Sham Trusts, The High Court And 'Putin's Banker'

On 11 October 2017, the High Court released its latest judgment in the long running saga between Mezhprom Bank and its liquidator, the Deposit Insurance Agency (the "DIA"), and Russian businessman Mr Sergei Pugachev (also known as "Putin's banker").

The case1concerned five discretionary New Zealand trusts, in respect of which the High Court had previously ordered Mr Pugachev to provide disclosure. In a decision which might initially be of concern to individuals and trustees with a connection to or looking to establish a trust in Guernsey, Mr Justice Birss, presiding, ruled that the assets held by the trusts should be available for enforcement (albeit he declined to order relief and adjourned the matter for further submissions).

On the facts of this particular case, Birss J found that at all material times, Mr Pugachev:

"...regarded all the assets in these trusts as belonging to him and intended to retain ultimate control. The point of the trusts was not to cede control of his assets to someone else, it was to hide his control of them. In other words, Mr Pugachev intended to use the trusts as a pretence to mislead other people, by creating the appearance that the property did not belong to him when really it did" (paragraph 424).

This has led some to worry about the susceptibility of offshore structures to onshore actions. Indeed, an article published in the Financial Times on Thursday 12 October 2017 declared that, "the ruling shows a decreasing tolerance in the High Court for opaque offshore accounts that put assets out of the reach of creditors".

The reality, however, is that the sort of claims run successfully by the claimants in this case remain difficult to prove. The key, as ever, is this: what is the true intention of all the relevant players at the time a trust is settled?

It is also worth bearing in mind that Guernsey, in common with other offshore jurisdictions, has "firewall" provisions in its Trusts Law which confer exclusive jurisdiction on the Royal Court of Guernsey over matters concerning Guernsey trusts. Accordingly, even if an English Court were to declare a Guernsey trust to be a sham, potentially this would be of limited impact.

Overview

Between 2011 and late 2013, whilst enquiries (and later proceedings) were ongoing in Russia, Mr Pugachev (for the most part via his son, Victor Pugachev) purported to settle assets worth over US $95 million into five discretionary New Zealand trusts, including properties in London, Russia and St Barts. Each of the trust deeds named Mr Pugachev as a discretionary beneficiary and a protector.

Birss J, sitting at the High Court in London, ruled that Mr Pugachev was the true owner of the assets held by the New Zealand trusts (which had come to light during a...