he could trust the Government at that time (The Hostile world from an Argentine perspective), but can he trust them now?

In May 2016 Mauricio Macri, the new President, offered Argentine residents a tax amnesty if they declared their offshore assets before 31st March 2017. Those who declare will pay a penalty of between 0 – 15%, in addition to the tax, but will escape criminal prosecution. Jose is not alone in having an account offshore; it is estimated that a whopping $500billion is owned by Argentine residents outside the country on which tax has not been paid, but if he declares now, will the Government change its mind later and go after him for more taxes?

Chile had an amnesty this year. For those who declared, no interest or penalties were payable. It raised CLP 160billion in extra revenue, ten times more than expected. However, Chile sacrificed CLP41.5billion ($62.3 million) in interest and penalties to do so.

There are numerous countries who have offered or who are about to offer tax amnesties; Belgium, Germany, Greece, Italy, Russia and coming soon is Brazil. For many, however the issue is much more complex than non-payment of tax or even whether to trust the Government of their country; in short they are suspicious of anyone who has or could have details of their private wealth.

Jose came to see me last week having read my Note ‘A Hostile World from an Argentine Perspective’. If he were to put his inheritance into trust would he not be losing control of his assets? The monies in trust would no longer be Jose’s, what was to stop them absconding with his money?

‘It depends who the trustee is.’ I told him ‘There are many trustees who are regulated and professional with an excellent track record, alternatively you can set up your own private trustee company provided it is in a suitable jurisdiction which will regulate it. This is often called a PTC.’

Jose can then appoint the people he trusts to be Directors of his PTC who will take the decisions on the trust assets and its distribution to his family. Jose will however need to take care as to who owns the PTC, because this person or entity will determine which Directors of his PTC can be removed and who is to replace them.  I recommend an Executive Entity to hold the PTC. This is an entity I created through specific legislation in the Bahamas which is designed for this task [https://en.wikipedia.org/wiki/Bahamas_Executive_Entity ]. It gets around any problem of succession if someone in power dies unexpectedly. It also enables a wayward or difficult Director to be removed and replaced where necessary.

The only major snag with a PTC, is that as from September 2017 its Directors will be treated as people of significant influence and will be reported to the country of Jose’s residence; Argentina. Most people Jose knows and trusts do not want their privacy compromised in this manner. Even if the PTC will not have to report, the bank where it holds an account will need to do so with effect from 1st January 2017.

Jose came to Garnham FOS because he read its book ‘When you are Super Rich who can you Trust’. He did his homework, Garnham FOS is independent, does not provide trustee services, has advised many of the wealthiest people in the world for more than two decades and has an excellent track record.

It was also one of the first independent advisors two decades ago to look for an effective and efficient solution on how to incorporate corporate governance principles into family wealth holding structures thereby maintaining control for the family and is now focussed on delivering for its clients privacy protection.   

If you would like to contact Caroline or any one of her team, please contact svetlana@garnhamfos.com or call her on 020 3740 7423.

(Caroline’s book ‘When you are Super Rich who can you Trust’ can be bought on Amazon or on our website where the rest of Caroline’s weekly blogs can be read on www.garnhamfos.com. )

Hunting a profit

Last week I had lunch with Richard, a business colleague and friend who I have known for several decades. His career has been stellar, leading some of the capitals best known private banking departments and multifamily offices. He and I have spent many happy hours enjoying country pursuits and working together, so I asked him first, whether, he was having much sport this year.

I wished I had not asked. He is off on Friday to stay for a few days with a German Count friend in his Bavarian chalet to hunt chamois. He showed me a picture of the chalet they would be staying in. Although in theory a bit like deer stalking in Scotland the hunter has to be much fitter given that the terrain is considerably steeper. He wondered whether he was fit enough for the challenge. Knowing Richard lacking fitness would make no difference, he would be determined to have a good time.

The conversation moved onto his work. He expressed his desire not to return to private wealth management. ‘The yields are so low, private wealth managers can no longer justify their fees. In my opinion, every investor should put 80% with an investment management, 10% in riskier projects with a good potential yield and 10% in investments of passion, which could include charitable work, impact investment or collectibles such as art or cars’.

In my book ‘When you are Super Rich Who can you Trust?’, I point out that ‘Investment management, whether passive or active is not a science. It does not follow rules that can be used to predict the future. It is an art, because it is dependent upon people and as we know, people are fickle and unpredictable’. Most investors do not really understand this in practice; if they did they would take a totally different approach to their investing.

Edward, a client of mine, did not understand this to begin with, but now does. He sold his business in 2007 and gave his money to a multifamily office to manage. Eager to learn, he followed the performance of the funds into which his account manager had invested his money. At that time, Edward assumed that some fund managers were better than others and that his account manager knew who they were. At the end of each year, he expected his account manager to ditch the funds which were not performing well and put them into the funds which had performed well – but this is to assume that investment management is a skill and not statistics.

As a statistic, if a fund manager has had a good year, Edward should take the profits and invest it in the worst performing fund.  Next year that fund could have a good year and he will benefit from the rise in the value of the fund, especially if having had a good year, other buyers, looking at the past year’s performance, want to invest in that fund and he will make a profit.

What a fund manager is doing is trying to spot undervalued assets or a trend in investments and what the account manager is doing is trying to spot next year’s stellar account manager, regardless of what he or she did last year.

When Edward realised that investment management was statistics not skill, what did he do? He engaged a wealth manager to go through with him his lifestyle needs and future trigger points; buying houses for his kids, the marriage of his daughter, succession, his personal passion for renewables and kids in Africa. It soon became clear from this analysis that his portfolio would best be passively managed using trackers, but that the portfolio set aside in trust for his children should invest in equities, with some bonds for the expected capital requirements. With regard to his interest in renewables, his wealth manager introduced him to a former investment manager who has a deep knowledge of renewables and to a charity with a charity to help him raise money for kids in Africa.  ‘Now that my portfolio is managed according to the needs and interests of myself and my family, I feel in control of my investments and feel I am getting value for the fees I pay.’

And what about Richard? Like the manager Edward was introduced to who works with him on his renewables interests, Richard is looking to work with a firm which specialises in medical technology. He will then seek out families, who have an interest in medical technology with whom he can work. ‘I want to use my skill and expertise in one sector so that I can pick projects on which there is real growth potential, if the family is prepared to take a risk’.

Looking for projects as compared to investment management is the difference between hunting and farming. Richard could take a lot of time and effort in Bavaria tracking down an animal, only to miss on shooting. Managing the 80% of ‘safe’ money produces a steady, but not spectacular return, hunting projects could however make the client a super profit – or none at all.

If you have experiences like Edward or Richard or have any comments, please let us know. If you would like to buy Caroline’s book or make an appointment to see her or one of her team, please contact svetlana@garnhamfos.com or phone her on 020 3740 7423.

The Garnham Family Office finds solutions to problems faced by UHNW families which range from dispute resolution, privacy planning, estate planning, setting up single family offices, to trust planning and much more.

Safe not sorry

When I was a child, my mother took me to the kerb on a quiet road and I was told to look right, then left and right again, listen, and only when certain that there were no cars to walk, not run, across the road. She seemed to be very serious about this exercise and so I accordingly took it seriously.

Two weeks ago I flew to Geneva, before the aircraft took off, the air hostess told us what to do with the oxygen mask should the cabin lose pressure and where to locate the life jacket if the aircraft landed on water. I sometimes wonder what people would do if such a catastrophe happened would they remember – or just panic?

Yesterday, my daughter phoned me – should she take travel insurance for her forthcoming ski holiday? Yes of course, and she should check whether it included helicopter rescue, medical treatment and return flight home in an emergency. But it costs £25 she wailed – nothing like the cost of emergency medical treatment.

In October 2016 Camden Wealth published a Personal Security Report on its research of UHNW people for Sec Tec, the leading personal security protection firm. A staggering 58% had never had a personal security review. This is alarming given that all the people interviewed were rich and therefore much more vulnerable to kidnap, extortion, and burglary.

Even for those of us who have less money to lose, most of us are blissfully ignorant of the dangers. If I were to go to a remote part of Tanzania on a safari with my family, how would I get out if I needed to, or what would I do if I needed urgent medical care miles away from the nearest doctor?

When I hired Christina a few months ago to be my housekeeper, what checks did I do before I happily gave her the keys to my home?

When the house burned down across the road firemen put in for me fire detectors as a free service, but I still do not know how to operate the fire extinguisher I bought.

I travelled recently to Cyprus and was met at the airport by a stranger holding a board with my name on it. I gave him my suitcase and he led me to a car. I did not give a second thought to my safety as he put my suitcase in the boot, and I got in. Did I check his name and ask him for personal identification?

When I went to the market last Saturday, I blissfully wore a fur gilet – it was cold, it did not cross my mind that in a market full of devout Muslim Arabs, that a white woman wearing a fur gilet would stand out from the crowd and could be a target for theft. 

We are led to believe that our world is low risk – but is it? The Sec Tech Report revealed that 27.8% of people interviewed globally have been burgled in the last five years. A further staggering 42.2% of people have had a mobile device taken – how many people keep their pin numbers, and other highly sensitive information about their personal and private lives on their mobile devise without installing a means of wiping such information should it be stolen?

It is true that residents of emerging or less secure countries are more aware of the dangers than we are, living in ‘civilised’ countries, but we should all be vigilant and know the dangers of what is going on – and do something about it before disaster strikes. 

A friend of mine was caught in a terrorist attack, he had no idea what he should do. Some people tried to run away – many were gunned down. He was lucky he stayed calm and still, and was not injured, but many others were killed.

The automatic exchange of personal financial information next year will be a threat to the personal safety of anyone who has a foreign bank account or an offshore trust. A client of ours who has had first-hand experience of the Italian mafia says ‘It is imperative that sensitive financial information is kept secure at any cost. You risk the safety of yourself and your loved ones to allow it to get into the wrong hands’

There are things which can be done. Just as SecTech can provide for you a personal security review, we can review your assets offshore and review what you could do to give you greater control, reduce the risk of wealth erosion, and improve the privacy of your offshore financial information. But time is of the essence. Privacy planning needs to be in place as from 1st January 2017 to be truly effective.

If you would like to comment please do so, or if you would like to book an appointment to see Caroline or any one of her team for a review, please contact Svetlana on 020 3740 7423 or write to her svetlana@garnhamfos.com

The hostile world from an Argentine perspective

Last week we looked at the hostile world of HNW families living in Russia, we now turn our attention to HNW families living in Argentina.

In 2001 Argentina defaulted on USD 82 billion sovereign debt, the largest-ever at the time. After that spectacle no one wanted to invest in Argentina. This resulted in restricted access to international credit markets. Furthermore, President Cristina Kirchner continued to default on its debts for a further 15 years. Then in December 2015 Mauricio Macri became President.

Macri immediately introduced market reforms to include settling payments with those creditors that previously had not agreed to exchange their defaulted debt for new securities, accepting a write-down. On top of that Macri removed currency controls and took a number of -yet not very sucessfull- measures to tamper the rampant inflation. Hence now Argentina is returning to be open for business.

In April 2016, Macri just four months later issued $16.5 billion in bonds in the largest emerging market debt deal on record. It was oversubscribed 3 times – Argentina was an attractive country in which to invest – it is recovering.

But all is not rosy in the Argentine garden.

According to the World Bank, the total tax on corporate profits (tax as a percentage over net realized profits) is 106% one of the highest in the world, as compared with Cyprus at only 24% one of the lowest. As any scholar of the Laffe curve (the higher the tax rate, the more inclined tax payers are to plan to avoid it) will expect, at this rate of tax asset protection and tax planning are foremost in the minds of Argentine residents, which is exactly what is the current state of affairs.

Although, traditionally not very sophisticated at planning using trusts, Argentines are increasingly turning to trust structures to protect their assets. There is no comprehensive trust tax regulation in Argentina, but it is clear from court cases and practice that (provided certain requirements are met) family trusts are not subject to tax in Argentina, both for the settlor and for the beneficiaries.

On 22nd July 2016 Macri still in strident mode, introduced a tax amnesty regime, such that if Argentines declared their taxable assets both onshore and offshore they would pay only a 10% penalty. As has been seen with other amnesties such as in Spain, the concern of the Argentines, is not the payment of tax, or the penalty of 10% for declaring the assets, but whether, if they declare their assets, at a later date, a future government will not demand more from them.

To trust or not to trust the Government is therefore the most hotly debated topic at the moment and the Argentines have only until the 31st March 2017 to decide what to do. To help make up the minds of wavering Argentines, the Argentine Government has made it very clear that anyone caught not declaring will be subject to very onerous measures; penalties and taxes.

A further difficulty for many is that even if they declared their assets and kept them offshore, what should they do if they wanted to use this money to invest in Argentina.The quandary is that even if all the monies are declared or in an offshore trust, they would prefer to invest back into Argentina anonymously again for fear that a future Government would come knocking on their door for more monies. There is much interest therefore in using an Argentine trust as an investment vehicle (the Fideicomiso), but then their preference is to have a professional regulated and established global trustee to act as trustee to ensure the safety of their assets and that all taxes are paid and that the Fideicomiso is fully compliant in Argentina.

What is even worse, is that most Argentines do not have the luxury of waiting until 31st March before deciding what to do, if they have monies offshore, they will need to do something before 31st December 2016, since after that day all assets held offshore in CRS compliant countries will be reported once the automatic exchange of information, under the Common Reporting Standard comes into force in September 2017.

GFOS has therefore been working on solutions for Argentines with Julian from a Family Office in Switzerland which achieves asset protection, privacy, control and succession planning on assets, using a tried and tested corporate and fiduciary structure, but if it is to be fully effective it will need to be in place before the end of the year.

If you would like to find out more write to svetlana@garnhamfos.com or call her on 020 3740 7423 to arrange with her an appointment to see Caroline. 

Is it a hostile world for UHNW families?

Last week I was invited to give the key note speech on wealth preservation in Montreux which over 170 guests attended, including a significant number of single and multi-family offices. At the end of my talk the chair asked the audience whether they thought the governments of the world were becoming more hostile to the UHNW community, the majority were of the opinion that they were and less than 10% were uncertain.

In my opinion the hostilities are very real and need to be taken seriously. Russia for example has in the last two years tightened its rules for all Russians who own companies offshore.  It wants to collect more tax from its wealthiest residents.

The simplest of structures I came across in my meetings in Montreux is called the ‘Russian Trust’, which is now beginning to cause serious and unwanted results. Sasha is a Russian resident who, to avoid the Controlled Foreign Company rules transferred shares in his Jersey investment co (Invest Co) to his driver. Unfortunately, his driver died unexpectedly and his widow is now claiming her rights to the shares in Invest Co! Sasha may have saved tax, but lost Invest Co.

A slightly more sophisticated structure was set up by Alexey and was described to me by his single family office CEO who attended the summit. Alexey transferred his shares in an offshore company (Profit Co) to a holding company in Guernsey, (Hold Co) in which professional directors were appointed to run Hold Co from ABC Trustee Company Ltd. The shares in Hold Co were also transferred to ABC Trustees Limited, but on ‘bare trust’ for Alexey which means that ABC Trustees Limited must do what Alexey tells them with the shares in Hold Co.

The Controlled Foreign Company (CFC) rules in Russia operate to tax all undistributed profits of both Profit Co and Hold Co to Alexey and Alexey is obliged to report these profits to the Russian tax authorities. The CFC rules apply if either Alexey controls Hold Co, or owns directly or indirectly more than 25% in Hold Co.

Alexey is not at all happy with the structure. The professional directors of Hold Co, operate the bank account and deliberately do not do what Alexey tells them, on the basis, so they tell him, that they need to have evidence that Alexey does not control Hold Co. However, given that ABC Trustee Company Ltd holds all the shares in Hold Co for Alexey under a bare trust arrangement, the structure will still need to be reported under the Common Reporting Standards by both ABC Trustees Ltd (assuming it is a Financial Institution) and by the bank with which it has an account to the Guernsey authorities which will then exchange this information to the Russian tax authorities.

Alexey clearly wants control, protection and privacy of Hold Co, but under his existing structure has none of these and could face prosecution in Russia as from next year.

I talked with the CEO of Alexey’s family office who was stuck as to finding the right way out of the current structure. I was able to propose a much better, more flexible and current solution which would account for the CFC rules, CRS reporting which was worrying the family and incorporated the Bahamas Executive Entity to own on the shares of Hold Co. This allows Alexey to have control and give him peace of mind.

The other rules which have been tightened in Russia, is where a profitable company situate in Russia pays out its profits to a jurisdiction with which it has a favourable double tax treaty such as Cyprus. Let’s take Ivan, he transferred the shares he had in a steel mill in Russia to a Cyprus holding company, Cyprus Co, which is owned by a trust and company offshore. Ivan and his family are beneficiaries of this offshore trust.

Ivan’s structure this year had to be adapted to fall outside the new rules. If his Cyprus Co was not to be treated as resident in Russia it needed to have a real presence in Cyprus. He needed to make sure that the Cyprus Co’s executive body did not operate in Russia, and its key officers did not perform their functions in Russia. He, therefore, took an office in Limassol, bought a holiday home in Paphos and engaged an account manager to work for Cyprus Co full time.

His concern has now turned to the profits accumulating in his offshore trust which owns a bank account in a CRS country. As from 2017 this trustee and bank will have to report the funds and any transactions to their Government, which will in turn report it to the Russian tax authorities. As a settlor Ivan like Alexi, will need to report the structure to the tax authorities if he has reserved to himself a benefit. He has no wish to benefit from the structure so is less concerned as to the tax consequences, but is very concerned by the exchange of this very private financial information, which may not be accurate, across the globe. He has seen families of wealthy Russian friends targeted by criminals once they obtain private financial information.  As one delegate said ‘CRS is a kidnappers’ charter’.

Most Russians aren’t trying to ignore the serious nature of these new rules but they do want to plan for privacy and safety of their assets in uncertain times. However, one of the professional delegates said that it was only a matter of time before the Russian tax authorities find a high profile tax dodger and drag him or her very publicly through the courts and into jail. It is not a good strategy to play Russian roulette!

If you have any comments, or would like to book a meeting with Caroline or one of her team to explore howbest to re structure foreign or domestic assets please contact svetlana@garnhamfos.com or phone her on 020 3740 7423.