UNIVERSITY OF LUSAKACertificate in Money Laundering

AwarenessWorkshop conducted for Cavmont Capital Bank.

19- 21 August, 2010, Lusaka.

Specialist Module: “The Use of Trusts and Companies in Money Laundering”

By

Chitengi Sipho JustineLLM(UWC/HU); LLB(UNZA); BSc(CBU); PGCert(RSA); PGCert(LAZ);

PGCert(ZIALE); AHCZ; DAAD Scholar in Anti- Money Laundering Law.

Specialist Modules

1. Trust and Company Module;2. Banking Module;3. Insurance & Investment Business Module;

and4. Management Module.

1. Trust and Company Module

a) Money Laundering Through Corporate Service - Trading Companies- Bearer Share Companies

b) Money Laundering Through Trustee Services - Discretionary Trusts- Blind Trusts- Dummy Settlers

a) Corporate Servicesi) Trading Companies• Trading Companies are not a creation of Cap 388.• They were companies established in the 1500s and

1600s by European countries to conduct trade and settlement in their colonies.

• Most of these companies have since ceased to exist or have changed their business scope.

• Today, they usually exist as ornamental family errands that certain families have bought from former regimes

Money launders use these types of companies, where existent, as they are normally not a concern of regulation and monitoring by any busy Government in the modern times.

ii) Bearer Share Companies• Herein, a stock certificate which is the property of

whoever happens to be in possession of it at any given time is issued to any bearer.

• Accordingly, no record of ownership is maintained by the issuing company.

• At law such issuing companies are not readily amenable to compulsory court orders of adducing evidence against bearers of its “shares” certificates.

Money launderers tend to take advantage of this loophole in the law for two reasons namely; lack of trace and ease of transfer of title without rigors and niceties at law.

They can deal dirtily even with minor sophistication, yet without leaving a trail of legally endangering traces.

b) Trustee Services• A trust is a legal creation of a fictitious entity which

is represented by a trustee for purposes of holding some benefits on behalf of certain beneficiaries; which assets are bequeathed by a settlor (also known as a donor )

i) Discretionary Trusts• This is an arrangement whereby property is set aside

with directions that it be used for the benefit of another, the beneficiary, and which provides that the trustee (one appointed or required by law to administer the property) has the right to accumulate, rather than pay out to the beneficiary, the annual income generated by the property or a portion of the property itself.

• It is termed a discretionary trust because the trustee has legal latitude or discretion to give or deny the beneficiary some benefits under the trust.

• The beneficiary cannot compel the trustee to use any of the trust property for the beneficiary's advantage.

• The beneficiary has no interest that can be transferred or reached by creditors unless the trustee decides to pay or apply some of the trust property for the benefit of the beneficiary. At that time, the beneficiary's creditors can reach it unless it is protected by a spendthrift clause. An assignee, a person who has received an interest in the trust from the beneficiary by assignment (a transfer of property), can hold the trustee liable for any future payment to the beneficiary by giving notice of the assignment.

Illustration of a Discretionary Trust • As an illustration, the settlor, one who creates a trust,

delivers K10,000, 000 to the trustee in trust for the beneficiary, and the trustee has the discretion to make any and every payment, or no payment at all, to the beneficiary from the corpus or income. Before the trustee has decided to make any payment to the beneficiary, the beneficiary assigns a right to K500, 000 of any payment the trustee elects to make to him or her. The assignee notifies the trustee of the assignment and demands that if the trustee decides to pay the beneficiary any amount up to K500, 000 the trustee must pay the assignee and not the beneficiary. If the trustee decides not to pay the beneficiary, the assignee has no right to payment. If the trustee subsequently decides to pay the beneficiary K500, 000 the trustee will be liable to the assignee for it.

Money Launderers like using this service for their heinous activities at the stage of placing owing to the unique legal position that renders the operation vulnerable and attractive for illegal activities.

Also for the fact that a person can create a discretionary trust for his or her own benefit, but creditors can reach the maximum amount that the trust can apply for or pay to the beneficiary under the trust terms, regardless of whether he or she actually received payment.

ii) Blind Trusts• A blind trust, also known as a "limping" trust or

"black hole”, is a trust in which the fiduciaries, namely the trustees or those who have been given power of attorney, have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust and no right to intervene in their handling.

• At law, blind trusts are generally acceptable as they were genuinely designed to propel business efficacy in situations where a settler (sometimes called a trustor or donor) wishes to keep the beneficiary unaware of the specific assets in the trust, so as to avoid conflict of interest between the beneficiary and the investments.

Money Launderers, especially Politically Exposed Persons (PEPs) in sensitive positions, firstly, often place their personal assets (including investment income) into blind trusts, to avoid public scrutiny and accusations of conflicts of interest when they direct government funds to the private sector.

Secondly, blind trusts have proved to be highly secretive vehicles typically deemed ideal for the purpose of concealing proceeds of crime and assets from revenue or exchange control authorities.

This scenario is compounded by the complexities associated with the identification of the settler from the trust deed as the law permits settlers herein to be either identified settlers or dummy settlers in the deed records.

In most cases, it is impossible to identify the settler, the purpose of the trust or even the true beneficiaries from the trust deed because the law does not strictly require that these details be disclosed in the trust deed.

iii) Dummy Settlors• A dummy settler establishes the trust by donating a nominal

sum to a trustee. • The trust deed contains the name of a discretionary

beneficiary (for example, the Red Cross), but that beneficiary is usually not informed of its status as such a beneficiary.

• The trustees have the discretion to add or change the beneficiaries.

• The true beneficiaries are named in a “letter of wishes” provided to the trustee by the settler; which is an extremely confidential document at law and the trustee is under a strict legal obligation never to divulge its contents to any person, not even the beneficiaries- both discretionary and true; except by a compelling Court Order.

• Once the trust is established assets can be added to the trust and additional beneficiaries added.

Money Launders keenly use this type of trust for purposes of laundering their dirty money and its proceeds owing to the aforesaid legal confidentialities and allowances that were initially intended to provide easy and confidential formalities of forming trusts for possible bequeathing of property and assets by well-wishers/ sympathisers to seemingly reliable charitable organisations, prior to confirmation after private scrutiny by both the trustee and the settlor because a dummy trust is indeed a conditional trust.

The vigilant efforts by the international regime against money laundering are seemingly curbing this mode of money laundering as evidenced by the recent United Kingdom criminal case of money launders who tried to use the Red Cross for the cause the Haiti victims; while their true intentions were to make use of such trusts to conceal assets that were proceeds of crime. They are being prosecuted for both money laundering and commission of its predicate offences.

End of Presentation

• Thank You