Tax authorities are assisted by Pugachev

On the 11th October 2017, the Privy Council handed down a judgement in the case of Mezhprom v Pugachev which should send shivers down the spines of every fiduciary business as well as all families whose wealth is held in offshore trusts.

Sergei Pugachev was the founder of Mezhprom which was once Russia’s leading private bank. In due course, however, it got into financial difficulties and had to be bailed out by the Russian Central Bank.

Creditors of the bank included The Deposit Insurance Agency an arm of the Russian State. It claimed that Mr Pugachev had misappropriated the funds and settled them in five trusts in New Zealand with private trustee companies, of which his adviser and his wife, in New Zealand were directors. Mr Pugachev was the Settlor and Protector and he, and his partner and children were the Beneficiaries.

As Protector Mr Pugachev had extensive powers to block any decision of the Trustee, and if it did not do what he wanted, he could remove and replace it.

The decision of the Judge focused on the intention of Mr Pugachev at the time he created the trust. Did he intend to divest himself of control of the assets when he set up the trust and transferred the assets to his trustee? If not, then his role as Protector was ‘personal’ and not ‘fiduciary’.

The importance of this distinction in the Judgement is fundamental. If ‘personal’, then in exercising his extensive blocking powers over the decisions of the trustee, he need only consider his own needs and requirements. If however, his intention at the outset was that the role of the Protector was ‘fiduciary’ then the Protector must, in exercising his powers, consider what was in the best interests of all the beneficiaries.

If the proper construction of the trust documentation was that Mr Pugachev intended that the role of the Protector was ‘personal’, then the trust was not a sham, it was a trust – but only a bare trust. As a bare trust, the assets were in the name of the trustees, but held to the order of Mr Pugachev. The beneficial interests in the trust assets remained with Mr Pugachev – and were, therefore, available to be seized by the bank Mezhprom to meet the claims of its creditors such as the DIA.

The Judge went on, if on a proper construction of the intention of Mr Pugachev at the time he set up the trust, was to divest himself of control of the assets, then following the Esteem case, he needed to find a common intention by both the trustees and the settlor to mislead, for it to be a sham.

The Judge looked to the divorce case of A v A for a precedent.  A common intention can be construed where the trustee, although not obviously or deliberately out to mislead, had a ‘reckless indifference’ as to what was the intention of the settlor and went along with it to secure the business.  

If this was the proper construction of the facts, then the test set by Esteem was satisfied and the trust as set out in the documentation was a sham and could be set aside as being void ab initio.

The Judge continued; if on a proper construction of all the circumstances leading up to the formation of the trust, Mr Purgachev had the intention to form the trust, the Protector’s powers were fiduciary and the trustee was not reckless as to the intention of Mr Pugachev in setting up the trusts, he would still set aside the transfer of the assets into the trust because they were transferred with the intention of defeating his creditors, so would be available to meet the claims of the creditors of the bank.

Mr Pugachev was defeated on all claims.

Some advisers say that the importance of this case is limited to its facts; Mr Pugachev, was Settlor, Beneficiary and a Protector with extensive reactive reserved powers. I do not agree.

This case, is dynamite for any third party, such as a tax authority. Tax authorities across the globe now know who is the Settlor, whether the Settlor is also a beneficiary and which trusts have a Protector under CRS.

All they now need to do, following the decision in the Pugachev case is to ask the Trustee for a copy of the Trust Deed. With this, they can identify the powers of the Protector and attack the trust on the basis that the Protector’s powers were personal to the Settlor, either directly or through his nominee which they can now glean from an objective interpretation of the trust deed. Before this case the tax authority would need to prove a common intention on behalf of the trustee and the settlor, to deceive.

I have for many years been wary of the office of Protector, and this case justifies my contention that the role of Protector puts the trust at risk of an investigation.

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

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Facebook Under Fire

In this digital age, we disclose our likes and dislikes every day, all the time; loyalty cards, browsing on the internet, and going about our daily activities, monitored 24/7 by CCTV cameras. So, what is the big fuss with Facebook and Cambridge Analytica? The issue is not even current; it relates back to an event which happened in 2014.

Facebook makes revenue out of allowing third party developers, such as Cambridge Analytica, access to the data of millions of its users.  In 2014, the data of their members and their friends required less filtering than today. But what is relevant today is that we now know Cambridge Analytica used this data to help Trump into the White House.

For many who think Trump should not be President, the use of this information in this way is an outrage. Whether Facebook will be made to pay, however, will depend on the law at that time. Facebook was subject to an order made in 2011 not to share data with any third party without the express permission of the user. However, it neatly sidestepped this requirement with the use of irritating pop-ups.

One of the issues addressed in the EU initiative on General Data Protection Regulations is to stop these annoying pop-ups which won’t disappear until you have ticked the box which says ‘I have read and agree to the terms and conditions’. Under the new initiative, due to become law on 25th May, consent can only be meaningfully if ‘freely given’ which means that consent is asked for in ‘clear and plain’ language.

Under these new data protection regulations there are 6 principles

·      The data must be collected lawfully, fairly and transparently

·      It must be collected only for a specific legal purpose

·      It must be adequate, relevant and limited to what is necessary

·      It must be accurate and kept up to date

·      It must be stored only as long as is necessary, and

·      It must ensure appropriate security, integrity and confidentiality.

These regulations apply to all digital technology businesses, but do they apply to the information collected by Governments? Under the existing rules, if the primary purpose of collecting data is for the best interests of the security and well-being of the country’s residents as a whole, or for the purposes of collecting and administering tax then the data protection rules may not apply subject to proportionality.

Let’s put this in context: Ferdinand set up a trust in Jersey fifteen years ago, with the proceeds of the sale of his first business. He appointed a professional, reputable trustee and his brother in law as a Protector. He and his family are UK resident, non-UK domiciled, but Ferdinand spends a lot of his time in Central America where many of his businesses are based. His businesses have done well and now his trusts are worth many hundreds of £’s millions.

His Jersey trustees tell him that under CRS he is obliged to self-certify his tax residence. From records kept by his professional trustees, it is known that he lives with his family in the UK, but spends a lot of his time in Central America.

In order to fill out this form correctly, Ferdinand, asks a reputable firm of accountants in both the UK and Central America for a tax report as to whether he is tax resident, and if yes, is he fully up to date on all taxes.

The UK report made it clear that Ferdinand was UK resident but not liable for any taxes. However, the report from Central America, was uncertain as to his tax residence, but that if he were tax resident, no taxes were due. Ferdinand has given both reports to his Jersey trustees and they have reported accordingly.

Ferdinand is keen to restructure his trust to give him greater control and to put beyond doubt that he is not tax resident in Central America. However, he is concerned about the information which has already been collected and exchanged? Has he got a right to demand that the information ‘be forgotten’ and when? If he were to make such a request, would not serve to draw attention to himself?

In Article 17 there is a ‘right to erase’. But does this to apply to data collected under the CRS?

Common sense would argue that if it was reasonable to collect information, even when there was a ‘reasonable excuse’ to say that this information would not give rise to any further tax due, Ferdinand would have the right to demand that this information be erased within a reasonable period of time, if by then inaccurate or out of date or maybe not?

The answer will only emerge as a result of long and painful litigation. If you do not wish to be a test case – please contact …. to find out how you can maximise control and minimise exposure.

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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The Partner for Private Clients

Last Tuesday we officially launched the BConnect Club, the partner for Private Clients. It was a fabulous event held on the roof terrace of the Trafalgar where we were joined by sponsors, Julius Baer, SPS Security, luxury chocolatiers  Godiva and Cult Wines. The room was packed with single family offices and carefully chosen UHNW friends of ours.

The BConnect Club is focused on serving the best interests of the UHNW community and the independent platform is able to provide them with fresh, exclusive deals which are pre-vetted, the opportunity to find co-investors for existing projects, meet each other at our Club events and get the opportunity to see the best luxury brands. 

As many of you will know, I am passionate about the unique concerns of the wealthy, which I wrote about in my book ‘When you are Super Rich who can you Trust?’.

It is a fact of life that whereas flames attract moths, money attracts all manner of greed in the form of sophisticated salesmen keen to get rich themselves. Therefore, the community which is in most need of advice and advisors tends to be very private and hard to reach. However, they have money and money needs to be invested, spent and taxed. For all these activities, they need advisers - ones they can trust to help them spend wisely, invest well, pay the right amount of tax and keep a low and safe profile.

And herein lies the conundrum – how do you chose your inner cabinet of advisers, to look after your best interests amongst a sea of sharks?

I set up Family Bhive ten years ago as aggregation resource of information for wealthy individuals. This hard to reach private community asked me and my team to provide a platform, where they could follow their interests and learn more about their concerns without revealing who they were and what they wanted.

Our UHNW members would contact our team to ask us, for example, to source five accountants who specialise in tax investigations, so they could compare one with another before asking for a meeting.

In conjunction with setting up Family Bhive I founded GFOS as a leader for wealth planning and structuring for UHNW individuals and Family Offices.  With the introduction of FATCA and the OECD Common Reporting Standard, all financial accounts held offshore are now being automatically disclosed to the tax authority in which the wealthy individual is living – whether there is any suspicion of tax evasion or not.

Through GFOS, we are able to offer Protection solutions to families who are concerned with the erosion of privacy, loss of control over their assets in trust and smooth succession. 

Through BConnect Club, we can now extend our partnership to find good quality deals. Already our private client members have put forward numerous ‘buy side’ deals, which are on line, families which are cash rich looking to invest – at the right price in property, bio tech and energy companies.

We will also be going out to our members to ask them what else they are looking for, across our range of portals; deals, luxury products and service providers. Once they tell us what they want, we source it, and promote it, and we tell our clients when we have what they are looking for.

If you would like to find out how you can join the Club please get in touch on the number below.

For any other Family Office needs please also write to us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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Interview with Financial Times

Matthew Vincent of the Financial Times contacted me last week to ask my views on UHNW deal clubs and to find out about the launch of our BConnect Club. The article can be found in the next edition of FT Wealth delivered FREE with the FT newspaper on 4th May.

As I told Matthew, the vision for BConnect Club is quite simple - we want to offer our UHNW members a place where they can find co-ivestors, find exclusive deals, find the best professional advisors and do it efficiently. They are part of an exclusive Club which has their interests at heart and provides them with an independent investment platform.

Investment is a people's business so all of our members are interested in meeting one another and finding partners for their projects. Our launch tonight will be one of the many events we will be hosting this year as a way to connect our members on and off line.

Matthew’s first question was ‘Why is there was so much interest from UHNW investors in doing deals direct?’.

In my book ‘When you are Super Rich who can you Trust?’ I remind my readers that the price of any stock or share quoted on a market, is dependent on how many people want to invest in it. Investment Managers may know all the facts and figures of stocks, shares, sectors and economies, but cannot predict whether any one will interpret these facts and figures in the same way and invest. It is only when a lot of people are chasing the same investment that the price goes up. 

At the same time Governments oblige financial institutions to be transparent in what they charge for their services.  Gone are the times when charges could be hidden in the small print.

So not only does the Financial Institution have to comply with the Governments hunger for information, but they must also openly declare how much they are making in fees. The point at which the investment manager is making as much, if not more, than the investor, is the point at which the investor starts to look for new ways to invest. And for many that point has been reached.

I personally know of deal clubs in London, Singapore, Canada, Dubai and Switzerland and they are growing almost daily. But each club faces the same challenges - good quality members, good quality deals and good quality events.

Some clubs get ‘good quality members’ by charging a high up-front fee, to weed out those who are not serious. We don’t. We screen our members and each and every one of them must be 'verified' before they join the platform as an UHNW or SFO member.

Another challenge is to make UHNW individuals and their single-family offices want to come back. From our experience, like minded wealthy people want to find others like them, to do deals – of course -  but also to ask for their opinion, ideas and recommendations. Like this evening’s event we bring our members together regularly, not only to promote deals, but as you can see from our broad range of sponsors, such as Bank Julius Baer, Cult Wines, and SPS security services we promote exclusive luxury products, as well as specialist advice.

BConnect Club enables anyone who wants to promote their luxury product and or specialist service providers to connect with our UHNW members, how best to do so is explained in my book ‘How to win Business from Private Clients’.

If you would like to find out how you can join the Club please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Family Governance III

This is the third in my mini-series on good family governance. In the first Note, I defined family governance to mean ‘the facilitation of effective entrepreneurial and prudent management of family assets that can deliver long term preservation of the family wealth’.

An essential element in the preservation of family wealth is to keep costs and risks to a minimum. Last week we looked at keeping fees to a minimum when dealing with a dispute within a family, and the week before we looked at keeping fees to a minimum when dealing with disputes outside the family. Now we look at keeping costs and risks to a minimum when dealing with an investigation from a tax authority.

In my experience, dealing with a tax authority is unlike any other interested party. It has a bottomless pit of resources, a manual as to how to deal with investigations and the ability to impose criminal sanctions.

An economist Dr Pickerty works closely with the OECD. He has calculated a whopping $7,600 billions of private wealth is held offshore which is untaxed. For cash-strapped Governments this is a prize worth fighting for, but until recently they were uncertain as to how to attack them, until Olenicoff.

Olenicoff was a Russian gentleman, under investigation by the IRS. He had $200 billions of untaxed and undeclared monies. The IRS gave him the option, spill the beans as to who and how he was advised or face a jail sentence of 22 years.

It took him just 30 seconds to decide.  He admitted that his advisers were UBS and his trust was a sham. For him it was preferable to pay the tax than go to jail. He was then taxed as if the monies had never been transferred into trust, but had remained in his unfettered ownership. He paid a lot of tax – but kept his freedom.

Until the case of Olenicoff, monies held in offshore trusts were beyond the reach of foreign tax authorities. But this case gave the IRS the ammunition it was looking for – the doctrine of sham.

All the IRS now needed was to get the information they needed about offshore trusts and who set them up, they could then investigate for evasion of tax and use their extensive criminal prosecution powers to impose jail sentences.

The IRS then came up with FATCA.

Under FATCA all financial institutions with assets in the US were obliged to report on all its clients who were US nationals. At the time, many thought it was shooting itself in the foot. Financial institutions, it was thought, would divest themselves of their US assets – but they did not – they preferred to report on their clients even though to do so cost them a fortune. Forbes has estimated that the cost for financial institutions to comply with FATCA is ten times the expected tax take for the IRS

The OECD encouraged by the success of FATCA followed suit. It introduced the automatic exchange of information (the Common Reporting Standard ‘CRS’) on all its member states – other than the US (which already had FATCA). Under CRS financial institutions are obliged to collate and exchange information with the tax authority in which the Settlor is tax resident.

However, despite this sword of Damocles, most fiduciary businesses are sanguine. They are satisfied that they operate their businesses with care, keep proper records and minutes and do not operate ‘sham’ trusts.

But this is to miss the point. Tax authorities are of the opinion that any trust over which the Protector has powers; such as to remove and replace a trustee is prima facie evidence of a lack of intention to transfer total control over the assets to the trustee. The tax authority then has all the information it requires to investigate. 

Olenicoff was faced with a plea bargain – confess that he did not have the necessary intention to relinquish control over his assets to his trustees, and pay tax on the trust assets as if they were not in trust, or go to jail for 22 years.

That may be a sensible decision for a Settlor such as Olenicoff to make albeit costly, but it is not such good news for the professional trustee.

If a trust is a sham, the trustees have no right to recover their professional costs from the trust fund and must return all their fees from inception to the Settlor. It does not take much work to calculate just how damaging such an investigation could be to any fiduciary business.

Good family governance recognises the risks and dangers facing families such as from over-zealous tax authorities and comes up with solutions.

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

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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