Author: Nicola Sharp
23 January 2023
3 min read
Recently, the role of offshore trusts has attracted new scrutiny in the media.
There has been speculation that sanctions" target="_blank">Roman Abramovich may have used offshore trusts to circumvent sanctions imposed on Russian oligarchs. And there are reports that the conservative peer Michelle Mone benefitted from a contract for PPE via an offshore trust.
The purpose of an offshore trust is usually to protect a person’s assets. But on occasion, offshore trusts can be used to obscure the ownership of assets, in order to protect or enhance a person’s wealth. For that reason, the clandestine nature of offshore trusts is often attractive to perpetrators of fraud. Money gained through fraudulent means may be concealed through the structure of an offshore trust - and moved beyond English legal jurisdiction.
In this article, we explore the nature of offshore trusts and the ways in which victims of fraud may regain assets which have been stolen.
First, it’s important to say that offshore trusts are not always suspicious. There are legitimate tax advantages in setting up an offshore trust, as they are exempt from UK income tax on foreign income.
While many tax advantages have been curtailed over recent years, people still choose to protect their money in offshore trusts for the flexibility and confidentiality afforded by the structure.
However, offshore trusts are commonly used for more sinister means; as a vehicle to hide assets. A typical tactic for fraudsters is to route their ill-gotten proceeds through offshore trusts and, by doing so, obscure their ownership of the stolen funds.
They set themselves up as the trustee(s), who own the legal title in trust. But the beneficiary would be an “innocent” third party. The trust exists for the benefit of the beneficiary, so it is very difficult to recover assets from the trust, which are beneficially-owned by somebody else.
When facing this hurdle in a civil fraud claim, the first step is to secure a freezing injunction. That protects the misappropriated assets from being dissipated while a claim is pursued. If the assets are held beyond UK jurisdiction, the courts can still freeze the assets by granting a worldwide freezing order.
Additionally, or alternatively, a Chabra Order can be used in circumstances where third parties hold the defendant’s assets that are the subject of the fraud accusations. The third party is not alleged to be liable for the fraud or directly accountable to the claimant. But a Chabra Order enables the claimant to freeze assets that are in the possession of the third party, which may be the case if the assets are owned beneficially under an offshore trust. Those assets are then protected, while the substantive claim is decided.
While a court can order injunctive relief to stop the funds being dissipated, it is not straightforward to recover the money held in the offshore trust.
It may be the case that any damages awarded can be met by the defendant via money and assets held elsewhere. But if it transpires that the funds held in the offshore trust are required, then it can be tricky to recover that money. One way to do it is to allege that the trust is a sham.
A trust will be deemed a sham when the requirements for the creation of a valid trust have not been satisfied, and a form of deception is present. For example, if the settlor and the trustee share the intention to give a false impression to third parties that the trust assets are held under the terms of the trust, when in fact they belong to the settlor.
In circumstances where fraud is suspected, it’s crucial to consider obtaining a freezing injunction at the earliest possible stage. If stolen funds are held in offshore trusts, they can be protected by a freezing order from the UK courts while the substantive claim is investigated.
It is not always necessary to recover the funds from an offshore trust, if other assets are available to pay damages (if owed). Recovering monies held in an offshore trust is complicated, but not impossible with the correct investigation and analysis of the structure of the trust.
Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.