According to figures published by the Swiss Federal Department of Finance in May 2005, there are 339 banks in Switzerland holding deposits from foreign investors with a total value of CHF1,967bn (about £860bn). Switzerland is, and has for a long time been, the world leader in private banking. According to some estimations, 30 per cent of the world’s private wealth held outside the owners’ countries of residence is managed in Switzerland. It is in this fertile ground that the seeds of private family trusts (and disputes about them) are sewn.
Swiss professionals in a competitive world are masters in the art of the management and administration of private wealth. The professionals include bankers, accountants, lawyers and professional trustees who advise international private clients, often in conjunction with foreign professionals, about how best to hold their assets. Often such advice includes the transfer of assets into a trust under the proper law of a jurisdiction with a strong Anglo-Saxon legal tradition – for example Jersey, Guernsey, the Cayman Islands, the British Virgin Islands (BVI), Bermuda, Gibraltar and the Isle of Man. Such places are nowadays shy of the epithet ‘offshore’, prefering to be more accurately described as an ‘international financial centre’. They used sometimes to be called ‘tax havens’, but as a result of the efforts of the Financial Action Task Force for Money Laundering and legislators and law enforcement authorities in those places, it is nowadays a most inaccurate description. I shall refer to them as ‘host jurisdictions’, in the sense that they host trusts.
The trusts ‘industry’ in Switzerland has prospered by working with host jurisdictions. Swiss banks and law firms often have affiliated trust companies in one or more host jurisdictions to act as trustees for their clients. There are also independent trust companies in Switzerland not tied to banks which have similar affiliates. And sometimes the Swiss professionals simply have correspondent relationships with professional trustees in the host jurisdictions. Trust professionals in Swiss banks and trust companies are generally very well trained in the establishment and administration of trusts, and the activities of the Society of Trust and Estate Practitioners has contributed greatly to their training and continued education.
It is a result of the health of Switzerland as a centre for international wealth management on a large scale that very wealthy individuals come to settle trusts based on advice originating there. At this point it is necessary to depart from Switzerland itself to examine the type of trust in question and the range of assets it might hold so as to be aware of the likely nature of a trust dispute.
The general style of such trusts was very accurately described by Lord Walker in Schmidt v Rosewood Trustees Ltd (2003): “It has become common for wealthy individuals in many parts of the world (including countries which have no indigenous law of trusts) to place funds at their disposition into trusts (often with a network of underlying companies) regulated by the law of, and managed by, trustees resident in territories with which the settlor (who may also be a beneficiary) has no substantial connection. These territories (sometimes called tax havens) are chosen not for their geographical convenience (indeed, face-to-face meetings between the settlor and his trustees are often very inconvenient), but because they are supposed to offer special advantages in terms of confidentiality and protection from fiscal demands (and sometimes under the insolvency laws, or laws restricting freedom of testamentary disposition, in the country of the settlor’s domicile). The trusts and powers contained in a settlement established in such circumstances may give no reliable indication of who will in the event benefit from the settlement. Typically, it will contain very wide discretions exercisable by the trustees (sometimes only with the consent of a so-called protector) in favour of a widely defined class of beneficiaries. The exercise of those discretions may depend on the settlor’s wishes as confidentially imparted to the trustees and the protector. As a further cloak against transparency, the identity of the trustee settlor or settlors may be concealed behind some corporate figurehead.”
Trustees of such trusts often have the protection of very wide exculpatory clauses excluding liability for anything other than their own ‘dishonesty’, ‘gross negligence’ or ‘wilful misconduct’ (recklessness) insofar as it is allowed by the law of the host jurisdiction (see Armitage v Nurse (1998)). It is also common for there to be an ‘anti-Bartlett clause’, excluding the rule in Bartlett v Barclays Bank Trust Co Ltd (No 2) (1980), which provides that a trustee, like any prudent businessperson with a controlling holding of shares, has a duty to inform him or herself. Such trusts are used for the purpose of holding a wide variety of assets. As a result, trusts originating in Switzerland often push the trust concept to its limit and may sit at the apex of a complex asset-holding structure.
For example, the trustee in the host jurisdiction (or even elsewhere) might hold on trust two one-dollar bearer shares, being the whole of the issued share capital of a BVI company with third-party directors, which in turn owns shares of three other such companies. The first company might hold a bank account in Geneva with a custodian bank with $200m (£110.2m) in it, which is managed on a mandate by an independent asset manager in Geneva, who arranges an investment for $20m (£11m) in a hedge fund, which is a company organised in the Cayman Islands but managed in New York. The second company might own paintings by Velazquez, Vermeer and El Greco (and famously in one case a coconut which had belonged to the artist) kept in a couple of tea chests at the Freeport warehouse in Zurich. The third company might own a company in the Netherlands Antilles, which owns another company in the Netherlands, which owns another company in France, which owns a Chateau.
The establishment and maintenance of such trusts is usually the product of painstaking planning and advice. It is hoped that nothing will go wrong – and usually nothing does, but when it does go wrong it can give rise to very long and protracted litigation. Sizeable disputes often warrant the involvement of specialised English solicitors and barristers, many of whom have established contacts in Switzerland who trawl the Swiss market for work. Sometimes they haul in a big case. The epicentre of the dispute is not often in Switzerland, but rather in the host jurisdiction or elsewhere.
The continuing excellence of Switzerland as a centre for international wealth management gives rise to trust disputes connected to Switzerland, but no one in the business of wealth management wants to hear about disputes – they want to know how to prevent them. Nevertheless, for as long as there have been trusts there has been litigation, and these days it is often international litigation. For those reasons the international trust litigation work for English lawyers is very directly linked to what happens in Switzerland.
Marcus Staff is abarrister at 24 Old Buildings