Axiom Legal Financing Fund stakeholders to oppose receivership application

Battle lines are being drawn up between the various stakeholders in the beleaguered Axiom Legal Financing Fund (the “Fund”).

Taylor Moor (“TM”), who acted as the main distributors of the Fund, are angry that the directors notified that shareholders that they would apply to the Cayman Grand Court for KPMG to be appointed as receivers of the Fund, without putting it to a shareholder vote.  Originally, this was one of the matters upon which the shareholders were expected to vote at the EGM earlier this month, but at short notice the resolution was withdrawn and the directors announced that they intended to go ahead with the receivership application unilaterally. TM intend to take legal action to oppose this move.

TM believe that the Fund should be put into liquidation rather than administration, with independent insolvency practitioners being appointed as liquidators. They believe that this would enable the liquidators to conduct a thorough investigation into the past affairs of the Fund and to take action against anyone who has been guilty of wrong-doing. The powers of Receivers are materially more limited in this regard. Furthermore, they are unhappy that the sole aim of a receivership is to ensure an orderly closure of the Fund – a decision which they believe is premature given that the investigation into the Fund’s loan portfolio is far from complete.

TM are also unhappy with the costs of investigating the situation to date ($1.3 million) and the lack of a complete and coherent report detailing the findings.

Whatever the merits of the case, this does seem to be a situation of poor stakeholder management by the Fund directors.  They must be aware of the sensitivities of the investors and need to be seen to take all steps that are necessary to investigate fully and take action if wrong-doing has occurred.  By proceeding with a receivership application in circumstances where they have not permitted the shareholders a vote on the issue, and in the knowledge that the main distributor of the Fund is clearly opposed, they are setting themselves on a difficult and antagonistic course.  Given the atmosphere of allegations and suspicion, it does appear unnecessarily inflammatory to proceed with an application that may limit a comprehensive investigation, without fully explaining the rationale for that to those who stand to lose their investment.

The Cayman Islands court is expected to hear the parties on 31^st January.

McKeeva Bush removed as Premier of Cayman Islands

The governor of the Cayman Islands, Duncan Taylor, has revoked McKeeva Bush’s appointment as Premier following yesterday’s vote of no confidence in his government, which was supported by members of his own UDP party.

Juliana O’Connor-Connolly has been appointed Premier in his place, to lead a minority UDP government.  The new government will need to build support from the opposition in order to be effective, with 3 of the former UDP members having crossed the floor along with Bush during yesterday’s no confidence debate, and so it will be a significant challenge for the new Premier to ensure the effectiveness of her leadership.

The move has come as something of a surprise to those who were expecting the governor to dissolve the Assembly instead, provoking an election - something which Bush himself had apparently suggested should happen.  Bush retains support amongst a not insignificant number of Islanders, and may have been hoping that they would vote to re-elect him and thereby vindicate his decision not to step down voluntarily.  It seems, however, that the governor has thwarted this ambition, for the time being at least, with O’Connor-Connolly’s appointment.  

Vote of no confidence in Cayman government passed

A motion of no confidence in the Cayman Islands government was passed yesterday in the Legislative Assembly, with 11 supporting the motion, and only 3 opposing. The no confidence motion was proposed after Bush refused to resign following his arrest and release on police bail on corruption charges, even after he had been called upon to do so by members of his own United Democratic Party

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The issue has split the UDP with a small number of his colleagues publicly backing the beleaguered Premier, but, as yesterday’s voting shows, he has lost the confidence of at least some of his colleagues and a split has opened up in the party, making its government untenable.

At the beginning of the debate, Bush and 3 UDP colleagues expressed their split from the remainder of the party by crossing the floor of the house.  Bush himself did not speak in the proceedings and abstained from voting.

He is expected to meet with the Governor to discuss what to do now – a difficult meeting no doubt, given the fact that Bush has very publicly called the Governor the “enemy” and accused him of being behind a “vindictive witch hunt”.

It would appear that an election is inevitable.

McKeeva Bush's position looking increasingly vulnerable

Confusion reigns over the position of Cayman Islands Premier McKeeva Bush’s political position following his arrest last week on corruption charges.

Following several days of almost complete silence from his party, the UDP, it was reported that over the weekend the party (with the exception of Ellio Solomon who publicly backed Bush’s decision to remain in office whilst the allegations are investigated) had decided to oust McKeeva Bush from office and replace him with Juliana O’Connor.  However, it seems that the position is not yet a fait accompli as although a letter was delivered to Bush asking him to step down, he has made it clear that he will not go voluntarily and no action has yet been taken to force this to happen. Politicians who are brave and make bold statements behind closed doors seem more reluctant to do so in public. The Governor’s office has said that it has not yet received any communication on the issue.

The opposition leader wrote to the speaker on Friday asking her to call a special meeting of the Legislative Assembly to debate the situation with a no confidence motion.  In view of the position taken by the UDP over the weekend, it is impossible to see that McKeeva Bush could count on the support of his erstwhile political colleagues to support him. As a result, it is difficult to see how Cayman can in practice avoid an early general election.

Bush, who retains a fair degree of popular support in the Island, did not release any statement on the situation yesterday although he is understood to feel angered and let down by the actions of some of his colleagues in failing to support him.  

The current uncertainty is not good for Cayman.  The government is effectively paralysed whilst this situation unfolds – an invidious position to be in whilst there is so much going on which needs to be very carefully handled – such as the Island’s relation with the UK and the new proposed “mini-FATCA” negotiations. 

Silverfleet in exclusive talks to acquire Ipes

It is understood that Silverfleet Capital, the European mid-market buy-out firm, is in exclusive discussions with RJD Partners to acquire Guernsey head-quartered fund administration business Ipes for a sum in the region of £50 million.

The deal is expected to close in the new year.

Axiom Legal Financing Fund managers asleep at the wheel

KPMG, the firm appointed initially to carry out a review of goings-on at embattled Axiom Legal Financing Fund, are reported to have said that whilst the fund does not appear to be a Ponzi scheme the managers of the suspended £117m fund carried out "little or no due diligence" on the cases in which they invested shareholders' money, and did not follow investment criteria.

Following a period of suspension, the funds directors have now appealed to have the fund wound up because it is unable to meet its financial obligations.  According to IFA online, the court documents disclose that KPMG's investigations "reveal grounds for suspecting there has been mismanagement" of the fund's assets, and that the net asset value of the fund has been overstated.  The size of the shortfall is not clear at this stage.

The loans made by the fund appear to have been made to law firms conducting genuine cases, but are unlikely to be repaid within the time frames required by the fund’s investment criteria.  Loans should only have been made to cases which could be completed within a year, whereas most, if not all, of the cases being funded will take much longer than this to resolve – in some cases up to 3 years – and in at least one case a loan appears to have been made to a firm which was close to insolvency at the time. 

There is also controversy regarding the payment of a “facilitation fee” of 50% of the loan value.

The findings disclosed in the court paper seem to show a situation where there has been a real breakdown in good governance at the fund.  However, it is not yet clear whether some of the stronger allegations of fraud made by OffshoreAlert are well founded – the court papers suggest that further investigation  is required before a conclusion can be drawn on that issue.

Does FATCA pose an unacceptable security risk to Americans abroad?

There has been a lot written about the problems of FATCA recently.  The financial institutions which will be subject to the new law have complained about the burden (in both time and costs) of reporting the information, and the fact that the anticipated IRS revenue receipts (estimated at $8 billion over 10 years – which is not a huge amount of money for a nation the size of the US) are probably outweighed by the costs of implementation. Americans expats (and in particular those who hold dual citizenship) are starting to appreciate the difficulties in opening bank or investment accounts overseas and are resentful of the fact that America is the only one of the leading industrialized nations which requires its citizens to pay US taxes even if they live outside the United States.

But one aspect about which there has been surprisingly little fuss is the security implications for Americans living abroad.  When FATCA becomes fully effective, foreign financial institutions will have to submit detailed annual reports on their American customers with bank accounts of more than $50,000, including cash balances, receipts, and withdrawals.

In order to meet all of the FATCA data gathering and reporting requirements FATCA will require the banks to keep data on a plethora of information including residential addresses, green card status and even the names of the Americans’ relatives.  The information is far, far more detailed than that which has been previously held by any financial institution with which I have ever had dealings.  Never before would the banks have had to gather and isolate such detailed records specifically relating to US citizens.

The US is a nation which is, post 9/11, usually somewhat obsessed with security.  And not without good reason.  It is a powerful country which has made a lot of enemies in recent years, and it usually takes the safety of its people very seriously.

Who might find it useful to have a database of all of the American residents in their territory?  Might perhaps a jihadist group in Afghanistan be interested to know where all of the US persons in Afghanistan live?  Might a South American kidnapping group be interested in a list which shows the cash balances held by US citizens in their territory, and the names of their relatives?  Might an anti-capitalist extremist be interested in being given the private and business details of a US resident business mogul near them?

Of course the data that the financial institutions gather should be kept confidential.  But bank IT systems are only as confidential as the employees who have to access them.  The IRS and HMRC (who are likely to follow the US in implementing FATCA-type legislation) know this already – indeed, they both make very good use of it by encouraging and even paying handsome cash rewards to whistle-blowers.  So if the IRS know they can get information from the banks by offering employees cash incentives to blow the whistle on wrong-doing, what on earth makes them think that Al-Qaeda can’t employ the same techniques with very different aims?   

By introducing legislation designed to stop tax cheats in their tracks, the US may be unwittingly putting at risk the lives of many of their expatriate citizens.  It seems that being seen publicly to take a tough stance on tax cheats takes a higher priority in these straightened times than the security of US citizens abroad.

The UK has a huge number of expats based in countries all over the world – including a large number of relatively unstable locations where corruption is rife.  The UK government would do well to consider this important aspect of security before deciding simply to follow a “me too” strategy and take the same route as the US.

Relations between Cayman's Premier and Governor go into melt-down

Relations between Cayman Islands Premier McKeeva Bush and its Governor Duncan Taylor have gone into melt-down following Bush’s arrest last week on suspicion of corruption and the illegal importation of explosives. 

Whilst speaking publicly in Jamaica on Thursday, Bush described his arrest as “a vindictive witch hunt” fuelled by the petty jealousies of the UK’s representative and political opponents, and pointed the finger of blame squarely at Mr Taylor, who he described as his “enemy”. Not surprisingly, the governor’s office has flatly denied the accusations.

No doubt it will be some time before the legal process sorts out the rights and wrongs of the allegations made against Bush, who strenuously denies any impropriety.  However, even if he is exonerated it is difficult to see how there can be any sensible working relationship between the two men in the future, which presents a real head-ache for an Island already having to adjust to a much tighter degree of control from the UK following the adoption at the insistence of the UK of the Framework for Fiscal Responsibility.

McKeeva Bush has insisted that he would remain as Premier, despite the inevitable calls for his resignation from opposition party members.  Meanwhile, his own party colleagues are reported to be meeting to discuss how best to handle the situation and it is notable that so far none of them have publicly come out in support of him since his arrest.

Whilst Bush undoubtedly retains a significant degree of support from the public in the Island, it is difficult to see how he can be effective as Premier with such serious allegations hanging over him, and with such an abysmal working relationship with the Governor.  

McKeeva Bush bailed without charge

Cayman Premier McKeeva Bush is reported to have been released on police bail without charge until February, while the Cayman Islands police continue their investigation into allegations including corruption and the illegal importation of explosives.  

Mr Bush spent several hours being questioned today and police have seized some property, including computer equipment. 

It is not yet clear where the situation leaves Mr Bush politically.  Not surprisingly, some opposition members have been calling for his resignation.  Several members of the United Democratic Party met at the Premier‘s house in West Bay after McKeeva Bush’s release from police custody following his arrest, but it is not yet clear what their response will be. 

Axiom Legal Financing Fund to be wound up

Axiom Legal Financing Fund, which has faced a slew of fraud allegations in recent weeks, is reported to have been put into receivership by its directors following a vote at an Extraordinary General Meeting held in London yesterday.

Until a few months ago, the award-winning Fund had been considered a great success but OffshoreAlert, a Miami based company, began to publish a series of articles raising red flags regarding the Fund’s activities, ultimately suggesting that it appeared to be a Ponzi scheme and questioning the bona fides of the CEO of Tangerine Investment Management, the Fund’s investment manager .

The £117m Cayman Islands based Fund was suspended in October following a flood of redemption requests in response to the allegations, and KPMG were appointed to review what had gone on.  It is understood that KPMG will be now be appointed as receivers, following yesterday’s shareholder vote.

It is not clear where this will leave the investors in the Fund, but some are already believed to be taking legal advice about their options.

GAAR commencement date pushed back, and will not apply to arrangements entered into before Royal Assent

It was today announced that the UK’s new general anti abuse rule (GAAR) will come into force from royal assent to the Finance Bill 2013 (expected to be July 2013) and not from 1st April 2013 as originally proposed.

The Government has also proposed that the GAAR will not apply to tax arrangements that have already been entered into before royal assent to the Finance Bill, which will be a significant relief to people who may have set up arrangements many years ago, for example to minimise inheritance tax.

Draft legislation for the Finance Bill 2013 was published today, including detailed guidance notes from HMRC and it appears that the government has taken on board some comments made during consultation in a number of amendments the draft legislation.

The main change relates to something which has been dubbed the “double reasonableness test”, about which there has been widespread concern.   The key aim of the GAAR is to prevent “tax advantages” arising from “tax arrangements” which are “abusive”.  In determining both whether there has been a "tax advantage" and if so whether it was "abusive" the concept of reasonableness was used.  The Government has amended the draft legislation by including clarification of the circumstances to be taken into account in determining whether arrangements are abusive. In addition the draft legislation has been amended to remove a reference to transactions or agreements which include non-commercial terms as one of the indicators of abusiveness.

The legislation also sets out how the GAAR Advisory panel will operate. It will give opinions on specific cases and approve HMRC guidance on the operation of the GAAR, although concerns have been expressed about the length of time that opinions are likely to take. However, it is expected that the opinions of the Advisory Panel will be published in anonymised form which should be a significant help to tax advisers in the early days of the GAAR’s operation. 

However, some trust practitioners remain concerned that the new legislation still provides insufficient clarity for individuals seeking legitimately to minimise their tax affairs.  

The GAAR will not impact the manner in which profits of multinational corporations are allocated between the UK and other countries – something which has been receiving much press attention in recent months.  Tackling that issue would require an international review of the complex transfer pricing rules.

  

Cayman Islands Premier arrested on suspicion of corruption

Premier McKeeva Bush, the leader of the Cayman Islands government, was arrested today in connection with allegations of theft and corruption in connection with the misuse of a government credit card and the importation of explosives without valid permits. 

He was detained at his home by members of the Financial Crime Unit of the Royal Cayman Islands Police Service and his office was searched.

Earlier this year, Cayman Islands Police Commissioner David Baines said Bush was the subject of three police investigations, two of them involving what he described at the time as financial irregularities.

Bush has publicly denied any wrongdoing and was tonight bailed without charges being preferred.  However, he is expected to return to police custody tomorrow for further questioning. 

Blackstone to acquire Intertrust

Private Equity giant Blackstone Group has agreed to acquire Intertrust, the international company and trust administration group, for a reported €675m from Waterland Private Equity Investments.

Fiduciary businesses have long been a favourite with PE houses, largely because of their stable client base and annuity revenue streams but also because the fragmentation of the industry allows for a buy-and-build strategy to be effectively employed as fiduciary businesses undergo a period of rapid consolidation.  Past transactions have included Doughty Hanson’s acquisitions of TMF and Equity Trust, IK Investment Partners acquisition of the Offshore Incorporations Group and Vistra, CBPE’s acquisition of Jersey Trust Company, and RJD’s acquisition of Ipes.  However, the purchase of Intertrust has been agreed at a time when there are unprecedented levels of pressure being put on the activities of multi-national firms such as Google, Amazon and Starbucks, which structure their activities through locations such as Luxembourg and Netherlands.  As such, the acquisition is effectively a bet on the resilience of those locations to weather the current storms.

Jersey and Guernsey fighting for a level playing field on UK's "mini FATCA"

The Chief Ministers of Jersey and Guernsey have issued a joint statement on developments relating to the UK Government’s attempts to introduce a “mini-FATCA” whereby the Crown Dependencies and Overseas Territories would be required to report assets for UK individuals to the UK authorities, in much the same way as the US government requires for its citizens under FATCA.

The fact that the UK is seeking to do this is no great surprise – there has been a whole series of initiatives over the years which are moving inexorably towards automatic data exchange, and most in the industry regard this as inevitable at some point in time.  Although there are vocal arguments that the costs of such arrangements are likely to be disproportionate to amounts collected in additional tax revenue as a consequence, there are equally those in the business who would welcome an opportunity to prove that the onshore jurisdictions are wrong to label the offshore centres as havens for tax evasion, and who resent the fact that the UK media consistently portrays them as such.  However, in my view the real risk for the Islands is that they are required to begin reporting well before other countries are – as it creates an uneven playing field in terms of cost and administrative burden, which will likely result in the flight of business to locations which can offer their services more simply and cheaply.  In short, the clients will disappear to less reputable locations, which does not serve the interests of HMRC, the Overseas Territories, the Crown Dependencies or, indeed, the clients themselves. 

It seems from the statement released by the Jersey and Guernsey authorities that they have decided not to fight the basic principle of reporting the information:

“As communicated last week, officials from Guernsey, Jersey and the Isle of Man continue to engage with US officials, aimed at concluding Intergovernmental Agreements under the US FATCA regulations.

We also share a common commitment with the UK to combat tax evasion and to participate in international efforts to combat financial and fiscal crime. We have long made it clear that neither Island has any wish to accommodate those engaged in tax evasion.”

However, Senator Gorst of Jersey added:

“The UK Government is seeking to promote more widely as a new international standard the principles of the US Foreign Account Tax Compliance Act (FATCA). Jersey considers that it is important that in doing so the UK Government mirrors the approach of the US FATCA in being global in its application, ensuring a non-discriminatory approach for all jurisdictions.  In our ongoing discussions with the UK Government we will be pressing them to make clear the steps they are taking to promote the adoption of automatic exchange of information worldwide to ensure that a level playing field is achieved for all finance centres competing in the global market place.”

It seems therefore that Senator Gorst is well aware of the risks of being at the “bleeding edge” of such initiatives, and will fight to ensure that the Islands are not singled out as being the only territories to which the rules apply.  I commend him in taking this approach, which is in the circumstances probably the only feasible option, as to resist the entire principle would leave the door open for people to conclude that the offshore centres are there to assist in tax evasion.  However, in doing this, the Islands can and should try to regain some of the initiative against those who seek to blacken the reputation of the jurisdictions unfairly.

Top Chinese Banker Criticizes Extra-Territorial Effect of FATCA and Dodd Frank

Liu Xiangmin, deputy director general of legal affairs at People's Bank of China, has roundly criticised the FATCA regulations introduced by the U.S., on the basis that they impose unfair costs on foreign banks and cause difficulties with conflicts with local laws.  According to a report first published by Reuters, he said that the U.S. should find a better way to tackle tax evasion than FATCA.

The comments were made during the Thomson Reuters Pan-Asia Regulatory Summit, where Liu was giving a speech on the foreign impact of financial regulation. He also noted the challenges posed to foreign banks by some of the regulation contained in the Dodd-Frank Act, such as the Volcker Rule, which bans banks from engaging in proprietary trading and will apply to many foreign banks if they have a branch in the U.S.

"The Volcker Rule seems to be intentionally designed to apply to a broad range of foreign institutions in order to level the playing field for U.S. entities subject to the rule."

Liu said governments should find a more effective way to regulate international finance.

He added "While it is understandable to address the cross-border externalities or spill-over effects with national legislation, a more effective and acceptable regime would call for better co-ordination between home and host-country regulators ..... An extra-territorial effect should be carefully evaluated and limited, so as to minimise the undue burden on foreign financial institutions" .

Liu's comments echo the sentiments expressed by many finance industry participants in other jurisdictions, who are angry at the costs being pressed upon them by the U.S.

Investors in Axiom Legal Financing Fund urged to boycott EGM and sack directors

Taylor Moor, the main distributor of embattled Axiom Legal Financing fund is reported by IFA online to have urged investors to sack the fund's directors and boycott the EGM to be held on 11^th December.

Axiom, a Cayman fund which provides financing for no-win, no-fee legal cases in the UK, was suspended in October following serious allegations of fraud made by OffshoreAlert.  The allegations have been strenuously denied by those involved, and KPMG has been engaged to investigate the situation.

However, having apparently grown impatient with the lack of sufficient explanation from the directors on how this situation has arisen, the fund’s main distributor, Taylor Moor, has written to investors saying "it is time for investors to take control of the situation" and to replace the current directors with new, impartial individuals.

According to IFA Online, Taylor Moor has urged investors to boycott the emergency EGM to discuss the future of the fund on 11^th December, because KPMG have not been given enough time to investigate.  Concerns are being expressed that because the investors have so little information available, they will be in no position to vote on the important matters to be discussed at the EGM.