Attacks on Non-U.S. Trusts in U.S. Courts A Cross-Border Perspective on Emerging Trends

Transcription

1 Aggressive Global Conflict-Free New York London Hong Kong Washington DC Miami Cayman Islands British Virgin Islands Attacks on Non-U.S. Trusts in U.S. Courts A Cross-Border Perspective on Emerging Trends John Couriel and Robin Rathmell

2 Presentation Outline 1. How Offshore Trusts Can Be Attacked in U.S. Courts, Including by Using a Trustee s Reserved Powers 2. How Offshore Jurisdictions Respond to Attacks on their Trusts by U.S. Courts 3. Emerging Trend: U.S. Law Enforcement s Increasing Awareness of, and Creativity in Approaching, Offshore Tax Planning Vehicles

3 Attacks on Offshore Trusts in U.S. Courts

4 Offshore attacks on Non-U.S. Trusts: Reserved Powers BVI 1993 Trustee Amendment Act included provisions for powers reserved by settlors First offshore jurisdiction to introduce reserved powers legislation Cayman Islands Introduced reserved powers legislation in May 1998 Went further than other jurisdictions by including a presumption clause by which any trust instrument that is not a will, testament or codicil has immediate effect.

5 Case Study: U.S. v. Grant, No. 00-cv-08986, 2013 WL (S.D. Fla. Apr. 22, 2013) (Altonaga, J.) Facts: Defendant, a tax-lien debtor, had been ordered to appoint a U.S. trustee for two offshore trusts or to otherwise repatriate assets; Defendant asserted she had insufficient power to repatriate corpus of offshore trusts. Relevant Holdings: Valid lien attached to the trusts Repatriation order required any funds repatriated from the trust to be paid to the government. Implications: Foreshadows awareness and sensitivity to repatriation and trust issues on the part of the government significantly, in connection with tax liabilities.

6 Case Study: Sanchez v. Sanchez de Davila, 547 So.2d 943 (3d DCA 1989) Facts: Venezuelan decedent s joint bank account for two of his children challenged by twelve putative heirs asserting forced heirship. Relevant Holdings: Notwithstanding Venezuelan law conclusion that heirs were inappropriately disinherited by giving effect to the trust, it is well settled in Florida that the disposition of a joint bank account is governed by the law of the situs of the account regardless of the domicile of any party to the account. Implications: Historical and well-settled expectation that U.S. state law will govern the validity and effect of trust deposits.

7 Case Study: Piloto v. Lauria, 45 So.3d 565 (4th DCA 2010). Facts: Intestate Venezuelan decedent Spouse petitioned to revoke letters of administration that had appointed an attorney of children to act as ancillary personal representative for administration of assets in Florida. Relevant Holdings: Florida law applied to ancillary estate and appointment of ancillary personal representative; Florida law also gave preference to wife, as surviving spouse, to become ancillary personal representative, whatever Venezuelan judgment said. Implications: Reaffirms application of U.S. state-law preferences to questions of appointment in intestate setting.

8 Case Study: Navarro v. HSBC and Wieler, No CA 42 (Fla. Cir. Ct. 2012); FSD Cause Nos. 51 and 132 of 2013 (Grand Court of the Cayman Islands) Facts: Settlor, a Bolivian national, had regularly transferred assets into U.S. accounts in the name of his ex-wife and children (marriage domiciled in Argentina). One U.S. account belonged to a Cayman trust whose sole assets were shares in a Cayman company. After divorce from settlor, wife used reserved powers to revoke the trust and demand trustee pay out trust assets. Relevant Holding: The Grand Court of the Cayman Islands: appropriate forum for the trial of the beneficial ownership issue was Florida Implications: Notwithstanding choice of law provisions, Cayman courts may allow a (messy enough) case to be Florida s problem.

9 How Offshore Jurisdictions Respond to Attacks on their Trusts by U.S. Courts

10 1. Enforcement Main issue is usually enforcement. Generally has to be done at common law because U.S. doesn t have enforcement treaties. Common law enforcement throws up two specific problems in our context: (1) jurisdiction and (ii) the requirement that the judgment be for a definite sum of money

11 Enforcement, cont d Jurisdiction Jurisdiction is an issue because offshore courts will only enforce a U.S. judgment if the U.S. court had jurisdiction over the judgment debtor, but jurisdiction is a question of local laws. Rubin v Eurofinance S.A. Not a trusts case but an important reaffirmation of the rules. Often this is fatal to local enforcement because the trustees of the trust are not parties to the underlying litigation.

12 Enforcement, cont d The U.S. judgment has to be for a definite sum of money: An issue in cases where the foreign court orders the judgment debtor to effect a variation of the trust instrument. Often occurs in matrimonial cases. Local firewall or hurricane shutter legislation local laws that provide protection for trust structures from foreign attack. Such legislation exists in the Cayman Islands, BVI, the Cook Islands (an extreme case), and other major offshore financial centers.

13 2. Other options: local attacks Local proceedings alleging that the trust is a sham Minwalla litigation in England and Jersey: the offshore jurisdiction prefers that allegations of sham be litigated locally Tasarruf litigation: local proceedings in the Cayman Islands to compel the settlor to exercise a reserved power in favor of creditors

14 3. Choose your jurisdiction Ultimately, the majority of offshore jurisdictions do not want to be seen as places where fraud and dirty money can be squirrelled away There is a tension, however, between this and the important, legitimate, wealth-planning services that go to the heart of these jurisdictions Much comes down to the offshore jurisdiction in question, as illustrated by the Anderson case in the Cook Islands The High Court of the Cook Islands refused to enforce the U.S. judgment on the principle that a country does not enforce the penal laws of another country. Cook Islands has extremely defensive firewall legislation

15 Emerging Trend: U.S. Law Enforcement s Increasing Awareness of, and Creativity in Approaching, Offshore Tax Planning Vehicles

16 May 19,

17 The plea agreement Largest bank in 20 years to plead guilty to a U.S. criminal charge $2.8 billion settlement Disclosures Complete disclosure of cross-border activities Cooperate in treaty requests for account information Provide detailed info as to other banks that transferred or received undisclosed funds 17

18 The fallout These secret offshore accounts were held in the names of sham entities and foundations. (Attorney General Eric Holder) We will continue to hold to account the bankers, brokers, and other professionals in Switzerland and around the world as well as the institutions that trained and directed them to use bank secrecy laws to protect U.S. tax cheats. (Deputy Attorney General James Cole) For those account holders who closed their accounts knowing that our investigations were focusing on Credit Suisse, we are obtaining information that is enabling us to follow the funds to other Swiss banks or to banks in other tax haven and bank secrecy countries. (Former Assistant Attorney General for the Tax Division Kathryn Keneally) While today s action is a significant milestone in our law enforcement efforts, our work in the offshore area is far from done, and we expect additional public actions in this area in the coming months. (Deputy Attorney General James Cole) 18

19 Next Waves? Activity in the S.D. Fla. and Elsewhere UBS AG entered into a deferred prosecution agreement, admitted guilt on charges of conspiring to defraud the U.S. by impeding the IRS, and paid $780 million in fines, penalties, interest, and restitution. Forthcoming trial in U.S. v. Weil, 08-CR COHN (S.D.Fla. Nov. 12, 2008) Other investigations into several offshore banks in Switzerland, India, Israel, and elsewhere. So far, the Tax Division s investigations have resulted in 5 convictions and 55 guilty pleas.

20 DOJ Tactics DOJ has sought to pit clients against banks and vice versa in an expanding web of leads Leads generated from bank disclosure have alerted DOJ to individuals. Individual defendants have been used to generate leads against tax professionals and companies Tax agents have posed as Customs & Border Protection agents 20

21 U.S. Law Enforcement s Trust-Attacking Tookit Subpoenas in aid of grand jury investigations Search warrants predicated upon SARs, PATRIOT Act, AML and other regulatory data Criminal asset forfeiture statues: 18 U.S.C. 982 (1994) and 21 U.S.C. 853 (1994) Claims as a debtor (e.g., tax liens) in Chapter 15 bankruptcy Are offshore trusts the next frontier for DOJ Tax enforcement?

22 Grand Jury Subpoenas Criminal grand jury subpoenas can be served on local branches of foreign banks and enforced regardless of foreign bank secrecy laws. Right against self-incrimination does not apply to records of foreign bank accounts required to be maintained pursuant to the Bank Secrecy Act. 22

23 Basic Asset Forfeiture Principles Would Provide for Robust Enforcement Against Trusts As a general matter, state courts (applying state family law) cannot defease the U.S. of its interest in property forfeited under the federal forfeiture statutes. U.S. v. Kennedy, 201 F.3d 1324 (11th Cir. 2000). [T]he legal fiction of a constructive trust may not be asserted to defeat the claims of the United States to forfeitable property. U.S. v. All Assets Held at Bank Julius Baer & Co., Ltd., 772 F. Supp. 2d 205 (D.D.C. 2011). We look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer s state-delineated rights qualify as property or rights to property within the compass of the federal tax lien legislation. U.S. v. Craft, 122 S. Ct (2002) (O Connor, J.; Scalia & Thomas, J.J. in dissent).

24 Foreign Financial Professionals: Cause for Concern? DOJ is investigating accountants, lawyers, trust company managers, financial advisors, and other professionals who have assisted US taxpayers evade tax. Setting up accounts for US taxpayers in non-us jurisdictions Establishing non-us entities such as trusts, foundations, and bearer share corporations in which American taxpayers can conceal assets Assisting US taxpayers with overseas cash management Using their firms addresses for account statements Just because you don t see it doesn t mean it s not happening. Our investigations go pretty far beyond what you can see publicly. -Kathryn Keneally, Former Assistant Attorney General and Head of the DOJ Tax Division 24

25 Discussion How to advise clients in structuring matters regarding the security of trust vehicles in light of potential U.S. expansionism, especially in tax cases? Likely rise in cross-border discovery in aid of litigation on either side of the U.S. divide. Family and divorce considerations, typically U.S. state-law questions (like the law of trusts) intersect with federal enforcement powers. Questions?

26 Kobre & Kim LLP Offshore Trust Practice Integrated advocacy team providing the full spectrum of cross-border asset recovery services in several jurisdictions. Miami Cayman Islands BVI London New York Hong Kong Market leader in large-scale international judgment enforcement and asset recovery matters.