Trust Estate

New Rules, Swiss Trusts And Beneficial Ownership Under Microscope

Tom Burroughes Group Editor 20 February 2020

New Rules, Swiss Trusts And Beneficial Ownership Under Microscope

This publication was the exclusive media partner at last month's annual STEP conference for the Switzerland and Liechtenstein industry. The event, held in Interlaken, ranged over topics such as new regulations on Swiss financial services, beneficial ownership rules, family governance, and economic "substance".

Switzerland’s prospects of a home-grown trusts law, controversies over beneficial ownership and the new regulatory landscape were among the topics aired at a recent conference among trust and estate planning practitioners in Interlaken, Switzerland.

The Swiss & Liechtenstein STEP Federation Alpine Conference was told about industry changes around the world, including those playing out in Switzerland – still the world’s largest single offshore jurisdiction – and the neighbouring small principality of Liechtenstein. 

As ever, a strong theme running through the two-day conference was how pressure for more transparency on people’s financial affairs clashed with the legitimate need for privacy. As an example, a panel discussion on the European Union’s Fifth Anti-Money Laundering Directive left delegates wondering how disclosures over art purchases could fit with a need to prevent owners being targeted by thieves. In recent years, the unfolding of the Common Reporting Standard and calls for public registers for beneficial ownership of trusts and companies prompted similar worries.

The gold sponsor of the event was Industrie-und Finanzkontor, a Liechtenstein-based trust company with a specific tradition and expertise in the long-term and multi-generational preservation of wealth, family values and businesses, and bronze sponsors were Lenz & Staehelin, the Swiss law firm, and Stonehage Fleming, the multi-family office. WealthBriefing was the media partner for the conference, and The Beehive Partnership was the conference organiser. Conference partners were: Cadell; Butterfield Trust (Switzerland); Swiss Life Global Solutions; Schroder & Co Bank; Swisspartners; Schellenberg Wittmer; Swiss Association of Trust Companies; Döhle; Acumum Advisory; Alliance Trust Company of Nevada; Family Office Advisory; and Thatcher Mackenzie.

Regulatory squeeze
HSH Prince Michael of Liechtenstein, executive chairman of Industrie-und Finanzkontor, spoke directly to WealthBriefing on the sidelines of the conference, stressing a theme that he also voiced during his panel session: the danger of rising regulations squeezing out smaller players from the industry. Negative and zero interest rates harm savings and pension funds and furthermore do not allow banks to improve their equity capital. “In general, people are going out of the financial markets. They buy into real estate, venture capital, private equity as well as gold and art,” he said. 

Prince Michael is outspoken in defence of financial privacy and is concernced with the reasons why financial privacy and property rights are under attack. “One needs to be outspoken about the consequences,” he said. “However, organisations with a weak management and weak products rather prefer to preserve the status quo and thus like regulations because it hobbles competition," he continued. 

Conference sessions
After a welcome to delegates by Andrew McCallum, managing director, Rhone Trustees (Switzerland) SA and chairman of Swiss & Liechtenstein STEP Federation, delegates were given a fast tour around the kind of cultural changes affecting the working world by Dame Inga Beale, former chief executive of Lloyds of London.

Trustee regulation
At the first panel discussion, the panellists considered the present state of play on how trustees are regulated in Switzerland, and some recent regulatory developments. Panellists were Professor Rashid Bahar, partner, Baer & Karrer and professor, University of Geneva; Leonard Vijverberg, senior associate, Lenz & Staehelin; and Philippe de Salis, head of fiduciary, Switzerland, Stonehage Fleming.

One discussion theme was focused on the exemptions in rules for professional trustees that arise when there are “family ties”, as in the case with private trust companies and dedicated trust companies. Panellists talked about how authorities are seeking to clarify the requirements of trustees and other interested parties, such as minimum levels of experience.  

One issue discussed by Professor Bahar was what happens to trustees of a company that is founded under laws of a non-Swiss country but which is actually run in the Alpine state. Such an entity is subject to licensing requirements but as things stand, cannot be licensed. That said, foreign trustees that are not operating in or from Switzerland are not subject to these licensing requirements. 

Panellists discussed the steps practitioners need to take to get licensed and the respective roles of FINMA, Switzerland’s national regulator, and “supervisory organisations” with the powers to oversee a particular activity. Ultimately, the rules for trustee licences are set by FINMA, the conference delegates heard, and FINMA uses a risk-based approach in its work. There remains work to be done in working out which supervisory organisations industry players must affiliate with, and indeed which supervisory organisations shall receive FINMA approval.

Second panel
The second panel looked at issues of trustee regulation worldwide, drawing on experiences in jurisdictions such as the Bahamas and Liechtenstein. Speakers on this panel were Paul Davis, partner, Higgs & Johnson, Bahamas; HSH Prince Michael of Liechtenstein, executive chairman, Industrie-und Finanzkontor; and Marcus Leese, partner, Ogier.

Davis, for example, pointed out how the Bahamas, a jurisdiction with common law trust structures, foundations and other entities, has plenty of tools in the box that clients might want to use. Swiss trust clients, for example, have been able to use Bahamas-based laws for certain purposes. He noted that one risk at a time of pressure for beneficial ownership disclosure was the risk of client data becoming vulnerable to hackers. 

Prince Michael, who as this publication knows has been a vocal defender of financial privacy and the importance of private property, talked about updates and recent changes in Liechtenstein laws, which he said were not particularly dramatic. He reiterated a concern that as regulations become more excessive and duplicating, the costs of running trusts goes up. This also includes a social aspect: due to the increased costs caused by regulations, the long-term protection of wealth can only be achieved for larger fortunes. This penalises especially smaller and medium-sized fortunes, which, however, are very important to the economy and society too. The protection of larger and smaller fortunes is equally important and regulations should be streamlined to be effective and affordable. 

A concern about public registers of beneficial ownership, Prince Michael said, is that they could fuel envy about wealth rather than really push back against money laundering.

Davis agreed that the cost issue is a serious one for the trusts sector. Legislation such as the US FATCA rules and others are passing more costs on to clients. “There is a smaller number of fiduciary structures and minimums are going up,” he said. 

Ogier’s Lees agreed, drawing on his experience in jurisdictions such as Guernsey, that the cost of business is rising. “Smaller families are no longer a part of the environment [for business] that we see. This pushes smaller structures to jurisdictions that are no longer regulated,” he said.

Asked if there will be a pause or event pushback to the rising volume of regulation, Davis said that is unlikely. “It would be naïve to think we are done now.” More positively, there is evidence that the market for protecting and transferring wealth is getting larger rather than smaller.

Third panel

The third panel discussed economic “substance” – which relates to the steps that providers of entities such as trusts and companies must have to show that they are in involved in actual commercial/economic activity and not just an empty shell for tax or some other purpose. Speakers in this panel were Herbert Bischof, managing partner, BDO (Liechtenstein); Paul Davis, partner at Higgs & Johnson, Bahamas; Professor Dr Pierre-Marie Glauser, professor, University of Lausanne and partner, Obserson Abels; and David Cooney, partner, Charles Russell Speechlys. 

Glauser pointed out that Switzerland has never had a “substance” requirement for offshore structures. Instead, it has operated the test of whether an entity has “effective” management and whether it is possible to “pierce the corporate veil” of a structure so that people can see where the commercial activity lies. “It is not about `substance’ itself but where day-to-day management goes on.”

Bischof said that Liechtenstein has a “relevant activities” test and that entities that don’t prove substance can be hit with criminal penalties. So far there hasn’t been any jurisprudence or tests of the substance issue in Liechtenstein because it is still a new concept.

Davis explored issues around the “substance”, such as whether an organisation engages in income-generating activity. In the Bahamas, for example, an entity which is able to benefit from status in local law must engage in income-generating activity there. 

Professor Glauser noted that with trusts in Switzerland, settlors usually created them when they (settlors) lived outside the country, as a pre-immigration structure before relocating to Switzerland, for tax optimisation. 

Fourth panel
Attention shifted to the major topic of beneficial ownership of companies and trusts. Issues that arose include new Swiss anti-money laundering duties for trust and company service providers and AML laws’ requirements to identify beneficial owners. The panel also touched on how jurisdictions such as the Isle of Man, Jersey and Guernsey have moved on beneficial ownership registers for companies. Panellists were Stephanie Auferil, founding partner, Arkwood; Lars Schlichting, partner, Kellerhals Carrard; and Filippo Noseda, partner, Mishcon de Reya and visiting professor, King’s College.

Panellists noted that the European Union’s Fifth Anti-Money Laundering Directive became law on 10 January. Schlichting, who asked about the Swiss situation, said he had seen no indication – yet – that Switzerland intends to set up a beneficial ownership public register for companies as is the case in the EU. “We are in a small corner and we’ve been quiet,” he said. 

Auferil, talking about French legal issues and France’s Constitutional Court ruling that pushed back at demands for public disclosure, noted that only authorities deemed competent can get access to beneficial ownership information, such as people who can demonstrate a legitimate reason, filed with a judge, why they should have it. 

It was noted by panellists that some jurisdictions, such as Liechtenstein, have created the condition that to count as a beneficial owner of a company, a person must actually have control of a company if their identity is be disclosed via a register. Noseda said it was important to differentiate between companies and trusts in terms of beneficial ownership: people who own companies attend annual meetings, are paid dividends and vote on agenda items, whereas a beneficial owner (beneficiary) of a trust might be a child, for example. 

Another issue for beneficial ownership advocates is that the EU, for example, has a right to privacy – which potentially conflicts with demands for total transparency. “I am stunned that no-one has brought this before the courts yet,” Noseda said.

Fifth panel
The final panel for the first day, following a short outline of 12 “Do’s and Don’ts” regarding tax and matters concerning trusts and standalone companies, was about European Union issues. Speakers on this panel were Jean-Blaise Eckert, partner, Lenz & Staehelin; Sabine Monauni, Ambassador of Liechtenstein to the EU; and Professor Dr Michael Wohlgemuth, research officer, Foundation for Governance and Public Law. 

The final panel discussion of the first day examined European Union issues, including Switzerland’s relations with the bloc, and, of course, the aftermath of the UK Brexit vote. Panellists for this segment of the conference were Jean-Blaise Eckert, partner, Lenz & Staehelin; Sabine Monauni, Ambassador of Liechtenstein to the EU, and Professor Dr Michael Wohlgemuth, research officer, Foundation for Economic Governance and Public Law.  

Second day
The first panel of the day centred around family governance issues. Panellists were Kecia Barkawi, founder and CEO of VALUEworks; Dina Casparis, independent lawyer, advisor and novelist; Etienne D’Arenberg, partner, Mirabaud & Cie; and Nichlolas Jacob, partner, Forsters LLP.

D’Arenberg said that a lot of inheritors need to have training sessions and gatherings to work through financial issues, including understanding concepts and ideas. (With some young adults this might not be such a challenge if they are studying law, finance, accounting or similar subjects in college.) Another big question for family members is whether they have enough people in their lives whose advice they can trust, he said. 

Barkawi gave the example of a family that asked her firm to run a programme to prepare their offspring to be responsible about wealth, as they would at some point have to get involved in running an operating company. To address this, a philanthropic project was created to get them accustomed to understanding budgets, planning and understanding outcomes.

Casparis noted that US and German families often became rich through industry, so there was a tried and tested family governance tradition that arose from that. In Switzerland, this was less the case, so discussing governance and money issues has not been as easy. A challenge for advisors is how they can connect with next-gen inheritors without going behind clients’ backs, Casparis said. 

One topic raised was how families should balance the need for their offspring to be treated fairly and whether this meant equality: not all young people are equally qualified or motivated to run an inherited business, which meant that sub-dividing assets could be challenging.

Second panel
The second panel of the day addressed art assets and the challenges of buying, selling and holding art at a time of heightened focus on money laundering rules. 

Speakers at this event were Sandrine Giroud, partner at Lalive; Michelle Stroube, legal assistant, at Mishcon de Reya; and Willem-Joost De Gier, co-founder, Cadell.

Stroube kicked off the panel discussion by laying out the need for intermediaries, buyers and sellers of art to be clear about its provenance, authenticity, the sources of wealth to buy art, tax, legal title and logistics. And under the latest EU anti-money laundering directive, taking effect in January, artworks worth more than €10,000 are subject to tests and regulatory requirements to prevent money being laundered.

The question arose of how many bidders in auctions for artworks are anonymous and what is going to happen if beneficial ownership disclosure means they can no longer keep their names private? “That information is going to get more and more public,” Stroube said.

Giroud noted that the global art market is worth around $60 billion and cited evidence, such as studies from Deloitte and Art Tactic, showing how high net worth investors have become keener on investing in art in recent years. This has fuelled turnover in the art market and the need to keep it compliant. She mentioned ventures such as the Responsible Art Market Initiative, put together by industry practitioners, to weed out problems and keep the market honest. De Gier noted that the fine art market is now very sophisticated and professional, and no longer amateurish. One factor, he said, is that the market can be driven by emotion, which can create its own challenges for avoiding problems.

Third panel
The third panel examined investing in real estate abroad. Participants were Liam Bailey, global head of research, Knight Frank; Dr Alon Kaplan, advocate and notary, Alon Kaplan Law; and Edward Reed, partner, Macfarlanes LLP. 

Bailey said that investors have to expect a period of lower returns after some strong figures; adding that the UK market post-Brexit was “interesting” because of the slippage of sterling, and the dissipation of some of the uncertainties about its departure from the bloc. Meanwhile, the market continued to be shaped by highly mobile capital flows. “That’s not going away.”

Dr Kaplan spoke specifically about Israel’s real estate market and of how a country that was founded in 1948 had gone from a population of about 400,000 to more than 9 million amid waves of immigration by Jewish people from around the world. He set out the various tax incentives, including a 10-year tax “holiday” - designed to draw in financial inflows - which immigrants can apply for.

Reed discussed the rise in the UK of Unexplained Wealth Orders and how this applied in a few recent cases to holders of property. He noted that UWOs applied to people suspected but not necessarily convicted of serious criminal offences (a fact that has raised some worries about due process of law). 

Fourth panel
The world of foundations was aired in the next panel, with discussion about the differences between trusts – creatures of the common law – and foundations (continental civil law), and the jurisdictions which are known for being friendly to foundations. Panellists were Christopher Jolk, partner at BMH Avocats; Paolo Panico, chairman, Private Trustees SA, Luxmebourg & Advocate, Paolo Panico’s Law Chambers; Dr Natalie Peter, partner, Blum & Grob Attorneys at Law; and Dr Johanna Niegel, senior client advisor, Allgemeines Treuunternehem, committee member of Verein STEP.

Fifth panel
This publication wrapped up its coverage of the conference by hearing panellists talk about the prospect of trust law taking shape in Switzerland, enabling a domestically-driven industry (foreign trusts are already recognised in the country, which is not a common law country). 

Panellists for this discussion were Professor Dr Francesco A Schurr, professor of Law, University of Innsbruck; Professor Dr Luc Thévenoz, Professor, University of Geneva, director, Centre for Banking and Financial Law; and David Wilson, partner, Schellenberg Wittmer.

The participants talked about how there are motions in the Swiss parliament to call for a Swiss trusts law. A key theme, the panel heard, was to be clear about the duties of trustees and beneficiaries. There will be a public consultation on the issue probably in the fourth quarter of this year and then the matter will go to parliament. With respect to the taxation of such Swiss trusts, Wilson noted that Swiss federalism sets limits to what the federal law can impose on the individual cantons of the country. 

To close the event, a “great debate” about trust and estate industry issues was held, featuring Nicholas Jacob, partner at Forsters LLP; Fabianne de Vos Burchart, counsel, Charles Russell Speechlys; Professor Dr Dominique Jakob, Professor of Private Law and director of the Center for Foundation Law at the University of Zurich; and Professor Dr Luc Thevenoz, Professor, University of Geneva, director, Centre for Banking and Financial Law.


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