Are the sands of trust law shifting?
February 2019 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
February 2019 Issue
As the 2018 Royal Court of Jersey case of First Trust Management Limited AG v Attorney General has shown, there is a new willingness to look beyond the formal principles that govern trust structures and allow the enforcement of criminal sanctions. Typically, sophisticated fraudsters will tie the ownership of properties up in complex trust and corporate arrangements. This case could signify a subtle yet important shift in the way that courts interpret the longstanding principles that govern property settled on trust.
Mr Arnold Bengis was the director and chairman of Hout Bay Fishing Industries (Pty) Limited, a South African company which ran a substantial fishing business off the coast of South Africa. Among the fare that Hout Bay brought in was a certain species of rock lobster. In the 1980s, quotas were introduced to prevent over-fishing of these lobsters. From 1994 these quotas were progressively and substantially reduced. Indeed, in 1999, Hout Bay had a dire economic future if it were to abide by imposed quotas, so it decided not to, and instead over the next two years, the company significantly over-harvested the lobsters.
While a prosecution for the infraction ensued (resulting in an eventual plea agreement in South Africa), the fallout from Hout Bay’s overfishing did not end there. Mr Bengis, along with his son and three other individuals, were prosecuted in the US for a number of offences that involved the importation and sale of the overfished lobster in the US. A further plea agreement was entered into and, as a result of the US prosecution, the South African government sought a restitution order in relation to the value of the lobster that had been overfished by Hout Bay. Ultimately, a restitution order was made for the sum of $22,446,720. Mr Bengis did not pay the restitution order and, as a result, he was re-sentenced to a period of further imprisonment and a forfeiture order of $37,200,838.36 was made.
Following this judgement, a saise judiciaire or freezing order was granted over realisable property of Mr Bengis, including money held in various companies in Jersey, the British Virgin Islands and Cyprus. These companies were ultimately owned by various Nevis trusts. Mr Bengis had, at one time, been the protector of the Nevis trusts, which gave him wide-ranging powers to appoint and remove trustees, to exclude and add beneficiaries, to change the forum for administration of the trust and to veto distributions and investments, however, he retired from this role in 2013. At the time of the freezing order application, neither Mr Bengis nor his son David Bengis, were beneficiaries of the trusts. An earlier judgement of the court in relation to the set up and effect of this company and trust structure held that: “as the monies in the accounts belonged to the Companies which in turn were owned by discretionary trusts, Mr Bengis could not have any legal, beneficial or other interest in the accounts even if he were a beneficiary of the Nevis Trusts, which in fact he was not”.
First Trust Management subsequently made an application to the Royal Court to lift the freezing order over the property held on trust.
The relevant law
Under the laws of Jersey, the confiscations order can only have effect over “realisable property” which is defined as: (i) in relation to an external confiscations order in respect of specified property, the property that is specified in the order; (ii) any property held by the defendant; (iii) any property held by a person to whom the defendant has directly or indirectly made a gift caught by this law; and (iv) any property to which the defendant is beneficially entitled.
The apparent stumbling block, then, was the ability of the attorney general to convince the court that the property held within the trust structure, of which Mr Bengis had no legal, beneficial or other interest, and of which he was not a beneficiary, was, somehow, “realisable property”. Discouragingly for the attorney general, the precedents were not particularly favourable. In previous cases, when applications were brought to freeze property in the form of the assets in similarly complex trust-company structures, the courts had strictly applied the principles of trusts and property law and had rejected arguments that beneficiaries of trusts or company shareholders held “realisable property” in the respective trusts or companies.
In the 2014 case of In re Tantular, Mr Tantular, who had been charged with fraud and money laundering offences as a result of his involvement in the collapse of an Indonesian bank, had set up a structure similar to that used by Mr Bengis. Mr Tantular had settled a number of assets in a Jersey trust, of which he and his family were beneficiaries. Following his conviction for the offences in question in Indonesia, the Indonesian government and the attorney general sought to freeze the assets held in the Jersey trust as “realisable property” in relation to a confiscation order. The court determined that the assets held by the trusts, of which Mr Tantular was both the settlor and a beneficiary, were nonetheless not Mr Tantular’s “realisable property”. The court held that, despite being a beneficiary of the trust, Mr Tantular did not have a beneficial interest in the assets of the trust. The court also indicated that, had the overseas confiscation order specified the property held by the trust, it would have been “strongly arguable that to confiscate any such property would be contrary to the interests of justice” due to the fact that it would have offended the fundamental principles of trust law.
Similarly, in the case of In re Rosenlund, the court held that a Danish confiscation order in relation to a conviction against Mr Rosenlund for tax fraud could not be enforced against property which had been held in a Jersey discretionary trust. This was despite the fact that Mr Rosenlund was both the settlor and the beneficiary of the trust and that there was a significant amount of evidence that the trust had been created and maintained for the purpose of subverting Mr Rosenlund’s tax obligations in Denmark.
The decision in First Trust Management Limited AG v Attorney-General
Given the court’s reluctance to enforce overseas confiscations orders where they would impinge upon the integrity of trust structures, the prospects of the court upholding the freezing order in First Trust Management Limited AG v Attorney-General appeared to be slim. After all, Mr Bengis may have settled the trust but he was not even a beneficiary at the time the order was sought. The court’s decision then, to look beyond the long-established principles of trusts law and uphold the order, signifies a shift in how those principles are interpreted.
In upholding the freezing order, the court found the trust assets to be “realisable property”, by virtue of the fact that there were reasonable prospects that a further forfeiture order would be made which specified the trust assets as property which was the subject of the order. In coming to this conclusion, the court diverged from the earlier judgements in re Tantular and re Rosenlund. In those judgements, the court noted with concern that, where a forfeiture order specified property that was the subject of a trust as being subject to the order, it may well be an affront to the interests of justice to allow the trust structure to be overridden, and, on these grounds, the court may well refuse to register the forfeiture order. The court, in the case of First Trust Management Limited AG v Attorney-General, acknowledged the concerns raised in the previous judgements, however it stated that: “in some circumstances it may well be in the interests of justice to enforce such an order. One example might be if the property in the hands of X could be shown to be the proceeds of the crime committed by A, even if it did not fall within the three usual limbs of the definition of realisable property”.
The court also intimated that, in certain circumstances, property settled on trust and subsequently shuttled between various trust and company structures may be said to be the subject of an “indirect gift” and therefore could be held to be “realisable property” for the purposes of enforcing a forfeiture order.
This is something of an about-face, as both these rulings signal a departure from the prevailing attitude of the court in relation to the enforcement of forfeiture orders against trust assets, in its previous judgements.
So, what does all this mean?
This may seem like a lot of legalese to little practical effect but the judgement of the Jersey court in First Trust Management Limited could well be a signal that courts are willing to look past the legal complexities that certain trust and corporate structures erect, at least in cases where they act as a bulwark against efforts to recoup the fruits of nefarious or dubious conduct. It remains to be seen whether this decision will be followed in other jurisdictions and certainly, as far as trust structures are concerned, the sky is not falling and the bastion has not been stormed. The legal principles that have been in place for hundreds of years remain firmly intact.
However, it does appear that the court’s attitudes to the inviolability of trusts is changing and that, at the very least, they will no longer permit these structures to give cover to criminals who seek to conceal the ill-gotten benefits of their own conduct.
Kate McMahon is a partner and Nikos Keim is an associate at Edmonds, Marshall, McMahon. Ms McMahon can be contacted on +44 (0)20 7583 8392 or by email: email@example.com. Mr Keim can be contacted on +44 (0)20 7583 8392 or by email: firstname.lastname@example.org.
© Financier Worldwide
Kate McMahon and Nikos Keim
Edmonds, Marshall, McMahon