Charities - the biggest scam?

Travelling through the foothills of the spectacular Dolomites with seven of my former Simmons partners, most of them litigators, on our annual skiing trip, I caught the tail end of a conversation. ‘What happens to funds raised for a charity, which is more than it needs – like the funds raised for the victims of the Grenfell Tower disaster?’ I piped up from the front of the bus, not really able to engage fully in the conversation over the drone of the engine – ‘Cy-Pres’.

Of course, the answer is much broader and more worrying than that one word.

Most charitable trust funds are worded so widely, that only a fraction of the funds raised need be spent on the main purpose, such as the victims of the fire and their families. The rest can be distributed to other grant making trusts, a local Council for it to spend on regeneration of the district or on mental health services; if that is what the purpose clause provides.

The doctrine of Cy Pres only kicks in when the purpose of the fund however broadly drafted has been exhausted. If a charity is set up for the relief of a specific disease ‘Xsis’, which is then eradicated, the doctrine of cy-pres allows an application to be made to the court to amend the terms of the charitable trust to follow as closely as possible the original intention of the testator or settlor to prevent the trust from failing. So, if Xsis affects African males living in Uganda, which has been eradicated, the court could change the terms of the trust so that the funds can be used for the relief of ‘Ysis’, as it also affects African males living in Uganda in much the same way as Xsis did.

Although I was not able to follow closely the conversation, what appeared to be the subject of discussion was how little had been distributed and how no-one appeared to be answerable to the complaints of the families who had suffered.

The body to which charities are answerable is the Charity Commission, but this is overburdened and under staffed.

David Holdsworth, the charity registrar in England and Wales, is on record as having said ‘It is unusual for us to be involved in this way as regulator but because of the urgent need of the victims of this tragedy, and because of the great generosity of the public who have given millions to different charities, it was right that we stepped in and helped charities work together in the best interests of those affected’.

By August of last year, the Charity Commission, said that a total of £18.9 million had been raised mainly by three charities; the Red Cross which raised £5.75m, the Kensington & Chelsea Foundation a further £5.75m and the Evening Standard which raised £6.78m. Of this sum only £2.8 million collected had been distributed by August to the victims, less than 15%.

The Red Cross said: ‘Every penny of the £5.75m raised by the Red Cross for the London fire relief fund will go to the surviving victims of the Grenfell Tower disaster and their families’. It said funds it had raised were being distributed on its behalf by the London Emergencies Trust, which had by August handed out £551,000 in grants.

These payments include a £10,000 Fresh Start grant. In addition, survivors who spent more than six hours in hospital can get a payment of £3,500 and those who lost a relative in the fire can get a payment of up to £20,000.

But, what of the remaining £5.25m? What is it being spent on, by whom, and who is making sure it is being spent for the purposes which the donors gave? If the Red Cross has given it to the London Emergencies Trust has it got any responsibility to ensure that it has been spent on the victims of the blaze – no! It is only the Charity Commissioners to whom charities are answerable and it is too busy with its 200,000 odd charities in Britain to keep a close eye on any one of them; and the monies these charities hold are ENORMOUS! In 2015, the top 5,000 charities held between them £17.46 billion – and I thought it was to be spent, - not kept aside for a rainy day.

According to David Craig’s book ‘The Great Charity Scandal’ there are 1,939 charities in Britain for children, 581 for the relief of Cancer, 354 for birds, 255 for animals and 81 for alcohol abuse. The Charity Commission cannot hope to help charities work together for the best interests of those affected, it hardly has the resources to make sure that the funds are being spent for the purposes for which they were raised – if at all.

Is it hardly surprising therefore with so little scrutiny that wealthy individuals seeking to make a difference set up their own  to make sure it is run properly, but this then adds another charity to an already overburdened Commission – and the problems thereby get worse.

From my experience rot sets in where money is allowed to accumulate without proper checks and balances as to who is making the decisions, where the money is going and what for. There are always complaints about how much charities spend on administration and marketing, which can be as high as 50%, but this could be just the tip of a rather stinky iceberg.

I have no solution, maybe you do?

Court Experience

Some say that Court experiences are like your first day of school. At school I always worked hard, handed my homework in on time, was never late, was known as the teacher's pet and got top marks. So I was convinced that if I ever have to go to Court, I'd be alright because I knew the rules of the system. 

I have been in the privileged position of not having had many Court experiences with any of my clients nor being involved in any disputes so when I had to participate in a hearing for an Asian client of mine, I was shocked at how unsettled I felt after. The tactics of the other lawyers were those of unattended bullies and there was little fairness involved; it was like whoever capitulates first is the loser, even if he is on the right side of the law. 

When planning, I always advise my clients to think ahead and remember that you might have to defend yourself one day - my words when drafting or writing documents are always very carefully chosen so that they cannot be misinterpreted or to put my client in a vulnerable position. 

The direction in which the world is headed now, especially with the obsession of transparency, means that undoubtedly, we are going to see a lot of litigation, a lot uncertainty and a lot of wealth structures under attack. Most disputes I've had can be sorted out with a good night's sleep, a nice glass of wine and a heart to heart conversation but that doesn't fly in Court - what was meant to be a few hours hearing turned into a 3 day deliberation over a four word email I had sent to one of the client's advisors!

A friend of mine who is a seasoned litigator called the other side of lawyers ‘lying toe rags’ and the fact that they were manipulating the truth annoyed me even more. Nobody likes being lied to, cheated or insulted but sticking to principles can be expensive.

Imagine what it must be like to receive a letter from HMRC claiming that you owe them a huge sum of money in tax, penalties and interest. The tax advice you were given five years ago, which cost you north of at least £10,000, which you followed to the letter, HMRC now claims is flawed and what you thought you had done, you had not done so now you are to be taxed regardless of the fact you had no idea you are doing anything wrong.

It is not for me to say that HMRC is abusing its powers but what I do think is unfair is that it treats legitimate avoidance taken on good advice in the same way as the deliberate evasion of tax.

The most vulnerable in the UK, I think, are the non-doms who took advice on coming to this country - costing them hefty fees! They were told to set up a trust which would take them outside the scope of income tax, capital gains tax and inheritance tax on all monies offshore - costing them another set of fees. These individuals had no intention of evading tax, they merely followed good advice for legitimate tax mitigation.

It may be in the fullness of time – that these non-doms can prove the attack against them was groundless. However, by the time they have engaged a lawyer to investigate the matter, put forward a good case, and argued it for years, possibly in front of a Judge – they may just find that what they have saved in tax they have spent in legal and court fees – that is if they win. If they lose, HMRC could wipe them out!

But, it is not as if you need to sit there like a sitting duck waiting for HMRC to catch up with you. There are some simple measures you can put in place to ensure that your trusts, whether you are a settlor or in the fiduciary business, are less likely to be investigated. 

To get an independent opinion on your tax position or 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:

Digging into Foundations

Foundations for the last century have been used by many UHNW individuals across the globe for much the same reason as settlors of trusts; privacy, asset protection, freedom of distribution, smooth succession and tax avoidance.

Although they serve much the same purpose, they are very different in history and nature.

Private foundations developed from entities set up by residents in continental Europe in the middle ages to fund religious houses.

In 1926, Liechtenstein broadened the appeal of foundations when it enactedthe Personen-und Gesellschaftrecht (Persons and Companies Act, hereafter referred to as the PGR) and made the foundation suitable for use as a vehicle to manage family assets.

Liechtenstein remained unique in establishing private foundations until Panama introduced the Foundation Law No.25 of 1995. Since that date foundation legislation that provides for the establishment of private asset- holding foundations has been enacted by the other jurisdictions, including Aruba, Anguilla, Antigua, Bahamas, Cyprus, Guernsey, Isle of Man, Jersey, Malta, Netherlands Antilles, Nevis, St Kitts, Seychelles and Vanuatu.

Joshua came to see me last week, he was looking to set up a structure for his wealth and was looking into trusts, when his friend Michael told him not to bother with trusts, but to set up a foundation, since they were ‘outside the scope of CRS’.

NO, they are not!

Fiduciary businesses which administer foundations must report to the home country of the founder in the same way as they would if they were administering a trust. The only difference will be the way in which the Governments treat this information once in their possession.

I explained to Joshua that Governments want to tax their residents on the assets they hold offshore and in particular if they are held in a trust or foundation.

However, whereas a trust is an obligation, and is only created if the three certainties are present; certainty of objects, certainty of subject, and certainty of intention, a foundation is a legal entity. Trusts are most likely to be attacked if there is no certainty of intention, under the sham doctrine. The evidence Governments will be looking for is whether the settlor passed total control to the trustees or was power reserved either to the settlor or a third party such as a Protector

Foundations, do not need certainties to exist, they are formed, like a company. Forms are filled in, the foundation is endowed and registered, and hey presto, it exists. The intention of the founder is irrelevant!

The bad news is that not only can it be formed like a company it can also be taxed as if it were a company under CFC rules.

CFC (Controlled Foreign Company) rules enable a Government to tax the founder on income arising to the foundation as if it were income of the founder, if he retains control for himself. Therefore, if Joshua were to set up a Foundation and reserve rights to himself, then he will be obliged to report the income arising to his foundation on his tax return in his home country as if it were his own income, and if he does not do so, he will be treated as evading (not avoiding) tax.

Joshua asked whether there was any way he could continue to exercise control of the assets in the foundation without infringing the CFC rules.

The problem here is that there is little case law as to what would or would not be considered ‘control’. Does it extend to having a seat on the Council, does it apply if control is exercised through a Guardian or Protector – it is simply not known – but the problem with not being known is that it leaves it open for hungry Governments to claim that any form of control exercisable by the founder triggers the CFC rules which would make Joshua liable to tax on all the income as it arises.

Joshua looked crestfallen. I told him not to worry. Like all clouds there are silver lining and we were able to put to him a tried and tested solution, which suited him perfectly and he liked very much.

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:

STARs in your eyes

Jacob came to see me last week. He lives with his wife and family in South America where he runs a successful import and export business.

In 2005 he was persuaded to transfer his then growing business into a Cayman STAR trust. He came to see me concerned as to how robust the STAR would be against creditors, tax authorities or family disputes in the light of CRS.

In 1997 the Cayman set up the Special Trusts (Alternative Regime) Law. Given the industry climate in mid 1990’s it was very clever legislation which ticked all desired boxes of a settlor running a business.

Jacob is passionate about his business and he wants it to continue long after his death. He has three children; Ben, Deborah and Adam. Ben his eldest is a budding entrepreneur, he has set him up an agri business which is doing well. Samantha is married, but is feckless and Adam, his youngest would like to follow his father’s footsteps into the business.

Jacob trusts Adam with his business but does not want either Deborah or Ben to make decisions about it.

Jacob was drawn to the STAR trust because during his lifetime he could be the obligatory enforcer and on his death his son Adam could step into his shoes. Unlike a normal trust, a document expressed to be under the STAR regime gives the beneficiaries Ben, Deborah and Adam no rights, these are all reserved to a person called an enforcer.

Jacob also liked the STAR because he was not restricted in setting out what he wanted which was for the continuation of his import and export business for the benefit of his children.

If he had put this as a term in a normal trust, there could be a debate as to whether the trust was set up primarily for the benefit of his children, in which case it would be a valid trust, or was it primarily for the continuation of his business in which case the trust would be invalid. By setting up a STAR trust this debate was unnecessary since regardless of what was the dominant purpose it would remain valid.

Another feature Jacob liked was that if at any time the business was taken over or became obsolete or went bust, the purposes could be rewritten giving him flexibility which he liked.

The only feature Jacob did not like about the STAR was that he had to appoint a professional trustee resident and licensed in the Cayman Islands. He was not convinced that a professional trustee had any idea of how to run an import and export business or would make the best decisions about the family investment or the family. He had heard gloomy tales of professional trustees unable to make a decision without seeking endless legal opinions which sucked out the cash resources of the trust and slowed down the speed of decision until making a profit was an impossibility. But the benefits outweighed his concerns until now.

I made it very clear to Jacob that I did not know how his government in South America would treat the knowledge that he had set up a STAR trust and that he continued to be the obligatory enforcer. All I could do was to go back to basics and apply them to the CRS regime.

Under CRS the trustee in the Cayman would need to report the existence of the STAR and that Jacob was the settlor and obligatory enforcer. What would it do with this information?

There would probably be little point in trying to argue sham because the STAR is a creation of specific legislation which obliges the settlor to appoint an enforcer so the existence of an enforcer will not render the trust void and even if they could get such an order in the country where Jacob lived, it would not be enforceable in Cayman.

So where would it be most vulnerable? The weakest link has to be the enforcer and his extensive powers. Why? Because he is living in the country which wants his trust assets taxed.

The case of Anderson in the US shows just how much of a danger this can be. Mr and Mrs Anderson lost their case against the IRS. They claimed that the money in trust was no longer theirs and therefore they could not compel the trustees to make distributions to them to meet the tax due. The IRS simply locked them up until the trustees saw that to make distributions was in the best interests of the beneficiaries!

In the case of Jacob’s trust, his tax authorities if they did not have suitable anti-avoidance legislation on transferring assets offshore, could run the argument that Jacob, given his extensive powers as an obligatory enforcer, was a quasi- trustee and therefore taxable in his home country on all income and gains.

If he refused to pay the tax, they could simply lock him up until such time as he did!

The STAR, when created in the 1990s, was the belle of the ball but I am not sure now twenty years on in the cold light of CRS, she is just as lovely. I welcome your comments.

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:

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

To buy Caroline's books please press here: