Criminal Offences for Wealth Structuring

In June 2008 Igor Olenicoff was offered a plea bargain by the US Internal Revenue Service. His sentence for fraudulent tax evasion would be slashed if he disclosed the identity of those who had helped him evade taxes.

Olenicoff, named Bradley Birkenfeld a senior banker with UBS who had assisted him in evading $200 millions of tax in offshore assets worth $7.26 billion.

In a seven-page deposition, Birkenfeld said that he assisted wealthy Americans to conceal their assets by creating ‘sham’ offshore trusts. Misleading and false documentation, Birkenfeld said, was routinely prepared to facilitate this. The advantage for UBS was that it could then continue to manage $20billion of assets owned by wealthy US individuals, which generated the bank $200 million in fees each year.

The statement read ‘By concealing US clients’ ownership and control in the assets held offshore, [UBS] managers and bankers…defrauded the IRS and evaded US income tax’.

At the time, this story broke, there was a lot of concern about how financial institutions would react to this bullying behaviour of the IRS. One commentator said ‘The US, of all countries, needs foreign investment. It won’t shoot itself in the foot.’

At the other end of the spectrum, there was concern that UBS could lose its banking license if Birkenfeld’s claims were found to be true.

In the fullness of time, neither concerns proved accurate, the IRS fined Swiss private banks a whopping $320 billion, not enough to put them out of business, but enough to hurt.

The IRS then went one step further. It introduced in 2010 the Financial Accounting Tax and Compliance Act which demanded all financial institutions with assets in the US to research and report on all its clients which were US citizens with monies outside the US. They had to report on all financial dealings of all its US clients, or face a massive 30% withholding on US assets.

In 2010, it was thought that there would be a massive disinvestment out of US assets, but instead these financial institutions complied at huge expense. Forbes estimates that the cost to the financial institutions of implementing FATCA has cost them ten times the amount of taxes raised by the IRS; a whopping $200million per annum and a total of $800 billion to set up.

On the back of the success of the IRS, the OECD introduced an automatic exchange of information known as the Common Reporting Standard, whereby financial institutions need to collate and report all financial information of individuals which hold assets outside the country in which they live to the country in which they are tax resident. As part of this information, where a trust is set up, the identity of the settlor, trustee, beneficiary and protector will need to be disclosed.

And now the UK Government has gone one stage further.

On the 1st September 2017, it published its guidance notes on ‘Tackling Tax Evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion’. In its guidance notes, the offence is aimed at corporations like UBS, in the case above, where one of its bankers, Birkenfeld facilitated tax evasion, in this case US taxes, by introducing their clients – in this case Olenicoff to third parties, with the intention of facilitating the evasion of tax.

What is interesting in the example given, was that Birkenfeld in his deposition said that he ‘assisted wealthy Americans to conceal their assets by creating ‘sham’ offshore trusts’.

There is nothing illegal or morally wrong in holding assets in a foreign jurisdiction and there is nothing criminal in the creation of trusts. Trusts are a legal concept recognised across the globe which have been in existence and used since the eleventh century.

What is wrong and what is now criminally wrong is setting up, or the introduction to any professional with the intention to setting up, a structure with the intention of evading tax i.e. setting up a ‘sham’ trust.

The law of sham is clearly set out in the Rahman case. The Settlor in that case Mr. Rahman, signed the documentation necessary to set up a trust. However, both parties understood that the words in the documentation would not govern their relationship. The trustees would do precisely what the ‘Settlor’ asked, regardless of the fact that they did not have to under the documentation signed by both parties.

The Judge held that the Rahman ‘Trust’ was not a ‘trust’ it was nothing more than a nominee arrangement – it could therefore be ignored for ALL purposes; claims of creditors, rights of forced heirs (as in the case of Rahman), or tax authorities - which can now impose criminal sanctions.

The unknown is how far tax authorities will push the law of sham, once they have all the information they need to pursue it. Are trusts with Protectors vulnerable as tax authorities would have us believe?

Write to us direct if you would like to discuss this Note or have questions relating to de-risking your trust against criminal liability.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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The UK's bringing out the big guns

You live in the UK, and have been given to understand that you are non-UK domiciled, but UK resident. You set up a trust in Jersey in 1998 to which your mother, who was living in Canada on her death, left half her substantial estate for you and your two daughters. Your brother Joseph, who also lives in the UK, is your Protector and business partner. You inherited the cosmetics business built up by your father in Canada on the death of your mother and now run it out of an office in Surrey with Joseph.

A local firm of accountants in Guildford do your tax returns and as far as you are concerned you are, and intend to be, totally tax compliant. Your trustees in Jersey, in accordance with their compliance obligations, have collated the information about your business and liquid investments held in trust, including some funds and insurance products and have sent them to the Jersey authorities which has forwarded them to the UK tax authorities who will in due course investigate you.

When you set up your trust your banker in Switzerland advised you with regard to your domicile and asked all the right questions about your father’s domicile at the time of your birth. However, he failed to ask whether at the time of your birth your father and mother were married. If he had asked he would have asked the same questions, but not about your father, but about your mother.

Unlike your father, your mother was born to English parents in England and always kept close ties with her family in the UK. She always intended to return, but soon after her husband died, she became seriously ill and died before she could return. It is more than likely that she retained her UK domicile of origin.

When your mother left her estate to your trust, you did not think to seek UK tax advice, since it did not seem relevant. Given that you do not know you are not tax compliant – you will not think to ask independent tax specialists to review your offshore trust arrangements.

However, if you do not make a full disclosure to HMRC before 30 September 2018, you will not escape the onerous penalties introduced in the Finance Bill 2017.

These penalties are called ‘Fail to Correct’ penalties and are significantly more onerous than the tax penalties which used to be levied on deliberate tax evasion. The ‘FTC’ penalties are

·      100% to 200% financial penalty of the tax undeclared

·      50% uplift in the event of any attempt to move assets to a more opaque jurisdiction, moving the penalty to 150% to 300%

·      An additional 10% for every year that the tax which was non-declared exceeds £25,000, and

·      Potential ‘naming and shaming’ if you have more than 5 FTC penalties

The problem is that you do not know that the advice you were given in 1998 was wrong – you did not know that it was important to tell your adviser that you mother and father were not married at the time of your birth.

This simple oversight is likely to result in a claim by HMRC that you were UK domiciled at the time of your birth and that the trust you set up in 1998 was in fact set up by a UK domiciled person. You are therefore subject to income tax on all the income which arose to the trust since 1998 under section 720 of the Income and Taxes Act 2007, and to all the gains made by the trust under section 86 of the Taxation of Capital Gains Act 1992. Your mother’s estate may also be liable to tax at 40% on her estate on death, payable by the trustees, subject to any double tax treaty there may be in Canada.

If your trust is worth £72million and the income tax and capital gains tax over the last 19 years has been £19million, you could face in addition to the tax, £39,900,000 of penalties with additional late payment interest at the official HMRC rates, a total tax bill in excess of £60,000,000, which excludes the cost of the legal and accountants bills and excluding a claim against the trustees for 40% inheritance tax on your mother’s inheritance.

The only way you can mitigate this penalty to 100% post 30th September, is to have a ‘reasonable excuse’.

Case law makes it clear that a reasonable excuse is available only if you sought suitably competent independent professional advice to review all of the non-UK assets and activities for any potential UK tax oversights and that you provided such advisers with all relevant information. In your case, you sought advice from a Swiss banker who would not be treated as ‘suitably competent’ and you did not give him all relevant advice. Furthermore, you failed to seek UK tax advice on the death of your mother, but you did not know that you should have done.

Given that the trust holds half of the chocolate business owned by you and your brother, this will need to be sold to pay the tax, which will then put both you and your brother out of a job and business.

The only sensible course of action is for you to engage an independent tax specialist, to tell you what taxes are due and to make a full disclosure before 30th September next year. Although it may be expensive – it will be nothing like £40million which will become due if competent advice is not taken.

You can write to us direct if you would like to discuss this Note with Caroline or have questions relating to HMRC's position.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Protecting Protectors

Allan has a trust which was set up for him, not by me, three decades ago. A professional trustee who I will call ABC Trustees Limited is trustee and does the trust administration and his local business adviser Mario is his Protector. Allan has a good relationship with ABC Trustees Limited.

He came to see me, because he was concerned about Mario. The trustees are obliged under the Common Reporting Standard not only to report on the identity of the settlor to Allan’s home country of Argentina, but also to identity Mario, as the Protector.

Allan is personally wealthy, independent from his trust, but Mario is not. Mario, simply could not afford to get stuck in the middle of a dispute or investigation and if this occurred on the death of Allan, Mario has said to Allan, that he would resign. He was not convinced that ABC Trustees Limited or Allan’s family would pay his legal fees as a Protector if anything went wrong, and given his exposure on Allan’s death would not continue in office.

What particularly alarmed Allan, was that ABC Trustee Limited, rather than give Allan assurance that his legal fees and costs would be covered in such a situation, said the opposite. If Mario were to use his powers to try to remove them, Mario’s legal costs would definitely not be paid out of trust funds.

ABC Trustee Limited also said to Allan that on reflection, they would prefer Mario resign, to avoid any suggestion that Allan’s trust should be set aside as a ‘sham’.

Allan did not want his trust set aside, but neither did he want ABC Trustees Limited, to have unfettered control of the trust assets and distribution. They were good administrators, but Allan was not convinced that they could take meaningful decisions without a legal opinion.

‘It would be like trying to run my business with my lawyers being asked to take all the decisions’ Allan said. ‘Mario can take sensible and swift decisions – he is man of business. I am more than happy for my lawyers to comment, but I would not want them taking the decisions, it would be disastrous. My lawyers are good, but they are risk averse, they know the law, but do not know how to run the businesses owned by the trusts.’ Allan was confused and angry.

‘I have come to you as an independent Wealth Protection Planner – what am I to do?

I pointed out to Allan, that the trust fund was legally owned by ABC Trustee Limited, and that Mario was right to be concerned, but that he should not blame ABC Trustees Limited. Setting up a trust with a Protector has, for decades, been standard practice, but with the introduction of the Common Reporting Standard, these arrangements now need a fresh pair of eyes’.

Mario was however, in an invidious position. If he felt it was in the best interests of the beneficiaries to replace the trustees, he may have difficulty getting the evidence he needed from the trustees to do so, if they disagreed, and would struggle getting his legal fees covered.

Even worse, the office of Protector was fiduciary, which means that he had to act in the best interests of the beneficiaries, which may prove tricky if the trustees were to become un-cooperative. Making good any loss to the trust could be significant.  Mario may be protected by an indemnity clause – but it was not unlimited. In Allan’s trust deed the indemnity did not cover Mario if he failed to act in good faith – but in whose opinion – his, the trustees – or the court? It could be very expensive for Mario, in legal fees and court costs alone – to prove this!

Allan and I sat a long while talking about what he wanted, what risks he faced, and how to protect him, his family and his assets. Ideally, he wanted to continue to engage with ABC Trustees Limited, continue to rely on Mario for his knowledge of Allan, his family, businesses and concerns, and ensure as little information as possible be reported to his home country.

I agreed to set out our discussions in writing to list his options and the solutions available to him.

As a planner, I said to Allan that I needed to look carefully at the rules and to stay well within, not only the law, but also the letter of the law. Whereas for decades, out of sight and mind was a good solution this could no longer be relied upon and all professional advisers must keep well within the parameters set or risk being fined along with his or her clients.

This does not mean, however, that there is no room to plan, but it must be done well, mindful of all the laws, and all parties must be fully aware of what they are doing and why.

I also pointed out to Allan, that to plan would also be of interest to ABC Trustees Limited. If they failed to do anything which they could have done, and as a result caused loss to the trust, they could also be held liable for breach of trust and ordered to make good any loss incurred.  Whereas planning may be a nice to have for Allan, it was in fact a ‘must have’ for the trustees.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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But... What do you do?

When I was at Simmons & Simmons a partner in the corporate department, Richard, collared me in the corridor, ‘I don’t know what you do exactly, but could you meet two brothers; clients of mine, who are about to sell their company for hundreds of millions of pounds… they would like someone to talk to!’

Of course, the answer was yes, I saw them and they became clients of mine; a relationship which lasted many, many years – but, what did I do for them?

To answer this question, we need to understand the real concerns of my clients. They were a little concerned about tax, a little concerned about succession and a little concerned that the family would remain harmonious when the fruits of their labour – the shares in their family company – were turned into cash, but none of these aspects really bothered them – what was of real concern, was who could they trust once their money was in liquid form.

It was my relationship with these two brothers, which sparked the idea for my book – ‘When you are Super Rich who can you Trust?’.

To explain, let me turn to Johnny who is five years old. ‘Imagine you have lots of sweeties, Johnny, and none one else in your class has any sweeties, what would you do?’

Johnny might say ‘I would give some sweeties to the people I like, Rupert and Jessica, but I would not give any sweeties to Max – because I do not like him. I would then put the sweets left over in a jar, and give them to Mummy to keep safe until I want them.’

I might then say to Johnny ‘What would you do, if your Mummy does not like you having sweeties and will not let you have your sweeties back when you ask for them – what would you do then?’ Johnny might say ‘I would not give her my sweeties, I would put them in a jar and hide them’.

Most wealthy people are like Johnny. They have had their fingers burned by people they have trusted and so are more cautious. Instead, they would prefer to put their money offshore where hopefully no one will find it. The problem is that with the introduction of the Common Reporting Standard, there is nowhere to hide wealth now – so the issue of who to trust has become more important than ever.

The challenge which I address in my book ‘When you are Super Rich who can you Trust?’ is to ask each adviser, ‘How do you make your money and what keeps you awake at night?’ I then compare the situation of a wealthy individual with a shareholder. A business owner does not trust just one person to run his business, he appoints a board – and so it should be with the management of personal wealth.

I encourage my clients to form an inner ‘Ring of Confidence’ – a team or cabinet, who will decide which investment manager, lawyer, accountant, art adviser, yacht broker to pick. This team then monitors their performance and reports back to the wealth owner once a year at the ‘Annual General Meeting’. However, I have not always been successful in persuading clients to accept the wisdom of this advice.

A client of mine with whom I worked with for many years insisted on having a professional trustee not only to administer and manage his substantial wealth, but also to be responsible for making the decisions – who to engage to invest and how much and when to give to a beneficiary.

On his death, without the client to guide the professionals, their duties and responsibilities began to strangle them. They were first fearful of losing the business – their biggest clients, secondly, they were fearful of being sued by one or more of the beneficiaries and thirdly they were fearful of being in breach of their compliance obligations. They were therefore reluctant to make any decisions without a legal opinion or a court order.

As a result, the trust fund became stagnant in its operation and stilted in its duty to act in the best interests of its beneficiaries. Their indecision and prevarication, which was perfectly understandable given their circumstances, served only to drive deeper the differences between the beneficiaries – despite a forty-page Letter of Wishes.

The outcome of nine bitter years of feuding and fighting was the division of the trust between the beneficiaries. During this time, the only parties to benefit were the professionals. The beneficiaries, although the rightful heirs, were powerless to pull the professional noses out of the trough which was intended for them. They could do nothing, but watch their father’s hard-earned fortune filter down to the families of his trusted advisers.

So, what do we do for our clients?

We can be trusted to provide personal, professional, independent planning for wealth ownership. We identify what your priorities are, how you wish to preserve your wealth and what your vision is for the future. We work closely with our clients to provide a very personal service in a legally compliant, cost effective and efficient manner.

In short, we are ‘Wealth Protection Planners’

To get an independent trust review or discuss all matters relating to privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Interview with The International Tax Review

Josh White of International Tax Review interviewed me last week on the Paradise Papers; please find the script (with a few tweaks) below:

 Should high net-worth individuals fear this kind of media exposure and a crackdown on tax havens?

“The answer is a massive and resounding ‘yes’. However, it’s not so much the media which is of concern, it’s what Governments will do with this information. This is the big question.

Can Governments be trusted?

If you are evading taxes – then Governments can be trusted to investigate and come down upon you hard and without mercy, but what if you have done something within the law and on good advice – Governments will try to rewrite what you have done to make you taxable – and in particular if you are the settlor or beneficiary of a trust offshore.

If a trust is not set up properly then they will try and argue that it is a sophisticated form of tax evasion!

As a result of CRS (the OECD initiative Common Reporting Standard) Governments will know precisely who has what and where, trusts will come under scrutiny and investigation. There is nothing inherently wrong with setting up a trust and taking money out of the country, but it will not stop Governments investigating once they have detailed information and try to have it set aside and tax the settlor as if it had not existed.

If you’ve done everything bona fide and with the best interests of your family in mind you shouldn’t need to worry, and it is arguable that it is an invasion of your privacy.

Take Lord Ashcroft, for example. There are talks that Lord Ashcroft will have to pay millions more in tax because the leak suggests that Lord Ashcroft may be exerting too much power over his appointed trustees. The suggestion is that he does not ‘trust’ his trustees by his interference and the question which HMRC will ask is, was it ever intended that a trust should be created or is it a devise to avoid tax?

Tax authorities are not normally privy to such private correspondence, but they believe they are entitled to investigate any trust where there is a ‘Protector’ on the basis that they have reason to believe the Settlor did not trust his trustees to give them unlimited ownership.

If HMRC is successful in proving that Lord Ashcroft’s trust is a sham the tax authority will issue a demand as if the trust never existed. I’ve seen investigations go on for up to 10 years, seen the removal of passports by tax authorities and costs run into hundreds of thousands of pounds. For those who think that they have nothing to fear from an investigation may I remind them that an investigation for tax is worse than an investigation for murder, because tax authorities have greater powers than the police.

Furthermore, there is a real fear relating to a handful of Governments which employ unscrupulous officials that the detailed financial information being collected and exchanged will get into the hands of crooks, criminals or thieves – which could threaten the safety of the  wealthy international family.

Is the media missing the perspective of entrepreneurs when it comes to tax avoidance?

We want entrepreneurs in this country and they are entitled to keep their money in whichever country they chose, if not then the government should put exchange controls back in place.

Is it morally wrong to avoid taxes?

There have been numerous cases on tax avoidance such as with the Duke of Westminster and the Ayrshire Pullman Motor Services cases in which judges have made it clear that there is no moral obligation to put the most amount of money into the government’s coffers.

This general rule however has been watered down in 2013 by the General Anti Abuse Rules (GAAR) which allows the Government to reinterpret what it thinks is aggressive tax avoidance. 

Although not used very often, it signals an increasingly uneven playing field as Governments across the world become more aggressive in raising tax revenue. Raising taxes is not about ‘paying a fair share’ it is about Governments making legislation sufficiently specific to collect revenue and if it fails, then tax cannot nor should it be collected.

In future, I suspect, we will see many more people face ever more intrusive tax investigations alongside ever greater tax claims. If trusts are to survive, offshore trustees need to make sure that their trusts are out of the line of fire by removing all persons of significant influence. No matter how meticulous the settlor and trustees have been in showing that the trustees have an absolute, unfettered right to make decisions, no-one, in their right mind would want an investigation, which is why we advocate that changes should be made to trusts to make them less vulnerable to attack.

You can buy Caroline's book 'When you are Super-Rich, who can you trust' here.

To get an independent trust review or discuss all matters relating to privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423