Asset Protection

11.1 The undesirable side of Offshore Creditor Protection Planning is the kind where litigation is actively contemplated, or is under way at the time the Trust is established.  The United States Courts have drawn a distinction between what they call "bankruptcy planning" (which is generally acceptable), and actively hindering creditors (which is not).

Oberst  v. Oberst 91 B.R. 97, Bankr. L. Rep. 72 [1988].

11.2 This planning invariably depends for its success on a succession of changes of jurisdiction.  Thus, as soon as the claimant/plaintiff has commenced proceedings in (say) the Cayman Islands, the debtor/Setdor will arrange for the Trustees in Cayman to be replaced by Trustees in (say) the Cook Islands.  This international "pass-the-parcel" can continue virtually ad infinitum, with the jurisdiction of the Trust being moved around the world every time the Claimants get close to the Assets.

11.3 This type of CPT is popular, and has been highly successful as new strategy for United States litigation attorneys.  After all, it increases prestige on the Plaintiff creditor to accept a greatly reduced out-of-Court settlement.  In this context, the CPT becomes nothing more than a procedural aspect of purely United States domestic litigation: a "bargaining chip".

11.4 However, as Transfers in such circumstances invariably breach the fraudulent conveyance rules in the home jurisdiction, a Trust is created, which from Day One has an almost 100% certainty of litigation involving it.  This is not one of the normal characteristics of Offshore Trusts, which are usually passive and always try to be non-controversial during their existence.

11.5 The professional Advisor in the United States involved in the implementation must consider two aspects relating to their own liability.  First, whether they might be held liable for their role in a transaction deemed to be a fraudulent conveyance: liability as a joint tort feasor or as an aider and abettor would require proof of the Advisor's intention, namely their knowing assistance or participation in the commission of a fraud.  As it is nearly impossible to eliminate potential exposure to a lawsuit, the Advisor should beware of actively encouraging Clients to make a fraudulent conveyance.

11.6 Second, if the Advisor is an Attorney, he or she is bound by ethical rules, such as a Rule 1.2(d) of the American Bar Association Model Rules of Professional Conduct.  Under these, Attorneys are prohibited from assisting Clients in conduct that the Attorney knows is fraudulent.  Violation of such ethical rules may lead to sanctions by a Bar Association. The Attorney should practice due diligence as regards the Client and his/her financial status, including independent verification and documentation thereof.  Note that no amount of due diligence will ensure that an action against the Attorney will not be brought if fraud is involved.

South Carolina Bar Ethics Advisory Committee Opinion 84/02 [1984].

11.7 As regards fraud or crime generally, it is also worth noting the provisions of the United States Crime Control Act of 1990, which contains Banking Law Enforcement provisions (the "Comprehensive Thrift and Bank Fraud Prosecution and Tax Payer Recovery Act"). These create criminal offenses in relation to transferring or concealing assets deriving from failed Banks or Savings and Loan institutions (including loans therefrom).

11.8 From an Onshore (United States) perspective, a CPT may be an effective litigation device.  But in view of the United States Courts' continuing jurisdiction over the Transferor, it is only realistic to regard this type of CPT as "effective" from an Offshore perspective if the Transferor is prepared to leave his country permanently, and go and live somewhere else.

11.9 CPTs are only designed to protect against civil law risks.  Unlike Settlors of "political risk" Trusts, Settlors of CPTs invariably remain living in the same place, and subject to the jurisdiction of their State and Federal Courts.  It is therefore open to those Courts to order the Settlor to retransfer the assets, or give other instructions to the Trustee in the Offshore jurisdiction to ensure compliance with the Order.  Such an Order may be backed up by contempt sanctions, daily fines, or imprisonment.

11.10 It is not difficult to imagine a judge in the United States simply determining that the Transferor has acted outrageously, that the Trust arrangement is a sham, and that the Defendant had better get the assets sent back over to the United States "or else".  Nor may the existence of an "anti duress" clause cut much ice with the Judge (see 9.3.3 above).  Also note that a Bankruptcy Judge may exercise his discretion and not put the Debtor into Bankruptcy, at a time when the Debtor may have counted on the suspensive effects of the Bankruptcy coming to his/her aid.

11.11 This type of planning, inevitably runs the risk of giving the Offshore industry a bad name, at a time when "Offshore" is already, in some people's minds a dirty word.

11.12 It has little to offer the Offshore world in the short-term, and nothing but trouble to offer in the medium-term.  The Offshore world by its very nature attracts the Bad and the Ugly as well as the Good.  But it is worth remembering that the Onshore centers are the spawning grounds for most of the fraudulent and dirty money activities that end up Offshore.  There have been enough financial scandals in recent years involving the Offshore scene without inviting more, through indifference or being unprepared.

11.13 Regulations passed Onshore tend to have a direct effect Offshore (e.g. 'money laundering' rules).  Offshore Trustees should take great care over the types of CPT planning they accept.  To do otherwise is to provoke or invite further legislative intervention in the Onshore jurisdictions, which would inevitably adversely impact the Offshore industry as a whole.

11.14 It may also not be too far-fetched to imagine claims by creditors being brought under the United States' Racketeer Influenced Corrupt Organizations Act ("RICO"), and upheld by sympathetic Courts in the United States in respect of flagrant and abusive examples of CPT planning.

11.15 Indeed, one United States Advisor goes even further, and suggests that the mass-marketing of CPT arrangements via United States Attorneys working together with Offshore Trustees, with model documents and supporting literature may even constitute an offer of a "security" and trigger the jurisdiction and registration requirements of the United States Securities and Exchange Commission.