Jersey: Protectors, Powers And The Proceeds Of Crime

Last Updated: 20 October 2008
Most Read Contributor in Jersey, September 2018

On 28 January 2008, the Royal Court delivered judgment in the matter of The Bird Charitable Trust and the Bird Purpose Trust. Proceedings were brought by Basel Trust Corporation (Channel Islands) Limited ("Basel") as the Jersey trustee of the Bird Trusts seeking directions pursuant to Article 51 of the Trusts (Jersey) Law 1984. The issues before the Court centred upon concerns Basel had raised regarding the validity of certain appointments made by the Protector of the Bird Trusts, a Mr Gary Kaplan. Mr Kaplan was the founder of BetonSports Plc and is currently incarcerated in the USA facing various charges relating to the operation of BetonSports' online gaming business. The Bird Trusts effectively held Mr Kaplan's share of the proceeds of BetonSports Plc's flotation in 2004.

Mr Kaplan sought to exercise his power as Protector to appoint a replacement Protector who would then appoint two new trustees. All of the replacements were operated from Liechtenstein. Basel's concerns arose out of certain technical deficiencies in the documents that had been executed by Mr Kaplan to effect the appointments, and to his broader motive in making the appointments, the effect of which would be to make Basel a minority trustee. That was set against the background of an ongoing criminal investigation in the United States relating to BetonSports Plc (ie, the ultimate source of the funds in the Trusts), and where it was known (at least by Mr Kaplan's advisers) that Basel was, at the time of the appointments, acting under a police consent regime pursuant to the Proceeds of Crime (Jersey) Law 1999 (later superseded by the granting of a saisie judiciaire in Jersey in respect of the realisable property of Mr Kaplan at the request of the US authorities). Basel sought directions from the Court as there was a possibility that Mr Kaplan's ultimate motive was to put assets beyond the reach of the authorities and to thus avoid the impact of Jersey's anti-money laundering legislation.

The Court considered the technical arguments and held that, on a proper construction of the relevant provisions of the Bird Purpose Trust, Mr Kaplan's notices had succeeded in doing no more than appoint a successor Protector - effectively "a Protector in waiting". The Bird Charitable Trust contained different provisions for appointments; as a result it was held that the notices in respect of that trust were technically effective.

The Court then considered Mr Kaplan's motives for making the changes and whether they were improper and amounted to fraud on a power. After reviewing the facts surrounding the appointments, the Court considered the relevant authorities concerning the nature of the powers that were being exercised. The Court confirmed the basic principle that a power can only be exercised for the purpose for which it was conferred and in accordance with its terms - failure to do so could amount to fraud on a power, a doctrine that can apply to administrative as well as distributive powers. The Court confirmed that the doctrine does not apply to general personal powers, but does apply to limited personal powers and fiduciary powers.

English and Cayman Islands authorities were followed by the Court in reaching its conclusion that, whilst it is a matter of construction in any case, in the circumstances of the Bird Charitable Trust, the Protector's powers of appointment of a successor protector were fiduciary - if the Protector's role is fiduciary, which in this case it was held to be (judged by considering the trust instrument as a whole), the power of appointing a successor would also be fiduciary.

Accordingly, the Court found that the doctrine of fraud on a power would apply the Protector's powers in the Charitable Trust Deed. It then had to consider the purpose for which the powers were exercised. It was held that Mr Kaplan had two motives; the first was to put in place a successor protector that could operate efficiently even if Mr Kaplan were incarcerated. The second is more interesting; to move the administration of the Trusts to a jurisdiction not constrained by the same anti-money laundering restrictions as applied to Basel as a Jersey trustee.

The Court analysed Article 32 of the Proceeds of Crime (Jersey) Law 1999 concerning the seeking of consent from the police to transact notwithstanding a suspicion that funds might represent the proceeds of crime. The Court concluded that Article 32 does not impose any direct prohibition but, rather, is essentially voluntary: if police consent is granted, it gives a trustee a defence to money laundering offences relating to those funds; whereas, if it is refused, it does not create a prohibition on dealing. The Court recognised that Basel had quite reasonably and properly followed the police consent, but nevertheless, in so doing was acting voluntarily.

The court held that Mr Kaplan was not, therefore, seeking to circumvent a prohibition imposed by law, but rather a restriction which the trustee had chosen to impose. That did not amount to an improper purpose under trust law and, therefore, Mr Kaplan had exercised his power in good faith in the interests of the beneficiaries.

The Court noted that it was not, in the circumstances of the case, having to consider an attempt to transfer assets, as that was not necessarily part of the change of identity of trustee - the transfer of assets to the new trustees would give rise to further considerations; similarly, the Court noted that, if there had been a conviction the position would be different. Nonetheless, the conclusion may come as a surprise, as to even suggest that a person motivated by a desire to circumvent anti-money laundering legislation or its impact when exercising a trust power is acting properly, will be considered by some to be sending the wrong message in a climate where countering money laundering and terrorist financing is at the top of the international political agenda.

Comment

This case is important for trustees and their advisors in both contentious and non-contentious areas of practice. The analysis of the position of protectors, types of powers, the approach to how notices will be technically construed and how the fraud on a power doctrine applies are instructive. Further, it is the first time in Jersey where the potential conflict of trust law and anti-money laundering legislation has been considered and, therefore, it is of considerable interest and significance. The decision is particularly timely, as Jersey's anti money laundering legislation is going to be subject to an IMF review in October and is currently undergoing an overhaul. In particular, the provisions of Article 32 will be under scrutiny as the last IMF visit in 2003 led to a recommendation that that Article be amended to provide positive obligations on reporting suspicion, rather than it being a defensive mechanism. It is also the latest in a line of decisions of the Royal Court where the shortcomings of the police consent regime under Article 32 have been highlighted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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