Adding VALUE in a CHANGING World
By Christian Papachristou, McLean McNally, Attorneys at Law

The Second Annual STEP (Society of Trust and Estate Practitioners) Caribbean Conference was held this year in Providenciales from May 8-10, 2000 at Beaches Turks & Caicos Resort & Spa. The conference was deemed a tremendous success, with larger than expected attendance. Participants came from the Caribbean, USA and internationally, drawn from the society’s membership of over 6,500 professionals involved in trusts and estate practice worldwide.

This year’s conference, “Adding Value in a Changing World,” emphasized two main themes. The first was “change”–referring to the profound changes affecting the way offshore professionals practice as a result of significant international initiatives in the area of cross border investigation and enforcement of tax matters.

The second theme was “adding value” to stakeholders: the families participants look after, the staff who work in their organizations, the owners of their businesses and the countries that host their undertakings. Adding value includes capitalizing on technology and providing increasingly sophisticated services in a complex and ever-more regulated environment to a sophisticated and globalized clientele.

With the trust industry known for its traditions and inherent conservatism, the challenge put forth is to adapt from a fixed business model to one having sufficient flexibility to accommodate ever-changing family situations, staff turnover and regulatory initiatives.

In fact, the genesis of this conference is itself representative of a new outlook within the industry. Only a few years ago, it would have been unheard of for five ostensibly competitive jurisdictions (three very different U.K. overseas territories, Turks & Caicos Islands, Cayman Islands and British Virgin Islands; one independent territory, the Bahamas; and one onshore jurisdiction, the United States) to cooperate in hosting an event of this kind.

Local barrister Christopher Coriat, Managing Director of Coriats (Caribbean) Limited, an independent trust company, served as the Turks & Caicos member of the conference Steering Committee. He is also chairman of the TCI branch of STEP.

For the first time, this year’s conference format included the use of a case study that presented issues relating to a prominent Latin American family with substantial international ties and equally substantial activities and assets. This served as a thread through the various topics presented.

The object of many of the presentations was to focus and provide solutions to the challenging asset protection, estate and tax problems posed by the case study. The conference benefited from the input of a group of eminent speakers in their field.

THE IMPORTANCE OF DUE DILIGENCE & PREVENTION
Michael Alberga, of the Cayman Islands law firm Myers & Alberga, presented a paper addressing a major concern of conference attendees: attacks against offshore financial centers and their implication for offshore trust work.

Under the title, “The Challenge of Compliance,” Mr. Alberga reviewed the threats posed to international financial services in offshore jurisdictions from several important, interlocking and networking sources: the Organization of Economic Cooperation and Development (OECD) harmful tax competition initiative; the European Union Code of Conduct in Tax Matters; the Financial Action Task Force’s efforts to implement its anti-money laundering recommendations; the International Monetary Fund/World Bank/multilateral development banks’ emphasis on transparency in financial supervision and regulation and good governance; the United Nations efforts to combat the improper use of offshore jurisdictions in money laundering activities and the Basle Committee of Central Bank’s and International Organization of Securities Commission’s efforts to strengthen financial supervision, cooperation and oversight in global transactions. The work of these organizations is complemented by efforts of the major industrialized countries to prioritize many of these issues.

Mr. Alberga emphasized the far-reaching implications for practitioners by saying, “Practitioners who advise clients are encountering many new laws, policies and culture on issues such as confidentiality, know-your-customer, identifying and reporting suspicious transactions, and a host of reporting and compliance issues as well as changes brought about by new criminal cooperation and international enforcement agreements. If practitioners fail to identify and comply with these myriad developments in international law and several fields of domestic law, they may subject their clients and themselves to criminal and administrative penal sanctions, such as forfeiture, draconian penalties, costly litigation and unfavorable publicity. These changes increasingly make due diligence and prevention policy in the context of international money movement and counseling a boom area.”

He emphasized that practitioners have a difficult task in advising clients who want secrecy and insist on complex or vague structures in international financial centers. Increasingly, practitioners may want to avoid undertaking new clients or transactions and may want or need to reevaluate advising existing clients when they are not able to discern certain goals or rationale for structuring, or when “yellow lights start flashing” (e.g., potential evidence that money is the result of predicate crimes).

Alberga also urged practitioners to organize themselves to ensure that they have a level playing field with respect to international organizations and governments implementing the international money movement enforcement regime. Practitioners must also work closely with the government and private sector both in their own country and abroad to anticipate fast moving developments and devise appropriate and balanced action and public diplomacy. In these respects, the Turks & Caicos’ new Financial Industry Association has served as an opportunity for local professionals to do just that.

Norman Inkster and Chris Mathers, of the Investigations and Security and Corporate Intelligence divisions of KPMG, gave a lively presentation on risks posed to practitioners and their organizations by criminal activity, with specific reference to money laundering in this age of globalization and rapid technological advances. “Risk Comes in Many Disguises” outlined some of the most common risks, including check forgery/counterfeit, secret commissions and kickbacks, non-remittance of funds, fraudulent loans, Internet securities, false financials, corporate espionage, telemarketing and “sweetheart” deals.

Inkster, formerly a Commissioner of the Royal Canadian Mounted Police (RCMP) and President of Interpol, urged attendees never to ignore their instincts, knowledge of how things “ought to work” and personal sense of right and wrong. The solution, he said, is prevention, through curiosity, skepticism and awareness. His corporate “To Do” list includes creating a risk-sensitive work place with a strong code of ethics, reviewing hiring practices and computer security, redefining “due diligence” and training employees accordingly.

As a former senior undercover operator at the RCMP Proceeds of Crime Section, Chris Mathers’ presentation on the need for money laundering compliance was based on a study of accounts of recent corruption cases, with the intent of pointing out the inherent dangers when participating in both domestic and international transactions.

His conclusion was that effective legislation by governments, coupled with strong, independently tested compliance programs at all financial institutions, are essential if a nation is to avoid the negative economic and social impacts of perceived complicity in money laundering.

Financial institutions, in turn, must be able to demonstrate that in addition to establishing appropriate measures to detect and prevent money laundering, they have dealt with corruption from the “top down” and from the “bottom up” by managing, recruiting and training employees at all levels for a corruption-free environment.

Mark Bridges, head of the International Private Client Team at the London firm Farrer & Co., presented a report on ethics and the context in which the “ethics card” is being used by international organizations to adopt international standards of compliance and regulation. He noted that, “In the past, the offshore world has stepped aside from this, even if unconsciously, adopting the theory that individuals have rights and freedoms which are a matter for the individual. All professionals will now have to consider yet more carefully their approach to their customers’ tax affairs and should ensure that there are no problems of the ‘undeclared account’ nature. This is still a matter of ethics and good practice; in some jurisdictions it is already a matter of compliance and it is easy to predict that most of the world will follow.”

In a presentation entitled, “Planning, Perils & Pitfalls,” Simon Beck, International Legal Counsel for Coutts (USA) International, discussed the Caminar Family case study in the light of increasing regulation and the emergence of foreign controlled corporation legislation in Latin America. Gone are the days when know-your-customer and anti-money laundering and trust busting legislation were minor concerns of trustees and packaged “one-size-fits-all” trusts were the accepted standard.

To survive, Beck concludes, professional advisors and trust providers must provide value and increasingly sophisticated settlors must see that the value is worth paying for. Perils and pitfalls can only be avoided with attention to detail from the onset. He says, “It would appear that the modern trustee must be an investment guru, a psychologist, a fortune teller, an international tax practitioner and a family confidant. Before we accept this task, we better have a good idea of what we are letting ourselves in for, have ensured that the proposed structure takes all relevant facts into account and that we are being paid sufficiently for our efforts!”

STRIKING A BALANCE BETWEEN PROFITABILITY AND COMPLIANCE
Caroline Garnham, head of the Private Capital: Family Office and Private Banking Group of U.K.-based firm Simmons & Simmons, reported on the challenge of compliance within the private banking industry, balancing the demands of profitability and financial needs of wealthy clients with compliance in the age of anti-money laundering regulation.

With the private banking business booming, (an estimated $15.5 trillion+ in investments under their management) the industry, she said, is especially vulnerable to money laundering. “Professionals such as private bankers, lawyers and accountants are not only in the firing line, but also in an impossible position assuming they wish to continue serving the best interests of their clients.”

As a way forward, Ms. Garnham proposed a team approach which would ensure that banking activities are reviewed by third parties with a view to maintaining adequate compliance. “In this way, the criminal has less scope to hide and the genuine client gets better service. The close union between the professionals, in particular between the banker and lawyer, is increasingly welcomed by the client to avoid unnecessary and expensive structures which fail to recognize the tax, regulatory or succession consequences and are difficult and expensive to unravel.”

A number of speakers addressed issues relating to the changes affecting trustees, where unbridled growth is being replaced by “survival of the fittest.” There was a consensus that trust companies tended to be very conservative organizations and had found it difficult to cope and adapt to this new environment.

Questioning “Can the Traditional Trust Company Survive?,” Peter Larder, Managing Director of CIBC Trust and Financial Services Ltd., Zurich, offered several suggestions to help minimize risk and maximize profits in the face of corporate change, including the need to define and segment the target market and decide whether you can offer all things to all people or if, in an increasingly unbundled financial world, being a financial portal is the preferred model–offering your clients the best products regardless of where they come from.

Larder recommended to invest cautiously in technology, but “recognize the importance of the Internet revolution. This will offer transparency which will encourage clients to carry out ‘reality checks’ on the ranking of their service providers, the charges and portfolio performance. New wealth clients are extremely information-technology literate and will not accept substandard offshore reporting.”

Prominent local attorneys Ariel Misick and Conrad Griffiths of the Turks & Caicos firm Misick & Stanbrook, gave presentations on developments in trust litigation and crisis and reputation management. In “Trust Litigation/Disintegration, the Quickness of the Hand Deceives the Eye,” Ariel Misick brought forth the urgency for Trustees when a trust it administers comes under attack, whether for ownership claims or “sham” claims. He explained the types of situations in which this predicament may occur, the consequences and offered advice on what to do.

Conrad Griffiths covered the risks that financial organizations face regarding civil, quasi civil/criminal and criminal proceedings and how to deal with each of those specific situations, urging participants not to think that “it may never happen to you.” He stated, “The relevant modern legislation in the jurisdictions represented at this conference is based on international conventions designed to create common access in the never-ending ‘war’ against money launderers and, so some say, those of you who like to lock up your filing cabinets and secure your databases. As with all wars, there are civilian casualties–innocent businesses and hard earned reputations will pay a heavy price.”

Kerry Harris, a founding member of DBA Communications, conference managers, added a public relations perspective to strategic crisis communications management. Her first piece of advice? Be prepared, as you will have a crisis. The only unknowns are when and how big, and to “wing it” is to fail. She urged practitioners to, “Assess your 3 ‘Ss’ (systems/services/skeletons); design a concise plan, test and work it; define the decision makers; know your stakeholders (pro and con); develop and update your 3 ‘Ls’ (lists/lines/lessons) and make effective communications as important as effective technical control.

The conference culminated with a spirited discussion between Andrew Edwards, author of the “Report on Financial Regulation in the Crown Dependencies,” and barrister and publisher John Goldsmith. In reporting on Ò”he Changing Face of Financial Regulation,” Edwards targeted critical lacunas in most jurisdictions as regulation of companies; regulation and reform of trusts; regulation of trust and company service providers; prosecution of criminals and recovery of proceeds of crime; and international cooperation and standards in all these areas.

He anticipates that the world is likely to enter a “NATO phase,” with polarization of “good” and “bad” jurisdictions and penalties and super-scrutiny by major countries. Edwards suggested that what needs to happen is the development of international standards in all areas and enforcement mainly through accreditation. Otherwise, he predicts, “Economic crime, deficiencies of regulation and failures in tax collection and distribution are all threats to civilization. If not effectively countered, other countries will tend to catch the viruses of poverty, crime and corruption that afflict the former Soviet countries of today. If they are effectively countered, the world should be able to achieve heights of prosperity and welfare not previously seen.”

Goldsmith labeled these theories as oversimplistic and noted that many of the problems mentioned have nothing to do with offshore jurisdictions, of which he feels there is enough regulation. In fact, he stated, many practictioners would be surprised about the extent to which London is used for money laundering.

Christian Papchristou, LL.L., D.B.S. (LSE) joined McLean McNally in December 1993 and was admitted to the partnership in 1999. His practice focuses on international taxation and corporate/commercial law. He can be reached at: Papachristou@McLeanMcNally.com