This article continues our Common Client Question Series, focusing on a topic that is raised by almost every potential new client. What protections are afforded assets in an offshore trust from fraud and theft by the trust company and its employees?
Granting signature authority of assets to a foreign corporate trustee can be a scary step for individuals inexperienced in trust planning and offshore finance. As with domestic trusts and U.S. banking, there is a possibility of fraud by the fiduciary company or its employees (think: recent Wells Fargo employee fraud revelations). To protect the assets and the client from these risks, we combine a variety of safety mechanisms to create the most secure structure in existence.
The Trust Protector
The first line of defense against trustee impropriety is the trust protector. The role of the trust protector was created as a check-and-balance system for all trustee discretionary activity. Prior to making discretionary distributions, amending the trust, or undertaking other acts enumerated in the Deed of Trust, the trustee must obtain the written consent of the trust protector. The protector may be an individual or a company, but we make use of a company specializing in protector services in a different jurisdiction from the trustee. By utilizing unrelated companies some eight thousand miles apart, we significantly decrease the opportunity for collusion.
Dual Signature Accounts
Depending upon the needs of the client, it is possible to structure the trust’s bank accounts so that the trust protector is a necessary co-signer. By working with banks skilled in account management for offshore trusts, we make possible a certain flexibility in account security that may not exist at traditional U.S. banks. The client may request, upon establishment of the trust, that all activity, all withdrawals, or only withdrawals above a certain threshold require the protector as a co-signer.
When selecting a jurisdiction for an offshore trust, the laws and regulations pertaining to asset protection and trustee supervision play a significant role. The Cook Islands boasts some of the strictest regulation of its trust companies in existence. Trust companies submit to an annual audit to ensure compliance with Cook Islands trust laws and due diligence requirements. The trust companies are operated by seasoned trust officers, licensed attorneys, and public accountants. Should a trust company fail, regulations provide that the trusts are seamlessly transferred to an alternate trust company.
Our network of trust companies and protectors has been developed over our twenty years of practice in this area. As such, we have come to know which companies provide the highest level of internal controls possible. Examples include telephone verification of distribution requests, requiring original signed affidavits for unusual requests, requiring dual employee signatures for actions by the trust company, and maintaining due diligence documentation on the beneficiaries beyond those required by U.S. banking standards.
The Cook Islands trust companies that we utilize also maintain insurance policies which cover trust assets against errors, omissions, and bad acts of the trustee. While this insurance varies from trustee to trustee, and has a claim limit, the majority of our clients find it sufficient to entrust their assets with a Cook Islands trustee.