On March 30 2015 the BVI Trustee (Amendment) Act introduced new obligations for trustees to maintain trust records into the BVI Trustee Ordinance. The new section is not groundbreaking, but the penalties for non-compliance are punitive and trustees should take steps to ensure full adherence.
The new section provides the following:
- Every trustee must "maintain records and underlying documentation" for each trust of which it is trustee. Such records include (but are not limited to) invoices and contracts relating to:
- payments and receipts of money;
- sales and purchases of goods; and
- assets and liabilities.
- The records must "show and explain" the trust's transactions and make it possible to determine with "reasonable accuracy" the "financial position of the trust" at any given moment.
- The records can be kept in or outside the British Virgin Islands.
- The records must be kept "for a period of at least five years".
- Failure to observe these requirements (without lawful or reasonable excuse) constitutes a criminal offence which may be punished by a fine of up to $100,000 or a prison term of no more than five years.
The requirements of the new section do not add to the existing duties that the common law places on trustees to keep clear trust accounts and be ready with them at all times. However, the potential criminal penalties for non-compliance with the new section are an extension of a trustee's exposure under the common law. At common law, a trustee who fails to keep and be ready with accounts is usually in breach of trust and may personally have to bear the cost of remedying the breach and any damage which flows from it, but there are no criminal penalties.
With this additional exposure in mind, trustees will likely be intent on complying with the new section. However, they should be careful not to fall foul of a number of unclear aspects of the provisions.
Scope of application
It is unclear whether the new section is intended only to apply to BVI trustees of BVI trusts or whether its scope extends to BVI trustees of non-BVI trusts and non-BVI trustees of BVI trusts. The safest approach must be to assume that it applies to any trust which is governed by BVI law or whose trustee has a physical presence in the British Virgin Islands or is doing business there.
Retention period
The new section does not state when the five-year retention period starts or whether the obligation to retain falls away when the trustee ceases to be trustee. One might expect the retention period for each record to start on the date it is created and end five years later (or on the date the trustee ceases to act as trustee, if earlier), but in light of the severe punishments for non-compliance, trustees would be well advised to interpret the new section more conservatively and retain all records for five or more years following the date on which they cease to act as trustee.
"Financial position of the trust"
There is no guidance on what is meant by the phrase "financial position of the trust". It is unclear whether a trustee should consider itself compliant with the new section's requirements if it retains records in respect of the assets it holds directly, or whether must it also maintain records in respect of any underlying assets. This point is particularly relevant in the context of Virgin Islands Special Trusts Act (VISTA) trusts where a BVI trustee will hold shares in a BVI company, which often in turn holds shares in a number of other BVI or non-BVI companies. How far down the chain does the trustee need to go?
While the new section does not make the extent of a trustee's duty in this area clear, the common law does so. The correct approach, in respect of both VISTA and non-VISTA trusts, has always been that a trustee should ensure that it has details of all assets held by the trust directly or indirectly, even if its administration and management powers and responsibilities in respect of those assets are diluted, as is the case where the VISTA legislation applies. The most straightforward way of satisfying this requirement in the case of trusts which hold underlying companies is for the trustee to obtain copies of the companies' annual financial statements.
Given that the new section does not extend trustees' duties under the common law, it is unlikely that it will demand a higher standard of diligence from a trustee who is already performing its functions with the appropriate degree of care. However, a trustee's failure to comply with its record-keeping obligations may now result in it suffering draconian criminal punishments. Consequently, record keeping should be at the forefront of the minds of all BVI trustees and trustees of BVI trusts.
For further information on this topic please contact Will Burnell at Harney Westwood & Reigels by telephone (+1 284 852 2564) or email ([email protected]). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
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