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Offshore Trust and Company Administration February 2013

Suggested answers and examiner’s comments Important notice When reading these suggested answers, please note that the answers are intended as an indication of what is required rather than a definitive “right” answer. In many cases, there are several possible answers/approaches to a question. Please be aware also that the length of the suggested answers given here may be somewhat exaggerated compared with what might be achieved in the reality of an unseen, time-constrained examination.

Examiner’s general comments

All candidates achieved a pass mark for this examination and over 80% of candidates achieved a merit.

The average mark obtained was slightly higher than the historic average.

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Section A Answer all parts of Question 1. Select only one of the options A, B, C or D for each part. 1. (i) Which of the following features is unique to a discretionary trust?

A. A beneficiary receives the income when they reach a certain age. B. The trustee can vary beneficiaries under the cy-pres doctrine.

C. The share of the trust assets each beneficiary will receive is defined by

the terms of the trust deed. D. Claims to any of the assets are subject to contingent interests and at the

discretion of the trustee.

(ii) Which of the following could be considered as being the usual right of an ordinary shareholder of a private limited company?

A. To inspect the statutory documents of the company.

B. To attend a directors’ meeting to appoint a new director of the company.

C. To receive a dividend. D. To transfer their shares in a private company quite freely.

(iii) A trust is unenforceable where:

A. A trustee has not had the assets transferred into their name.

B. A trustee has not been appointed. C. It is against public policy.

D. A trustee has acted beyond their powers.

(iv) Great Northern Railway v Swaffield (1874) is an example of an agent:

A. Being able to delegate. B. Creating an agency of necessity.

C. Acting negligently. D. Allowing conflict of interest.

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(v) A director of an offshore private company will be attending one of its board

meetings where a matter in which he has a personal interest will be discussed.

Which of the following statements is correct?

A. He must not attend the meeting or discuss the matter with the other directors.

B. He must declare his interest in the matter but must leave the meeting. C. He must declare his interest in the matter and may be allowed to vote at the

meeting. D. Company law prohibits him from voting on the matter.

(vi) Which fundamental trust concept was established by the Saunders v Vautier case?

A. If all the beneficiaries of a trust are sui juris and in agreement, they may bring a trust to an end.

B. The beneficiaries must be clearly identifiable. C. Trustees are not allowed to put themselves in a position where their interests

and duties conflict.

D. The difficulty in identifying the assets of the beneficiaries of the trust may indicate that no trust was intended.

(vii) Which of the following statements is correct?

A director of a private limited company owes a duty of care to:

A. The shareholders of the company.

B. The creditors of the company.

C. The other directors of the company. D. The company.

(viii) The purpose of an Anton Piller is:

A. To freeze some or all of the assets of a defendant in a court case.

B. To search premises without warning to prevent the defendant from destroying

relevant documents.

C. To require the defendant to perform his or her contractual obligations.

D. To require the defendant to disclose his or her financial position to the court.

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(ix) What does the term “equity will not assist a volunteer” mean in trust

administration?

A. Equity does not act and treat others fairly. B. The trust fails because a trustee has not been appointed.

C. The trust fails because one or more of the three certainties does not exist.

D. Equity will not help a party to a trust by creating a trust.

(x) Which of the following statements is an advantage of setting up an offshore

company?

A. The company must make greater public disclosures.

B. The company will have statutory books.

C. It may assist in the avoidance of probate formalities.

D. There is a requirement for a formal audit.

(Total: 10 marks)

Suggested answers

(i) D. Claims to any of the assets are subject to contingent interests and at the discretion

of the trustee. (ii) A. To inspect the statutory documents of the company. (iii) C. It is against public policy. (iv) B. Creating an agency of necessity. (v) C. He must declare his interest in the matter and may be allowed to vote at the meeting.

(vi) A. If all the beneficiaries of a trust are sui juris and in agreement, they may bring a trust

to an end. (vii) D. The company. (viii) B. To search premises without warning to prevent the defendant from destroying

relevant documents. (ix) D. Equity will not help a party to a trust by creating a trust. (x) C. It may assist in the avoidance of probate formalities. Examiner’s comments Section A was generally well answered. However, many candidates answered parts (i) and (iii) incorrectly.

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Section B Answer all ten questions. 2. Identify four purposes of a set of trust accounts.

(4 marks)

Suggested answer

Any four of the following:

Confirms that the trust assets have been properly administered and that the terms and conditions of the trust deed have been complied with.

Confirms the assets and liabilities of the trust at a particular date (the year-end of the trust accounts).

Helps to explain to beneficiaries how their entitlements have been calculated and also how the trust property has been accounted for.

Assists the trustee with the general management and control of the trust assets by recording the present position, which is particularly useful with regards to the investments of the trust.

Shows how the trust assets have performed, including income obtained and expenses and payments made.

Enables the trustee to fulfil their statutory duty and keep adequate accounting records which most offshore jurisdictions impose.

Provides information which may be required by beneficiaries for taxation purposes and other filing requirements.

Examiner’s comments This question was the best answered question in Section B.

3. Identify eight items which may be included in a management or service agreement

prepared by a corporate services provider (CSP) that will also be signed by beneficial owners of an offshore private company.

(4 marks)

Suggested answer Any eight of the following:

Full names of the CSP and beneficial owner(s).

Full registered office address of the CSP.

Full address of the beneficial owner(s).

Date of the agreement.

Duration of the agreement.

Termination of the agreement.

The services to be provided by the CSP.

The responsibilities of the CSP.

The form and authority for giving instructions by the beneficial owner to the CSP.

Fees and charges details.

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Complaints procedure.

Name and address of the regulator.

The proper law of the agreement. Examiner’s comments A very well answered question; many candidates obtained full marks.

4. Identify four effective controls and procedures which offshore services providers require to manage risk.

(4 marks)

Suggested answer

Any four of the following:

Good management planning processes.

Established policies, standards and procedures.

Effective process and performance monitoring.

Good quality internal audit.

Accurate and up-to-date record keeping.

Succession planning with retraining if necessary.

To have a separate “independent” compliance department to monitor and update all procedures.

To have an established four-eyes criteria in place.

To have a fully trained and qualified (fit and proper) staff. Examiner’s comments Although a generally well answered question, some candidates were unable to identify four effective controls and procedures and sometimes did not fully focus on the question asked.

5. Identify four statutory powers a trustee possesses in the majority of offshore jurisdictions.

(4 marks)

Suggested answer

Any four of the following:

Rely on the powers as a beneficial owner of the trust assets.

Sue and be sued as trustee.

Consult professional persons in relation to the administration and affairs of the trust assets.

Delegate the management of the trust assets.

Appoint professional persons in relation to the administration and affairs of the trust assets.

Appoint investment managers whom the trustee reasonably consider competent and qualified to manage the investment of the trust assets.

To invest the trust assets in investments authorised by the trust deed and local law. Examiner’s comments This question was generally poorly answered question. Many candidates discussed the powers of a trustee that are located in a trust deed whereas the question requested candidates to identify the powers that a trustee finds in trust law (statutory duties).

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6. Explain the roles of the non-executive director (NED) of a corporate services provider

(CSP). (4 marks)

Suggested answer NEDs will not usually play a part in the day-to-day administration of the corporate services provider (CSP). They are usually found in larger CSPs and generally have specific expertise or good connections that may be useful to the company.

NEDs whilst taking an objective standpoint are required, as part of good governance, to question the actions of executive directors and the direction the CSP is taking and any possible opportunities that they could be missing. These days the NED has a more active role and is accountable for ensuring that the activities of the board are directed towards the long-term benefit of the business. Examiner’s comments Although a generally well answered question, some candidates explained the role of the corporate services provider which was not requested.

7. List eight duties of a trustee. (4 marks)

Suggested answer

Any eight of the following:

To ensure that he has been properly appointed.

To be aware of the terms of the trust deed and the assets to be introduced into the trust.

Ensure the assets of the trust are transferred into the name of the trustee and are controlled by the trustee.

To preserve and enhance the value of the assets whenever possible (but care with this one).

To invest the trust assets in accordance with the trust deed.

To keep accounts and to provide information.

To treat all beneficiaries fairly and impartially.

To investigate the proceedings or any previous trustee when taking over an existing trust to ensure that there are no circumstances that may give rise to a claim for a potential breach of trust.

To keep trust property separate from any of their personal assets.

To distribute trust funds to the beneficiaries in accordance with the terms of the trust deed.

The trustee is allowed re-imbursement of expenses and agreed fees but must not make secret profits from the trust.

Examiner’s comments A very well answered question; many candidates obtained full marks.

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8. Specify eight rights of an ordinary shareholder of a private company. (4 marks)

Suggested answer Any eight of the following:

To receive a share certificate.

To receive a dividend, if one is being declared.

To receive the annual accounts of the company.

To be notified of all shareholder meetings.

To attend and vote at all shareholder meetings.

To be involved in the winding-up of a company.

To appoint the Liquidator of the company.

To appoint and resign officers of the company.

To authorise the director fees.

To appoint the auditors of the company.

To approve the financial accounts of the company.

To receive any surplus profits on the winding-up of the company.

Examiner’s comments A generally well answered question.

9. Describe four points which need to be considered in respect of the four-eyes criteria and

explain how they can be applied to a financial services provider (FSP). (4 marks)

Suggested answer Any four of the following:

Processing and authorisation with a minimum of two individuals to direct any regulated business, so two signatories over a set amount.

Individuals should have executive power, attendance at board meetings with authority to resolve not to do something, power and authority to challenge the status quo.

Work for the same organisation and be in the same building, maintain an office within the organisation that enables full access to all the different sectors within that FSP.

Two minds formulate and implement policy, minimum of two directors.

Both individuals must be part of the day-to-day involvement, i.e. executive role, not one a non-executive director and the other an executive director.

Both persons must have the necessary expertise, experience and knowledge of the business so as to detect imprudence, dishonesty or other irregularities.

Experience and knowledge of the different systems is essential.

It is unlikely that closely-related persons would be a sufficient four eyes criterion.

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Examiner’s comments Although many candidates were able to pass this question, the majority of candidates were unable to describe four points to be considered in respect of the four-eyes criteria and mainly discussed the subject matter and did not explain how the four-eyes criteria can be applied to a FSP.

10. When will a trust be void? (4 marks)

Suggested answer If any of the three certainties is missing:

(i) words or intention

(ii) subject matter

(iii) objects

and/or:

Set up for purposes contrary to the proper law of the trust.

Set up under duress and/or undue influence.

Terms of trust uncertain.

Immoral or contrary to the public good.

For fraudulent purposes.

Examiner’s comments Although the majority of candidates discussed the three certainties in their answers, they were unable to identify other reasons why a trust will be void.

11. Identify the possible ways a beneficial owner might be able to receive funds from an

offshore private company. (4 marks)

Suggested answer

Receipt of a dividend payment from the company (or via a trustee if an underlying company owned by trustee).

Repayment of loans granted to the company by the beneficial owner plus any interest if previously approved).

Loans (interest bearing or not and/or secured or not).

Share redemption.

Other capital distributions.

Payment of salary, commission or expenses. Examiner’s comments A very well answered question.

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Section C Answer two questions only. 12. (a) Explain the reasons why a settlor may want to include provisions for the

appointment of a protector in a trust deed. Describe the usual powers of a protector in an offshore discretionary trust.

(15 marks)

(b) Identify the actions that an individual should take, and the conditions which must be fulfilled, to successfully acquire a domicile of choice.

(10 marks)

(Total: 25 marks)

Suggested answer (a) Possible reasons for the appointment of a protector include:

The settlor may place great faith with the protector who may be a family friend or business acquaintance (accountant or solicitor).

The settlor may be unfamiliar with trust administration.

The settlor may feel uncomfortable and/or uneasy with transferring some of their assets to a trustee that he does not know.

The settlor may be concerned that the trustee may not pay attention to his requests and wishes.

The settlor may be concerned that the trustee will fail to exercise their powers and duties in a satisfactory manner and may wish that a third party (the protector) monitor and in some instances guide the actions of the trustee.

The settlor may wish to withhold certain powers from the trustee or grant certain powers to the protector.

Protector’s powers:

It is essential that the powers given to the protector do not supplant those of the trustee. The protector should be able to approve or veto proposed actions of the trustee rather than direct the trustee.

The usual powers of the protector could include their consent to:

Remove and appoint new trustees.

Add or exclude beneficiaries.

Change the proper law of the trust.

Approve income and capital distributions to beneficiaries.

Approve the appointment of agents and/or advisors.

Approve investment recommendations.

Appoint successor protectors.

Approve a proposal to terminate or even transfer the trust.

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(b) In order to supersede a domicile of origin, the client must acquire a domicile of choice,

and, to do this, the following conditions must be satisfied:

The individual must be physically present in the country he wishes to choose as his domicile; and

he must intend to reside there permanently or for an unlimited time.

Physical presence alone or intention alone will not suffice.

An individual will not acquire a domicile of choice in a country before he arrives there regardless of having decided to live there for the rest of his life.

An individual may be present in his domicile of choice for many years, but may not have sufficient intention to reside there permanently to acquire a domicile of choice.

Indications of intention to retain a foreign domicile i.e. that an individual does not intend to stay permanently in his country of origin (for instance, the United Kingdom) include:

- A retention of accommodation abroad; - A foreign will and grave plot; - Naturalisation; - Business interests abroad; - Social and family connections; - The education of children; - Visits to the foreign country.

Unlike a domicile of origin, a person can abandon a domicile of choice without necessarily acquiring a new domicile of choice, in which case his domicile of origin will revive. A person abandons a domicile of choice by:

Ceasing to reside in that particular jurisdiction: and

Ceasing to intend to reside there permanently or indefinitely.

Examiner’s comments

Question 12 was attempted by 95% of candidates and was the most popular question in Section C (along with Question 13).

In part (a), majority of candidates were able to identify the reasons why a settlor may wish to appoint a protector and the usual powers of a protector. However, many candidates appeared to be unaware that the trustee requires the consent of the protector to carry out various powers. It is not the protector that carries out these transactions. In part (b), some candidates were unable to identify the conditions to successfully acquire a domicile of choice.

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13. (a) What are the reasons for, and benefits of, an offshore trust services provider (TSP)

undertaking a periodic review of a trust? (6 marks)

(b) Identify the items which should be included in a typical periodic review checklist.

(19 marks)

(Total: 25 marks)

Suggested answer (a) The main reasons include the following:

It is like an internal audit and is part of best practice for the TSP.

To ensure that the internal policies and procedures of a TSP are being undertaken correctly.

To review the trust files, documentation and other records.

To review all aspects of the administration of the trust since the last review took place or since the constitution of the trust if the first review.

As the review should be undertaken by the non-administrator of the trust (or by a member of a separate review section) this will provide an independent viewpoint.

The benefits may include the following:

Minimise risk by alerting trustees of potential problems before they materialise into major issues.

To adhere to internal policies and procedures.

The review process will also cover all aspects of administration since the last review took place to see that all matters have been handled correctly.

Provides a holistic review of all trust documents and records.

(b) Items in a typical periodical review checklist will include the following:

Name of the trust.

Reference number.

Name of the trustee.

Date of review.

Name of the administrator of the trust.

Name of the person conducting the review.

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Documentation

Check that the trust deed and supplemental deeds and/or documents are being followed by the trustee.

Check that the trustee resolutions have been prepared especially when distributions have been made or for any other important decisions.

Check that all distributions that the trustee has made have been made only to named beneficiaries.

Check that due diligence and compliance is current for all settlors and beneficiaries.

Check that the trustee holds any loan agreements and that the details are accurately recorded.

Check that the trustee holds current tax and legal advice.

Check that details of any underlying company statutory records and documents are accurate and up to date.

The summary on the trust accounts should be checked against the trust deed.

Trust assets

Undertake a physical check of the trust assets held to include a check that the assets are held in the name of the trustee.

Reconcile trust assets held with those listed in the records of the trust and in the financial statements.

Check on the appropriateness of any trust assets held.

Check on the revaluation dates of any investments held.

Check that the trustee holds a copy of the last annual accounts if they hold shares in a private company.

Reconcile any assets held by custodians.

Check that all bank statements have been reconciled against the records maintained by the trustee.

Check that vouchers are held in respect of any dividends received. If there are physical assets such as real estate, furniture, antiques, jewellery, boats, and so on, additional checks should be made, such as the following:

Whether the trustee holds proof of title.

Whether the trustee holds recent confirmation of the asset(s) and the whereabouts of the documents of proof of ownership.

Whether the assets have been valued recently.

Whether there is sufficient insurance in place, and whether there is evidence that the premiums have been made and cover is sufficient.

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Beneficiaries

Check that accurate and up-to-date information on beneficiaries is held.

Check that any distributions made by the trustee were to beneficiaries that were entitled.

Fees

Check that appropriate fees and expenses have been taken.

Check that an accurate and up-to-date fee agreement is held and has been accepted by the settlor(s) and/or the beneficiaries of the trust.

Conclusion

List any comments by the reviewer;

Recommended action to be taken by the administrator;

Signature of the reviewer, and date.

Examiner’s comments Question 13 was attempted by 75% of candidates. Part (a) was generally poorly answered. However, in part (b), the majority of candidates were able to identify the items that should be included in a typical review checklist.

14. (a) Identify the possible risks and describe the potential consequences faced by an

offshore services provider (OSP) which offers company management services to its private clients.

(10 marks)

(b) Describe the internal controls and procedures that an OSP should implement to

minimise risk for new clients and new business.

(15 marks)

(Total: 25 marks) Suggested answer (a) The potential risks include the following:

Poor performance of the OSP.

Fraud and embezzlement.

Loss or destruction of assets.

Incorrect decision-making.

Inaccurate record-keeping.

Unreliable accounting.

Loss of revenue or excessive costs.

Rise or fall in base rate.

High number of complaints.

Competitive disadvantages.

Accepting or administering business which is illegal or which is being provided to clients who are undesirable (criminals and money launderers).

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Being exposed to this level of risk could have a variety of consequences that could include the following:

It could lead to financial loss for the OSP.

Deterioration in the reputation of the OSP.

Infringement could result in legal action being taken.

Serious contravention could lead to loss of licence to operate.

For a multi-OSP such as a bank, this could easily have a knock-on effect on other services provided (and on the OSP’s operations in other jurisdictions).

Similar risks may apply personally to the directors and officers of an OSP.

(b) The management of the OSP must review and establish what is required to ensure that all

business risks be effectively managed; this will include the following:

Develop a planning process to include long-term (three to five years) strategic and financial plans with short-term operating objectives.

All strategic and financial plans and operating objectives to be updated annually.

Implement a manpower planning process with succession planning for all key jobs.

Introduce a comprehensive training program for staff at all levels.

Ensure that a process procedure is in place, and is followed by all staff, to control the quality and nature of the new business accepted.

Implement appropriate policies and procedures to cover any fiduciary responsibilities and operational activities; and ensure that they are reviewed and updated on a regular basis.

Acceptance of new business

An OSP should implement and follow a satisfactory new business acceptance policy to try and maintain the quality of their business base by implementing/adhering to the following:

New clients should be asked to complete a questionnaire or similar documentation setting out their requirements.

A management services agreement should be put in place between the client and the OSP, detailing the nature and terms of the services which are to be provided.

OSP normally request their clients to sign a form of indemnity.

OSP’s often arrange a separate ‘professional liability insurance’ through an offshore captive insurance company.

The OSP should only allow senior, experienced and qualified employees to act as directors of managed companies.

Internal procedures could be implemented to ensure changes to directors and officers are recorded and filed in a timely manner.

The OSP should have a flexible data base to record clients’ details and to allow quick changes to improve efficiency.

Beneficial owners should be discouraged from taking a predominant role in the management and control of an offshore private company.

Split boards should be avoided if at all possible.

Any loans which offshore private companies make or receive should have a commercial purpose and be properly recorded and documented.

General powers of attorney should not be issued and limited powers of attorney should be issued with great care.

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Examiner’s comments Question 14 was attempted by only eleven candidates.

In part (a), the majority of candidates were able to identify the potential risks, but were unable to describe the potential consequences faced by an OSP. In part (b), the majority of candidates were able to identify the internal controls and procedures and scored good marks.

The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.