Speed Read: Paul Beckett discusses orphan structures in various finance centres and outlines the reason why government and regulatory attention should focus on jurisdictions which promote their use.

In a post-2008 Great Recession world of increasingly complex criminality, corruption, doctrinal fanaticism and state terrorism, just as the distinction between legitimate tax avoidance and illegitimate tax evasion has been blurred, so the distinction between privacy and confidentially on the one hand and secrecy and concealment on the other has ceased to resonate. Hence there has been a global initiative to identify beneficial owners. The new mantra is that “someone, somewhere must know who owns something or everything”.

On 22 March 2018 the United Kingdom Government’s Department for Business, Energy & Industrial Strategy published its proposals for a register of beneficial owners of overseas and other legal entities in response to evidence presented to it. [1]

All is not what some would hope it to be. For every initiative, there is a counter-initiative. There has been a global fiduciary services drive in recent years towards the creation of ‘orphan’ structures, which have no beneficial owners. Various finance centres have introduced orphan structures, including Bahamas Executive Entities (BEEs) and various non-charitable purpose trusts – both of which are outlined below.

Bahamas Executive Entities

In 2010 Bahamas Executive Entities (‘BEE’) were commissioned by The Bahamian government from leading London lawyers to fill what the government believed to be a gap in the offshore products market. [2]

Introduced under The Executive Entities Act 2011 with the intention of facilitating the establishment, operation, management, and termination of a new private wealth structure, a BEE is defined as ‘a legal person established by a Charter to perform only executive functions and registered in accordance with the Act’ and is ‘able to sue and be sued in its own name’. A BEE is an ‘orphan’ structure: there are no shareholders or members of any kind, and no beneficiaries. It is the corporate equivalent of the non-charitable purpose trust.

No estate, inheritance, succession or gift tax, rate, duty, levy, or other charge is payable by a founder or any other person with respect to any interest given to or received from a BEE. The BEE is statutorily immune to foreign forced heirship rights, challenges to fraudulent dispositions, or the application reciprocally of foreign judgments: if assets have been transferred into the ownership of a BEE, the validity of that transfer cannot be challenged. Anyone seeking to avoid accountability encounters few if any obstacles in their path.

Non-charitable purpose trusts

A trust is a simple triangle. A settlor, wishing to benefit a beneficiary, transfers property to a trustee, who takes that property into their name but who holds it for the benefit of the beneficiary.

But not in the case of a non-charitable purpose trust, under which there is a complete absence of beneficial ownership of any asset held, because such a trust cannot by law be for the benefit any individual or identifiable group of legal or moral persons. The third corner of the triangle is cut off. It exists simply for its own stated purpose, which could be the holding of the very shares in a company which form the trust fund.

Non-charitable purpose trusts are now available globally. The following table samples some of them.

Jurisdiction

Statute

British Virgin Islands

Trustee Act (Cap. 303) as amended by Trustee (Amendment) Act 2013

Barbados

International Trusts Act 1995

Cayman Islands

Introduced into the Cayman Islands via the Special Trusts (Alternative Regime) Law, 1997, now embedded in Part VIII of the Trusts Law (2011 Revision)

Cook Islands

International Trusts Amendment Act 1995-96, s 8

Guernsey

Trusts (Guernsey) Law 2007, se 12

Isle of Man

Purpose Trusts Act 1996

Jersey

Trusts (Jersey) Law 1984 (as amended by Trusts (Amendment No 3) (Jersey) Law 1996 with effect from 24 May 1996)

Labuan

Labuan Trusts Act 1996 (as amended, 2010) Section 11A

Mauritius

Trusts Act 2001, s 19

Niue

Trustee Companies Act 1994, s 31

Samoa

Trusts Act 2014, s 66

Turks and Caicos Islands

Trusts Ordinance 2016

US, Delaware

Delaware Code title 12, s 3556

US, New Hampshire

New Hampshire revised Statute s 564-B

US, South Dakota

South Dakota Codified Laws ss 55-1-20

US, Wyoming

Wyoming Statute ss 4-10-410

A lost war? Or the wrong war?

Worldwide, spurred on by the G20 High-Level Principles on Beneficial Ownership Transparency (Brisbane, 2014), efforts are being made to implement enforcement mechanisms for identifying the beneficial owners of companies and other ‘legal persons’ such as limited liability companies, foundations etc.. Many early adopter initiatives are themselves plagued by the inadequacy or complete absence at either a local or an international level of definitions of “owner”, beneficial” and “control”.

Even if these conceptual difficulties could by means of more evolved, nuanced drafting be overcome, confronted with orphan structures, such initiatives will fail.

No central registration initiative, no compulsory declarations, will be of the slightest use where there are no beneficial owners in the first place. When they get there, the cupboard will be bare. Governments and regulators are fighting the wrong war – the spotlight needs to be turned on those jurisdictions promoting orphan structures, and political and economic pressure must be applied to ensure their repeal.