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Andres Knobel, Nick Shaxson ■ Trusts: Weapons of Mass Injustice?

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Tax justice reports

Trusts: Weapons of Mass Injustice?

Trusts are widely used for proper legitimate business purposes and to protect vulnerable individuals. This paper deals with the other side of trusts: the abuses and risks that they create and facilitate. While trusts may hold assets and engage in business just like companies, they hardly ever need to register. This secrecy enables all manner of financial crimes and abuses. Trusts go beyond secrecy by shielding assets from the rest of society. They do this placing assets into ‘ownerless limbo’ – thus unreachable even by legitimate personal creditors, or tax authorities or crime-fighting agencies. This paper discusses the mechanisms of how trusts facilitate abuses, and the balance of benefits and risks to society. It addresses some common arguments in support of trusts, and proposes solutions to eliminate the harms. 

Trusts are usually described as a legal arrangements involving private family matters (such as caring for sick or vulnerable people, or arranging family affairs for tax and estate purposes.) A simple trust arrangement typically involves three parties: a settlor (such as a parent) transfers assets to a trustee (such as a trusted lawyer) who must hold and manage those assets according to the settlor’s instructions, and for the benefit of beneficiaries (such as the parent’s sick child).

This paper deals with the other side of trusts: the abuses and risks that they create and facilitate.

First, secrecy. While trusts may hold assets and engage in business just like companies, they hardly ever need to register, allowing the true owners, beneficiaries or controllers of trust assets to keep hidden, especially from public scrutiny. This secrecy enables all manner of financial crimes and abuses. Even when trusts do have to register, their complex control structures often confuse authorities about who really controls or benefits from the assets. We summarise our recent work explaining who should be registered as a “beneficial owner” of a trust, which trusts should be registered, and how to enforce this, and the relevant information.

Second, trusts go beyond secrecy by shielding assets from the rest of society. They do this by placing assets into ‘ownerless limbo’, where the assets have legally been ‘given away’ but not yet received by a real, warm- blooded person – thus unreachable even by legitimate personal creditors of the parties to the trust, or tax authorities or crime-fighting agencies. Trusts’ asset protection can be stronger than the usual limited liability available to shareholders of incorporated companies, and this is available not just for vulnerable persons, but for anyone, especially wealthy people accumulating wealth through generations, worsening inequality.

On top of all this, tax havens are engaged in a race to the bottom to offer ever more devious and illegitimate forms of trust law allowing multiple subterfuges to defeat the laws of other jurisdictions.

We suggest, as a basis for debate:
– Requiring trusts to be publicly registered as a precondition for them to be legally valid and binding on third person
– Mechanisms for piercing their asset protection that affects third parties outside the trust.
– Disallowing assets in “ownerless limbo”, ever. In short, until they have been received by someone, then they should be considered as not having been given away.

Some problems require international cooperation: otherwise, people can move themselves or their money abroad, to escape new rules. Yet our proposals could be undertaken by a single country: not to solve the global issue, but to prevent trusts’ from causing harm in their own territories.

Key findings

  • trusts are widely used for proper legitimate business purposes and to protect vulnerable individuals. But trusts also pose dangers for society.
  • First, they can create secrecy. When the persons involved in trusts are unknown this can facilitate harms in terms of tax evasion and other crimes, frauds, market rigging, money laundering and many other abuses.
  • Second, by legally disconnecting assets from the people who control and enjoy them, trusts can convert wealth into “ownerless” assets. this shields the assets from legitimate creditors and taxes.
  • tax havens and secrecy jurisdictions are engaging in a race to the bottom to offer even more troubling trust regimes, offering ways to help their users escape foreign laws that would give rights to creditors.
  • Most if not all of the genuinely socially useful properties of trusts could be achieved in other ways. However reforms could curb or eliminate the harms while preserving the benefits.

Key recommendations

  • Transparency: all relevant persons and assets connected to a trust should be registered with public authorities, and information exchanged with those persons’ home jurisdictions as necessary. The next step is publication of the registration information (not the full trust deed, but the identity of the trust’s beneficial owners), providing public access. 
  • No “ownerless” assets: so-called “ownerless assets” should not be tolerated. Where a settlor has placed assets into a trust, but no beneficiary has received them yet or is identifiable as being entitled to the assets, then from the perspective of their creditors (which include the settlor’s tax authorities) the assets should be deemed to still be the property of the settlor, as if the trust did not exist.
  • Explicitly prohibit abusive trust provisions: prohibitions should be applied to, for example, self-settled spendthrift provisions, anti-duress and anti-forfeiture provisions, flee clauses, or high degree of control by the settlor or regulations disregarding foreign laws and foreign judgments.
  • Target abusive offshore regimes: as with tax haven and money-laundering blacklists, jurisdictions with abusive trust regimes should be subject to countermeasures such as blacklisting. Lists should be based on objectively verifiable criteria, such as the Financial Secrecy Index, rather than on politicised lists set up by bodies susceptible to influence from powerful countries.
  • Sham trusts are not trusts: call them something else: sham trusts containing prohibited abusive provisions should also be prohibited from claiming trust status. It is time to design some (pejorative) new terms to denote these structures where the settlor retains control or is one (or the only) of the trust beneficiaries.

Additional resources