Bernhard Vischer highlights the difficulties sometimes faced in indentifying the beneficial owner of a Swiss “Trust”.
Trusts in Swiss Law
It is a truism that Swiss domestic law does not acknowledge "trusts", but one should not believe that there are no relationships under Swiss law in which "assets have been placed under the control of...a party for the benefit of a beneficiary or a specified purpose" (to quote from the definition of trusts in Art. 2 of the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition" [referred to hereinafter simply as "the Convention"]). Indeed, it is by no means uncommon in Switzerland that professional 'fiduciaries' (or "Treuhänder" in German) hold and administer assets on behalf of clients. So, do notaries and lawyers, as well as banks and (other) financial intermediaries (referred to hereafter as "FI").
Under Swiss law, relationships in which "one party holds assets for the benefit of another" are contractual, i.e., ruled by the law of contracts (basically the "Law of Obligations", SR 220, Part V of the Civil Code), or statutory (e.g., the position of a guardian in the law of tutelage, Art. 360 et seq. of the Civil Code, SR 210). One of the main reasons why jurists from a Common Law background generally hold that such relationships do not qualify as "trusts" appears to be that as Swiss law has no equity, it can not therefore have equitable relationships such as trusts. It is, however, not immediately clear in what other way the contractual fiduciary relationships are basically different from trusts, and the definition of trusts in the Convention would arguably also seem to cover fiduciary relationships, even though the basic definition quoted above is narrowed by three further conditions.
By law the assets placed with a fiduciary under a mandate ("Auftrag", Art. 394 et seq., Law of Obligations) are at least separable from those of the fiduciary, and, as a rule, they will also be kept separately (Art. 401). In the case of fiduciaries required to keep commercial books (such as incorporated fiduciaries), the assets held for others are not listed under the assets of the fiduciary, but held off balance sheet. This comes close to the requirement in the Convention that "the assets [to be held in trust] constitute a separate fund, and are not part of a trustee's own estate" (Art. 2 lit. a).
In whatever way contractual fiduciary situations under Swiss law are structured, they create relationships that function similarly to those we find in trusts (in trusts these are the settlor, the trustee, and the beneficiary; in fiduciary relationships these are typically the client, the professional, and the beneficiary [who may well be the client]). Like a trustee, the fiduciary has the duty and also the power to comply with his instructions. Thus, the third condition listed in the Convention, designed to narrow the ambit of the general description of trusts mentioned above, holds that "...the trustee...has the power and the duty...to manage, employ or dispose of the assets in accordance with the terms of the trust...." (Art. 2 lit. c of the Convention). In most cases, this would not exclude from the definition of trusts the fiduciary relationships commonly found in Switzerland.
If at all, it would be the second condition of Art. 2 lit. b of the Convention which could prevent Swiss fiduciary relationships from being deemed trusts; "....title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee". In Switzerland, the fiduciary does not normally (but could in principle) become the legal owner of the assets held by him for third parties. On the other hand, the majority of all trust funds, just as the majority of all assets held by fiduciaries, are bankable assets. In other words, they are bank deposits in the widest sense. Presumably, in the overwhelming majority of such cases, the assets are not the "property" of anyone, except perhaps the bank or depositary (one exception could be share certificates held by the trustee or by the fiduciary with a bank, but registered in the name of either the settlor/client or the beneficiary). This is because the bankable assets in a trust fund are not normally specified scrip or bank notes, but basically nothing more than a claim against the bank. This claim is held by (or is "in the name of") the client of the bank, whether it be a trustee or a fiduciary. Thus, even Art. 2 lit. b of the Convention is hardly a reason generally to disqualify fiduciary relationships, because the position of a true trustee is often not different from that of a fiduciary under Swiss law.
If, as I have tried to demonstrate, thet raditional fiduciary relationships under Swiss law do, by and large, correspond to the definition of trusts in the Convention (including the conditions listed in the Convention), why is it that we can not speak of Swiss trusts? Other than the jurisprudential issues, in particular the objection to the contractual nature of most commercial fiduciary relationship (which is an objection that would equally disqualify trusts in jurisdictions such as Liechtenstein and Panama), the reason would appear to be that the law of mandates which covers most of the fiduciary-type commercial relationships under Swiss law provides that as a matter of law a mandate can at any time be terminated by either party (Art. 404, Code of Obligations).
Though this restriction can be engineered around (but never overcome as such), in practice, it renders well nigh impossible the offering of long-term professional trust services under Swiss law. This is probably the main reason why it is not practicable to have 'trust-like' fiduciary relationships under Swiss law. Rather than trying to circumvent this restriction in the law, it is easier simply to apply another, more convenient set of laws from another jurisdiction.
Beneficial Ownership is a term first commonly used in Swiss law following the introduction of the Anti-Money Laundering legislation about 17 years ago. The source of this term would appear to be rooted in US law and "beneficial ownership" in Swiss law is a strange and protean concept. Perhaps because it has no useful legal definition, it is difficult to describe exactly and to 'pin down'. Looking at the equivalent German and French terms, "wirtschaftliche Berechtigung" or "ayant droit" respectively, we see that both of these terms reflect the idea that an asset actually 'belongs' to the person entitled to derive benefit from it, to enjoy it. At the root of the concept lies the idea that the law should not protect 'shams' in the sense of artificial constructs designed to pervert the 'true' situation. "Substance over form" is the motto.
Defining the beneficial owner of assets belongs to the routine 'due diligence' requirements governing, not only the opening of bank accounts, but also the provision of other financial and fiduciary services by Swiss FI. It is thus an issue of considerable practical importance that arises in a large number of instances. In the past, pragmatic solutions were applied based on experience with fiduciary relationships and common sense. In many situations the client is the beneficial owner, the client being the person who brought the business to the FI (or for whom the business was brought), brought the assets, and pays the fees. If doubt arises, the standard 'profiling' of clients generally establishes whether he or she could reasonably be expected to own the assets in question, and roughly how these assets were obtained.
With the ratification of the Convention, Swiss law (and Swiss FI) will not only recognise trusts, but the provisions of a trust will also be recognised, and will thus have to be taken into consideration in all their complexity. In some situations, this may cause problems regarding the proper identification of the beneficial owner. We have seen that the legal title or the contractual claim to assets, which is normally one of the key indicators of beneficial ownership, may not help further. Despite his 'legal title', the trustee, especially a professional trustee, will hardly ever qualify as the beneficial owner because he is regularly acting "for the benefit of someone else or for a specified purpose". One must, therefore, have recourse to some other criterion, but there is probably no one infallible and practicable way to identify the beneficial owner. All that is clear is that, in the case of trusts and with the possible exception of charities, a beneficial owner must, as a matter of law, be identified if the account or fiduciary relationship is to materialise. Therefore, the Swiss bank or FI will have to adopt a pragmatic approach, and take stock of the situation as a whole based on their experience with trusts and with the Swiss fiduciary relationships.
The first step, derived from the impermanent Swisscontractual relationships, may well be to determine to whom the assets are ultimately to be returned or given to by the trustee. In many cases of revocable trusts, it may be safe to consider the settlor (or the person instructing and funding any nominee settlor) as the client and as beneficial owner. This is because the beneficiary of such a trust is in a somewhat analogous position to that of a person named heir under a will. If all goes as planned, the estate will eventually fall to the heir, but during life, the owner of the assets retains the power to change their destination. In the case of irrevocable trusts with fixed beneficiaries, they may be considered the beneficial owners of the trust's assets. In both cases, the situation is usually clearer if, as is often the case in practice, the reserved powers are extensive.
More serious problems arise with discretionary trusts, or with trusts for the benefit of (large) classes of beneficiaries with corresponding discretion of the trustee. Here, the banker or FI will probably not be able to simply take his client as beneficial owner, and the trust instrument may not be of much help either. The FI will have to try to see behind the trust instrument and, for example, get a letter of wishes and use that as the basis to determine the beneficial owner. Another option would be to try to see the documentation used when the trust was created.
It is very rare in practice for someone to settle a large sum in a trust run by a professional trustee without the person out of whose pocket the asset's came retaining some degree of (perhaps indirect) control over the allocation of the funds. Professional trustees have extensive forms, sometimes with indemnity clauses. Indemnity clauses and other indications in the due diligence investigation made when the trust was set up may show where the assets originated, and, by extension, who has an interest in seeing matters develop as intended. Conceivably, this person would be the beneficial owner, at least until any distribution is made. In extreme cases of irrevocable trusts with wide discretionary powers, no letter of wishes and a large class of potential beneficiaries, as a last resort one will have to consider the trustee as the beneficial owner, because he de facto and for the duration of the trust has the use of the assets.
Despite many similarities between trusts and the domestic Swiss fiduciary relationships with which Swiss practitioners are familiar, it can be difficult for a Swiss bank or FI to identify the beneficial owner of a trust. As a result of Switzerland's having ratified the Convention, the problem will presumably not only become more common as more trusts hold their assets in Switzerland, but also more difficult because the trust instrument in all its complexity is now recognised as being valid in Switzerland.
The way to deal with this problem could well be to rely on the experience gained with domestic Swiss fiduciary arrangements, and to analyse the functional relationships between the various persons involved. No fixed test seems available, and especially with discretionary trusts, the Swiss bank or FI will need to take an eclectic approach, and simply broaden the base of their investigation at least until they can see where the funds concerned originating, and who is the driving force in setting up the trust.
Dr Bernhard Vischer, Zug, Switzerland