Asset protection: threats and solutions - PowerPoint Presentation

Slide1

Asset protection:

threats and solutions for Russian private clients

Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, MoscowSlide2

What

Dangers are for a Typical Russian Private Client?

Key risk areas:

Matrimonial disputes

Inheritance

Creditors

Political risks

Can be a PEP

Lives Globally

Family abroad

Owns a

business

Cyprus/BVI

structured

Foreign bank accountsSlide3

Divorce DisputesSlide4

Typical Weak Points

Married before acquiring wealth

No pre-nuptial agreement

Structured his assets too straightforward or too late (e.g. after wife rejected pre-

nup

agreement)

Exercises direct control over assets held in trusts

Structure details compromised to wife / rivals

Rivals may attempt using divorce to attack

NB

:

Potanin’s

wife Natalia was represented in her

US discovery litigation by law firm

Alston&Bird

, who earlier assisted in obtaining US visa for Oleg

Deripaska

,

Potanin’s

rival in

Norilsky Nikel disputeSlide5

Divorce Case Study 1

Clean-cut divorce, matrimonial property divided, fair provision for spouse made

Spouse suddenly sues for half of business, actually belonging to business partners

Aggressive discovery in many jurisdictions

Fishing expeditions and use of improper means of obtaining information

Suspicion that litigation is funded by rivals

Challenge

: coordination of multi-jurisdictional team of counsels to fight off unsubstantiated disclosure requests filed in many jurisdictions simultaneously Slide6

Divorce Case Study 2

On the verge of

business sale completion suspects spouse’s infidelity, hires private eye

Reveals infidelity

and

a plot to file for divorce immediately after sale completion

Existing corporate structure known to wife

Needs a new ‘clean slate’ structure to protect sale proceeds and to invest further

Challenge

: Building the new corporate structure being recipient of business sale proceeds and yet formally unrelated to the Client Slide7

Divorce Risk Mitigation

Use pre-nuptial agreements (both on Russian and common law levels, supplementing each other)

Carefully structure asset holding (existing structures shall be reviewed from time to time)

Trust the trustees – allow discretion, do not manage directly (or at least leave no paper track)

Be reasonable – moderate provision to the ex-spouse may pay off by decrease of litigation risk

NB

: If the proceedings have already started, try limiting wife’s access to the “real money” to prevent further discovery and litigation funding Slide8

Inheritance DisputesSlide9

Typical Weak Points

There is very often no will or only Russian law will

Succession

rarely

considered

in

business structuring

Straightforward view on inheritance (e.g. income and capital are not seen as separate assets)

Heirs rarely know how assets are structured

Personal input in business valued above capital

Management can abuse when shareholder dies

Surviving partners tend to squeeze out heirs

NB

: Yuri

Abramyan

, owner or an ice cream manufacturer, divorced his first wife in 2005 and remarried, but never separated marital property with the first wife. After his death in 2009, widow reportedly attempted to take control over the business, squeeze out deceased’s heirs and to strip assetsSlide10

Inheritance Case Study 1

Shares in Russian company passed to minor children under intestacy rules

Under Russian law, voting and disposition requires consent of state guardian authority

Children studied abroad, lost RF resident status, personal income tax on div. increased

Sought legal advice after estate distribution

Challenge

: Convincing Russian notary and state guardian authority on post death variation which is permitted under Russian law but used very rarelySlide11

Inheritance Case Study 2

After

patriarch dies, majority stake in company dissipates between beneficiaries

Parents are not interested in running business, spouse has no experience or skills

Minor (but blocking) shareholder becomes more active in operational control, and aggressively attempts to increase its stake

Challenge

: Protection of late patriarch’s family who are collectively the major shareholder but most members are passive and not involved into operational controlSlide12

Inheritance Risk Mitigation

A will or several wills covering all jurisdictions where assets are held to meet local law rules

Structuring business or asset holding shall provide reliable transfer of control to beneficiaries

A trustworthy protector capable to represent heirs before business partners and to enforce the will

If heirs are unfit to continue business, agree share buy-out with business partners in advance

NB

: Even relatives of deceased HNWIs can face cash flow issues when death is sudden and no arrangements were made. Easily accessible emergency cash reserve can resolve this.Slide13

Creditor ProtectionSlide14

Typical Weak Points

Business structuring often mixes asset holding and operational roles

Structure details are disclosed or compromised

Ultimate beneficiary issues personal guarantees

Ultimate beneficiary involved in operational management as a shadow director or even holds role of a general director (CEO) / board member

NB

:

Gleb

Fetisov

, ex-owner of “My Bank “, sold the bank in December 2013, but reportedly sale was on nominal value due to bank’s poor financial position. Bank license was revoked in January 2014, and in February

Mr

Fetisov

was arrested on charges of RUR 10B embezzlement from bank. RF Central Bank claims money were withdrawn from the bank as loans to sham companies before the sale Slide15

Trends

Russian courts apply corporate veil piercing

Skakovaya-5

– bona fide purchaser status

Citadele

Banka (

Parex

)

– bank licensing rules

Severnuy

Kuzbass

– thin capitalization rules

Standards for Directors’ liability grow stricter

Supreme

Arbitrazh

Court Plenum Ruling #62

Pre-bankruptcy rules – statute amended in 2013

Kirovsky

Zavod (Doroga

) case – Director’s dutiesInterested transaction rules reform

would cover wider scope of affiliates, including informal ones

Statutory criteria for affiliates are debatedSlide16

Creditor Case Study 1

Company was involved in construction project, hired sub-contractors

The

project

owner never paid, business had no funds to repay sub-contractors

Considered the company as a write-off

Sub-contractors filed for bankruptcy

and

RUR 160m director’s

personal liability claim

Challenge

: Protection from very formal and rigid rules of RF insolvency legislation, imposing director’s liability for debtor company in full for failure to file insolvency application or transfer accounts to insolvency officerSlide17

Creditor Case Study 2

Operational partner requested additional funding to overcome “liquidity issues”

Investor had concerns on mismanagement

Audit, legal and technical DD conducted

Management abuse revealed, funds wasted

Operational partner formally not related to any misfeasance triggering personal liability

Challenge

: Review and analysis of complicated and entangled governance, decision and financing structure to reveal any grounds for operational partners’ personal liability for waste and embezzlement, locating his assetsSlide18

Creditors Risk Mitigation

Structure business in watertight vehicles for various types of assets or business activities

Thinly capitalized subsidiaries are not prohibited, but major shareholder can be potentially liable

Protect identity of the beneficiary, e.g. by creating plausible role (e.g. a hired manager after sale of business to a strategic investor)

Do not personally hold director positions

NB

: Delegate operational management , and if personally involved into decision making try not to leave paper track as shadow director concept is likely to be applied by Russian courtsSlide19

Risks for PEPsSlide20

Typical Weak Points

Assets owned or actually used but not declared

Gap between declared income and assets/lifestyle

Owning or de-facto controlling business

Business structured in a straightforward way

Personal assets structured poorly or held directly

Hasty attempts to cover up tracks make it worse

NB

:

As declaration deadline approached in 2013, a number of

high-ranked

officials divorced, leaving businesses and inappropriately valuable assets to ex-wives. These include Zhirinovsky, head of LDPR party and some 30 State

Duma

deputies, as well as $450M worth Maxim

Liksutov

, head of Moscow Transportation Dept. and (ex)owner of

Aeroexpress

, railroad service connecting Moscow with airportsSlide21

Trends

2013 Declaration campaign

: Income disclosure

De-

offshorization

policy: capital should return home

Federal Law

196666-6

: introduces UBO concept, tax authorities can receive personal bank accounts data, toughens currency control rules

Tax rules aimed to deter evasion

DTT benefits can be subject to UBO disclosure

CFC bill is being under development

Anti-Corruption rules for state officers

Bank accounts abroad had to be closed

Securities held abroad had to be disposed

ofSlide22

PEP Case Study

On son’s death shares passed under intestacy under Russian law, partly to farther

Political position the Client holds requires declaration of shareholding

Voting by shares can be considered as restricted business activity, holding is a grey area

Challenge

: Weighting legal and political risks of involuntary receipt of shares and timeframe for disposing of the same Slide23

PEP Risk Mitigation

Full compliance with restrictions, where possible

Structuring business holding using blind trusts

Using vehicles with no UBO (funds, charities)

Some

rely on relatives

as trustees or front

-

persons

Providing plausible explanation for assets (including ones being used, not owned) or lifestyle

Being reasonable – do not hold assets directly on PEP’s personal name, be moderate in lifestyle

NB

: Watchdog activism has increased in Russia over last

few years

, when

activist reveal

and

publicly disclose

undeclared property of state officials Slide24

Questions?Slide25

Thank

You For Attention!

Ilya Aleshchev

Alimirzoev & Trofimov law firm, Moscow

i_aleschev@atlawyers.com