And still the heat rises

In March 2018, the Law Society published its guidelines as to what it considers to be money laundering and high-risk activities. I quote

‘Independent legal professionals are key actors in the business and financial world’ it says, ‘facilitating vital transactions that underpin the UK economy. As such they have a significant role to play ensuring that their services are not used to further a criminal purpose….

Money laundering is generally defined as the process by which the proceeds of crime and the true ownership of those proceeds are changed so that the proceeds appear to come from a legitimate source.

But it is not restricted to drug running and fraud by criminal gangs, the Proceeds of Crime Act 2002 includes ‘profits and savings from relatively minor crimes, such as regulatory breaches, minor tax evasion or benefit fraud.’

There are three classic phases to money laundering: placement, layering and integration; getting the cash into the system, finding a way to obscure its source, and making wealth appear legitimate so that the criminal can enjoy it. We all know and agree that the proceeds of crime need to be identified as a first step to catching criminals, but the heavy guns are out for the ‘minor tax evasion’ as well, which won’t be placed, layered or integrated. More often than not it is simply sitting in a bank account waiting for a rainy day.

Schedule 9 of the Proceeds of Crime Act 2002, outlines the practices where vigilance is particularly high, which includes,

·      Advice about the tax affairs of another person by a practice or sole practitioner

·      Legal services involving the participation in financial or real property transactions concerning the buying and selling of real property or business entities

·      The managing of client money, securities or other assets

·      The opening or management of client money, securities, or other assets

·      The opening or management of bank, savings or securities accounts

·      The organisation of contributions necessary for the creation, operation or management of companies

·      The creation, operation or management of companies

·      The creation, operation or management of trusts, companies or similar structures

 In short, the entire private client industry needs to be on the look-out for the proceeds of crime and the savings from evading tax!

The industry is advised to take appropriate steps to identify, assess and understand the money laundering risks businesses faces and apply a risk-based approach to compliance with documented policies, controls and procedures to identify these problems.

At greatest risk are those lawyers involved in the sale/purchase of real property, creation of trusts, companies and charities, and management of trusts and companies and therefore anyone involved in this practice area must place additional controls where necessary to minimize the risk of money laundering.

In my area of expertise, I need to ask why a client wishes to set up the trust, the appropriateness of the structure, and to understand all aspects of the transaction.

But now we need to go even further.

Several decades ago I was working in a law firm and down the corridor from me was a lawyer, who I will call John, who kept himself to himself. John was rumoured to have a rich wife – which explained his lavish lifestyle. By chance a trainee, noticed that a lot of John’s clients were using an accountant in an offshore financial centre which was not used by any other partner in the firm, and asked why. It then came to light that John was working a little too closely with some of his clients, introducing them to this accountant, who would not ask too many questions for a fee paid to John, into his offshore bank account. He was, dismissed.

But as from 2017 senior management must flush out such rogue elements.

For most hard-working diligent tax and trust practitioners, clients are for the long term, we get to know their family, go to their weddings, funerals, religious ceremonies – we know who they are what they want to achieve and we do our best to keep them well within the tramlines of the law and introduce them only to professionals with the same high standards of decency. But in a large organisation not everyone has the same sense of integrity. A rogue worker looks the same as any other diligent practitioner, the only difference is that he/she is more motivated by financial reward than keeping his/her clients the right side of the law.

On 1st September 2017, the Government published guidance for companies on failure to prevent criminal facilitation of tax evasion. This now makes senior management in an organisation criminally liable for the failure to prevent an associated person facilitating the evasion by their clients of tax.

Up until 2017, prosecutors merely had to show that the senior members of the relevant body were not involved in or aware of such illegal activity. Now if they turn a blind eye, or fail to have a proper procedure in place to flush out such rogue elements they may find themselves in the dock alongside their criminal colleagues.

If you would like to find out more, or buy my book When you are Super Rich who can you Trust? simply send me an e mail to caroline@garnhamfos.com.

Substance over Form

Last week, I had a meeting with a dear friend and client who I will call Fred. Over the three decades I have known him, he has had good luck and bad, in about equal measures, but in recent years his commercial property interests have rocketed. He came to me, because he was looking to ‘take profits’.

Fred came to live in the UK from Australia some fifteen years ago and bought residential property in the UK, which did very well. About seven years ago, I told him, that I thought the UK government would start to attack the tax benefits of UK residential property. He took my advice and sold the UK residential property, switching into commercial property which he held in offshore special purpose vehicles in BVI and trusts which he set up in Guernsey about the same time.

I said he needed to review his entire structure the mood of the world had changed and offshore structures had to change with it, to reflect substance over form. For example, the governance of the special purpose vehicles which held the commercial property interests needed to be carefully looked at; in particular who was on the board, where board meetings were held, what the board members discussed and how everything was recorded.

I reminded Fred that ‘The key advantages of using BVI companies to hold the commercial property portfolio are they are outside the scope of UK capital gains tax provided the company is non-UK resident, which means that the central management and control of the company must be outside the UK.

I touched on the leading case on this issue – Wood v Holden last week.

Fred looked smug, he was ‘well acquainted with the rules of central management and control’. His BVI companies had a majority of Guernsey resident directors, he was not on the board, they met at least twice a year in Guernsey at which board meetings were held and minutes properly taken which were kept at the offices in Guernsey,

I asked what the minutes recorded, after all Fred was the brains behind the business empire? The majority of directors maybe resident in Guernsey, but what experience did they have in buying and selling UK commercial property? Furthermore, how in practice did Fred convey his business decisions to the Guernsey board?

He said that informal meetings and discussions were being held continuously in the UK, but when a decision had to be made, his CEO would fly to Guernsey to have a formal meeting at which the decisions would be taken.

I asked whether the minutes conveyed the business discussions? Fred said yes, his CEO would go through the properties held by the SPVs, and explain the proposals to the board at which point discussions would be held, and then the board would resolve to agree the proposals.

I asked whether these discussions were recorded and the time taken to come to these decisions? If the directors had no real knowledge of commercial property were these discussions meaningful?  These factors could now come under greater scrutiny.

The First Tier Tribunal case last year of Development Securities is unusual, but is a salutary reminder that substance trumps form.

In this case, three Jersey companies, ultimately owned by Development Securities PLC, were used as part of a tax structure designed to increase the group’s available capital losses. The offshore companies bought real estate at an artificially high price with a view to selling them on, at a loss, shortly afterwards. This loss would then be available to set off against the profits of Development Securities PLC.

The boards of the Jersey companies held at least four meetings between the date the companies were incorporated in June 2004, and the date the Jersey directors retired about six weeks later in July 2004.

At these meetings, the Jersey board considered the steps proposed, gave approvals to the entry into and subsequent exercise of the call option and set out all the related administrative steps needed to complete the transaction, - in accordance with directions from a UK tax accountant.

The First Tier Tax Tribunal wanted to look at the facts and took everything into account; all correspondence, minutes, hand written notes, telephone calls and in particular the advice given by the accountant who orchestrated the whole thing, which was not privileged.

The Tribunal came to the conclusion on the facts, that, at the time the Jersey companies were incorporated and the directors appointed by Development Securities, the decision to undertake the transactions had already been taken (by Development Securities) and that the directors of the Jersey companies, in agreeing to be appointed, in effect were also agreeing to carry out the transactions, subject only to confirmation that it was lawful in Jersey for them to do so.

What was of particular relevance in this case, was the fact that the boards of the Jersey companies did not discuss in any detail the transactions which they were to take, and in fact were not qualified to do so!

My advice to Fred, was put in place a structure so that real decisions are taken by people with real qualifications, which is not in the UK – if that means hiring a private jet once every three/four months’ – that is a small price to pay for a saving capital gains tax!

If you would like to find out more about setting up and running headquarter structures call Caroline on 020 3740 7422 or e mail on caroline@garnhamfos.com.

Should you admit weakness?

If a trustee asks an adviser, for a review of the offshore structure for ‘tax purposes’ should the tax adviser admit where it is weak or not? The answer is – it depends!

Ivan set up his business group headquarters in Guernsey fifteen years ago which is owned by a trust. The business is predominantly UK based and is now substantial.

The first area of vulnerability, I would advise Ivan, is whether any part of the structure could be treated as UK tax resident. The leading case on this is Wood v Holden, 2006.

In this case, the judge decided that a company will be resident in the place where decisions are made by its board of directors, subject to one exception. Where an ‘outsider’ has ‘usurped’ the function of the board and effectively exercises management and control from the UK, without regard to the board. In this case, the company will be treated as resident and taxed in the UK.

However, to cross this line, depends on a finding of fact. An ‘outsider’ can propose, advise and influence the decisions of the board, but must not ‘usurp’ its function. The line is crossed only where the outsider ‘dictates’ the decisions of the board and the directors do as they are told. 

There have been a number of cases since 2006, which give further clarification.

In the case of Laerstate BV v HMRC 2009 a controlling shareholder and one of the two directors Dieter Bock, resigned from the board, but continued (in practice) to exercise central management and control of the company from the UK, notwithstanding that he was no longer a director. It was decided that the influence of Dieter was such that the company was UK resident and liable to UK tax. This decision hinged on the fact that the board listened to what Dieter demanded, regardless of the fact that he was not a board member.

In Lee v Butler v HMRC 2017, HMRC successfully argued that a trust was effectively managed in the UK (a similar test, but not identical test to central management and control) in circumstances where decisions were made by a trust company in Mauritius, but the ‘shots were called’ from the UK. Again, the trust company listened to what was being dictated by non-board members in the UK.

HMRC has also made reference to recent developments in Australia. In Bywater Investments and Hua Wang Bank Berhad 2016 a company was held to be resident in Australia where an individual was carrying on the ‘real business’ in Australia with decisions being rubber-stamped by a non-resident director.

The second area of vulnerability, I would advise Ivan, which can affect the tax treatment of offshore structures, is whether the trust has a ‘fixed place’ of business in the UK, through which trust or company business is carried on, or if somebody habitually exercises, in the UK, authority to bind the offshore headquarters.

These are important areas and need to be looked at with care, because once HMRC starts an investigation it will demand to see all board papers and minutes, and possibly also the email correspondence between the directors and other key individuals. It is specifically looking for the unguarded comment, or casual conversation, on which it will build its case based on these ‘facts’.

However, getting back to my question, should an adviser admit where a structure is weak? The answer is – it depends. HMRC cannot demand to see advice which is ‘privileged’; advice from a qualified lawyer. It can however, demand to see advice from an accountant – which is not privileged.

Therefore, Ivan’s trustees, if they are concerned that that structure could be investigated by UK HMRC should first seek the advice from a lawyer to determine where the structure could be regarded as weak and how to make it more robust.

As part of this exercise, advice should also be sought as to what to do, to avoid a tax investigation, becoming a nightmare.

Long before UK HMRC starts sniffing the trustees should first seek advice from an independent accountant to tell them how to fill in all the relevant tax returns, to avoid the 200% onerous penalties for failure to correct, which I covered a few weeks ago. Then trustees need to be advised as to what to do as and when a tax inspector comes sniffing.

The temptation is to respond to the demands of the tax inspector, without first taking advice from a good dispute resolution lawyer. Tax authorities have been ordered not to compromise and have the mind-set that offshore structures are set up for one reason only - to avoid tax. So, they care little if their investigation is harsh, long winded and unfair.

If a trustee wishes to act in the best interests of his beneficiaries, it should engage the best dispute resolution lawyer to resolve the dispute. If this is not done, the dispute can, and will, drag on for years and years, benefitting only the professionals.

If you would like your offshore structure reviewed or to engage a dispute resolution lawyer, please contact me on 020 3740 7422 or e mail me on caroline@garnhamfos.com.

Summer party

Summer Party

What a glorious summer we are having here in London – I cannot remember so many warm days over such a long period. If asked where am I going for a holiday this summer – the answer is nowhere! It is so glorious right here, on my roof terrace overlooking Hyde Park.

And Summer is also time for Summer Parties.

Our BConnect Club held its second get together in the psychedelic room above the renowned Aquavit restaurant, in the heart of St James’ in London. A fabulous venue and the food was exceptional.

Like any Club event its members were there to enjoy the company of others, eat, drink, network and make new acquaintances. For those not familiar with the BConnect Club, it is the trusted partner for the private client.

In my book, ‘When you are Super Rich who can you Trust?’. The answer is no-one. But, you can trust the collective wisdom of like-minded people. Other wealthy families have had similar problems to yours, and collectively they know the dangers, opportunities and pitfalls. Many focus on how to find a good deal in which to invest their cash - it is not easy 

The trouble is that wealthy people do not always want many people to know too much as to who they are and what they are looking for. The BConnect Club recognises this. It is for like-minded people to meet others like them offline, but also to connect with investment opportunities, product providers and professional advisers online, and if desired can, through our team of relationship managers, be guided as how to find, what you are looking for.

As I say in my book,  J.K. Rowling when she first became liquid rich, is on record as saying that she was ‘terrified’. She did not know what dangers to look out for, or who to trust. BConnect Club is the 'go to trusted partner for the private client', both online and offline to help them steer a straight course through shark invested waters.

The name BConnect Club comes from our Joint Venture partners. Ankush Mehta is the founder of Bespoke Connections, and me the founder of Family Bhive the online forerunner to BConnect Club. Together we have formed the BConnect Club.

Bespoke Connections – does what it says on the tin, it makes connections, but before BConnect, its connections were only offline. However, now with an online presence these connections can be made more meaningful. We can now connect our members not only with deals, which Ankush and his team are so good at, but also with luxury product providers such as our sponsors Cult Wines, and services such as C6 which provides our members with due diligence and insight information.

Although we are only a few months old, connecting with the contact list of Ankush and my own contact list we already have membership with net wealth in excess of £24billion and £515million liquid assets to invest. BConnect Club may be a new kid on the block, but it already has a dedicated team and is growing every day.

This is why I am so thrilled to inform you, my readers, that Svetlana Galeva, who has worked for me for over four years, has joined the team at BConnect Club.  Svetlana is a natural connector and facilitator and I wish her every success at BConnect Club.

Meanwhile GFOS goes from strength to strength. 

GFOS is a legal boutique which specialises in providing international families with significant wealth, with control over their family offices and trust assets.

Everyone knows that a company has shareholders and company directors. The shareholders are given reports and can hold an AGM and EGM if they want more information or are keen to know if someone is behaving beyond their brief or not in a manner which is their best interests. Directors and shareholders may not always see eye to eye, but good governance with its formality and rules  keeps them muddling along without too much intervention from the professionals.

This is not however, always the case with the ownership structure and management of single family offices and assets held through offshore structures. Professionals are often left to manage personal assets with few if any checks and balances, such that when a difference of opinion emerges or a dispute arises, matters are often made worse by the professionals seeking out further professional opinions, which often slows down the dispute resolution and gives rise to missed opportunities.

Through my close connection with BConnect Club and its ethos, I would like to offer every wealthy family and Single-Family Office who joins The BConnect Club as a member a FREE consultation with GFOS to review what, if anything, can be done to improve the good governance in their single-family office or in relation to their assets held offshore.

If you would like further information please contact me on caroline@garnhamfos.com or call on 020 3740 7422 I can also be contacted if you would like to buy a book, which can also be bought on line from www.garnhamfamilyofficeservices.com or at Amazon.

A day out at Ascot

Ascot is quintessentially English.

I was invited to join a business colleague Bryan and his wife Jolante for champagne and canapes at 11.00 in Car Park 1 at Ascot races last Tuesday. For those not familiar with the quirks of the English summer season, the business elite with connections, book or buy a car park space and host picnics – come rain or shine for their friends and colleagues.

Car park 1 is the poshest of all the car parks! But no matter how posh, if it is raining, everyone is expected to smile, stand with an umbrella in one hand and juggle the champagne and canapes with the other, using what you can of the parked car or boot as a table. Fortunately, this year it did not rain, and so I could eat and drink without fuss.  The weather on Tuesday, although cloudy, was warm with a soft breeze.

Bryan is a consummate networker, he was joined by a most interesting and varied group of people, from intrepid explorers, to a NHS negligence claims barrister and a former ambassador to Greece. For some, it was their first time at Ascot, and for others it is a yearly tradition. I arrived early so that I could, not only enjoy the company of my host and his guests, but also visit family and friends in other parts of the car park.

Most people who picnic in Car Park 1, like me, apply for tickets to the Royal Enclosure which gets you as close as possible to the Royal family, from whom there is always a good turnout. Royal Ascot is the Queen’s favourite event and she makes a point of going every day. She always arrives promptly at 2 in a long procession of horse drawn open carriages down the racetrack to her box. A little before 2.00, I joined a few friends to stand on the terraces to welcome the Queen and the Royal Procession into the Ascot stadium.

I am a fan of the Queen. I admire her tireless devotion to duty, and her tenacity. Most women at her age would not venture out so often let alone without a stick or an arm to lean on – not the Queen, she serves her country without complaint and stands and walks for hours without an aide. I was not the only one keen to be on the terraces to welcome Her Royal Highness. The terraces were packed with gentlemen wearing morning suits; top hats and tails, and women wearing hats and looking their best.

A cheer went up as the Queen approached and the gentlemen took off their top hats as a sign of respect. The Queen was dressed in a stunning canary yellow coat, with light blue hyacinths on her yellow dress and in her matching yellow hat she wore a blue hyacinth flower.

In the second carriage rode the Prince of Wales, with his wife Camilla, dressed in a simple but elegant cream dress coat and hat. With them rode the Prince’s nieces Beatrice and Eugene. But the belle of the ball, apart from the Queen, was the newly appointed Duchess of Sussex, only one month after her wedding to Prince Harry, riding in the third carriage.

Meghan looked elegant, in a white Givenchy shirt dress, and white hat with black details. She obviously fits well into her new ‘role’, and was invited to give the trophy to race winner Frankie Dettori to much applause.

I joined my friends as they put a £5 bet on ‘Rhodendron’ to win ‘both ways’, at the bookies, and then joined them on the terraces to watch the first race. Sadly, Rhodendron did not win. They shrugged, smiled and looked at the race card to consider what horse to back in the next race.

At this stage, I decided to visit some clients who were also at the races who had invited me into their box. Unlike the true Brits, who attended good English schools and make up the back bone of the square mile, the real money rarely picnics in the Car Park. They prefer the comfort and convenience of a box.

I started on the fourth floor. This box was packed with the great and good, their table groaned with delicious food – and on the side was another table set with empty glasses and waiters, keen to fill the glasses with whatever a guest may chose; champagne, wine, Pimms or whatever took a guest’s fancy. Our host had invited his polo team to join him, they mingled easily with the City’s leading entrepreneurs, tall, elegant and impossibly good looking.

The next stop was a box also on the fourth floor, full of distinguished property developers. Here more tables heaved with delicious food and empty, expectant glasses. The atmosphere was friendly and engaging.

The third stop was on the sixth floor, the host was a race horse owner with pictures of his winners on the walls. ‘Of course, there is no money to made in racing horses’, our hosts wife explained to me ‘unless you breed them, the winnings are derisory, (unlike in France). The thrill of owning a race horse is just that - a thrill accompanied by an enormous bill!’

I ended the afternoon back on the fourth floor, where some of the food had been taken away and replaced with tea and scones. I ate a few sandwiches, had a cup of tea, and then thought about going home. One of the guests and family were leaving at the same time. We departed together, and were held up by the departure of the Queen. She and her family left in black limousines, with Police clearing the way of people and traffic for the fleet of royal cars making their way back to Windsor. My fellow guest then headed for the helli park, where his pilot and helli were waiting, to fly him high over the traffic jams, while I headed back for the train. My phone rang while I was on board for London ‘So sorry to have missed you – not to mind, we’ll meet for a coffee soon’.

Another fabulous day at the races.

If you would like to buy my book on ‘When you are Super Rich who can you Trust?’ or ‘How to win business from Private Clients’ please write to me at caroline@garnhamfos.com or call on 020 3740 7422.