Trust s and t he Caym an Islands Beneficial Ow nership Regist er

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1 Trust s and t he Caym an Islands Beneficial Ow nership Regist er Part XVIIA of the Companies Law, in force from 1st July 2017, makes provision for keeping a register of beneficial owners of Cayman companies. The legislation is supplemented by the Beneficial Ownership (Companies) Regulations This guide is intended to help trustees and their advisers to determine who are the beneficial owners for the purposes of the Companies law, where the company in question is held as part of a trust structure. Cont ent s - The Beneficial Ownership Register - Key Definitions - When Is A Beneficial Owner Registrable? - How Does It Work For Trust Structures? - Compliance concerns - Conclusion Josh Lewison, Barrister, Radcliffe Chambers, London The Beneficial Ow nership Regist er Although the Register affects trusts to a large extent, it is rooted in company law. Much of the terminology is therefore familiar to company lawyers, but less so to trust and private client lawyers. In particular, the name of the regime is itself understood in a company law sense: beneficial ownership under Part XVIIA is concerned with the legal title to shares and the legal right to vote them rather than the underlying equitable ownership. To a trusts lawyer, it may therefore come as a surprise that a beneficial ownership register should capture the details of trustees and other fiduciaries, but not the details of all of those with a beneficial interest in the shares. The key features of the regime of which trustees should be aware are: The Register is often concerned with capturing details of immediate rather than ultimate control; That includes capturing the details of trustees and protectors, even though they may act in a fiduciary capacity and have no beneficial interest as understood by trust lawyers; and The touchstone is the right or ability to exercise control over a company, rather than the right or ability to gain an economic benefit.

2 Key Definit ions The central concepts of the new regime are the?beneficial owner?, the?relevant legal entity? and?significant influence or control?. The first two terms are defined, the third is not. In the UK, statutory guidance provides a further definition of significant influence or control Section 247 of the Companies Law provides that an individual is a beneficial owner of a company if: He or she holds, directly or indirectly, more than 25% of the shares in the company; He or she holds, directly or indirectly, more than 25% of the voting rights in the company; He or she holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company; He or she has the right to exercise, or actually exercises, significant influence or control over the company; or He or she has the right to exercise, or actually exercises, significant influence or control over a trust and the trustees of that trust are beneficial owners of the company or would be if they were individuals. Section 248 of the Companies Law provides that an entity is a relevant legal entity if it would be a beneficial owner if it were an individual. Alternatively, regulations may make further provision for relevant legal entities. Thus, beneficial owners can only be individuals. There is no territorial limitation on individuals: they can be anywhere in the world. The same is true of relevant legal entities under the Cayman law, which is a difference from the UK regime. In the UK, a relevant legal entity would be a PSC if it were an individual and it must be subject to its own disclosure requirements, essentially limiting the term to UK companies and publicly traded companies in the EEA and a handful of other countries. When Is A Beneficial Ow ner or Relevant Legal Ent it y Regist rable? The question of which individuals or entities are registered is dealt with in s. 251 of the Companies Law. Essentially, the register needs only to record the immediate beneficial owner or relevant legal entity. In a chain of corporate holdings, that means that individuals or entities will not need to be registered if they are further up the chain. That position is different from the UK?s PSC Register regime. In the UK, a chain of ownership involving non-uk entities may well result in in individual becoming registrable in the public register.

3 The first diagram shows a Cayman company, the shares in which are held by a BVI company. The shares in the BVI company are held by an individual. Under the Cayman regime, Adam is a beneficial owner because he holds the shares in Charlie Ltd through Bravo Ltd: ss. 252 and 253 of the Companies Law. Bravo Ltd is a relevant legal entity because it would be a beneficial owner if it were an individual. Bravo Ltd is registrable, because it does not hold its interest only through another legal entity which is itself a relevant legal entity. Adam, on the other hand, does hold his interest only through a legal entity which is itself a relevant legal entity. That means that he is not registrable, although he is a beneficial owner. In the second diagram, the UK position is shown. Deborah is a PSC, because she holds 100% of the shares in Foxtrot Ltd through Echo Ltd. Echo Ltd holds the shares in Foxtrot Ltd, but is not itself a relevant legal entity. That is because Echo Ltd is not subject to its own disclosure requirements: it does not keep a PSC register and is not traded on a relevant exchange. The result is that Deborah is registrable in Foxtrot Ltd?s PSC Register and Echo Ltd is not: the opposite of the result under the Cayman system. The difference in the result comes from the UK?s requirement that an entity be subject to its own disclosure requirements in order to be a relevant legal entity. With that requirement, few offshore companies qualify, meaning that PSCs at the top of corporate structures have their details captured because the ownership chains are transparent. Under the Cayman implementation, the corporate chain remains opaque and only the bottom link in that chain needs to be registered. Structures designed to protect confidentiality have a greater chance of succeeding in Cayman than they do in the UK.

4 How Does The Syst em Work For Trust St ruct ures? The main concern for trustees will be whether there is an individual or a group of individuals with significant influence or control over the trust. In the UK, Part 21A of the Companies Act is silent as to what constitutes significant influence or control over a trust. The Companies Law in Cayman is similarly silent, so that it can be anticipated that regulations or guidance will provide the definition. In the next diagram, a simple trust structure is shown. Lima Ltd is a Cayman company holding assets and keeping a beneficial ownership register. The shares in Lima Ltd are held by a private trust company on the terms of a discretionary trust, shown as a green ring. Harriet is the protector of the trust. The shares in Kilo PTC Ltd are held by Juliet Fiduciary Services Ltd, a company carrying on business as a corporate and fiduciary services provider. Those shares are held on the terms of a purpose trust, of which Ingrid is the enforcer. The settlor of the discretionary trust is George. When Lima Ltd completes its register, it will register Kilo PTC Ltd as a relevant legal entity because Kilo PTC holds 100% of the shares and thus would be a beneficial owner if it were an individual. Juliet Fiduciary Services is also a relevant legal entity, because it holds the shares in Lima indirectly through Kilo PTC, but is not registrable because Kilo PTC is a registrable relevant legal entity. The trustees may also have to register Ingrid, Harriet and George, depending on the guidance and on the powers that each holds. Regulations or guidance will supplement the Companies Law so as to identify

5 persons with significant influence or control over trusts. In the UK, a number of matters give rise to significant influence or control. The guidance lists the following: The right to appoint or remove any of the trustees, except through application to the courts or as a result of a breach of fiduciary duty by the trustees; The right to direct the distribution of trust funds or assets; The right to direct investment decisions of the trust; The right to amend the trust; and The right to revoke the trust. The most common power that gives rise to significant influence or control is having the right to appoint or remove a trustee. That is a right that most protectors will have, some enforcers of purpose trusts have such a right and it is a right that is commonly reserved to the settlor during his or her lifetime. In the UK, this has given rise to serious privacy concerns. Under the Cayman regime, trusts are likely to be affected in the same way. In the example given in the diagram, if Harriet has significant influence or control over the trust marked in green, then she will be a beneficial owner because Kilo PTC would be a beneficial owner if it were an individual. Harriet will therefore have to be registered. Likewise, if George has the right to appoint or remove a trustee, he will have to be registered. There was a concern in the UK that letters of wishes written by a settlor might be interpreted as giving rise to significant influence or control, but the statutory guidance has since clarified that non-binding instructions do not count. Being a beneficiary under a discretionary trust does not normally give rise to significant influence or control. However, where the interests under the trust are fixed, the beneficiaries may have the right to bring the trust to an end due to the rule in Saunders v. Vautier. Having the right to terminate the trust is a right described in the guidance as giving rise to significant influence or control. Regulation 15 of the Beneficial Ownership (Companies) Regulations 2017 provides that if two or more persons each hold a share or right jointly, each of them is treated as holding that share or right. Thus, if a number of beneficiaries have fixed interests under a trust, then they collectively hold the right to terminate it. Each will be a beneficial owner. Com pliance Concerns The great variety and complexity of trust structures has given rise to interesting problems of compliance and unsuccessful attempts to commoditise the process. That is not likely to be successful for any structure of moderate complexity. A recent survey of the UK's central PSC register found over 1,300 examples of cases in which the register recorded offshore companies as PSCs, which is totally incorrect. In revealing client

6 information in that way, trustees will have been in breach of their statutory duties as well as in breach of their duty of confidentiality to their clients. Thought also needs to be given to who analyses the information in order to record it on the register. In the UK and offshore, accountancy firms and corporate and fiduciary service providers have been doing so. But in many cases, those persons will not have any privilege in their documents, so that they may become a weak point in litigation. A more sensible strategy from the point of view of information security is to have the analysis conducted by lawyers. Conclusion The Cayman beneficial ownership register appears superficially similar to the UK PSC Register. However, the approach to relevant legal entities means that in pure corporate structures only immediate beneficial owners or relevant legal entities are captured. Under trust structures, on the other hand, a wide range of connected individuals may have to be registered. Due to the non-public nature of the Cayman register, that is likely to be of less concern to clients than the public register is in the UK. Trustees must ensure first that they are collecting and recording the details of the right people and entities. They must also ensure that they are not oversharing information, by going beyond the scope of their regulatory responsibilities and identifying individuals who fall outside the statutory definitions. Josh Lewison Radcliffe Chambers Lincoln's Inn London WC2A 3QB