© ICSA, 2016 Page 1 of 15

Suggested answers and examiner’s comments

Offshore Trust and Company Administration November 2015 Important notice When reading these suggested answers, please note that the answers are intended as an indication of what is required rather than a definitive “right” answer. In many cases, there are several possible answers/approaches to a question. Please be aware also that the length of the suggested answers given here may be somewhat exaggerated compared with what might be achieved in the reality of an unseen, time-constrained examination. Examiner’s general comments

The pass rate for this session was 81%.

Candidates generally appeared to struggle with questions in Section B.

Candidates who did not provide answers at a pass level for Section C did not achieve a pass for the examination as a whole. This shows the importance of Section C.

© ICSA, 2016 Page 2 of 15

Section A Answer all parts of Question 1. Select only one of the options A, B, C or D for each part. 1 (i) The major advantage of a hybrid company over a trust is that:

A It can be structured so that economic interest is separate from control.

B It can be set up in the UK.

C It has a perpetuity period of 200 years. D It can be used for trading purposes.

(ii) Which of the following can be considered a power of a director of a UK private company?

A To act fairly between members of the company. B To authorise others to bind the company. C To act in the interest of the company. D To receive notice of all general meetings.

(iii) A service provider would choose to incorporate an underlying company: A To preserve and enhance the value of the trust assets. B So that the trustee can provide income for the beneficiaries of the trust.

C To hold investments for an overlying trust.

D So that the trustee can have a diversified underlying portfolio of investments. (iv) The majority of regulated offshore trust services providers (TSPs) have established trustee

committees to oversee the activity of trusts. Which one of the following statements is correct?

A The committee of the TSP must have a minimum of two authorised signatories and normally consists of senior members of staff.

B Only the directors of the TSP can be included in the committee.

C A sole director of the TSP can attend and sign trustee resolutions on behalf of the committee. D The TSP needs to hold a full meeting of the trust company every six and twelve months

to ratify all matters approved by the trustee committee.

© ICSA, 2016 Page 3 of 15

(v) Which one of the following is a typical objective of a regulator in an offshore jurisdiction?

A To revoke the licences of a regulated person or firm. B To protect consumers. C To discipline regulated persons. D To impose financial penalties.

(vi) The Proceeds of Crime Act (PoCA) sets out that a criminal offence is committed if a person:

A Uses criminal property. B Acquires criminal property. C Converts criminal property. D Enters into an arrangement which they know, or suspect, involves the proceeds of

crime. (vii) Which of the following is not included in the Directors’ report of a UK company?

A How the directors have maintained the reputation of the company. B How the directors have promoted the success of the company. C The full names of the directors of the company. D The full name of the secretary of the company.

(viii) Which one of the following sets of events should trigger a review of the risk assessment of a

trust and company structure.

A The making of a suspicious activity report and the purchase of a property in London. B A change of purpose of a structure under administration and the termination of the trust

and company structure. C One of the beneficiaries becoming a politically-exposed person (PEP) and the receipt

of a new Letter of Wishes from the settlor of the trust. D A change in the occupation of the settlor of the trust and an additional beneficiary being

appointed. (ix) An offshore services provider has carried out risk profiling of a potential new client, which

shows that the client engages in trading activities involving the handling of cash. This is an example of:

A Country risk B Activity risk C Customer risk D Relationship risk

© ICSA, 2016 Page 4 of 15

(x) The Westdeutsche Landesbank Girozentrale v Islington London Borough Council (1996)

case established that:

A Where a beneficiary has consented to a breach of trust, he cannot subsequently make the trustee personally liable for any loss arising out of the breach.

B A nominee shareholder can only exercise their powers as bare trustee in the interest of

the beneficial owner. C Where there is a trust, the equitable interest of the beneficiary is binding upon third

parties. D It is not permissible for a trust deed to exclude a trustee’s liability for gross negligence.

(Total: 10 marks)

Suggested answers (i) D It can be used for trading purposes. (ii) B To authorise others to bind the company. (iii) C To hold investments for an overlying trust. (iv) A The committee of the TSP must have a minimum of two authorised signatories and

normally consists of senior members of staff. (v) B To protect consumers. (vi) C Converts criminal property. (vii) D The full name of the secretary of the company. (viii) D A change in the occupation of the settlor of the trust and an additional beneficiary being

appointed. (ix) B Activity risk (x) C Where there is a trust, the equitable interest of the beneficiary is binding upon third

parties.

Examiner’s comments Parts (vi), (viii) and (ix) proved problematic for the majority of the candidates. Few candidates correctly identified the two trigger events in part (viii).

© ICSA, 2016 Page 5 of 15

Section B Answer all ten questions. 2 Give four reasons why trust accounts are prepared. (4 marks)

Suggested answer Any four of the following. A set of trust accounts serves the following purposes; it:

confirms the assets and liabilities of the trust at a particular date (the year end of the trust accounts);

helps to explain to beneficiaries how their entitlements have been calculated and also how the trust property has been accounted for;

assists the trustee with the general management and control of the trust assets by recording the present position, which is particularly useful with regards to the investments of the trust;

shows how the trust assets have performed, including income obtained and expenses and payments made;

enables the trustee to fulfil their statutory duty and keep adequate accounting records which most offshore jurisdictions impose; and

provides information which may be required by beneficiaries for taxation purposes and other filing requirements.

Examiner’s comments This was a well answered question, with some very good answers provided.

2 Identify eight statutory documents and items that are usually required to be held at the registered

office of a private limited company which is also the administrative office of the company. (4 marks)

Suggested answer Any eight of the following.

The minute book.

The original certificate of incorporation.

The original memorandum and articles of association.

The register of members.

The register of directors.

The register of secretaries.

The register of charges.

Copies of the financial accounts of the company.

The company seal, if appropriate.

© ICSA, 2016 Page 6 of 15

Examiner’s comments This was the best answered question in Section B.

4 Explain the usual powers of the regulator in an offshore centre. (4 marks)

Suggested answer

The regulator usually has the power to grant a licence to a regulated service provider so that they are authorised to provide regulated services).

The regulator can usually vary any authorisation granted to a regulated service provider (that is, can place a restriction on some of the services provided by the regulated service provider).

The regulator can also withdraw such an authorisation (that is, to revoke any licence granted to a regulated service provider).

The regulator has the power to visit a regulated service provider periodically or without notice.

The regulator can issue Codes of Practice to the regulated service providers.

The regulator also has rule-making powers and has powers to investigate and gather information in order to assess whether an authorised person is abiding by any such rules or regulations.

Examiner’s comments Some candidates did not provide more than two correct powers of a regulator in an offshore centre, in answer to this question.

5 Identify four monitoring aspects that business-acceptance procedures may cover. (4 marks)

Suggested answer Any four of the following. Business-acceptance procedures may cover the monitoring of aspects such as:

Customer due diligence requirements, including the identification of the customer.

Risk profiling of the customer and the business to be undertaken.

An assessment of the services to be provided.

Terms and conditions.

Administration fees and charges.

The obtaining of tax or legal advice.

Formal acceptance of the business. Examiner’s comments Although the question requested business-acceptance procedures (that is, immediate action before take on of new business), some candidates included a 90-day review in their answers which was not correct for this question.

© ICSA, 2016 Page 7 of 15

6 Define and state the applicable requirements relating to the proper law of a trust when included in a trust deed.

(4 marks) Suggested answer The proper law of a trust are the rules that govern the administration of trust assets in that particular jurisdiction.

A trust’s proper law is usually expressed within the terms of the trust instrument (trust deed) and is the law that would be used to determine the answers to questions relating to the validity or interpretation of a trust, if brought to court by beneficiaries.

The proper law will also effect any transfer of property into a trust.

The proper law will also indicate the capacity of the settlor (if any) within the trust deed.

The proper law will also indicate the powers and duties of trustees. Examiner’s comments Generally, this question was not well answered. Candidates who did not provide a correct definition of the proper law of a trust, also did not provide any correct requirements relating to the proper law of a trust or did not answer this part of the question at all.

7 Identify four benefits of undertaking a periodic review of an offshore trust structure. (4 marks)

Suggested answer Any four of the following.

To confirm that the trust structure has been administered in accordance with the terms set out in the trust deed and the trust law.

Minimising risks.

Alerting trustees of potential problems before they materialise into major issues.

Evidencing that internal policies and procedures are adhered to.

To ensure that all assets and liabilities are correctly shown in records of structure.

To ensure that all assets are adequately insured (if necessary and appropriate).

To confirm that any issues raised at the last review have since been resolved.

That any unresolved issues raised at the current review are recorded as action points.

Examiner’s comments A majority of candidates answered this question well.

8 Explain the procedure that the company secretary should follow when the sole director of a private limited company resigns.

(4 marks) Suggested answer The company secretary will:

© ICSA, 2016 Page 8 of 15

on receipt of the letter of resignation from the sole director of the company, arrange a general meeting;

send notice of the general meeting to all the members of the company that are listed on the members’ register;

arrange for the proposed new director to sign and return a letter of acceptance to act before the general meeting is held; and

attend the general meeting to ensure that a quorum is present and oversee the voting in of the new director.

Examiner’s comments This was another well answered question in Section B. However, it was surprising that some candidates stated that a board meeting would be required to appoint a new director, bearing in mind that the sole director had already resigned.

9 Identify four aspects that a trustee should consider when undertaking regular reviews of trust

investments. (4 marks)

Suggested answer Any four of the following: A trustee should undertake regular reviews of the investments of the trust to consider aspects such as:

The performance of the investment portfolio against its benchmark.

Whether the investment manager has performed in line with the market.

Whether the investment manager has invested the funds in line with the objective of the trust fund (for example, income or capital growth).

Whether the investment manager is taking too much risk to achieve the performance.

Whether the circumstances of the beneficiaries have changed since the previous investment review.

Examiner’s comments Although the majority of candidates identified three or more aspects in undertaking a regular review of trust investments, a small number of candidates did not provide any answer to the question.

© ICSA, 2016 Page 9 of 15

10 Explain what happens to a trust when a trustee dies and what procedures should be followed afterwards.

(4 marks) Suggested answer On the death of a sole trustee, their trusteeship automatically terminates and the assets of the trust form part of the estate of the deceased trustee. The executor or personal representative should decide whether to continue to act as trustee or to appoint or allow the court to appoint another trustee. If there is more than one trustee and one died, the remaining trustees could continue to act, subject to this being permitted under the terms of the trust deed. The remaining trustees must agree to continue as trustees and to ascertain from the trust deed whether a replacement trustee is to be appointed. Examiner’s comments Generally, this question was not well answered. Many candidates answered either that the trust always came to an end or that the settlor was able to appoint another trustee. However, a number of candidates who answered this question well concluded that the assets would form part of the estate of the deceased trustee and that their executor or personal representative would probably apply to the court for the appointment of a new trustee. Some candidates explained that a corporate trustee would not die, but this was not part of the question asked.

11 Identify eight reasons why an offshore private company may pass a special resolution. (4 marks)

Suggested answer Any eight of the following. Special resolutions are used for most of the major decisions affecting the structure of the company; for example:

an alteration of a company’s constitutional documentation;

a change in the definition of a meeting, to allow for circular resolutions;

a change to quorum;

a change to the process for the issuing of shares;

a change to un-certificated shareholdings;

a reduction of capital;

the winding up of the company;

the appointment of a liquidator; and

change to the jurisdiction of a company. Examiner’s comments A number of candidates did not identify sufficient reasons why a private company would need to pass a special resolution, with some answers not identifying more than two correct reasons.

© ICSA, 2016 Page 10 of 15

Section C Answer two questions only.

12 (a) Explain the role and powers of a liquidator when winding up an offshore private limited company.

(13 marks)

(b) (i) Explain Capital Gains Tax (CGT) and describe how it is calculated. (8 marks)

(ii) Identify eight items which are not subject to CGT. (4 marks)

(Total: 25 marks) Suggested answer (a) The role of the liquidator

The liquidator manages the liquidation or winding up of the company and will usually advertise in the Local Gazette (the warning to all third parties and creditors) of the impending winding up of the company, requesting any claims to be forwarded to his offices before the expiry of a set period, with the date of the deadline clearly specified in the wording of the notice. The liquidator will realise all of the assets of the company, take his remuneration before paying off any creditors, other than secured creditors (as they hold the assets under their charge), discharges all the liabilities of the company in accordance with the ranking of priorities as set down within company law and will distribute any surplus (if any) to the shareholders/members of the company in accordance with their entitlement. As soon as the company’s affairs are wound up, the liquidator will prepare a set of accounts of the winding up, detailing the conduct of the liquidator and the disposal of the company’s assets/property, call a general meeting of the shareholders/members at which time the accounts will be presented and an explanation given. After the meeting, the liquidator must give notice to the Registrar (or equivalent body) of the holding of the meeting and the date the meeting was held. Powers of a liquidator In order to carry out their role, the liquidator will have a wide-ranging powers to:

bring or defend civil actions in the name of, and on behalf of, the company;

carry on the business of the company to the extent expedient for the beneficial winding up of the company;

make calls of capital against the shareholders as entered on the members register;

sign all receipts and other documents in the name of, and on behalf of, the company; and

carry out any act authorised by the court.

In some offshore jurisdictions in a compulsory winding up, when the liquidator has realised the company’s assets, the liquidator must apply to the court for the appointment of a Commissioner of the Court (or equivalent) to examine the liquidator’s accounts and authorise the distribution of the funds derived from the company’s assets.

© ICSA, 2016 Page 11 of 15

(b) (i) CGT is a tax on the profit or gain you make when you sell or ‘dispose of’ an asset. Disposal of an asset is when you cease to own it. For example, if you: sell it; give it away as a gift; transfer it to someone else; exchange it for something else ; or receive compensation for it. For example, you receive an insurance pay-out when

an asset has been destroyed. It is the gain you make, not the amount of money you receive for the asset that is taxed. The annual tax-free allowance for CGT is known as the 'annual exempt amount'. If an individual’s overall gains for the tax year are above the annual exempt amount, they will only pay CGT on the excess and if the overall gains are below the annual exempt amount, they will not pay.

(ii) Some types of exempt items are not subject to CGT. These include:

an individual’s principal private residence;

ordinary private cars;

tangible moveable assets: goods and chattels worth less than £6,000;

wasting assets with a life expectancy of less than 50 years;

leaseholds;

gifts to the nation;

foreign currency for personal use;

gilts;

permanent interest bearing shares (PIBs);

personal life assurance pay-outs;

gambling;

premium bond winnings;

Individual Savings Accounts (ISAs); and

compensation for injury or wrong. Examiner’s comments Although the majority of candidates achieved good marks in discussing the role of the liquidator in part (a), a small number of candidates did not provide any answer for the powers of a liquidator. Part (b) was generally well answered.

© ICSA, 2016 Page 12 of 15

13 You have been asked to give a training presentation to employees who are new to the offshore finance industry. The presentation is to be entitled: “Your obligations under the anti-money laundering regulations”. Prepare the key points, with short explanations, which should appear in this presentation. (25 marks) Suggested answer Start with definition of money laundering Money laundering is the processing of criminal property by concealing, disguising or converting it in order to give it the appearance of having arisen from a legitimate source, when it is in fact, the proceeds of crime. It could also be explained as the procedures and actions that are carried out to alter the identity of illegally obtained funds, and to make it appear that the funds have come from a legitimate source. It is a criminal’s way of transferring the proceeds of criminal activities back into the financial system (usually the banking system) in an attempt to make dirty money look as though it has come from legitimate activities after a series of transactions aimed at concealing the true origins. State that criminal funds may arise from:

drug dealing;

organised crime;

illegal arms trades;

people trafficking;

embezzlement;

insider dealing;

theft;

tax evasion; and

terrorist financing. Identify and explain the three stages of money laundering Placement is the physical disposal of cash proceeds that have been received from the illegal activity into the financial system in an attempt to conceal its true origin. Layering could involve a complex layer of financial transactions in order to hide the true identity of the source of funds (for example, transfer of funds between accounts and financial jurisdictions). Integration occurs if the layering stage has been successful; the illegally obtained funds will now be integrated into the financial system and will appear to be legitimate funds. Funds can then be used for any legitimate purchase of assets. Recognising money laundering

The customer has numerous accounts and pays in amounts of cash to each of them to hide the total of the credits.

An individual or company whose accounts show little or no business related activities, receives or disburses large sums which bear no relation to the previous activities of the accounts.

A reluctance to provide routine information when opening and/or maintaining an account(s).

© ICSA, 2016 Page 13 of 15

The customer has several accounts in financial institutions, all within the same locality.

There is a matching of payment outs with credits paid in by cash on the same or previous day.

Large cash withdrawals from a previous dormant or inactive account or from an account that had recently received an unexpected large credit from abroad.

Physically moving cash between jurisdictions.

Making loans in cash to businesses that seem to be legitimate.

Purchasing high-value goods for personal use.

Purchasing the services of high-value individuals.

The use of a wide number of intermediaries.

Assets held in high risk countries such as Nigeria or Iraq.

Main offshore offences and penalties Assistance 14 years in prison and/or an unlimited fine. Failure to report 5 years in prison and/or unlimited fine. Tipping off 5 years in prison and/or unlimited. Examiner’s comments This was the most popular question in Section C. However, many answers did not focus on the audience; the presentation was to be given to “employees who are new to the finance industry”. Candidates should have concentrated on the basic anti-money laundering issues/topics such as:

Definition of money laundering.

Examples of money laundering.

The three stages of money laundering.

Examples of suspicious activities.

Main offshore offences and penalties. Although the suggested answer for this question is focused on these main topics, marks were awarded for different but valid points. Some candidates focused completely on UK money laundering laws, and so on, and did not appear to identify that the answer should have been from the offshore perspective.

© ICSA, 2016 Page 14 of 15

14 A prospective settlor asks you, as a trust service provider (TSP), to explain the normal administrative powers found in a discretionary trust deed.

Identify and explain at least ten of these administrative powers. (25 marks) Suggested answer Trusts of original and additional property The trust deed confirms that the trustee is able to receive the original trust property and is able to receive additional property upon the same trust throughout the trust period. Funds added to the trust property are known as additional settled funds or assets. Trusts of income and capital The trustees of a discretionary trust are usually given wide powers to distribute the trust property. The ‘trusts of income and capital’ clause(s) may give the trustee discretionary power to pay income or capital to any of the beneficiaries or to hold some or all of the trust fund upon a separate trust for any of the beneficiaries. Trustees may be given powers of accumulation, which allows them to retain income and add it to the capital of the trust fund. The trusts of income and capital clause may also set out how the trust fund will be distributed at the end of the trust duration if the trust has a set duration. Powers of appointment and advancement Trustees may have very wide powers to appoint new trusts or to transfer trust property to a new trust (if there is a beneficiary in common) or to a company formed by the trustee. Powers to ignore interests The trust deed may set out that the trustee may ignore the interests of a beneficiary when considering whether to apply the trust property for the benefit of another. Payment to persons not of full capacity The trustees may be able to transfer trust property to the carer of a minor or a person of unsound mind. Powers of addition and exclusion Trustees usually have the power to add additional beneficiaries to the class of beneficiaries or to remove a person from the class of beneficiaries or exclude a person from benefiting from the trust property. Exclusions can usually be revocable (capable of being undone) or irrevocable. Exercise of trustee’s powers and discretions The trust deed may set out that the powers of the trustee can or may be exercised at their absolute discretion and as they think fit.

© ICSA, 2016 Page 15 of 15

Powers of delegation The trustee may have the power to delegate their power to others, providing the delegation is done in good faith. Retirement and appointment of new trustees The trust deed may set out the provisions with regards to the retirement of the existing trustee(s) and the appointment of a new trustee. The trustee is often granted the power to appoint a new trustee. The trust deed may also provide a release from liability for the retiring trustee. Remuneration of a trustee The trust deed may provide for the remuneration of the trustee. In some jurisdictions, the trustee may not otherwise have a right to be remunerated under the law. Disclosure The trust deed may set out that the trustee need not disclose information about how they reached their decisions when exercising their powers. Power to vary the settlement It may be the case that the terms of a settlement may be varied. Examiner’s comments This was the least popular question attempted by candidates but was also the best answered question in Section C. However, candidates often only listed the powers of a trustee instead of identifying and explaining these powers. Also, some candidates included the duties of a trustee in their answers which was not required.

The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.