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