USE OF TRUSTS BY EASTERN EUROPEAN CLIENTS: Practical Issues

Collective portrait

Age

We start with the client’s age. Naturally, the question of setting up a trust usually arises with clients of mature age when it is sensible to think about inheritance planning. This approach is evident and accepted in the developed countries, but is only partly so in Russia. This is due to the Russian client using another aim when setting up a trust (and we will discuss later what that aim is). Thus, our potential client is of the most active business age: in the maturity of his 30 – 40 years. This age level is now increasing, and it is rather rare now to come across such a case (common at the beginning of 90s) when fiduciary services might be required for a successful banker, chairman of the management board of 27 years of age, and represented by an experienced lawyer, president of a law firm 25 years.

Occupation

About 60% of our clients are ‘ex-businessmen involved in commodities and services trading and production outside the bounds of one state.

A considerable part (15-20%) is made of those utilizing offshore instruments for asset holding purposes, whether they involve enterprises, real property or securities.

Another 5% are players of the Russian securities market which showed a considerable growth in the recent years.

The remaining part are occasional users, in which category we should, unfortunately, include settlors of trusts.

Status

Due to my occupation, I have many contacts with foreign trust practitioners, investment bankers, as well as lawyers, auditors and other professionals in the asset management market, and I have an impression that all of them learnt the alphabet using one and the same book looking as follows: A – Abramovitch, B – Berezovsky, C – Chubais (Chichvarkine, Chelsea), D – Deripaska, E – Eltsin Family …

The thesis to be remembered by every professional practicing in the Eastern European market is as follows: we have few Abramovitches, not more than letters in the alphabet mentioned. And all of them have already been taken into account and “distributed” probably among those practitioners now reading this article! That is why when hearing the word ‘Russian’, there is no point in thinking about such clients as Abramovitch, whether as regards his capital, or the manner of acquisition thereof.

So, what’s left?

Normal, adequate people, always having at least one, and often two, or more higher education degrees, speaking decent English, and sometimes having the experience of living abroad, having a number of children from different marriages, quite non-drinking (!), often arrogant, demanding, rather thrifty workaholic, resultaholic and achievementaholic.

Types

As we are trying to build up an image of a typical client, it would make sense to “visit” a gallery of model portraits of potential clients.

‘Red Director’. This is still a frequent type as he is the right age category. This is a person who made himself and reached a high social status in Soviet times. Nevertheless, he has a rather flexible mind and can present himself properly. In his time, he made extensive use of his personal qualities, knowledge and connections for acquiring new assets. Now it is time to think about his estate.

‘Smarty Shark’. This type started his career in 1990s, at the time of the market economy formation. He has no history of Soviet experience behind him, he started up in business on his own and got off to a flying start. As a rule, his business is related to high technology products: telecommunications, cellular communication, software, etc.

‘Russian Yuppi’. They are graduates of the best technical universities of the country, they had training in the school of hard knocks with the first foreign corporations in Russia, they’ve made a meteoric career, received western education, and at some point outgrown ‘their parents’, they set up new, mobile, aggressive companies built up to the western standards.

‘Gangster’. Our list would not be complete without this category, and my words could be disputed, if it is omitted. This category is already outdated. Gangsters are in the past, and their successors have legitimate business, they changed they mentality, got to the power, and thus are innocent again, but meeting them is as unsafe as those representing the next category.

‘Civil officer’. The most complex point is that a representative of any of the above mentioned category may turn out to be a shadow beneficiary acting on behalf of a third party – a civil officer, for instance. It is well known to you what consequences might follow.

Potential difficulties

Let us now discuss the peculiar features to be considered when building up relations with such clients.

Guarantee of trust relations reliability

The first difficulty we experience is to convince the client of reliability and security of using trust relations. Imagine a situation: a person raised in the atmosphere of constant possible deception, having taken a great pain to earn, keep and protect his assets, learns that:

(a) he transfers his assets in ownership, not in management (as he used to think);

(b) the trust will be irrevocable, and the settlor actually gives up legal ownership of his money;

(c) he will not be able to have influence upon the trustee, who will own the money he earned.

This client then panics and runs away never to return back, he hides his money under the mattress again, feeling great relief that he managed to protect them again from frauds to whom he might have given them himself.

Well, of course, I am being ironical now, but in practice I faced even more weird situations, with more dramatic and even tragic consequences.

As follows from our practice, when working with clients like this, it is more important to provide logical, and not legal, evidence of reliability and compliance.

We try to convince the clients of security telling them about dynasties of trustees for whom their profession as a trustee runs in generations. Age-long stability of trust companies in Liechtenstein, for instance, appears to be a more serious point than legal documents. A considerable amount of assets (of other, yet not deceived clients) under management of a trustee, is a more convincing argument than a trustee license.

Wrong understanding of the trust concept

Sophisticated western users understand trusts as popular instruments of inheritance planning allowing for isolating own assets for the purpose of transferring them to the inheritance estate and protecting them from “robbery” as a result of divorce.

A client from Russia understands a trust as offering a possibility of re-involvement in the business turnover of the assets which have changed their title holder, but which still work for their former beneficiary upon his instructions, and where the original state of things may be restored, if necessary.

Thus, the clients regard trust as an agreement for fiduciary management of assets in favour of third parties. When hearing explanation of such key concepts as declaration of the trust null and void, the clients are as attentive as when listening to an evacuation instruction for the emergency cases.

Quasi-Trust relations

As mentioned before, it is often very hard, psychologically, for clients to realize and accept the new, unknown ‘rules of the game’, and as a result the market saw a new product - much more simple, understandable and less expensive. This is a substitute for the trust relations - nominee services. A one-page-size Declaration of Trust is substituted for the full-fledged Trust Deed, a shadow director is substituted for the trustee, and this shadow director or nominee offers the services not at GBP 300 per hour, but at GBP 120 per annum. In this situation the client is the settlor, beneficiary and protector – all in one; that is, the client retains control over everything, still remaining an anonymous owner.

Price Factor

Demand for such quasi trusts occurred about 20-30 years ago, in particular in the East, when the world fiduciary services market met this new quasi-trust product and the new players – without due qualification, licensing, and thus offering their product at dumping prices. This was 25 years in advance of the quasi-trust relations development in Russian. And in my opinion, about the same number of years must pass to change the situation. Now real trust relations comprise less than 1% of the total quasi-trust agreements. One of the main reasons making the clients consider this simple product as an alternative of the more complicated one, is the cost of the services.

No court practice for trust cases

One more dominant obstacle seriously limiting the use of trusts in Russia - is lack of court practice for the cases involving trust relations. It is not clear what ruling the Russian law enforcement agencies might pass with regard to assets in trust. We can suggest that they probably will interpret the trust as civil law relations with all relevant consequences to follow, which might cast a lot of doubt on feasibility of using trusts in Russia.

In spite of all difficulties and negative issues discussed in this article, time doesn’t stand still, the situation is changing for the better!