Read our article in the Cayman Financial Review Magazine, eversion
Trusts are like the four-door sedan of Cayman’s financial services industry: they’re not sexy or built for speed, but they’re safe, comfortable, reliable and particularly good for families. It is therefore not a surprise that the trust industry doesn’t get the same kind of media attention as some of Cayman’s other financial services.
Trust law dates back 45 years in Cayman and while the trust industry might have more or less just plodded along under the radar, it is an extremely important sector of the Islands’ financial services offerings.
The trust sector remains one of the main pillars of Cayman’s financial service industry – with billions of dollars under administration – and has attracted some of the brightest and the best, both in terms of legal practitioners and administrators.
Attorney Tim Ridley, a former Maples & Calder partner who arrived in Cayman in 1973, has watched the trust sector evolve for almost 40 years. He noted that Cayman essentially has the same basic trust law as England, which dates back many centuries.
“This is extremely helpful as it means English court decisions and other authorities are routinely relied upon and cited in the Cayman courts.”
Ridley said Cayman’s 1967 Trust Law was based on the English 1925 Trustee Act, but with a number of innovative provisions to assist UK tax planning and to create the ‘exempted trust’. “A leading UK tax and trust barrister, Milton Grundy, was the principal draftsman of this new law,” he said.
“This law and developing problems in the Bahamas put Cayman on the map for trusts. Indeed, many Bahamas based trusts transferred to the Cayman Islands in the late 60s and early 70s. Since Cayman was within the sterling area for UK exchange control purposes until about 1979 or so, it was possible for UK residents to establish and fund Cayman trusts relatively easily.
Once Cayman’s trust sector was established, innovation helped solidify and evolve it. “The 1967 trust law has been amended and updated over the years,” he said.
“In addition there has been very specific legislation… targeted at the trust area. The Trusts (Foreign Element) Law 1987 greatly enhanced the validity of trusts established by clients from civil law countries; the Fraudulent Dispositions Law 1989 significantly clarified the law relating to gifts and transfers to trusts; the The Special Trusts (Alternative Regime) Law 1997 enabled broad-purpose (non-charitable) trusts and expanded the duration period for trusts; and the Reserved Powers Law in 1998 gave greater protection to trusts where the settlor retained broad rights over the trust or the trust assets.”
Another key to Cayman’s rise as a trust jurisdiction has been its focus on quality business, Ridley said. “Probably the greatest challenge to Cayman has been its greatest strength. Cayman has gone to great lengths to avoid piling ‘em high and selling ‘em cheap’ when it comes to trusts.
The focus on high-net-worth business has produced complaints that Cayman is not interested in private client trust business. While that may be true as far as the lower end of the market is concerned, nothing could be further from the truth at the top end.”
Ridley said that servicing the top end of the trust market is highly complex and this requires great professional skills. That is something Cayman has been able to attract.
Barrister Shân Warnock-Smith QC is one of the many top trust professionals Cayman has attracted. After travelling here from London to appear in various court cases over the years, she and partner Andrew De La Rosa moved to the Cayman Islands in 2010 and set up International Chancery and Trusts Chambers.
Warnock-Smith said Cayman was well known for the high quality of its trust professionals.
“I think it’s the classic example of the best attracting the best. Once one starts to have a bit of a track record of excellent practitioners, then of course other practitioners of quality inevitably follow.”
De La Rosa thinks the expertise in Cayman sets it apart from other international financial centres.
“If you wanted to distinguish between Cayman and other major jurisdictions… the difference is that the resident base of trust practitioners here… is very strong. And you simply don’t have that [in other jurisdictions].”
Trust attorney Morven McMillan, a partner at the law firm Mourant Ozannes, said Cayman has a lot to offer in terms of its expertise. “Not just amongst the legal profession, but also in the trust administration business,” she said.
Like the legal practitioners working in Cayman’s trust industry, McMillan said some of the professionals working in trust administration business had a great deal of experience.
“They’ve practiced internationally. They haven’t just gained their experience here in Cayman; they’ve often worked in other offshore jurisdictions as well.”
Brian Taylor, the head of personal trust at RBC Wealth Management, has been in the trust industry for 27 years in four different international financial centres. Having spent the last 10 years in the Cayman Islands, he thinks it’s one of the premier trust industry jurisdictions.
“I think certainly the breadth of professionals that we have both in the industry on the administration side, but also the legal and accounting support that we get is of the highest order.”
Taylor said the importance of the trust administrators is often overlooked.
“The attorneys get all the glory because that’s what everybody talks about, but really it’s the administrators that have the relationships with the clients. They’re the ones that speak with the settlors and beneficiaries; they’re the ones that really build on Cayman’s international reputation because if [clients] were unhappy with the service they were receiving, the best attorneys in the world really wouldn’t help.”
Warnock-Smith said Cayman’s policy of allowing foreign lawyers to practice here – unlike several other offshore financial centres – was a big advantage.
“One of the great strengths of Cayman… is Cayman’s continued readiness and willingness to allow English counsel to appear in court,” she said.
“That has done wonders for the jurisdiction, I think, because you’re getting the real experts coming in to conduct the litigation hand-in-hand with the local expertise. You get therefore a lot of cross-fertilisation of ideas and approaches.”
The trust industries in jurisdictions like Bermuda, the Bahamas and Jersey are put at a disadvantage by not allowing foreign counsel to appear in court, Warnock-Smith said.
“For a client to know that he or she can instruct the person who has been advising them for years to appear in court is a huge advantage. I think it’s a huge strength of the jurisdiction.”
Courts and judiciary
Having top practitioners in the trust industry is only part of the reason for Cayman’s success in the sector. Carlos de Serpa Pimentel, a partner and the private client and trusts practice group head at Appleby, said there was a combination of other factors that made Cayman a dominant player in the international trust industry.
“We have excellent legislation,” said Pimentel, who is also the chairman of Cayman’s chapter of STEP – the Society of Trust and Estate Practitioners.
“We also have a very strong and reliable court system and judiciary which is used to hearing substantial cases about trusts and dealing with complicated issues of trust law.”
In addition, Pimentel said Cayman’s legal system had an appeals process that went all the way up to the Privy Council. “So that’s also very attractive and gives stability to the administration of trusts.”
Pimentel said the Financial Services Division of Cayman’s Grand Court, which was established in November 2009, was a very welcome development for the trust industry.
“Trustees and beneficiaries of trusts need sometimes to have recourse to the court,” he said.
“As for other litigants, it’s important for them to have access to specialist judges, to judges who know about trusts and who understand trusts and it’s important that their cases are disposed of as swiftly as possible and that they’re actively case managed. That’s what the Financial Services Division brings – expertise and active case management, speedy resolution to issues and the allocation of one particular judge to the case, so you know all the way through who your judge is.”
McMillan, who is in her second stint in the Cayman Islands after practicing here from 2001 and 2005, thinks the Financial Services Division of the Grand Court is an improvement for the jurisdiction.
“I can see the difference from when I used to practice in Cayman and now. I also think that in terms of what it says for the courts here – moving with the times, progressing, reorganising themselves in order to meet the demands of the industry – is a very positive development.”
McMillan said Cayman courts have been at the cutting edge of some of the developments in international trust law over the years.
“You can tell by the body of judgments that are reported and used internationally, which makes Cayman an exciting place to practice.”
Warnock-Smith pointed out that Cayman’s courts also have a long and good track record, something some of the emerging trust industry jurisdictions don’t have.
“I’m finding that I’m increasingly asked whether Singapore is the sort of place you might move your trust to because, quite often, we get consulted on whether somebody should move their structure from one jurisdiction to another and Singapore is the name that comes up fairly frequently at the moment.
"One has to say – and we’re not the only people saying it – that you have to have reservations about that jurisdiction because one simply doesn’t know how the courts are going to be able to handle any issues that arise. It is essential to have a… reasonably predictable approach being generated by the judiciary.
"Because although you may start your structure confident that it’s never going to result in litigation, long experience shows you otherwise, and you always have to plan on the basis that you might end up in court one of these days. You’ve got to be in a jurisdiction where you know you can get to court efficiently and once you’re there you’re going to be dealt with on a high-level basis.”
Like the rest of Cayman’s financial services sectors, the trust industry has also faced challenges from the global recession, but not as much as some might think.
Warnock-Smith said trusts, to a large extent, are recession proof. “There are always people with money,” she said.
“The fortunes out there are still huge and they’re always needing servicing in some way or the other – there are disputes within the family, new family members, there are divorces, there a deaths – all of those things are entirely recession proof; they’re simply facts of life. So there’s always an event going on in respect to any given trust that requires some attention.”
Pimentel agrees that Cayman’s trust industry proved resilient through the recession, even though some other financial industry sectors struggled.
"Although [the trust industry] in recent years was perceived somehow slightly as the poorer relation of the more fashionable financial services, it actually was quietly getting on with what it did and providing jobs in the financial industry and being a viably and economically successful sector,” Pimentel said, noting that the trust industry was a significant employer in Cayman.
Taylor said the financial crisis was bad in the sense that it reduced revenues in the short term, but it had some benefits.
“When there’s crises, typically that’s not necessarily a bad thing from a trust point of view because people then suddenly becoming worried about what’s going to happen to their money,” he said, adding that they then often make a reassessment of their investment strategies; people with trusts often change to trustees the feel are more secure.
“So there’s that benefit, for the larger firms anyway.”
In addition, recessions also tend to get people to think more about things like estate planning and family investments. Taylor said that historically, most trusts are formed when something happened in the family, but the recession also served as a catalyst for people to form trusts.
The financial crisis also brought about another round of heighted criticism and scrutiny of offshore financial centres, Pimentel said.
As a result, Cayman ended up on the OECD’s so-called ‘grey list’ of uncooperative jurisdictions, the government responded by signing the necessary number of Tax Information Exchange Agreements. Pimentel said Cayman continued signing TIEAs even after it reached the minimum number to get off the grey list.
In addition, the OECD instituted a peer review system whereby different international financial centres review each other’s legislation and standards. Cayman underwent the first round of its peer review in 2010 when South Africa and France looked at various pieces of legislation. The review was very positive.
“Following the first round of the peer review there were very, very few points of note in relation to Cayman,” Pimentel said, adding that Cayman subsequently “implemented a few tweaks” to a couple pieces of legislation to reach full compliance.
Another thing that is often mentioned by those suspicious of Cayman’s trust industry is its confidential nature. Pimentel said there is a difference between secrecy and privacy and that everyone, not just high-net worth individuals, can desire privacy for legitimate reasons. Sometimes, that reason is safety.
“A lot of clients and high-net-worth individuals who use the Cayman Islands perfectly legitimately to establish their structures, live in countries where there are often significant threats to their personal safety as a result of divulging financial information,” he said.
“Certainly, in my time I have known of cases where, particularly with wealthy families in South America, individuals have been kidnapped and murdered when third parties became aware of the extent of their wealth. So there are perfectly legitimate reasons why individuals seek privacy.”
Pimentel said most countries that allow trusts don’t require a register of trusts or beneficiaries of trusts.
“The reason for that primarily... is that a trust is a creature of common law; it’s not a statutory creature. Individuals have always been free to establish trusts and essentially, a trust is a private arrangement. “
Pimentel said trusts are not separate legal entities like companies or corporations.
“When people talk about ‘the trust’ that’s actually technically incorrect because a trust is a relationship between a settlor or a donor of assets and the trustee, who is charged with holding those assets for the benefit of certain named beneficiaries or for certain purposes,” he said.
“The trustees are given the trust duties to administer and implement the terms of the trust, but it very much needs to be seen as a relationship, not as separate animal.”
Many of the critics of trusts come from civil law jurisdictions, where trusts are not really a known concept, Pimentel said. These critics often assume a register of trusts is appropriate. “But that really goes against the concept and idea of the trust.”
Although some critics see trusts of a way of avoiding taxes, Pimentel said it wasn’t the primary reason for trusts.
“There can be tax advantages, but in many, many cases, the primary motivation for the trust is not for tax planning purposes,” he said.
“There can be other purposes. There can be motivations of wanting to ensure there’s dynastic planning for high-net worth individuals to make sure that assets stay within the family or so that family businesses can stay in the same state for generations to come. There can be legitimate privacy concerns. There can be questions of asset preservation.”
Regardless of the motivation, the trust industry, just like the rest of Cayman’s financial services industry, faces “the full rigors of our anti-money laundering laws and the high standards of attaining due diligence”, Pimentel said, adding that entities also have to be licensed by the Cayman Islands Monetary Authority to carry on trust business in Cayman.
“CIMA is an active and very well respected regulator, so it ensures the standards are kept high and that’s also part of why the trust industry is respected in the Cayman Islands,” he said.
At RBC Wealth Management, Taylor said a significant amount of the work of a trust administrator deals with conducting various Know Your Customer regimes, starting with due diligence on the person funding a trust.
“In the same way for banking you have to do full due diligence on the individual and on their source of wealth and where their assets that they’re putting into the trust came from,” he said. “And when you’re making a distribution to somebody, you have to do that same KYC to make sure you’re giving it somebody who… isn’t a terrorist.
“But the KYC doesn’t stop there, Taylor said. “As… soon as you appoint anybody as the investment manager, they do the same due diligence on you as well.” Whether a Cayman firm or a US brokerage firm is engaged, either will also require due diligence on the person who established the trust, Taylor said, noting that usually multiple entities like bankers, brokers or investment managers might be engaged for a particular trust and all of them require KYC.
“When you talk about trust administration, a lot of what we have to do is providing that information,” he said.
Taylor said the days of hiding money behind trusts are in the past. “Cayman ostensibly has secrecy law, but to all intents and purposes, that’s gone,” he said, noting that the settlor must now give a waiver of consent to reveal identity information.
“If you want us to appoint [a company like] Merrill Lynch, we’re going to need a waiver of confidentiality because we’re going to give all the KYC you’ve given to us to… to Merrill Lynch, because they want to know who’s behind [the trust] too.”
Taylor thinks there will always be more requirements for transparency and compliance.
“But it comes down to, why does anyone set up in a particular place,” he said.
“The advantage Cayman has, with many of its [financial services industries] is having that expertise of people being able to know what to do. It may get to the stage [because of regulatory factors] where the difference between a Cayman trust and a US trust is minimal, but then you’ll probably go for where the expertise is.”
Some financial structures become very popular only to later lose favour for one reason or another. McMillan thinks there will always be a market for trusts.
“I think that because the trust as a structure has a lot to lend… in terms of flexibility, and so it still meets people’s needs in terms of estate and succession planning,” she said.
“It’s adapted over the years to the ups and down in the financial world, but the basic structure remained consistent for centuries.”
The adaptive nature of trusts has allowed for them to be used in a variety of ways that can take advantage of other financial structures offered in Cayman.
“Cayman trusts are also frequently used in innovative commercial transactions,” Ridley said. “For example, unit trusts for mutual and hedge funds, and securitisations and charitable trusts to own special purpose companies.”
Taylor thinks the personal relationship side of the trust industry – which is different than in other sectors of financial services – will continue to make it a popular structure.
“Unlike banking, where you’re only interested in the client – not their spouse, parents or kids - as a trustee, I’m interested in your family, I’m interested in all those people who are beneficial clients.”
Taylor said “all families are dysfunctional in one way or another” which leads to all sorts of family intrigues to which the trustee must remain impartial. “Sometimes you’re the mediator between squabbling kids or spouses. And when it gets really bad, that’s when the lawyers come back in and you get the litigators and they go to court.”
Unlike the flavour-of-the-day financial structures, the long history of trusts actually works to its benefit.
Warnock-Smith said the trust remains a very popular and well-respected structure into which to put one’s wealth.
“Even those people who come from countries which don’t traditionally recognise trusts – civil law countries, the Far East countries like China – once you explain to them what you can do it and why it’s there and how flexible it can be… people get to understand – and actually instinctively, quite readily - its benefits. It’s such a tried and trusted underpinning.”
Trusts might have been around for centuries, but they have certainly evolved. “It’s extraordinary really how the trusts changed,” said Warnock-Smith.
“Just in the last 10-20 years, given the antiquity of its origins… the shape in which you can make your trust has become infinitely variable, much more flexible than it used to be.
The innovation of trusts over the years have allowed more applications and the Cayman Islands has been at the forefront of many of these innovations, with the STAR trust being a leading example.
“A STAR trust is unique to the Cayman Islands,” said Pimentel, adding that they have been very important to the expansion of Cayman’s trust industry, partially because of its many applications in the commercial world. “It’s still seen very much as forward thinking and cutting edge [legislation]... and a very flexible tool in wealth structuring, with wider applications.”
Other trust legislation has helped keep Cayman innovative, so much so that other jurisdictions have created laws that have imitated if not copied the legislation in some cases.
With the boundaries of trust law constantly being pushed, Warnock-Smith said it was very important for Cayman to ensure it continued to keep up with developments and stay innovative.
Cayman’s STEP chapter helps it do that. McMillan said STEP was an important organisation at that was very much at the forefront of Cayman’s trust industry. “STEP I think forms the focus for the trust industry and provides a forum for discussion,” she said.
Cayman’s 300-members STEP chapter provides a foundation for innovation, but it also has a mandate to provide education and training for trust professionals. “STEP is also for people to share their expertise with more junior members and to provide training, which I think it does very effectively,” she said.
McMillan said one of the greatest strengths of Cayman’s trust industry was “the number of people who are working very hard to keep the industry developing in the right direction, and I think we all work together”. She said Cayman has much going for it as a financial services jurisdiction.
“We just need to keep getting that message out there.”
STEP plays a key role in spreading the word about Cayman’s trust industry. For example, in September 2011, Cayman’s STEP chapter for the first time held a trust seminar in London with an impressive slate of offshore and onshore speakers that attracted hundreds of financial industry professionals.
In May 2012, Cayman will once again host STEP’s Caribbean Conference, which only comes to Cayman every five years or so. More than 300 leading trust professionals will attend the conference from many international financial centres.