In their guilty plea in a U.S. court on Wednesday, Cayman National Trust and Cayman National Securities admitted to encouraging U.S. taxpayer clients to open accounts in the name of sham trusts and sham companies in the Cayman Islands to conceal their beneficial ownership of these accounts.
The sham trusts were nominally directed by Cayman National trust officers, but were controlled by the U.S. clients. The managed companies, for which the trust company provided management services, were shell companies with the sole purpose of holding the assets of U.S. clients, the Department of Justice said.
Cayman National Securities treated the entities as the account holders. For instance, in some cases Cayman National Securities’ account files included a photocopy of the passport of a Cayman National trust officer or third-party service provider instead of the U.S. client and beneficial owner.
This allowed the U.S. clients to trade in U.S. securities without Cayman National requiring them to submit the necessary tax forms. Completing the forms would have alerted the U.S. Internal Revenue Service to the existence of the accounts at Cayman National Securities and would have prevented the clients from evading taxes on the money and any trading profits in those accounts.
“Similar sham structures were set up for certain U.S. taxpayer-clients by third-party service providers, including Caymanian law firms, some of whom received referrals from Cayman National Securities,” a statement of fact attached to the plea agreement stated.
“In addition, Cayman National Trust acquired sham trusts when it acquired the assets of trust companies with preexisting clients who had created similar sham trusts for the purpose of evading U.S. tax obligations,” the document said.
The court records state that at all relevant times Cayman National Trust and Cayman National Securities knew that certain U.S. clients were maintaining undeclared accounts to evade U.S. tax obligations and that the trust company and the brokerage knew they had a legal duty to report the income in the accounts to U.S. authorities under a qualified intermediary (QI) agreement with the IRS.
“In fact, in reports dated May 15, 2009 and August of 2009, the then-president of [Cayman National Securities] suggested that certain U.S. taxpayer-clients could be placed outside the purview of the upcoming QI audit, even while keeping their assets at [Cayman National Securities], by allowing them ‘to create Complex Trusts’ even though doing so may ‘put the firm at risk,’” the statement of fact stated.
In 2009, Cayman National Trust hired a law firm to review the tax status of 50 trusts maintained by Cayman National that had U.S. beneficial owners.
The trust company also provided managed company services for about 105 entities owned by U.S. beneficial owners but did not ask for a review of the tax status of these entities.
An internal report in 2011 noted that the company structures remained under active review and “where relevant, required corrective actions will be taken to ensure that there is no reputational or focused spotlight risks to [Cayman National Trust],” according to a statement of fact in the plea agreement.
In June 2011, Cayman National Trust hired a new president, who in his first report in August 2011, observed that he had “never seen a business in quite the same ‘challenging’ state in the 30 years of my working life.”
The report highlighted that because of the 50 trusts and 105 companies connected to U.S. clients, Cayman National Trust had “too much concentration on U.S. connected business.” The Cayman National Trust president stated that the U.S. clients would require “additional effort, compliance and indeed worry” and expressed surprise that Cayman National Trust had only started to request legal and tax opinions five years after most of its competitors in Cayman had done so, the statement of fact said.
An internal review by the new president revealed that Cayman National’s trust officers had not conducted sufficient due diligence on their clients, that there was missing know-your-customer documentation and missing information about the beneficial owners of the structures.
“Indeed not a single file was found to be complete and without tax or other issues,” the statement of fact said.
In September 2014, Cayman National Trust made four staff redundant. Cayman National Trust President Michael Hodgson explained at the time that “Over the past three years, our client base has reduced for various reasons; for example, some clients no longer fit our target market, some were unprofitable and some U.S. connected clients closed.” Cayman National Trust has had losses in each financial year since 2010.