On the evening of 7 February 2013, the Executive Cabinet in Panama approved a law which, if passed by the National Assembly of Panama, will result in the immobilisation of Bearer Shares.  The law looks likely to be passed by the National Assembly.

In future, any new Panamanian companies which issue Bearer Shares will have to leave those shares with a Panamanian custodian.  Holders of Bearer Shares in existing companies will have to deposit their certificates with a designated custodian (registered agent, bank or trust company) in Panama, and will receive a custody certificate in return.  The designated custodians will be regulated in Panama, and will be required to keep a record of the details of the person who deposited the bearer shares.  If a holder of Bearer Shares dies, the custodian will require that a Grant of Probate (or equivalent) is obtained in order to transfer those shares to the heirs of the deceased shareholder.  In many countries the Probate process is a public process and so the fact that the deceased owned the shares becomes a matter of public record.  This removes what many see as the principal benefit of holding Bearer Shares.

The changes have been brought about as a result of the demands of the OECD.  More specifically they are an attempt by Panama to comply with the standards set by the OECD Global Forum on Transparency and the Exchange of Information for Tax Purposes, and Recommendation 24 of the Financial Action Task Force (FATF).

The immobilisation of Bearer Shares is seen as an important step in the international fight against tax evasion.  However, many holders of Bearer Shares possess them for a much more understandable reason – to preserve confidentiality in the ownership of those shares.  This is not in an attempt to deprive tax authorities of revenue to which they are entitled, but is done to keep confidential the financial affairs of an individual or a family.

For holders of Bearer Shares in a Panamanian company, the desire for confidentiality remains, despite the immobilisation of the Bearer Shares.  The question is how can they achieve that desire once the new rules take effect?

One option is to make use of a Cayman Islands STAR Trust.  A STAR Trust is the name for a non-charitable, purpose trust, established under the Cayman Islands’ Trusts Law.  For holders of Bearer Shares in a Panamanian company, a STAR Trust offers an opportunity to preserve confidentiality, whilst complying with the immobilisation of Bearer Shares rule (and acting in full compliance with international laws).

How does it work?  The holder of the Bearer Shares arranges for the establishment of a Cayman Islands STAR Trust.  It is a requirement of the Trusts Law that a Cayman Islands Trust Corporation acts as, or amongst, the trustees of a STAR Trust.  Once established, the Bearer Shares are transferred to the STAR Trust, to be held on the terms of the STAR Trust Deed.  As far as the custodian is concerned, the legal owner of the Bearer Shares is the Trustee of the STAR Trust.  It is the Trustee who is named on the custody certificate.

The Trustee will be required to carry out due diligence on the beneficiaries of the STAR Trust, but that information does not need to be placed on any register in the Cayman Islands, and so the information about beneficial ownership remains confidential.  If a beneficiary of the STAR Trust then dies, this is not something about which the Panamanian custodian will be concerned – the Trustee is the legal owner of the Bearer Shares and so the fact that a beneficiary of the STAR Trust has died is irrelevant to the custodian.

By using a Cayman Islands STAR Trust, holders of Panamanian Bearer Shares are able to comply with the new rules, whilst still meeting their legitimate requirements for confidentiality in the handling of their affairs.

The person who established the STAR Trust (known as the “settlor”) would typically be included as a beneficiary of the STAR Trust, along with his or her family, and anyone else who the settlor wanted to include.  This provides a mechanism for the settlor to have access to the income and capital of the Bearer Shares, as permitted by the STAR Trust Deed.

Why a STAR Trust, and not just any trust?

A STAR Trust is unique to the Cayman Islands.  It is also ideal in this situation.  STAR Trusts are exempt from the perpetuity rules which apply to many other trusts around the world.  This means that a STAR Trust can continue indefinitely.  The ability to continue indefinitely makes STAR Trusts an ideal vehicle for dynastic planning.

It is also possible, using a STAR Trust, to limit the rights to information given to beneficiaries under the STAR Trust.  A frequent criticism levelled against “ordinary” trusts is that potential beneficiaries can cause significant problems for the Trustee by bringing malicious claims in an attempt to get hold of some of the trust assets.  With a STAR Trust, the beneficiaries’ rights of action are removed, passing instead to an “enforcer”.  The Enforcer has a duty to enforce the STAR Trust, to ensure that it is administered for the Purposes set out in the Trust Deed. 

The final attraction of a STAR Trust is that it can be for beneficiaries and for (charitable or non-chartable) purposes.  Very few jurisdictions around the world allow trusts to be set up in this manner.  As a purpose trust, the Trustees have increased ability to retain the Bearer Shares for a long period of time, with a view to (for example) the development of the underlying business.  With “ordinary” trusts, there are often difficulties where the Trustees seek to retain a single asset for a long period of time.