The Regulation Of Trust And Corporate Service Providers

In the Yale Journal on Regulation, in a piece entitled “What is Regulation?”, Barak Orbach states that:

“Regulation is state intervention in the private domain, which is a byproduct of our imperfect reality and human limitations.” Orbach continues – “We live in a complex world of finite resources in which the pursuit of self-interest often fails the individual and causes harm to others. These imperfections and limitations are the primary motivation for regulation – to promote economic efficiency, environmental sustainability, morality and the general welfare of the public.”

Cary Coglianese and Robert A. Kagan in “Regulation and Regulatory Processes” state that:

 “Society needs regulation specifically to correct for failures of the private marketplace, such as the accumulation of market power in the form of monopolies, the lack of information needed by market actors to make fully informed decisions, and the frequent negative side effects or externalities of business activity.”

The regulation of trustees fits into the scenarios described above. Some regulation is to protect society and specific jurisdictions; some aspects of regulation protect those using trust services (or more accurately those in respect of whom trustees are acting).

The degree of regulation is open to debate. It is also worth noting the often informal, often highly personal nature of certain trustees – typically friends and family – where significant regulation is not appropriate. 

As shall be discussed below, regulation of trust and corporate service providers (TCSPs) is not new. A number of territories have had regulation for over 50 years.[i] However, even in 2023 regulation is not present in a number of jurisdictions and in those where it is, regulation is not done in the same way. Furthermore, does the efficacy of some of the regulatory measures stand up to scrutiny?

This article does not concentrate on anti-money laundering (AML) legislation[ii] but it is worth highlighting that a great deal of recent regulatory focus and enforcement for TCSPs has been in this area:

• In 2006 the FATF issued a report entitled “The Misuse of Corporate Vehicles Including Trust and Company Service Providers[iii]”;
• The FATF in October 2010 published a report entitled “Money Laundering Using Trust and Company Service Providers[iv]”; and
• FATF 40 Recommendations contain specific references to “DNFBPs”.[v] TCSPs are one of the DNFBPs.

In addition, TCSPs also appear amongst the so-called “Enablers” who allegedly facilitate the handling of illicit money. Examples of such reports are “Regulating the Enablers” by The Alliance for Securing Democracy[vi]; “The Enablers: How Western Professionals Import Corruption and Strengthen Authoritarianism” by Ben Judah and Nate Sibley[vii]; and “Economic Crime” – House of Commons Treasury Committee.[viii]

Much of the enforcement action against TCSPs in recent years has been for breaches of compliance legislation - failure to carry out due diligence, source of funds checks, source of wealth checks and also to maintain appropriate policies and procedures.[ix]

In terms of the non-compliance related regulation of TCSPs there is more of a focus on consumer protection.  The 2020 consultation from the Hong Kong Monetary Authority (HKMA) July 2020 promoted “the merits of developing a regulatory code to strengthen the level of protection of customers making use of trust services, especially those for wealth management purposes”.

At this stage, it is also necessary to point out that most trusts are not bi-party relationships. Once a trust is established then the trustee does not have “clients” or “customers.” This is something that can catch trustees out!

However, in the commercial context, where a would-be settlor is contemplating the set-up of a trust and is choosing potential trustees, the settlor is most certainly a “consumer”.  A number of the regulatory provisions do regulate marketing activities. In the Cayman Islands for example[x]:

“The [Cayman Islands Monetary] Authority expects all licensees to demonstrate a high level of responsibility in the marketing of all of their services. The Authority recognises that the reputation of the jurisdiction is sensitive to the manner in which service providers market their services.”

It is also possible to argue that trust law itself has its origins in protecting the consumer. The courts of law were not an appropriate place to get a remedy and thus the courts of equity arose and the rest is history. This point is made since it is crucial that regulation of trustees does not take the place of the court in terms of the trustees’ duties to beneficiaries.[xi]  Therefore provisions relating to complaints about regulated entities should not impact on the jurisdiction of the court.

Trust statutes do also contain a certain amount of consumer protection. For example, Jersey, Guernsey and Hong Kong do not allow a trustee[xii] to be exonerated from liability where the trustee has been grossly negligent and Hong Kong, Singapore and England have statutory duties of care applying to certain aspects of the trust relationship.

The growth of international finance centres took off in the 1950s and 1960s. Professional trustee services were part of this growth. Regulators then followed. Looking at the Jersey Financial Services Commission by way of example, its guiding principles include “reducing risk to the public of financial loss due to dishonesty, incompetence, malpractice or the financial unsoundness of financial service providers” and “protecting and enhancing the reputation and integrity of Jersey in commercial and financial matters”.

A number of jurisdictions regulate those carrying out “trust business” and restrict the use of words which could suggest that a company was so authorised (such as “trust” or “trustee”).  Consistent with the objectives of regulation it is common for certain activities to be excluded from trust business. This frequently includes “private trust companies”.[xiii] Furthermore, lighter touch regulation may apply to those who are carrying out trust business in respect of a very narrow class of “customers”.

So what are the ways of regulating trust business?

Many jurisdictions have restrictions as to the use of words in the name of a company such as ‘trustee’ or ‘trust company’. This is not universal. In fact, in terms of the “lighter touch” private trust companies there is not a universal solution. Cayman and BVI for example require such companies to advertise to the whole world that they are such companies; Jersey, Guernsey and Bermuda do not have any such restrictions for private trust companies.

A number have seemingly high annual fees for trust companies. Many jurisdictions require regulated trust companies to have a minimum amount of share capital. These amounts are usually not trivial but can be insignificant when compared to the value of trust assets.

Many jurisdictions regulate the ownership of trust companies. The degree of regulation depends on each individual regulator and is difficult to quantify but certainly changes of ownership (direct or indirect) are monitored by regulators in a number of jurisdictions.

Several jurisdictions require audits of trust companies. However in the author’s view audits are of disproportionate significance in this regard. First, the auditors only “audit” the trust company itself (and not the trusts); second, it is accepted that auditors rarely find fraud.[xiv]  Per the ICASA:

“Audit procedures and rules are more likely to determine whether an organization’s financial statements are fairly stated without any material discrepancies and whether appropriate internal controls are in place. They are not aimed at detecting and remediating a fraudulent occurrence.”

A number of jurisdictions regulate some or all of the directors of a trust company. This can vary from “fit and proper” to being satisfied as to the credentials of the directors. There are number of issues – there is no “one size fits all” qualification for a trustee.

Today’s trustee (more likely a combination of individuals in an organisation) could benefit from being part legal expert, trust expert, investment guru, psychologist, psychiatrist, agony aunt, accountant and therapist. That is without considering necessary expertise in family business, art, crypto or cultural experience. It is difficult therefore to be too prescriptive as to who can and cannot be a director of a trustee but there should be some form of appropriate requirement for professional trustees. Certain jurisdictions restrict corporate directors to be a director (or one of the directors) of a regulated trustee.

Many jurisdictions require regulated entities to adopt and follow a number of regulatory policies and procedures. Aside from AML, these can include cyber security, whistleblowing, data protection, outsourcing, governance and marketing. A further test is that such policies have the necessary force and that the regulator enforces them. How effective these are will be discussed in part II.

Look out for Part II on ifcreview.com in early-2023.

Footnotes:

[i] See for example: The Banks and Trust Companies Regulation Law 1966 of the Cayman Islands. This was modelled on a similar law in the Bahamas.

[ii] Including the wider source of wealth, source of funds, monitoring and record-keeping.

[iii] https://www.fatf-gafi.org/media/fatf/documents/reports/Misuse%20of%20Corporate%20Vehicles%20including%20Trusts%20and%20Company%20Services%20Providers.pdf

[iv] https://www.fatf-gafi.org/media/fatf/documents/reports/Money%20Laundering%20Using%20Trust%20and%20Company%20Service%20Providers..pdf

[v] Designated Non-financial Businesses and Professions. See R22 and R23.

[vi] https://securingdemocracy.gmfus.org/regulating-the-enablers/   

[vii] https://s3.amazonaws.com/media.hudson.org/files/publications/EnablersFINAL.pdf

[viii] https://committees.parliament.uk/publications/8691/documents/88242/default/

[ix] See for example: https://www.mas.gov.sg/regulation/enforcement/enforcement-actions/2020/mas-imposes-composition-penalty-of-1100000-on-asiaciti-trust-singapore-pte-ltd-for-amlcft-failures and https://www.gov.je/News/2021/Pages/TrustCompanyFined.aspx - BUT THERE ARE MANY OTHER EXAMPLES.

[x] https://www.cima.ky/upimages/regulatorymeasures/1499756724MarketingPolicy1_1599570685.pdf

[xi] Or equivalent responsibilities.

[xii] In Hong Kong this applies to a professional trustee.

[xiii] Such exemptions are not the same across jurisdictions.

[xiv] See for example: https://www.isaca.org/resources/news-and-trends/newsletters/atisaca/2019/volume-24/why-auditors-rarely-find-fraud

Richard Grasby
Richard Grasby is a Partner in Appleby’s Hong Kong office, leading the Private Client, Trusts and Family Office practice. Richard advises trustees, ultra-high net worth individuals, private trust companies and family offices on the establishment, restructuring and administration of trusts, including special trusts i.e. BVI VISTA, Cayman STAR and Employee Benefit Trusts. He regularly assists in estate administration, succession planning and family governance. Private clients and family offices instruct Richard to advise on the use of corporate vehicles for asset holding and succession planning purposes. Richard is an expert in regulatory law including AML, AEOI, economic substance and licensing and risk management for trust companies. He also advises on collective investment funds, particularly unit trusts and private label funds. Richard has acted for many of the world’s leading trust companies, financial institutions, wealthy individuals and related structures. He has experience with dealing with clients and advisors across the globe. Richard has over 20 years’ post qualification experience with the majority spent in offshore firms. Richard has lived and worked in Jersey, London, the Cayman Islands and (since 2009) Hong Kong. He is admitted as a solicitor in England and Wales and the British Virgin Islands and is a Registered Foreign Lawyer in Hong Kong. He has also been admitted as an Attorney in the Cayman Islands. Richard is an active member of STEP. He has been on the local executive committee since 2012 and is a former chair. He is on the global steering committees for the Business Families and International Client Special Interest Groups. He is a member of the Academic Community. Richard is an elected Academician of the International Academy of Estate and Trust Law (the only such offshore practitioner in APAC). He is also a Certified Anti Money Laundering Specialist. Richard is a lecturer on trusts and family offices for the Hong Kong Securities and Investment Institute and for the Hong Kong University of Science and Technology. He is a member of the Hong Kong Trustee Association, the Family Firm Institute the International Bar Association and the Investment Migration Council. Richard is an active speaker at events across the world and a writer for many journals.