British Virgin Islands: Obstacles On The Path To Recovery

Article by Martin Kenney & Elizabeth O'Brien

Introduction.

There are many obstacles that must be traversed by a claimant or victim on his path to recovery that are fundamental to the design of any asset recovery litigation. They include:

• A multi-jurisdictional complex of facts and legal problems.

• Disharmony in legal rules governing the provision of access to documentation and information reposed in the hands of third party capital market intermediaries who come to handle or unwittingly launder the suspect money.

• Bank, fiduciary relation and company secrecy laws which purport to frustrate attempts to access information leading to the discovery of the whereabouts of stolen wealth.

• The juxtaposition between apparently conflicting systems of law.

• Company law. The setting aside of the legal fiction, company, is often a prerequisite to gaining access to funds protected by this legal cocoon.

• The law of trusts and agency can be abused in an attempt to (at least) superficially distance the attribution of the suspect funds, or in an attempt to place the funds into an abstract, legal fortress.

• The presumption that dealings with assets and money through company, contract, trust and other are all bona fide.

• Time and money.

The foregoing does not represent an exhaustive list of the difficulties and barriers that must be crossed. It does, however, provide an introduction to the predictable difficulties which the asset recovery expert will invariably encounter. Having recognised the major obstacles, a strategy can be developed accordingly.

Often, victims of fraud operate under the illusion that recovering what has been taken is simply a matter of right and wrong, black and white, "she took it – therefore she must give it back." While there are examples of cut and dried cases, in an increasingly technological age in which international transactions and communications are commonplace, the solving of a fraud case involves a lot more than identifying the culprit. The road to recovery can be long and arduous and may involve major setbacks. The processes of firstly proving liability and secondly enforcing the obligation are two distinct and often equally difficult ones. The authors advocate plaintiffs to seek to invert the normal civil litigation paradigm of resolving the question of liability first – only to seek the enforcement of an award at the end of the process. We believe that a completely inverted approach is the most effective one in managing risk in the face of serious fraud.

The importance of solid ground work, reliable evidence and a proven legal foundation cannot be over emphasised. Nor indeed can the potential financial burden of prosecuting an asset recovery exercise which may run for long periods of time. (See, Sections 16.0 and 17.0 – 'Financing the Cost of the Asset Recovery Process' (U.S. and Commonwealth)). These are all considerations which require highlighting and attention.

Multi-Jurisdictional Mix.

Given the age in which we live, where electronic transactions take milliseconds and where the ability to communicate by means of the world wide web has changed the way in which we conduct our lives, it is no surprise that the experienced white collar criminal avails of this increasingly border-diminished world to travel and move money with ease. While for the most part jurisdictions which avail of the benefits of trade with more developed countries have made inroads in the area of accountability and transparency in financial matters, a core group of 'tax-havens' or relatively 'regulation-free' hotspots continues to offer the tax conscious and the economic criminal alike, a safe place in which to repose billions of dollars each year. This 'multi-jurisdictional' factor can make the task of the victim of economic crime much more difficult than it would otherwise be. Indeed, the addition of this factor can often dissuade victims from seeking recovery.

Negotiating these obstacles requires a good knowledge of the customs and laws of offshore havens and an understanding of the bureaucracy which dogs these often small and somewhat provincial jurisdictions. The value of cultivating close relationships and sources in such places, both within the law enforcement and political spheres, is high. Knowledge of how these places operate and under whose or what influence is helpful.

Bank and Fiduciary Relation Secrecy Laws.

The founding principle for banking confidentiality in common law jurisdictions was outlined in the English House of Lords decision in Tournier v. National Provincial & Union Bank of England. ¹ Lord Justice Bankes laid down four principles governing when disclosure of a banker/customer confidence may be made: (a) where disclosure is under compulsion by law, (b) where it is in the interests of the public to disclose, (c) where the interests of the bank require disclosure, or (d) where the disclosure is made by the express or implied consent of the customer.

Bank confidentiality has been taken a step further in Switzerland, a confederation of 26 sovereign states, or 'Cantons'. The Swiss Confederation has no general power to legislate on civil or criminal procedure. Each Canton therefore has its own statute on civil and criminal procedure, and they vary. Privacy and secrecy are highly valued in Switzerland and access to information is limited. Certain professionals (e.g., priests, lawyers, notaries, auditors and physicians) are obliged, by law,² to maintain the confidentiality of facts which they learn in the course of their professional conduct.

Similarly, Liechtenstein imposes criminal sanctions for the breach of confidential obligations as proscribed by law. The bankers duty of confidentiality, based on Article 14 of the Liechtenstein Bankengesetz, prohibits bankers and their agents and employees, from disclosing facts or information with which they were entrusted in the course of their profession. Such duty endures indefinitely. Breach of Article 14 risks criminal sanction under Article 63.1 of the Bankengesetz. Trustees and lawyers are similarly restrained pursuant to Article 11 of the Gesetz über die Treuhänder and Gesetz über die Rechtsanwälte.

In 1976, the Cayman Islands joined the ranks of those jurisdictions making the breach of the duty of confidentiality a criminal offence with the passing of the Confidential Relationships (Preservation) Law. This law purports to criminalise the dissemination of "confidential information" whenever disclosure occurs without either (a) a court order or, (b) the explicit consent of the principal, or bank customer, who has imparted information to his offshore bank or trustee in the course of a transaction of a business or professional nature. However, the attitude of the judiciary to the interpretation of this law in the Cayman Islands has had to move with the times, in recognition of the fact that justice cannot be shackled by a piece of legislation that is frowned upon by the developed world.

While the confidential information about the affairs of persons doing business in and from the Cayman Islands is required to be protected, the protection afforded by the law is not absolute. Disclosure will be allowed where it is appropriate to ensure that justice is done in disputes between persons and where the enforcement of the criminal law and the administration of justice - whether in the Cayman Islands or overseas – requires that disclosure be allowed. See, In the Matter of Ansbacher (Cayman) Limited (No.2), Cause 69 of 2000 where the Court said:

Accordingly, it is recognised that the duty of secrecy owed by a bank to its customer is a duty subject to qualification, as is classically stated in Tournier's case [1924] 1 .K.B. 461 at page 473 per Bankes LJ:

And at page 481, per Scrutton LJ:

And finally, in words which serve to clarify and explain the third of Lord Justice Bankes' qualifications, at page 486 per Atkin LJ, the court said:

The Commonwealth of the Bahamas enacted the Fraudulent Dispositions Act 1991 which provided for two principal modifications to the then 420 year old scheme established during the reign of Elizabeth I (namely, the English Fraudulent Conveyance Act 1571). Such modifications (a) limit the time available for the institution of an action seeking to set aside a disposition of assets to two years following the actual date of the completion of the offending transfer of wealth, and (b) shift the onus of proof from the debtor to the creditor by placing the burden of establishing an intention to "defeat, hinder, delay, or defraud" a creditor, onto the creditor, thus making it more difficult to upset a conveyance on the basis of fraud. During the 1990's, representatives of well-known banks and trust companies from the Bahamas marketed their offshore asset protection trust settlement and administration services aggressively, to high net worth individuals onshore.

When the FATF published its first list of Non Co-operative Countries and Territories in June 2000, all of the above-mentioned jurisdictions, with the exception of Switzerland, were on that list. They were included because they had been identified as having critical deficiencies in their anti-money laundering systems or a demonstrated unwillingness to co-operate in anti-money laundering efforts. In June 2001, when the FATF updated its list, they were among those removed from the list, having made progress in remedying their deficiencies.

The fact of this forced change of attitude means that it is now more difficult for the authorities and banks in these jurisdictions to refuse assistance to a bona fide victim seeking information on the whereabouts of his funds, or in taking proper action in the face of apparent fraud. Public policy arguments can be used to buttress the right of access to information and provide persuasive arguments as to why bank secrecy cannot be used as an obstacle to a victim's search for remedy. Thus, while it is important to be aware that bank secrecy still acts as an impediment, it is not necessarily the unyielding principle it once was.

The Conflict of Laws.

Bearing in mind the multitude of jurisdictions through which an apparent fraudsman and the proceeds of his fraud may pass, it is not surprising that the issue of the conflict of laws arises on a frequent basis. The 'conflict of laws' is a vast study unto itself. It determines, in part, what system of law is to be applied to resolve a given dispute (in the sense of which jurisdiction's law will prevail), and what remedy can be applied. The fact that a wrong may be governed or punishable by the laws of Jurisdiction X because it was committed for the most part in that jurisdiction, does not preclude Jurisdiction Y, the jurisdiction in which the harm was felt by the victim and in which proceedings were instituted, from applying its own remedial and procedural law. In addition, issues may arise in relation to the admissibility of evidence, the interpretation of foreign law and consideration of public policy arguments. The 'Conflict of Laws' has something to say in relation to each. It is not within the province of this paper to engage in a detailed discussion of the principles of the conflict of laws. However, it is an area of importance to multi-jurisdictional investigations and asset recovery litigation. The answers to questions such as where the fraud was committed; where the money now lies; where the apparent fraudster is domiciled or resident, and where the majority of evidence is reposed not only illuminate the decisions as to how to proceed but are often the determining factor in choosing the primary litigation location.

The impact of the conflict of laws should not be overlooked when considering the appropriate forum in which to institute recovery proceedings. This is particularly true in jurisdictions where legal concepts and norms may differ significantly from those that we have become accustomed to. The effect of the conflict of laws may impact upon the evidence offered, the remedies sought and the cause of action pleaded. This discussion isolates a few issues with a view to illustrating the important impact this area of the law may have. The cause of action of unjust enrichment or monies had and received is singled put for attention as an area in which the conflict of laws can have widely divergent effects depending on the circumstances.

In every case involving a foreign element it is necessary to consider three preliminary questions. First, what is the principal legal issue with which the case is concerned? Second, what are the connecting factors prescribed by the rules of the conflict of laws, for determining which system of law shall govern the resolution of the substantive merits of the dispute? Third, what system of law do the connecting factors point to in the case before the court?

The nature of a plaintiff's remedy is a matter of procedure to be determined by the lex fori ³ (or the law of the place of the forum court). Therefore, if the plaintiff is, by the lex causae (or the system of law that governs the resolution of the substantive merits of the dispute – also known as the 'proper law'), only entitled to damages, but is, by the law of the forum, only entitled to a different type of relief, the latter remedy is, ordinarily the only one that will be available. (See, Boys v. Chaplin [1971] AC 356). Conversely, a forum court will not grant specific relief where to do so is contrary to the principles of the law of the forum.

Generally speaking, the principle that the forum grants only its own remedies in respect of wrongs governed by a foreign law only applies if two conditions are satisfied. First, the lex causae must give the plaintiff some remedy against the defendant in respect of a wrong similar in character to that alleged in the forum proceedings.⁴ Secondly, the forum remedy sought must "harmonise with the right according to its nature and extent as fixed by the foreign law".⁵ Forum remedies will be refused if they are so different from those provided by the lex causae as "to make the right sought to be enforced a different right."⁶ Although an action in the forum country will not fail merely because a claim is unknown to the forum law, it will fail if the law of the forum has no appropriate remedy for giving effect to the plaintiff's alleged foreign right.⁷ Similarly, the method of enforcing a judgement is a matter of procedure.⁸

The obligation to restore a benefit of an enrichment obtained unjustly at another person's expense gives rise to liability in restitution. An obligation to restore an "unjust enrichment" or "unjust benefit" is imposed by substantive law. This obligation can be treated as an independent one, both within the context of the domestic law where the obligation is sought to be enforced⁹ and for the purpose of considering the appropriate law to be applied under the choice of law rules of the conflict of laws.¹⁰

The obligation to restore the benefit of an unjust enrichment obtained at another person's expense is governed by the proper law of the obligation. The law of the obligation is chosen by reference to the manner in which the obligation arose. Dicey and Morris on The Conflict of Laws (12th Ed.) identify the following separate circumstances in which an obligation to restore the benefit of an unjust enrichment may arise under English law:

1. If the obligation arises in connection with a contract, its proper law is the law applicable to the contract. ¹¹
   
   
2. If the obligation arises in connection with a transaction concerning an immovable form of property, the proper law of that obligation is the law of the country where the immovable is situated (or the lex situs). ¹²
   
   
3. If the obligation arises in any other circumstances (such as fraud), its proper law is the law of the country where the enrichment occurs. ¹³

The determination of the proper law of the obligation depends largely upon the proper characterization of a claim which is in issue. The determination of, for example, whether a claim is to be characterized as a right to recover an unjust enrichment is determined by the lex fori (or the law of the forum). Thus while the obligation to restore is governed by the lawof the obligation, that is the place where the enrichment occurred, the characterization of the claim is a matter for the forum – as the forum is the source of the choice of law rules to be applied to resolve a conflict of laws.

To clarify, while the obligation to restore the benefit obtained is governed by the lex causae (or by its proper law), the question of whether there was in fact an unjust enrichment giving rise to that obligation, is a question reserved solely for determination by the lex fori (or the law of the forum).

Whether the appropriate law is classified as remedial (or procedural) or substantive has a direct bearing on which choice of law rules are applicable. For example, if the law applicable to the obligation to restore a benefit arising by virtue of an unjust enrichment is the law of a common law country which seeks to rectify the unjust enrichment by means of the imposition of a constructive trust, or liability on a third party for a "tracing" remedy, the question arises as to whether the existence of the tracing remedy is a matter of substantive or procedural law.¹⁴ Dicey and Morris make a number of suggestions as to how this dilemma may be resolved under the English conflict of laws. In the absence of any directly relevant authorities the following submissions are put forward:

1. The existence of the obligation to restore the benefit is determined by the law which is applicable by virtue of clause (2) (c) of Rule 201 of Dicey & Morris – the law applicable is the law of the country in which an immediate benefit was received.
   
   
2. Such system of law will provide the precise legal concept by which the obligation to restore the benefit is secured (at least to the extent that the concept which obtains in the proper law is properly characterised as substantive).¹⁵
   
   
3. Whether the concept is characterised as substantive or procedural is a matter for the lex fori. In arriving at the correct classification, the court of the lex fori (or the forum court) should have regard to the function which the concept serves in the context of the relevant foreign legal system. ¹⁶
   
   
4. The court of the lex fori should recognise a constructive trust or permit a tracing remedy in circumstances where neither would exist in the lex fori and should also for example recognise an obligation on a fiduciary to account for profits if the law which regards him as a fiduciary would impose that obligation, even though the lex fori might not necessarily regard a fiduciary relationship as having arisen in the circumstances. ¹⁷
   
   
5. Recognition of the foreign right or "remedy" may be subject to the limitation that such recognition may be denied if the court of the lex fori would be unduly inconvenienced in giving effect to it, though this position should only be taken if either there is no appropriate remedy in the lex fori to enforce the foreign right, ¹⁸ or if the foreign "remedy" has no functional counterpart in the lex fori.

In any case, the appropriate law of evidence to be applied is said to be that of the lex fori. However, it is important to note that the classification of whether that aspect of the law of evidence is either procedural or substantive has a great bearing on which law is to be applied. The lex causae (or the proper law of the wrong) generally determines what are the facts in issue.¹⁹ This it may do by providing that no evidence need, or may, be given as to certain matters, as such an issue is for the substantive law to determine.²⁰

The lex fori on the other hand determines how the facts in issue must be proved. Questions as to the admissibility of evidence are decided in accordance with the lex fori.²¹ Here a distinction must be drawn between the admissibility of a document, and the effect or weight to be given the information contained therein. The first matter is arguably a matter for the lex fori. The latter is arguably a matter for the law of the country in which the document was created or concluded.

Finally, where foreign law is a part of the equation, it must be specifically pleaded. It is not automatically assumed by the Court. Foreign law is a question of fact which must be proven by evidence of persons who are experts in that law. (See, Allen v. Hey (1922) 64 S.C.R. 76). Where foreign law is not proven, it is assumed to be the same as the law of the forum. (See, Canadian Fire Insurance Company v. Robinson (1901) 31 S.C.R. 488; Sheon Importing Limtied v. Babchuk, [1971] 4 W.W.R. 517 (B.C.S.C.)).

The above should serve to acquaint the reader with the variety of complex issues which may arise in the context of a trans-border dispute. Recognition of this fact and awareness that a law other than that of the forum may apply is important if one is to maximise the potential advantages available to a victim of fraud.

Company Law.

The separate identity offered by incorporation is a benefit exploited by dishonest obligors. Many jurisdictions continue to offer relatively regulation-free environments in which corporations, or at least special species thereof, can operate without the need to provide information regarding ownership, management or accounting. As put by the OECD Report – "using corporate vehicles as conduits to perpetrate illicit activities is potentially appealing because these vehicles may enable the perpetrators to cloak their malfeasance behind the veil of a separate legal entity." The difficulty in getting access to any meaningful information in relation to a corporation's dealings is further compounded by the slow pace at which enquiries are dealt with by the relevant authorities in such jurisdictions.

The FATF has made inroads in recent years in coercing regulation-shy jurisdictions into reforming their laws and strengthening their regulators. The list of Non Co-operative Countries and Territories has had the desired effect of shaming many jurisdictions into reforming their company law.

In a Report on the Misuse of Corporate Identity by the OECD published in 2001, serious criticism was visited upon those jurisdictions which:

In more general terms, the Report attacks shell companies (which by the Report's own definitions include trusts), on the basis that they:

The Report's conclusion is summarised as follows:

This is a far reaching objective and immediately raises questions regarding banks and professional duties of confidence, bank secrecy obligations (which in some jurisdictions go further than a mere duty of confidence), and, above all, the extent to which taxation of another country is covered by this. These objectives and the mechanisms put in place to ensure their attainment are commendable. However, in practice, it may be many years before recalcitrant jurisdictions comply with these dictates, if indeed they ever do. In the interim, claimants are left with no option but to pursue alternative methods of securing the relevant information, methods which themselves may cast a shadow on the information thus revealed. From a fraud victim's perspective, it is lamentable that a shroud of secrecy continues to surround many offshore corporations or IBC's, so called.

Almost every economic crime involves the misuse of corporate entities. While corporations have been credited for their immense contribution to rising prosperity in market-based economies, they have also been misused on a grand scale. Certain jurisdictions allow corporate vehicles established under their law to use instruments that obscure beneficial ownership and control, such as bearer shares, nominee shareholders, nominee directors, and so-called "corporate" directors, without providing effective mechanisms that would enable authorities and victims of fraud to identify the true owners and controllers when genuine questions regarding such identities arise. Some of these jurisdictions further protect anonymity by enacting strict bank and corporate secrecy laws that prohibit company registrars, financial institutions, lawyers, accountants and others from disclosing any information regarding the identities of those who hold beneficial ownership and control over a company, to law enforcement authorities and others. In any asset recovery exercise involving the use of corporate vehicles for an illicit purpose, the relevant enquiry will be to identify who exercises effective control (rather than legal control) over the corporate vehicle. In many cases of use of the corporate veil to conceal the true beneficial ownership of wealth, the real beneficial owner or founder controls the corporate vehicle despite outward appearances suggesting control by a third party. For example, directors of a corporation can merely be 'nominees' who pass on the de facto duties of a director to the beneficial owner and accept instructions from him. While meaningful corporate information has in some jurisdictions been difficult to obtain in the past, pressure from the international community on the offshore world has helped.

In a small number of offshore jurisdictions, the authorities require extensive disclosure of beneficial ownership and control information to the authorities at the formation stage and impose an obligation to up-date such information when changes occur. However, there are many different types of corporate vehicles. They are not subject to the same disclosure requirements. The classic example is the international business corporation (or "IBC") which is prevalent in so many of the offshore jurisdictions. However, an increasing number of jurisdictions are supplementing these approaches by requiring intermediaries involved in the formation and management of corporate vehicles to obtain, verify, and retain objective records on beneficial ownership and control and to grant to authorities access to such records for the purpose of investigating illicit activities.

The following is a list of two types of corporations that are vulnerable to misuse for illicit purposes, and therefore provide ample opportunity to ensure anonymity by a dishonest obligor;

(a) Private Limited Companies and Public Limited Companies Whose Shares are Not Traded on the Stock Exchange.

The principal distinctions between private and public limited companies are that the shares of a public company are freely transferable and there are no limits on the number of shareholders. These two features generally enable a public company to issue registered or bearer shares, offer shares to the public at large and trade shares on the stock exchange. In exchange for this flexibility, public companies submit themselves to rigorous regulatory supervision. In contrast, private companies may only issue registered shares, must restrict transfers and must limit the number of shareholders, and of course may not issue shares to the public at large. Therefore private limited companies face a less stringent supervisory regime. Private limited companies are misused most frequently because of their lower minimum share capital requirements and because the identity of the shareholders of these entities are of "secondary relevance."²²

(b) International Business Corporations / Exempt Companies.

International Business Corporations (or IBCs) and Exempt Companies are the primary corporate forms employed in offshore financial centres by non-residents. IBCs are limited liability entities incorporated in an off-shore centre which may be used to own and operate businesses, issue shares or bonds, or raise capital in other ways. IBCs are generally exempt from all local taxes on profits, capital gains and other income as well as stamp, gift and other taxes. They are often barred from doing business in the jurisdiction in which they were incorporated. Exempt companies have many of the same features. In many offshore financial centres, IBCs may issue bearer shares and may employ nominee shareholders and nominee directors to disguise ownership and control. They are often subjected to little or no form of supervision with no requirement to file annual returns or accounts.

As noted above, the means of achieving anonymity through a corporate vehicle include the use of bearer shares, nominee shareholders, and nominee directors and/or corporate directors. Bearer shares are negotiable instruments that accord ownership of a corporation to the person who possesses the bearer share certificate. They can effectively obscure the ownership of a corporate vehicle. Companies issuing bearer shares are usually exempt from having to maintain a share register with respect to those shares. Thus, obtaining information in relation to the identity of the true owners of such corporations is difficult, and the use of private investigators or pre-emptive Norwich Pharmacal / Bankers Trust disclosure orders may be the only way in which meaningful information may be uncovered.

Nominee shareholders are employed in most jurisdictions. While many jurisdictions require corporations to maintain shareholder registers and file annual returns containing a shareholders list and directors information, the use of nominee shareholders reduces the usefulness of the register because the shareholder of record may not be the ultimate beneficial owner. Where nominee shareholders are used, most jurisdictions employ investigatory means to discover the identity of the beneficial owners. In the United Kingdom, section 512 of the Companies Act 1985 provides companies with a procedure to identify the beneficial owners of their shares. Under this section, a company can ask the nominee to disclose the identity of the beneficial owner. If the nominee refuses to honour such request, the company can apply sanctions.

Nominee and corporate directors can also be used to conceal the identity of the beneficial owner. Their use, as in the case of nominee shareholders, renders director information reported to the companies registry much less useful.

In addition to the above methods, dishonest obligors frequently employ a chain of corporate vehicles – whereby each link in such a chain may have been established in a different jurisdiction, to further muddy the waters. The tracing of beneficial ownership to wealth is made more difficult as a result. For example, an IBC in Jurisdiction X may be owned by another IBC in jurisdiction Y, which in turn may be owned by another IBC in Jurisdiction Z. Former Australian billionaire, Alan Bond, used a variety of corporate vehicles in different jurisdictions to hide assets from his creditors. In this case, the tracing of beneficial ownership proved to be so difficult that in the end Bond's creditors opted to accept a settlement of AUS$10.25 million, even though the debts totalled more than AUS$1 billion.

As can be seen from the above discussion, in jurisdictions where incomplete reporting of corporate affairs is the order of the day, there are problems.

Trusts.

There are a number of basic features of trusts which provide benefits to those who use or abuse them, while providing headaches to those who are tasked with ascertaining asset location and ownership. A trust separates legal from beneficial ownership. It therefore provides opportunities to conceal the real entitlements lying behind the ownership of certain assets.

A trust enables anonymity to be preserved. There are very few legal systems in the world which require the public registration of trusts. In some jurisdictions, there are obligations to notify a Government agency of the creation of a trust by the use of a Declaration of Trust where the identities of the beneficiaries are to be purportedly added at a later date (the "Red Cross" technique) – but where no real information is ever provided. In a slightly different manner, Liechtenstein law provides that a Settlor can either register a trust (which will reveal a certain amount of very basic information to the public by means of an entry in a public register), or deposit the entire Deed with the Central Registry with the result that no entry is made in the Public Register. By using a Declaration of Trust coupled with a purported promise to subsequently disclose the identities of the individuals intended as the real beneficiaries, it is possible to avoid the disclosure of any information to the public authorities and to avoid any entry on a public register. It is to be noted that the late Robert Maxwell arranged for his assets to be held through Liechtenstein entities as, apparently, did Ferdinand Marcos of the Philippines with assets allegedly misappropriated from the Philippine Treasury.

It is common for a Settlor of a discretionary trust to give to the Trustees a clear indication as to his wishes for the future administration of the trust, as well as to indicate how he would wish the Trustees to exercise their dispositive powers over the wealth reposed in the trust. Critics of trusts point to the fact that it is very rare for trustees to act other than in accordance with such documents and that their use can make a mockery of the apparent terms of the trust deed itself. Similarly, the role of a Protector, now common in trusts, can be used to the same effect.

An offshore trust will usually own its assets through a company incorporated in the same jurisdiction as that in which the trustee is resident. This removes, by the introduction of additional layers of anonymity, the identity of the real owner of the assets even further from public view. Quite apart from any corporate veils, the use of bearer shares, nominee directors and even corporate directors in those jurisdictions where they are permitted (which include the United Kingdom), introduce further layers which an investigator may want to pierce.

It is always a duty of a trustee to maintain books of account of his trusteeship. There is, however, no obligation for the financial statements of a trust to be subject to a formal audit. Such an audit results in an independent review of the financial activities of a trustee and reduces the chances of fraud. Turning to techniques developed in the offshore world, further layers of confidentiality appear.

The use of "flee clauses" is now commonplace. While the precise terms of such a provision are capable of great variation, the essence of a flee clause is that, upon the occurrence of a certain event (such as the imposition of taxation upon the trust fund in excess of a certain level, the invasion of the territory in which the trustee is resident and the filing of a claim against the trust fund), then the trustee is automatically dismissed and is replaced by a trustee resident in another jurisdiction. Such clauses are seen to be inserted in an attempt to thwart the efforts of (a) appropriate authorities to collect taxes, (b) creditors to recover sums due which have been placed into trust, and (c) interested parties to collect information about the activities of individuals under investigation. Despite their common use, it is rare for such clauses to be supported by the necessary administrative arrangements. A Trustee waiting to assume the Trusteeship upon the happening of a particular event will need not only full information about the trust but also access to the trust fund itself. The shortcomings of many international trust companies were revealed when a state of emergency was declared in Bermuda following the assassination of Governor Sir Richard Sharples. Many trust deeds provided for the flight of trusteeship upon the declaration of a state of emergency, and it is reported that the resulting chaos for many trusts took a long time to resolve.

A trustee is the legal owner of the trust assets. As such he would appear to have complete control over those assets. However, some trust deeds provide for the creation of committee structures within trusts which remove all control from the trustee and pass it to that committee. This is wholly invisible to the outside world, and this technique leaves the trustee as a bare trustee only.

Connected to this practice are the methods used by the less reputable trustees to administer trusts in such a way, usually by simply regarding their function as being to implement the wishes of the Settlor or other nominated individual, as to create a sham trust. An interesting line of cases has started to develop in this area.

Mention has been made in the above discussion of methods which can be used to negate the real impact of systems of registration of trusts. The technique of failing to name the Settlor (which includes the identity of the individual who adds assets to the trust), and of failing to include the names of the real or intended beneficiaries, create what have come to be known as "blind trusts". These clearly provide considerable opportunities to conceal assets from tax and investigating authorities. They are also used to conceal the identity of the intended ultimate beneficiaries from the trustees.

A trust set up in an offshore jurisdiction will often contain assets of substantial value. Trusts of such value are increasingly subject to attack not only by law enforcement agencies, but also from individuals who have a claim against assets held in trust. Such attacks are not welcome in the offshore trust world, and most of the offshore centres now have specific legislation which is intended to protect the trust fund against attack from other jurisdictions. Typically such legislation will provide that if a trust is expressed to be subject to the laws of a certain jurisdiction (such as the Cayman Islands, for example), then only Cayman Islands law can be applied to that trust and, in particular, to determine entitlement to the trust assets. Such legislation means that any individual or government agency attempting to obtain assets held in, say, a Cayman Islands trust, will find that the existence of such legislation creates considerable difficulties.

In the 1990's in particular, some jurisdictions sought to assist those settlors who wish to create trusts to protect their assets against actual or potential creditors by introducing asset protection legislation. This movement has had the effect of degrading the law of fraud. It is hardly a surprise to find that many of the settlors of such trusts are professionals resident in the United States who are more than aware of the large sums awarded in negligence cases by American Courts. For instance, the Cook Islands asset protection laws have become particularly well known as a result of the misfortunes of the Andersen family.²³ While asset protection trusts will have a period within which they respect fraudulent disposition laws and do not effectively protect assets against claims from creditors, these periods are far shorter (usually to the order of six months to two years from the date of a fraudulent disposition of an asset – whether concealed from a creditor or not), than the longer periods (usually two to five years from the date of discovery of a fraud), applicable in those jurisdictions which have not introduced asset protection legislation.

A trust must either have identifiable beneficiaries or must exist for accepted charitable purposes. If it has neither of these it will be void. If a trust is not for beneficiaries it follows that great care must be taken to ensure that its objects are charitable. Not all humanitarian, or apparently worthy, objects are charitable. This has led many jurisdictions to introduce legislation permitting the creation of "purpose trusts", that is to say trusts which have identifiable purposes which are accepted as not being within the legal definition of charitable. Such trusts are not, on the face of it, obvious ways in which to conceal assets and activities. But they are indicative of the ingenuity of those in the offshore world who wish to introduce new trust concepts and products. A variation of a purpose trust has been introduced in the Cayman Islands as a STAR Trust. 'STAR' stands for Special Trust Alternative Regime. This highly ingenious legislation has created a hybrid of a purpose trust and a trust for beneficiaries, in that it permits a single trust to be capable of benefiting both beneficiaries and purposes (whether charitable or otherwise) within a single document. Its controversial aspect is the removal of all rights of enforcement of the trust from the beneficiaries and their transfer to an Enforcer. This means that a beneficiary is genuinely incapable of obtaining information about the nature of the trust fund and his entitlement to, for example, income from it for delivery to an investigating authority. Such legislation has not been welcomed in the onshore world where law and tax enforcement officers regard it as provocative.

Some jurisdictions have introduced legislation to avoid problems connected with sham trusts. Some commentators have argued that if a trust, either by its terms or by the manner in which it is administered, leaves too much power and control in the hands of a settlor and too little in the hands of a trustee, then that trust is a sham and should be set aside. Such arguments are not popular with those settlors who like to retain such controls. Specific legislation has been introduced in, for example, the Cayman Islands to make it clear that reservation of powers to a settlor (or, indeed any other person) will not invalidate a trust as a sham. Such legislation is frowned upon by those who seek to impose greater regulation and transparency upon offshore trusts as it can be seen as an attempt to sidestep the controls placed upon trustees.

As can be deduced from the above, the use of the trust relation provides an effective means to shelter assets and is used by both those who seek to tax plan in a legitimate fashion and those who simply seek to evade pre-existing obligations. In order to be in a position to even attempt to reach assets held in trust, a thorough understanding of how they are created and how they function is crucial. It is imperative to look critically at the trust relation from a multi-dimensional perspective. This involves an appreciation of all relevant constituents affected by the settlement, administration and use of the trust relation. Sharp dealing, dishonesty, and other manifestations of mala fide conduct are often (although not always) a precursor to a court opting to look to the substance of the transaction establishing a trust and ultimately treating of the trust relation as non-existent. In these circumstances, a court would be at large to order that some or all of the responsible parties in the chain of the trust, whether in its settlement or administration, make good the loss sustained by a claimant. In cases where the existence of a trust relation is found, courts are increasingly being asked to consider whether that trust relation is in fact a true or sham trust. Where it is found to be a sham, it may be fair to say that there is not in fact a valid subsisting legal arrangement. However, as noted above, some jurisdictions have enacted legislation to ensure that such an enquiry never gets off the ground.

While the existence of a trust along a chain of assets is no doubt a considerable obstacle, the unquestioning faith in the integrity of the trust relation has become undermined in recent years, a fact which should be considered by those who are party to such an arrangement. It is useful to be aware that what might once have been considered valid at the commencement of the life of a trust may not necessarily endure at a later date, when different facts and circumstances have arisen, or when viewed from a different perspective. Recitals and intentions of the parties to the trust arrangement as expressed in the trust deed itself are but one of a number of factors which fall to be put before a court in its consideration as to whether it should grant relief to an alleged wronged claimant. Thus, trust deeds are important, but not sacrosanct. An attack on these important documents, or rather the transactions which they represent in holographic format, should move away from the turgid and unwavering 19th century perspective of the sanctity of contract, legal persons and relations. Courts have become increasingly willing to call a sham trust a sham — a non-entity, with all of the repercussions that follow.

In tackling an asset protection trust, it is useful to bear in mind the evidence that a court will need to disregard a trust or to declare it to be a sham. In order to get at the assets protected by a trust, a claimant must be able to prove that a trust is being used as an instrument of fraud, or as a cloak for fraud and abuse. In drawing such a conclusion a number of factors must be considered, to wit:

1. the intent of the settlor;
   
   
2. the form of the transaction;
   
   
3. the substance of the transaction; and
   
   
4. the rights of the parties involved.

The object of the establishment of a trust is of paramount importance in considering whether the trust is being used as an instrument of fraud. Such object will need to be clearly proved to be insincere or mala fide before a court will consider setting the artifice of that trust aside, enabling access to the assets thus protected.

Conclusion.

The above identified 'obstacles' represent but a fraction of the many hurdles the fraud victim may encounter on the path to recovery. The victim of fraud may experience dejection, despair and shame at having fallen victim to fraud, amongst other emotions. While anger and annoyance can be channeled for positive purposes - focusing the victim on the goal ahead - despair, dejection and shame are negative emotions which must be banished. To the extent appropriate, the victim must be counseled to maintain a positive attitude and a determination to succeed, focusing on the result sought to be achieved and the most efficient means of achieving it.

Footnotes

^{1. 10 T.L.R. 214 (1923).}

^{2. Non-compliance with Article 321 of the Swiss Criminal Code may lead to criminal sanctions against the professional concerned. Civil servants are restrained from disclosing "secret facts" pursuant to Article 320 of that Code. Swiss banks are subject to the secrecy provisions in Article 47 of the Swiss Banking Act. However, if a Swiss bank's suspicions are aroused in relation to any transaction, it must inform the Federal Reporting Office for Money Laundering without delay.}

^{3. Flack v. Holm (1820) 1 J&W, 405; De la Vega v. Vianna (1830) 1 B and Ad. 284; Liverpool Marine Credit Co v. Hunter (1868) L.R. 3 Ch. App. 479.}

^{4. McMillan v. Canadian Northern Railway Co. [1923] AC 120 (PC).}

^{5. Phrantzes v. Argenti [1960] 2 QB 19.}

^{6. Id, p. 36.}

^{7. Id, Khalij Commercial Bank Ltd v. Woods (1985) 17 DLR (4th) 358 (Ontario).}

^{8. Minister of Public Works of Kuwait v. Sr. Fredrick Snow & Partners [1983] 1 WLR 818.}

^{9. Goff and Jones, The Law of Restitution (3rd edition 1986) p. 15.}

^{10. Blaikie, 1984 Jurist Review, p. 112.}

^{11. Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Limited [1943] A.C. 32.}

^{12. Batthyany v. Walford (1887) 36 Ch. D. 269 (C.A.); Pettkus v. Becker (1980) 117 D.L.R. (3d) 257 (S.C.C.).}

^{13. Chase Manhattan Bank N.A. v. Israel-British Bank (London) Limited [1981] Ch. 105; Re Jogia (a bankrupt) [1988] 1 W.L.R. 484.}

^{14. Ministry of Health v. Simpson [1951] A.C. 251.}

^{15. It will be seen therefore that the categorisation of the relief is important (i.e., whether the concept of a constructive trust is substantive or procedural).}

^{16. For example the foreign law may describe a constructive trust as a "remedial" device, as in Canada.}

^{17. United States Surgical Corporation v. Hospital Products International Pty. Limited [1983] 2 NSWLR 157, 192 - reversed without consideration of the question of choice of law, (1984) 156 CLR 41.}

^{18. Phrantzes v. Argenti [1960] 2 QB 19 at 35. Remedy in this context must be understood in the procedural sense.}

^{19. Mahadervan v. Mahadervan [1964] P.233.}

^{20. See also, Dubai Bank Limited v. Galadari (5), the Times, June 26, 1990.}

^{21. See, Yeates v. Thompson (1835) 3 Cl.F. 544.}

^{22. See, the OECD report of 2001 on the extent and means of misuse of corporate vehicles for illicit purposes.}

^{23. See, FTC V. Affordable Media, LLC 179 F. 3d 1228 (9th Cir. 1999) (otherwise known as the "Andersen case").}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.