On 30 March 2015 a new section (the New Section) relating to
trustees' obligations to maintain trust records was inserted
into the British Virgin Islands' (BVI) Trustee Ordinance. The
provisions of the New Section are not groundbreaking but the
sanctions for non-compliance are punitive and consequently trustees
should be eager to ensure full adherence.
In summary, the New Section provides that:
1.
Every trustee must "maintain records and underlying
documentation" (Records) for each trust of which it is
trustee. Such Records include (but are not limited to) invoices and
contracts relating to (i) payments and receipts of money by the
trust, (ii) sales and purchases of goods by the trust, and (iii)
the assets and liabilities of the trust.
2.
The Records must "show and explain" the trust's
transactions and make it possible to determine with
"reasonable accuracy" the "financial position of the
trust" at any given moment.
3.
The Records can be kept within or outside the BVI.
4.
The Records must be kept "for a period of at least five
years."
5.
Failure to observe these requirements (without lawful or reasonable
excuse) constitutes a criminal offence which may be punished by a
fine of up to $100,000, or a prison term of no more than five
years.
The requirements of the New Section do not appear to add to the
existing duties the common law places on trustees to keep clear
trust accounts and 'be ready with' them at all times. The
potential criminal sanctions for non-compliance with the New
Section are, however, an extension to a trustee's exposure
under the common law. At common law, a trustee who fails to keep
and be ready with accounts will usually be in breach of trust and
may have to personally bear the cost of remedying the breach and
any damage which flows from it, but there are no criminal
sanctions.
With this additional exposure in mind trustees will be intent on
ensuring that they comply with the New Section, but to do so
successfully they will have to be careful not to be tripped up by a
number of areas of uncertainty within the provisions. For
example:
1.
It is not clear whether the New Section is only intended to apply
to BVI trustees of BVI trusts, or whether its scope extends to BVI
trustees of non-BVI trusts and non-BVI trustees of BVI trusts. The
safest approach must be to assume that the New Section applies to
any trust which is governed by BVI law, or whose trustee has a
physical presence in the BVI or is doing business
there.
2.
The New Section does not state when the five year retention period
starts, or whether the obligation to retain falls away when the
trustee ceases to be trustee. One might expect the retention
period for each Record to start on the date it is created and end
five years later (or on the date the trustee ceases to act as
trustee, if earlier), but in light of the severe punishments for
non-compliance trustees would be well advised to interpret the New
Section more conservatively and retain all Records for five or more
years following the date on which they cease to act as
trustee.
3.
There is no guidance on what is meant by the phrase "financial
position of the trust." Should a trustee consider itself
compliant with the New Section's requirements if it retains
Records in respect of the assets it holds directly, or must it also
maintain Records in respect of any underlying assets? This point is
particularly relevant in the context of VISTA trusts where a BVI
trustee will hold shares in a BVI company and often the BVI company
will in turn hold shares in a number of other BVI or non-BVI
companies. How far down the chain does the trustee need to
go?
While the New Section does not make the extent of a trustee's
duty in this area clear, the common law does – the correct
approach, both in respect of VISTA and non-VISTA trusts, has always
been that a trustee should ensure it has details of all assets held
by the trust, whether directly or indirectly, even if its
administration and management powers and responsibilities in
respect of those assets are diluted, as is the case where the VISTA
legislation applies. The most straightforward way of satisfying
this requirement in the case of trusts which hold underlying
companies will be for the trustee to obtain copies of the
companies' annual financial statements.
Given that the New Section does not extend trustees' duties
under the common law, it is unlikely that the New Section will
demand a higher standard of diligence from a trustee who is already
performing its functions with the appropriate degree of care.
However, a trustee's failure to comply with its record keeping
obligations may now result in it suffering draconian criminal
punishments and consequently record keeping should be an issue
which is at the forefront of the minds of all BVI trustees and
trustees of BVI trusts.
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.