Rock and a hard place

Monday, 01 October 2012
On restraining overseas trustees under the UK's Proceeds of Crime Act 2002.

Overseas trustees are caught between a rock and a hard place when the UK authorities obtain a restraint order under the Proceeds of Crime Act 2002 (POCA) over assets believed to derive from criminal conduct committed in the UK. In this situation, an overseas trustee will want to know the following:

  • the extent to which a UK restraint order applies to the assets of the trust
  • whether the terms of a restraint order freezing activity in relation to trust assets applies to an overseas trustee, and if so whether a UK restraint order could be enforced against them
  • whether an overseas trustee can continue to administer and manage trust funds, and if so whether they can withdraw their professional fees from trust funds; and
  • in what circumstances an overseas trustee should apply to the local courts for directions in relation to the handling of the trust funds, and whether the costs of the application can be paid from trust funds.

UK restraint order

Under POCA, a UK court may make a restraint order prohibiting a person suspected of involvement in criminal conduct from dealing with any property they hold. The power must be exercised with a view to preserving the suspect’s assets so that these assets will be available for satisfying a confiscation order if the suspect is charged and convicted of a criminal offence. Although the impact of a UK restraint order is draconian, since a suspect is prohibited from spending money on ordinary living expenses without prior permission from the court, the evidential threshold for obtaining a restraint order is surprisingly low. A prosecuting authority needs to establish no more than reasonable cause to believe that a suspect has benefited from their criminal conduct, in circumstances where the criminal conduct is the subject of an investigation.

Where possible, a suspect’s assets will be identified in a restraint order. However, in most cases where a restraint order has been obtained at an early stage in the investigation, the order is worded widely so as to capture any assets of the suspect about which the prosecuting authority has no knowledge. Typically, a UK restraint order will be specified to apply to all of the suspect’s assets, ‘whether or not they are in his own name and whether they are solely or jointly owned’. A well-drawn restraint order will also stipulate that for the purposes of the order, the suspect’s assets are deemed to include ‘any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own’. With the position of an overseas trustee in mind, a restraint order is also likely to provide that a suspect ‘is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions’.

This formulation begs the question as to whether a suspect is to be regarded as a person who can instruct an overseas trustee as to how they should act. Although an overseas trustee may regard themselves as acting independently of the settlor or beneficiary, their position can be compromised where a factual analysis discloses that the trust funds have always been expended in accordance with the settlor or beneficiary’s instructions, in the absence of any independent consideration by the overseas trustee of any alternative investments or disbursements. A UK court is required by POCA to exercise its powers with a view to allowing a person other than the suspect (ie, a third party) to retain or recover the value of any interest held by the suspect, but this provision is not engaged where a third party is not acting at arm’s length from the suspect (and therefore is the suspect’s alter ego in the eyes of the UK prosecuting authority).

An overseas trustee’s liability

Against this background, where an overseas trustee holds assets that could be caught by a UK restraint order, they will wish to know whether it is bound by the terms of the order. Instinctively, an overseas trustee would expect not to be bound, since they reside and conduct their business in a country or territory that is not subject to the jurisdiction of the UK court. However, an overseas trustee taking this view would, for various reasons, be running a considerable risk. While most restraint orders contain a provision that states that the terms of the order will not affect or concern anyone outside the UK’s jurisdiction, in practice the making of a UK restraint order affects an overseas trustee in unexpected ways.

Usually, a UK restraint order states that the terms of the order apply to a person other than the suspect only to the extent that the order is declared enforceable by a court in that country or state. Various offshore countries or territories have passed legislation to facilitate the making of these orders and the jurisdiction is not infrequently invoked, particularly in cases where large sums of money are involved. Accordingly, if there is a domestic order requiring an overseas trustee to abide by the terms of a UK restraint order, the overseas trustee has no alternative but to oblige.

“Most overseas trustees would be squeamish about deliberately flouting the terms of a UK restraint order”

The position is more complicated where no domestic order has been made but the existence of the UK restraint order has been brought to the overseas trustee’s attention. A UK restraint order will make clear that it is a contempt of court for any person notified of the order knowingly to assist in a breach of the order, and any person acting in this way may be imprisoned, fined or have their assets seized. In this situation, strictly speaking, an overseas trustee is not obliged to abide by the terms of the order and there is no mechanism for enforcing the order against them. But that said, most overseas trustees would be squeamish about deliberately flouting the terms of a UK restraint order that had been brought to their attention by the UK prosecuting authority or the subject of the order. Apart from anything else, the trustee would be exposed to an allegation of money laundering.

The existence of a UK restraint order is sufficient to generate reasonable grounds for suspecting that the settlor or beneficiary have been engaged in money laundering. A suspicious activity report would need to be made to the relevant domestic authority, and consent to proceed with dealings involving the trust assets would probably be refused. A nice question would arise if an overseas authority gave consent to act in contravention of a UK restraint order.

An overseas trustee’s dilemma

Among other things, though, an overseas trustee will be concerned about their ability to continue with the management and administration of the trust assets, and to receive remuneration for their services. Most UK restraint orders made in cases where there are assets located outside the UK seek to cater for this eventuality. Normally, a UK restraint order will provide that nothing in the restraint order should prevent an overseas trustee from complying with ‘what he reasonably believes to be his obligations, contractual or otherwise, under the laws and obligations of the country or state in which those assets are situated or under the proper law of any contract between itself and [the suspect]’.

Subject to an exposure to liability under the anti-money laundering legislation to which reference has already been made, it seems an overseas trustee would fall within this provision where they continue to actively manage and administer the trust assets since such action accorded with their reasonable belief about the extent of their obligations. Unfortunately, a trustee’s ability to receive remuneration in such circumstances is less clear. Receipt of adequate consideration for a trustee’s services may be an entitlement under the trust deed, but it is difficult to see how this entitlement can be described as an obligation.

Conclusion

It is clear that an overseas trustee will be faced with one of two scenarios where a UK restraint order is granted and brought to their attention.

If the overseas trustee’s domestic court has made an order enforcing a UK restraint order in their country or territory, the safest course of action is for the overseas trustee to seek directions from their domestic court on any issue that arises. Unless the wording of the domestic court’s order is sufficiently clear to afford the overseas trustee adequate protection, the trustee should seek directions on any matter relating to administration and management of the trust funds, and the trustee’s remuneration.

The same position is reached, albeit by a different route, where a UK restraint order is not the subject of an enforcement order in the country or territory in which the overseas trustee is located. Although the overseas trustee is not obliged to abide by the terms of the order, their ability to continue to administer and manage the trust assets will be significantly circumscribed by the operation of the anti-money laundering regime. In this situation too, an overseas trustee may need to seek directions from their domestic court where any issue arises in relation to their continued dealings with the trust assets.

There is no reason why a domestic court should not order that the costs of an application by an overseas trustee for directions should not be paid from trust assets.

Author block
Right
Jonathan Fisher QC

Jonathan Fisher QC TEP is a practising barrister at Devereux Chambers, Temple, London.

Topic
Trusts
Section
STEP Journal
Country
United Kingdom

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