Cook Islands: International Tax and Offshore Trust News
Fiducia - Volume 7, Issue 1

The Anderson Case (Federal Trade Commission v Affordable Media LLC et al) has been the subject of much discussion by commentators during the past six months. It may therefore be helpful to practitioners to gain an insight into the proceedings, both in the United States and in the Cook Islands, from the Trustee's perspective.

It is worthwhile restating the facts of the Anderson Case having regard to some inaccuracies that have thus far been published by other commentators.

In August 1995 Michael and Denyse Anderson ("the Andersons") settled a Cook Islands International Trust called the Anderson Family Irrevocable Trust ("the Trust"). The original beneficiaries of the Trust were their children, however, some six months later the Andersons themselves were added as beneficiaries of the Trust. The original trustees of the Trust were the Andersons and Asiatrust Limited, a subsidiary of the Asiaciti Trust Group. At the time of establishment of the Trust, Asiaciti Trust conducted its usual Due Diligence procedures to ensure that the property being settled on the Trust was neither the result of a fraudulent conveyance nor derived from any illegal activity.

The property settled on the Trust included a nominal settlement sum and a 98% interest in a United States corporation, the Anderson Family LLC ("Anderson LLC"). Anderson LLC carried on business in the United States as a telemarketer. During the period September 1995 to May 1997 Anderson LLC made regular distributions to the Trust in accordance with the Operating Agreement of the members.

Further distributions were made by Anderson LLC in the period June 1997 to February 1998. It is these distributions which form the basis of the FTC's complaint against the Andersons.

In April 1998 the FTC obtained an ex parte temporary restraining order ("TRO") against (inter alia) the Andersons. The TRO had the effect of freezing all assets owned by the Andersons. The TRO also required the Andersons to repatriate to the territory of the USA, all assets held by them outside the USA. The District Court incorporated the terms of the TRO into a preliminary injunction in May 1998.

It should be noted that the preliminary injunction was entered by the court prior to any pronouncement of judgement in relation to the alleged wrongdoing of the Andersons. At the time of writing (December 1999), and notwithstanding some gratuitous observations by both the District Court and the Ninth Circuit, it is understood that there is no judgement entered against the Andersons in respect of the alleged wrongdoing.

On May 12, 1998 the Andersons sent a fax to Asiatrust Limited demanding that all assets of the Trust be repatriated to the United States. The fax incorporated verbatim the terms of the District Court TRO/ preliminary injunction.

Upon receipt of this fax, Asiatrust Limited immediately sought legal advice from Cook Islands local counsel as to what it should do in response to the demand. The advice subsequently received was that:

• The issue of the TRO constituted an Event of Duress under the terms of the trust deed.
• As a consequence of the Event of Duress occurring, the Andersons were automatically removed from office as Trustees leaving Asiatrust Limited as the sole Trustee.
• Repatriation of the trust fund to the USA would confer a benefit on an Excluded Person and would be in breach of the Trustee's common law duty to act in the Interests of all beneficiaries, having regard to the fact that the Andersons' children were also beneficiaries of the trust.

On 14 May 1998, Asiatrust informed the Andersons that as a result of having obtained legal advice, it was precluded from complying with the demand.

In June 1998, Asiatrust Limited also sought legal advice from a US law firm in relation to whether the US District Court could assert jurisdiction over Asiatrust Limited as a consequence of the TRO/ preliminary injunction. The advice received was that, on a proper consideration of the applicable law, the District Court would have neither subject matter jurisdiction nor personal jurisdiction over Asiatrust Limited. Notwithstanding this advice, we considered it prudent for Asiaciti Trust executives to remain outside the USA pending resolution of the TRO.

Also in June 1998, Legal Counsel for Asiatrust Limited participated in a telephone discussion with Legal Counsel for FTC and Legal Counsel for the Andersons. During those discussions, it was suggested to FTC that perhaps the most appropriate way to proceed in the matter would be for FTC to commence proceedings in the Cook Islands against the Trustee (alleging a fraudulent conveyance) and at the same time seek a mareva injunction. This, it was submitted, would have the same effect as the TRO issued by the District Court.

As is well known, the District Court ordered the incarceration of the Andersons in June 1998. The Andersons appealed this to the Ninth Circuit.

The primary concern of Asiatrust Limited throughout has been to fulfil its primary duty as trustee, which is to preserve the trust fund for the benefit of the beneficiaries in accordance with the proper law of the Trust (notwithstanding knowledge of the FTC's allegations).

In November 1998 FTC engaged Cook Islands legal counsel and obtained an opinion on the most appropriate way to enforce a repatriation of the funds to the USA. It is understood that this opinion suggested two ways in which a repatriation of funds could occur. The first option was to commence proceedings against the Cook Islands Trustee alleging a fraudulent conveyance and, concurrently, seek a mareva injunction. The second option was to request the Andersons (in their capacity as Protectors of the Trust) to sack Asiatrust Limited as Trustee, appoint a Trustee friendly to the FTC, amend the trust deed to remove the language relating to the "Event of Duress" and then have the new Trustee repatriate the funds to the US.

FTC decided to take the second option and in December 1998 it requested the Andersons (whilst still incarcerated) to sign the following documents:

• A Deed of Removal and Appointment of New Trustee to remove Asiatrust Limited as Trustee and appoint a new Cook Islands International Company, known as FTC Incorporated, as the new Trustee. FTC Incorporated had been established at the instigation of FTC and was owned by FTC.
• A Deed of Amendment to exclude FTC from the definition of "Excluded Person" under the trust deed.
• A Declaration of Resignation by the Andersons as Protectors and the appointment of FTC as new Protector.

Consequently upon execution of these documents ("the December documents"), the Andersons were released from incarceration.

Asiatrust Limited received copies of the December documents on 21 December 1998 and immediately sought legal advice from local counsel on the effect of those documents. On 23 December 1998 counsel advised that:

• The Deed of Removal and Appointment of New Trustee was invalid because inter alia it was an exercise of power by the Protector for the benefit of an Excluded Person and therefore contrary to the terms of the trust deed.
• There was no power to amend the trust deed.

On 29 December 1998, Asiatrust Limited wrote to FTC's Cook Islands legal counsel advising that it believed the Deed of Removal was invalid.

It was understood that FTC would thereafter commence proceedings in respect of the validity of the December documents. However, by May 1999 no such proceedings had been commenced. Therefore, in June 1999 Asiatrust Limited made an Application for Directions to the Cook Islands High Court in respect of the December documents. FTC sought, and was granted, leave to appear in those proceedings.

As is well known, on 15 June 1999 the Ninth Circuit rejected the Andersons' appeal against the finding of contempt by the US District Court.

Asiatrust Limited's Application for Directions was heard by the High Court on 29 July 1999 and judgement was handed down on 11 August 1999 by the Chief Justice, Quilliam CJ. He decided that:

• The December documents had been executed by the Protectors for the benefit of FTC.
• FTC was an Excluded Person for the purposes of the trust deed.
• The December documents were therefore wholly invalid apart from the Resignation of the Protectors, which Quilliam CJ accepted as a valid resignation.
• FTC should pay the costs of the Applicant.

Subsequent to this decision, FTC finally commenced proceedings against Asiatrust Limited in September 1999 alleging a fraudulent conveyance(s) to the Trust pursuant to section 13B of the International Trusts Act 1984 (Cook Islands). FTC also obtained an order from the High Court of the Cook Islands that the Registrar of Court be made a co-signatory to the trust fund. This order was sought as an alternative to a mareva injunction. The fraudulent conveyance proceedings are presently before the Cook Islands High Court.

In September 1999 the US District Court purged the Andersons of their contempt. However, at the time of writing it is understood that the District Court is yet to hand down judgement.

The present situation is therefore as follows:

• The Andersons have been purged of their contempt.
• The trust fund remains with the Cook Islands Trustee although the Registrar of the Cook Islands High Court is now a co-signatory.
• The US District Court is yet to hand down its judgement on the allegations made against the Andersons.
• The FTC's Cook Islands proceedings alleging fraudulent conveyance are currently pending the US District Court's judgement.

As will be appreciated, the conduct of this matter has been extremely difficult for the Cook Islands Trustee. The primary concern of Asiatrust Limited throughout has been to fulfil its primary duty as Trustee, which is to preserve the trust fund for the benefit of the beneficiaries in accordance with the proper law of the Trust (notwithstanding knowledge of the FTC's allegations). Thus far the Cook Islands High Court has agreed with the manner in which the Trustee has acted.

Future developments in the matter will, it is submitted, depend upon the outcome of the proceedings against the Andersons in the US District Court. If the District Court finds that the Andersons have committed the offences alleged by FTC, the Cook Islands High Court will then need to consider whether any fraudulent dispositions were made to the Trust.

Recent changes to tax and other legislation in the Asia-Pacific region which affect international tax planning.

The Australian Government has introduced a number of measures designed to substantially reform the Australian tax system. These include the introduction of a 10% Goods and Services Tax ["GST'] and capital gains tax ["CGT'] relief. The CGT amendments are effective from 30 September 1999 and include the removal of CGT indexation from that date. Disposals of assets acquired after that date will be taxable on the full nominal gain subject to a 50% reduction for individuals and a 33-1/3% reduction for superannuation funds. Small business owners will receive some further exemptions from CGT.

From 1 July 2000 [fiscal year 2000/2001] the corporate tax rate will reduce to 34% and will further reduce to 30% with effect from 1 July 2001. Trusts, limited partnerships and life assurance companies will be taxed on an entity basis at corporate tax rates with effect from 1 July 2001. The taxation of trusts on an entity basis is causing widespread concern in Australia where trusts have been the preferred private business ownership structure for over 30 years.

The recent decision of the UK Court of Appeal in the Dimsey case will have a significant impact on the structuring of ownership of UK property by foreign investors. The UK tax legislation taxes employees including directors, on the value of benefits received by them through the provision of living accommodation by their employers. The effect of the decision in the Dimsey case is to confirm the Inland Revenue's long held view that a "shadow director" of a company that owns UK property is assessable to UK income tax on benefits received from that company, i.e through the occupation of the UK property. Many Asian and other foreign investors own UK property through offshore companies and use "nominee" directors with a view to avoiding UK income tax. The Dimsey decision does not preclude the use of offshore companies and trust structures to own UK property but greater care needs to be taken to avoid the application of the Dimsey case decision.

Michele is a U.S. Certified Public Accountant and a Canadian Chartered Accountant who is the Manager of Offshore Business Services in the Singapore office. Michele holds a Bachelor of Science in Accounting degree from University of Southern California, USA and is a member of the American Institute of Certified Public Accountants, the Canadian Institute of Chartered Accountants and the Society of Trusts and Estate Practitioners. She is also undertaking the U.S. Certified Financial Planner course.

Michele originates from Hong Kong and lived in North America for fifteen years. Prior to joining Asiaciti Trust Group, Michele was Manager at Price Waterhouse in Vancouver, Canada. She had also held a position of Vice President - Finance and Controller with a publicly listed company in Vancouver, Canada. Prior to that, she was a Manager with a medium-sized CPA firm in Los Angeles, California, USA.

Michele has over ten years of professional experience in commercial and professional accounting, encompassing advising clients on accounting and tax-related matters.

Graeme Briggs, Asiaciti Trust’s Executive Chairman, and Adrian Taylor, Legal Counsel, co-presented a paper on the Anderson Case from the perspective of the offshore trustee at the First Global Summits in Los Angeles, San Francisco and New York on Oct 7, 11 and 13, 1999. They also took part in the open forum with other practitioners at each Summit. The summits were very well received with over 100 attendees at each venue.