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ANGUILLA: ESTABLISHING A HEDGE FUND IN ANGUILLA – AN OVERVIEW
Anguilla enacted a Mutual Funds Act in 2004 (“the Act”) to compliment
its suite of legislation. It is a recent player but offers a
cost-effective and efficient regulatory regime under the supervision of
the Financial Services Commission of Anguilla (“the Commission”).
Scenario
A brokerage firm based in the USA with offices and clients in London,
Hong Kong, Shanghai and Tokyo, amongst other major financial centers,
wishes to launch an internal product for its clients, who range in net
worth from small investors with accounts holding assets of less than
US$100,000 to high net-worth individuals worth several million US$. It
decides to launch an offshore fund for non-USA clients. An Anguilla fund
is ideally suited for this as will be explained below.
Fund types
The Act provides for three types of funds:
1. Private – a private fund is a fund, the constitutional documents of
which, specify that it will have no more than 99 investors and these
documents specify that an invitation to subscribe for or purchase shares
is not to be made to the public. An invitation is not made to the public
if it is made to specified persons and is not calculated to result in
shares becoming available to other persons or by reason of a private or
business connection between the person making the invitation and the
investor. There is no minimum subscription for investing into a private
fund and they are not required to submit audited financial statements
annually to the Commission or issue a prospectus, albeit, most usually
do as a matter of practice. The Commission also has the power to
designate certain funds as being private funds.
2. Professional – a professional fund is a fund, the shares of which are
made available only to professional investors and the initial investment
in which, in respect of each of the persons constituting a majority of
such investors, is not less than one hundred thousand United States
(US$100,000)
dollars or its equivalent in any other currency. This minimum initial
investment limit shall not apply in respect of an investment made by the
manager, administrator, promoter or underwriter of the professional
fund. Professional funds are not required to submit audited financial
statements annually to the Commission or issue a prospectus, albeit,
most usually do as a matter of practice. The Commission also has the
power to designate certain funds as being professional funds. A
professional investor is defined as a person whose ordinary business
involves dealing in investments or who has signed a declaration that he,
whether individually or jointly with his spouse, has net worth in excess
of one million United States dollars or its equivalent in any other
currency and that he consents to being treated as a professional
investor.
3. Public – a public fund is a fund which is not a private or a
professional fund. Unlike the private and professional fund, a public
fund must submit to the Commission audited financial statements annually
and must issue a prospectus.
Special purpose and corporate vehicles
An Anguillian fund may be in the form of an Anguilla domestic company,
international business company, limited liability company, limited
partnership, partnership, unit trust or protected cell company/protected
cell accounts (segregated portfolio company/segregated portfolio
accounts). However, the Commission, which approves all fund applications
has the power to exclude any body which is designated by regulations as
not being a mutual fund. To date, the Commission has not excluded any
type of entity from being used as a fund. The corporate entities are
extremely useful because they allow for the issuance of series or
classes of shares with different rights thus allowing for the creation
of umbrella funds and master/feeder structures. The use of an Anguillian
domestic company also allows for the use of companies limited by
guarantee, limited by guarantee and shares, as well as private companies
whereby the articles restrict the number of shareholders to 11.
Structuring
To the brokerage house, a product or series of products could be created
to cater for its wide range of investors. For the small investors who do
not generally invest USD100,000 in one product, a private fund would be
ideal. The brokerage firm could create several private funds of 99
investors each with a low minimum subscription in a “cookie-cutter”
fashion. That is each private fund could issue a similar prospectus, use
the same functionaries with the same or similar agreements and basically
negotiate on legal and other fees. The costs for establishing and
operating each fund of 99 small investors would decrease dramatically,
thus avoiding any adverse impact on performance or undue burdens on the
fund manager.
Unlike the private fund, which has a maximum number of investors, a
professional fund does not have that restriction but instead has a
minimum subscription as stated above. This is ideally suited for the
wealthier of the brokerage firm’s clients. In fact, it could indeed
market it to an unlimited number of its clients, but from a practical
point, the use of several professional funds in a master-feeder
structure would be more efficient in terms of managing and administering
the structures and assets under management.
Alternatively, the brokerage firm could create a public fund or indeed
several public funds for its clients. This of course would allow all
clients to invest without issues of investment size or investor numbers.
The Anguilla public fund would be required to submit a prospectus prior to
being registered and present audited annual financial statements as well
as a certificate of compliance from the jurisdictions where it is
marketing and or operating outside of Anguilla.
Requirements for recognition or registration
All applicants whether a private, professional or public fund, must
submit a completed application which is set out in the Mutual Funds
Regulations. The form is simple and requires basic information about the
fund itself including its principal place of business, directors (where
the applicant is a corporate entity), classification and functionaries.
Each of the functionaries i.e. the manager, administrator, investment
advisor and custodian/prime broker must be stated and be located in a
recognized jurisdiction. The Commission has issued an extensive list of
jurisdictions thus making this requirement immaterial for most practical
purposes.
The application must be accompanied by certified copies of the articles
of incorporation and certificate of good standing, director and
shareholders’ details including full names, date and place of birth,
addresses and citizenship, country and length of residence, educational
and professional qualifications, employment history, details of 25% or
more shareholding interests in companies in the past 10 years, nominee
details, questions detailing business, litigation and general legal
background, and the names of three non-related referees. A prospectus
must also be submitted for public funds and for private and professional
funds, a business plan must also be submitted detailing the following:
investment objectives, types of investments, restrictions on
investments, risk factors of the fund, actual or expected size of
shareholders’ investment base, valuation arrangements and frequency of
valuations and redemption mechanisms.
Dual recognition
A private and professional fund which is registered or licensed under
the law of a jurisdiction other than Anguilla may be recognized in
Anguilla upon submission of an application providing evidence that it
falls within the definition of either of those terms, is lawfully
constituted under the laws of another jurisdiction and pays the
requisite fee. This is similar to the regime in, say, Singapore, which
allows approved funds from other jurisdictions to be registered there by
the Monetary Authority of Singapore.
Regulatory oversight, flexibility and tax exemption
The Commission regulates the domiciliation of funds in Anguilla. It is
an independent statutory body free from political influence and its
members are appointed by the British Governor. In exercising its
functions, the Commission adopts an efficient, business sensitive and
deliberate approach. Applications are thoroughly vetted and responses
given in the shortest possible period of time. An ideal application,
which is thoroughly completed and involving persons who have recently
gone through a due diligence review by the Commission, could be approved
within a matter of 5 working days. Unknown applications tend to take a
bit longer in order for the Commission to complete its due diligence
review but once all the requisite information is provided determinations
are usually made within 10 working days. In addition, the Commission has
published guidelines which are publicly available for review as to its
approach to granting approval.
Under the Act, there are several provisions which allow for flexibility
in the Commission exercising its functions. For example, under section
14, a private or professional fund which is maintained by a group of
family trusts for the sole purpose of facilitating investment and
without any solicitation being made for the sale of a right to
participate in the fund, is exempted from recognition. A professional
fund is also allowed to carry on business from within Anguilla for a
period of 14 days without being recognized. While under section 31, the
Commission may choose not to apply any provision of the Act if it would
not be prejudicial to the public interest.
An Anguilla fund is exempt from all forms of taxation including stamp
duty, corporate, dividends and withholding among others. This is
specifically enshrined in the Act.
Conclusion
Anguilla is an up and coming domicile for hedge funds because of its
business friendly approach to regulation and legislation. It is well
positioned to make a mark in this growing industry.
Contributed
by Carlyle Rogers, Managing Director, GCSL Anguilla
Carlyle's email address is carlyle@gcsl.info
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BELIZE: THE CHARITABLE TRUST
The Belize Trust has many uses, usually, there is an asset
protection slant to the many trust arrangements that offshore
practitioners find themselves involved in. However what many persons do
not realise is that these same arrangements can be used for the greater
good of society.
Many practitioners have inquired as to whether or not Belizean law
provides for Charitable Trusts. I won’t use my words. I will let the law
speak for itself. Section 14 of the Trusts Act stipulates the following:
14.-(1) For the purposes of this Act, and subject to subsections (2) and
(3) below, the following purposes shall be regarded as charitable-
(a) the relief of poverty;
(b) the advancement of education;
(c) the advancement of religion;
(d) the protection of the environment;
(e) the advancement of human rights and fundamental freedoms;
(f) any other purposes which are beneficial to the community.
So many possibilities come to mind upon reading this section. Being an
avid ESPN watcher myself, I immediately think of a newly rich ballplayer
from the Dominican Republic, who by experience is frugal, wants to keep
his money from wily creditors, but he also wants to give back to his
native Dominican Republic with sports programs for the local kids,
empowering them through sports, or some other noble effort. Any vehicles
or equipment purchased or owned by the trust he would set up under
Belize law would certainly be afforded the same protection as would any
asset protection trust arrangement. In fact, should it ever reach the
point where the trust arrangement or the settlor does become the subject
or target of litigation, there might be a further moral imperative on
the part of the judge to ensure that the trust is protected from
malicious and greedy creditors, seeking to feed on the fruits of your
poor client’s labor. That is not fair, and is something that Belize law
can protect against, that is something that we at GCSL can help you do.
The only criterion is that for the trust to be viewed as a charitable
one, it must be for the benefit of the community or a substantial
section of the community having regard to the type and nature of the
purpose.
Does your client happen to be a group of people concerned about the
environment? Say like Greenpeace, would they be termed “tree-huggers” by
the politically incorrect? That is fine because Section 14(d) clearly
caters to that sort of arrangement. Finally anti-global warming
individuals who want to have polar bears around for their grandchildren
to hopefully experience will be able to get the same protection that
others more “self- inclined” might crave for. Protection of assets
should also work for the protection of the environment.
Simply stated, the Trusts Act provides for charitable trusts in the same
way it provides all the exceptional asset protection features available in
Belize.
Contributed by Carlo Mason, Managing Director, GCSL Belize
Carlo's email address is carlo@gcsl.info
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COOK ISLANDS: A SOLID
BODY OF CASE LAW UNDERPINS THIS LEADING ASSET PROTECTION JURISDICTION
Critics of the Cook Islands as an appropriate or even viable asset
protection jurisdiction are nothing new. Since the first cases were
heard in Cook Islands courts as far back as the mid 1990’s, some high
profile practitioners have used these cases as grounds for discouraging
use of the Cook Islands as the situs of offshore asset protection
trusts. Over the next few newsletters, we will be taking an in-depth
look at case law in the Cook Islands to highlight some of the issues
that are currently in vogue as well as to dispel some of the myths that
are being promoted about the Cook Islands. Our first installment will
deal with the issue of fraudulent transfer and how client attorney
privilege cannot be used to hide clear fraudulent intent.
It is not uncommon for a trustee company to be approached at a time when
a settlor may already be under threat from creditors. In the Cook
Islands, trustee companies are required by law to obtain from a settlor
(which includes the person principally settling assets on the trust) an
affidavit, as to the settlor’s state of solvency. In the event the
trustee discovers that the settlor falsifies the affidavit, a trustee is
compelled by law to resign.
The concern regarding solvency is to avoid a situation where the
settlement of assets on trust may amount to a fraud by a settlor on his
or her creditors. Whilst the Cook Islands International Trusts Act (the
“ITA”) imposes time limits on the rights of creditors to have access to
assets settled on trust, it is now settled law that the Cook Islands
legislature did not intend that a person acting with fraudulent intent
to establish a trust can escape the consequences of his or her actions.
Nor can a fraudulent settlor hide behind attorney client privilege.
Fraudulent intent, as with common law jurisdictions generally, can be a
reason whereby the otherwise sacred protection afforded by
attorney-client privilege, may be overridden. In a 2002 case where
fraudulent intent on the part of a settlor when establishing an
international trust was alleged by a creditor, the High Court of the
Cook Islands, in an interlocutory hearing involving the discovery of
documents, overruled a claim of attorney/client privilege and ordered
documents be handed over to the plaintiff’s attorneys. The facts and
various court decisions are detailed below.
The settlors of the trust (“E” and “B”) owned a U.S. corporation (“P
Inc.”). In May 2000, P Inc. defaulted on certain loan obligations and
the lender bank made demand under personal guarantees previously granted
by E and B. On 12 July 2000, E and B were formally notified arbitration
proceedings under the terms of the guarantee had been initiated, and on
the same day they settled a Cook Islands trust. Between August and
October of 2000 over US$16 million in assets were transferred by E and B
to a Cook Islands Trustee company and another, as trustees, as a
settlement on trust. On 31 October 2000, the settlors consented to two
arbitration awards being entered against them relating to the guarantees
for amounts totaling over US$17 million. On 28 December 2000, a USA
Circuit Court entered a judgment on the first arbitration award against
E and B. In June 2002, proceedings were filed in the High Court of the
Cook Islands by the bank under section 13B (1) of the ITA claiming that
the transfer of the assets to the trust was made with the intention and
effort to hinder, delay, deprive or defraud the plaintiff and left the
settlors without sufficient assets to satisfy the judgment which had
been entered against them. In the course of discovery, E and B claimed
legal privilege in respect of certain documents which were being sought
by the plaintiffs, including documents that would normally be the
subject of attorney client privilege. In an interlocutory application,
the plaintiff bank applied to the Court for discovery of those
documents.
In his decision, the Judge emphasized the importance of attorney-client
privilege and the Court’s general reluctance to overrule its
application. However, the Court noted that attorney-client privilege may
be overruled where the client’s intent in seeking advice is the
furtherance of some crime or fraud. Whether or not the attorney is
cognizant of the client’s nefarious purpose is irrelevant.
After reviewing a number of decisions by the Courts in Australia, New
Zealand and England, the Judge determined that the “scope of the fraud
exception goes beyond deceit or fraud simpliciter and catches any
commercial practice or business dealing that would readily be described
as dishonest to the point of fraud by a reasonable businessman.”
The Judge did not believe the ITA, which is designed to provide asset
protection, modifies this basic rule. He pointed out the rights of
creditors are not excluded by the Act and quoted with approval the Cook
Islands Court of Appeal’s comments in another case when it stated, “It
should not be lightly assumed that Parliament intended to defeat the
claims of creditors by allowing international trusts to be used to
perpetrate a fraud against a creditor.”
The Cook Islands Court of Appeal subsequently upheld the High Court’s
decision, in January 2003. It is understood that the matter was
subsequently settled by agreement between the parties for less than the
amount claimed, so to that extent, the asset protection objectives of
the settlors were successful.
Contributed by Puai Wichman, Managing Director, GCSL Cook Islands
Puai's email address is puai@gcsl.info
This article was written in consultation with John
McFadzien, Barrister
and Solicitor in the Cook Islands.
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. Mr. Cheung was
my chauffeur. He is 52, probably weighs in at 52kg (max) and enjoys
speaking with his passengers. We chatted away for 20 minutes in English,
Mandarin and Cantonese (the latter two always improving for me after a
glass or six) as Mr. Cheung cut through traffic to The Oriental. He
loved my Putonghua accent, albeit he pointed out that my studies needed
to improve. In any event, the man was having fun, not because he was
tugging around a fella almost twice his weight, but because Mr. Cheung
apparently knows everyone in Singapore. He was waving, smiling and
throwing out brief greetings to every single person we passed....and
everyone was waiving, smiling and throwing back brief greetings to Mr.
Cheung...I mean everyone! I also joined in the fun and found myself
laughing and joking with Mr. Cheung and his “friends” the entire trip. I
woke up the next morning thinking I had a most excellent adventure with
Mr. Cheung primarily because we were being nice to and having fun with
EVERYONE! One of those great life experiences...so smile
