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Sham Trusts: how does the recent statement in the High Court that Sham Trusts do not really exist correlate to the OECD CRS Guidelines

September 29th 2018

The recent case of JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch) or "Putin's banker" contains a welcome analysis of what, if anything, a sham trust signifies legally.

The phrase is frequently used as a threat by tax adminstrations to beseige offshore trustees, and it is therefore of interest to those involved in the Common Reporting Standard and its reporting requirements.

It is apposite, as the term trust in itself does not describe a legal entity, as there is no legal entity or legal person created by a "trust".  It is therefore legally impossible to create a "sham" trust.  Any issue as to sham is, as the judgment points out an issue as to the nature of the documentation as between the trustees and the Settlor.  The trust itself is in fact a concept independent of the trust instrument or deed, which does no more than evidence the existence of the property arrangement that the trust is and the manner  in which the persons named in the trust may operate in relation to each other and the property held in trust.

The point of the judgment in an asset recovery context, was that the effect of the documentation and the behaviour of the protagonists was such that the judge decided the effect of the documentation was that of a bare trust, and not the trusts that were purportedly set out in the deeds..

In rare cases, it may be that there is no "trust" in the absolute created by the transfer of the assets from the purporting Settlor to the purporting trustees. However, that is an absolute, as oposed to a circular argument going back to the beginning through the executed documentation and the presence or absence of third parties.

As the term "sham" is also bandied about gleefully by NGOs and others with gay abandon,  the statement by Birss J that "Despite the frequent references to a 'sham trust', there is not really any such thing." might halt that rush to nonsense as a form of casuistic change. All these overheated cerebral attacks acheive is a treasonously tinctured falsehood implying that the very basis of the English Common law and its gloss which is equity and its property law descendant the trust, are themselves shams, along with the laws of the states and territoires who have implemented it.  That in itself is insolent nonsense.

Peter has  written a short summary of the impact that the judgment might have on such issues as the Common Reporting Standard and international tax verifications generally and is available for advice on how to use the legal confirmation of the limited value that the now limited  term "sham" bears in a trust context.

The real incidence if the judgment is that there is now judicial authority for arguing that the terms of the trust are in fact severable, and can remain valid as against third parties;  that the trustee retains the rights of ownership, maybe as a form of bare trustee, but can be entitled to their remuneration and their right to administer the trust assets to pay liabilities, despite certain aspects of the deed being declared as inoperative as between the settlor and the trustee or as against third parties.

Please see the Resources page - the article was updated on 18th April, 2018