Cook Islands Asset Protection Trust Law

Cook Islands Asset Protection Trust Law” was published in the Pepperdine University School of Law Journal of Business, Entrepreneurship and the Law, VIII:II, July 2010 and is reproduced by permission.

Know Your Trustee - What you can do about it!
By David R. McNair

Articles about customer due diligence - the ‘know your client’ mantra – are as common as advertisements, (I’ve written some myself) but seldom in this world of self congratulatory writings do we read much about ‘knowing’ your trustees and other offshore service providers. It is one thing for the seller and another for the buyer.

Clients, and perhaps as importantly, attorneys and advisors who stand in the front line of potential client claims in the multiplicand world of those who make their living from ‘recommending’ offshore services to a domestic clientele, need to pay plenty of attention to the credentials of those providing those services.

It is self evident that offshore ‘service providers’ proliferate in offshore finance centers. The issues are; who are they? What is their pedigree? Many provider web sites boasting of this or that service in this or that jurisdiction never mention who owns the ‘provider’, or what their expertise or experience is. Unless an advisor or client has a history of dealing with a particular company, and sometimes not even then, the pedigree and experience of the provider are not readily known. They might be anyone. Regrettably, they sometimes are.

Point one; your provider may be anyone from the best to the worst. At the ‘best’ end, providers are subsidiaries of brand name banks, or well known trust companies, owned and staffed by responsible experienced professionals who have no hesitation in disclosing their identity, nationality, interest in the provider, professional affiliation, experience, and, if one asks, client insurance cover and, importantly, claim record.

Let’s look at big brand name banks. There are some left! Many operate in offshore centers. They offer many services, but to a hesitant customer the safety of their name is the biggest draw. It goes without saying that there will be no theft, no mistakes that go unresolved except in a customer’s favor, and essentially no country risk. Most have unlimited liability insurance. A customer pays for this. Advisory fees run between 1.5 and 2% per annum, even for cash. There’s much to be said in favor of using big banks the most obvious being the security of their name. Even with big banks though, it is worth checking whether the bank you intend working with is a branch or a subsidiary of the parent or regional branch. The point is this; the parent may be isolated from the liability of a subsidiary by virtue of the subsidiary being separately incorporated in a particular location, while a branch is likely directly linked to the parent and thus under the general umbrella of the parent’s liability protection.

At the other end of the scale are banks that raise many questions. With the widespread adoption of FATF and Basel standards there are fewer of these today but they exist. The ‘National Bank’ of this or that jurisdiction might be owned or staffed by inexperienced local hires, or even relatives of regulators or politicians. They may or may not have correspondent relations with other banks. If they don’t they must piggy-back on those that do. Given the number of cases of fraud let alone failures amongst small banks in offshore jurisdictions, great caution is warranted.

Point two; ownership of your provider should be transparent. It is not enough to know that the trustee is incorporated locally when the ultimate shareholders may be living elsewhere. That ‘elsewhere’ might be the very country that you are seeking to isolate you assets or business affairs from or a place of dubious repute.

Who are the shareholders? Are they investors relying on professional staff, or are they experienced in the industry? Do the shareholders have any history of business failure?

Point three: what are the fees? Analyzing fee structures can provide an insight into the business experience and expertise of the company. For example; providers typically charge entity establishment and annual maintenance fees. How do these compare to competitors? By definition, competitors compete, so prices should be roughly comparable. A very low fee quote might indicate an inexperienced or otherwise desperate provider.

Many also charge fees calculated by reference to assets under administration. What are these fees for? If they are for advisory services, they may be justified depending on the origin, quality, and quantity of the advice. If they are simply fees wrapped in soothing phrases about a caring trustee, then I’d suggest they are not justified.

Some trustees provide specific investment service packages. As a matter of prudence, legal advisors should examine sample documentation in advance of any commitment, looking for up front fee deductions, and termination fees, as well as structure termination provisions if any. In one notorious case, insurance policies provided for total premiums to be paid up front, fees deducted at the outset, and the residual policy value to be repaid to the owner after a period of years. The policy document unfortunately allowed the promoters to terminate the policies before the period of years had expired. They did so. There was no refund. The owners did not succeed in their suit against the promoters.

Point four; who does the work? Trustees invariably boast of employing expert, professional staff, but diligent inquiry may reveal something else. People of all manner of backgrounds are employed in offshore jurisdictions. It will be comforting to learn something of staff background and turnover.

Point five; what insurance does the provider carry? Can you see it? Is there a claim history and if so, what is the basis of the claims and how were they resolved?

Point six; does the provider have any matters requiring rectification by the local financial supervisory body? Is there a history of supervisory requisitions?

Point seven; is the provider being sued and if so what is the nature of the claim or claims?

Point eight; adverse indicators appear but you want to go ahead anyway. What can you do about it?

In the Cook Islands a new legal service known as APT Audit is available to both prospective and existing clients. This is a documentary review process conducted by an independent legal advisor retained by the client to examine and verify that:

underlying entities are properly incorporated or formed,

transactional matters have been carried out effectively,

investment vehicles have been effectively established,

account procedures are established,

the trustee is properly licensed and insured,

the trustee is not subject regulatory requisition, and

that the trustee is or is not the subject of claims.

The legal audit process can include a review of staff experience and internal handling and authority procedures as required.

The aim is to provide the reassurance and security of an independent verification for new and established clients. A useful by-product of the procedure is a potential reduction in liability exposure of the client’s domestic advisor who has recommended the offshore structure, foreign jurisdiction and foreign trustee.

David R McNair of David McNair P.C. has more than 20 years of experience in the offshore industry in the Cook Islands and elsewhere. He was admitted to practice law in the Cook Islands in 1990.