Some 100 years ago J.P. Morgan, the renowned banker, was questioned by a congressional committee in the United States of America about the workings of New York’s Wall Street (I am of the opinion that even today they continue to remain a mystery for many of us). To the question of whether commercial credit should first and foremost be based on money or property he, apparently, replied: “No Sir: first thing is character”. On that issue we read and hear constantly more about trusts (often the crown jewel of succession planning) than we do about having trust in others, however it is an inextricable essential when creating a trust, or indeed for any business endeavour whether or not it involves the financial services industry.
Unfortunately the erosion of trust right across the board has been steadily worsening, especially since the terrible recession in the first decade of this century (the aftershocks of which are still being felt), only to be followed, firstly by the COVID-19 pandemic (suggesting parallels with the Black Death in the 14th century which killed an estimated one-third of the population living between India and Ireland) and, secondly, the current international economic crisis that is still unfolding during a confrontation between Russia and the rest of Europe. All this and international tensions also with China. If ever there was a moment for an abundance of faith in others it is now, considering that for the past 15 years or so events have meant that the world has become a breeding ground for swindlers, cheats, tricksters and their ilk.
Those in the financial services industry must prove their credibility. The other challenge is the wall of regulation that keeps seeing a further row of bricks added, slowing operations down and adding to the cost of doing business. It used to be that a more streamlined system, with lighter regulation (and therefore lower costs), would be found when one went offshore to jurisdictions (very often islands) that specialised in corporate and fiduciary services, collectively described as offshore centres. I argue, however, that this description is now a misnomer, because there is no clearly defined borderline between onshore and offshore business anymore. What was once the exclusive advantage of offshore centres has been, and continues to be, whittled down. What will eventually be left will be offshore centres that specialise in, say, insurance or mutual funds, for example, supplementing the normal menu of services.
For decades the two weapons in the arsenal of onshore government bureaucrats were transparency and tax evasion; in both cases, and for years, the offshore industry was always vulnerable to attack. This has undergone a radical change, although even today there still remains one or two miscreants, but where, wisely, angels usually fear to tread. The question is, however, have onshore governments led by example, having gone on a witch hunt, whenever and wherever they could, against offshore centres? Sadly, the answer is no.
After years of criticising the ineptitude of the US for being far too lax in allowing states to write their own rules on ownership transparency (we know that opaqueness can be the handmaiden of tax evasion), there appears to be a sea change taking place and the Federal government will require most corporations, limited liability companies and other entities doing business in the US to report information on those who ultimately own or control them. The reporting requirements extend to both domestic and foreign companies. In the case of a foreign entity, however, it only applies if the entity has to register in any US state in order to do business. Domestic entities that are not doing business also need not register when their creation does not involve the filing of a document with a secretary of state or similar office. This regulatory leap in supervision has come about as a result of various US administrations over the years working with the US Congress as well as law enforcement agencies. Progress in reaching this point has been painfully glacial. It is, nonetheless, a clear sign that the borderline between the offshore and onshore worlds will eventually become even more indistinct. This war of the worlds (with apologies to H.G. Wells) has been raging for decades, although this move by the US is a landmark.
In my opinion it is still nothing more than an encouraging sign because these statutory obligations need to be implemented and rulemaking procedures have to be put in place. To my mind the most contentious aspect to be addressed is an agreement about who will have access to beneficial ownership and why; safeguards will need to be put in place to ensure that information is secure and protected.
One can imagine the lobbying and countless committees (at state and federal level) that might be encountered during the process – not to mention input from the private sector. Even if by some miracle a competent ringmaster can bring some order to the project, we are at the stage where the circus big top tent hasn’t even been raised.
But let’s get back to trusts, that crown jewel of succession planning I already mentioned. Well, the federal legislation does cover business trusts created by the filing of a document with a secretary of state or similar authority. In many states, however, the creation of non-business trusts does not typically involve the filing of any information and presently the Financial Crimes Enforcement Network (FinCEN), which is central to the project, appears not to recognise that any disclosure rules for trusts in general should apply. FinCEN is the bureau of the US Department of the Treasury charged with combatting domestic and international money laundering, terrorist financing and other financial crimes, and which should be the ringmaster I referred to. I admit that trusts, in fairness, are a conundrum to many international authorities, but this particular exclusion creates a Shangri-La, an idyllic hideaway, for trust practitioners in the US.
A new report from the Institute for Policy Studies (IPS) has put several states in the US and their respective trust industries under the microscope and has concluded that they are opening the door for money launderers and tax evaders.[i] It estimates that the US holds US$5.6 trillion in trust and estate assets on behalf of citizens and foreigners. Estimates, we know, can be inaccurate, but common sense argues that the capital of capitalism either meets or exceeds that figure.
“The concept of the “offshore tax haven” has very much washed ashore”, says the IPS report, and as you will appreciate this doesn’t come as news to me (please see my March IFC article entitled "Owls and Sheep" and its specific reference to tomatoes).[ii] The report names 13 states that are able to provide opaque beneficial ownership involving trusts, highlighting South Dakota, Nevada, Alaska and Delaware, describing them as “the shadow states in the darkest corners of the wealth management industry.” Also mentioned in the report are, what is termed as “Emerging Enablers”, being the states of Rhode Island, Ohio, Missouri, Illinois, Florida and Texas, seen as becoming willing aids in the effort to maintain the secrecy of those wishing to hide their wealth for nefarious reasons. To a much lesser extent, but nonetheless important aids in support of the US trust industry as it operates today, are Tennessee, Wyoming and New Hampshire, all of which the report describes as “Bad Actors”. It is an idiomatic term with a multitude of applications and, indeed, interpretations, that have nothing to do with spaghetti westerns.
The report, close on the heels of the revelations of the Pandora Papers, pulls no punches: “The clandestine world of financial secrecy stretches around the world, all the way back to the United States”. The IPS, having been started in 1963, is no newcomer to the scene, like so many similar organisations (from the credible to the unreliable), and is based in Washington D.C. But regardless of the pedigree of the IPS, every seasoned corporate and trust practitioner either onshore or offshore knows that the report, irrespective of any rhetoric, speaks the truth and countries, not just people, who live in glass houses should not throw stones.
Is it any wonder that the Integrated Values Survey, a global research project established in 1981, found that between 1985 and 2020 individuals who believed that most people can be trusted fell from 38 to 26 per cent?[iii] Since then, with the social, political, and economic calamities that have befallen us, how the picture must have become more bleak, from Australia to Zambia. And this is before we examine not just individuals but governments and institutions.
Low levels of trust were once identified with regions of the globe such as Latin America. One hears the constant view (correctly) that improving civic trust is essential to Latin America economic growth; now that problem has travelled to the developed world. This mistrust is fostering populist and authoritarian regimes. In the United Kingdom, Sir Mike Rake, former chairman of BT Group, has commented on “the disenchantment in institutions by the populace and even in democracy… I don’t need to elaborate on the issues we face in our disunited kingdom”.[iv] No longer are these comments confined to so-called banana republics.
Armand Jean du Plessis, Duke of Richelieu, known as Cardinal Richelieu, was a French clergyman and statesman in the 17th century. Steeped in statecraft, he is said to have opined "If you give me six lines written by the hand of the most honest of men, I will find something in them which will hang him”. Even a curmudgeon like myself, who is as sceptical as the late H.L. Mencken, an American journalist, cultural critic and satirist, does not believe that we have gone that far, but the humourist in me can identify with a sign I read many years ago in a small family grocery store on West Bay in the Cayman Islands which read: “In God we trust. Everyone else cash”. This fits nicely with some graffiti I once saw: “If God made Man who can you trust?” Friedrich Nietzsche, the 19th-century rebel philosopher who once asserted that God was dead, would have appreciated that.
Derek Sambrook is a member of the Society of Trust and Estate Practitioners in the United Kingdom and obtained the Trustee Diploma of the Institute of Bankers in South Africa in 1973, becoming a Fellow of the institute in 1996. He emigrated in 1977 from Rhodesia (now Zimbabwe) where he was branch manager of a trust company and continued his profession in North America (Miami), Europe (including London and the Channel Islands), and the Caribbean (including the Cayman Islands). He has lived in Panama since 1996 where he is the Managing Director of Topaz Services, S.A. (www.trustservices.net), a Panamanian financial services company. He was Treasurer of the British Chamber of Commerce Panama for several years. Mr Sambrook‘s regulatory experience began in the corporate division of the Rhodesian (now Zimbabwe) Ministry of Justice (1965-1970) and subsequently he was appointed by the British government (1989-1992) as the first Bank, Trust Company and Insurance Regulator in the Turks & Caicos Islands, British West Indies; he established a regulatory body and drafted trust and insurance laws, banking and other regulations including licensing guidelines. As a direct result of his innovative captive insurance law, the Turks & Caicos Islands at the end of his contract had more than 5,000 producer-owned reinsurance companies and was the leading domicile in the world for this service. During his tenure he was also an affiliated member of the Latin American and Caribbean Banking Commission and Chairman of the government’s Offshore Financial Services Committee. He was a columnist for a leading United Kingdom offshore financial journal for over 15 years. His newsletter, Offshore Pilot Quarterly, has been published since 1997. In 2021 he celebrated 50 years in the trustee profession.