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War on trusts

(Article published in the June 20, 2007 issue of Manila Standard Today)  
       A cold chill shot through my spine when, in a quick scan of the table of contents of the OFC Report 2007, I bumped into the title of Robert Clifford’s article, “The War on Trusts.”  For a fleeting second, I thought the CEO of Investec Trust wrote his piece after he had a talk with Ms. Marily De Vera, Trust Officer of Banco de Oro and President of the Trust Officers Association of the Philippines.  But going through the article gives no indication that he did.  But the drift of their sentiments is the same.

What De Vera sees in the Philippines, Clifford sees magnified in various financial centers and intensified particularly in what is known as “offshore” jurisdictions.

 Observes Clifford: “As the battle for financial services rages between national and supranational interests, offshore and onshore, the trust industry continues to evolve and adapt.”

 Undoubtedly working from the same insight, De Vera secluded her board at the top floor of the BPI Building on 08 June 2007.  In a whole day exercise facilitated by Tita Puangco of Ancilla Enterprise Development Consulting, the TOAP Board crafted the association’s vision and mission in today’s ever-changing world. 

 The trends that indubitably validated the Clifford insight and made critically necessary the De Vera initiative are there for every one to see: (a) the relentless assault on the traditional (and undoubtedly sometimes, nay often, abused) feature of confidentiality of trusts; (b) the setting of ever-rising standards of behavior and performance, and (c) the competition among the centers and the players getting stiffer at a rate faster than the expansion of the wealth they are fighting for. 

 Trust confidentiality is under attack from various forms of international commitments of public authorities to gorge out information from their subjects and mandate their exchange among sovereigns.  At the vanguard is are the bilateral tax treaties among countries.  The website of the Bureau of Internal Revenue reports 31 tax treaties entered into by the Philippines.       Among these are those with the United States, the United Kingdom, Singapore, and other financial centers.  Typically, a tax treaty provides for the exchange of such information as is necessary for carrying out the provisions of the treaty and for the prevention of fraud or fiscal evasion.  Since trusts are subject to taxation, information gathered by one treaty party on trusts ostensibly connected to the taxation may be transmitted to the other party under the circumstances provided for in the tax treaty. 

 Another battering ram being used to crack trust confidentiality is the mutual legal assistance treaty (MLAT). An MLAT calls for assistance in criminal investigations and proceedings and its coverage often is broad enough to encompass all aspects of a criminal prosecution, from investigations by law enforcement agencies to grand jury proceedings to trial preparation following formal charges to criminal trial. The Philippine MLAT with the United States can be considered the model of broadness: Article 1 obliges the parties to provide mutual assistance `in connection with the prevention, investigation and prosecution of offenses, and in proceedings related to criminal matters.''

 Various types of assistance are usually provided for but the most worrisome to trust practitioners is the provision of documents to the requesting party.  Such documents may be provided through compelled production by individuals, conduct of search and seizure, provision of publicly available documents, and, even if not publicly available, could be made available to the requested party under similar circumstances.  Trusts do submit reports to the Philippine government which may then be obliged to furnish the same to MLAT counter parties on the authority of the various MLATs now in effect.

 And who can be unaware of the overhanging authority of the Financial Action Task Force (FATF)?  Under threat of sanctions which would make international commerce impossible for the country, the Philippines passed the Anti-Money Laundering Law in 2001 and like other set-ups acceptable to the FATF, the Anti-Money Laundering Council is asked to act on requests of other governments for information about Philippine residents necessary to enable the requesting party to combat money laundering.  Again, a big tear on the fabric of trust confidentiality.

In addition to the cracks at the confidentiality wall, trust practitioners are pressured to adhere to with standards of professionalism imposed by law and regulation that seem to be getting stricter and stricter.  Terms such as “fit and proper”, “unsafe and unsound”. “suitability test”, “international best practice”, previously unknown (or at most limited to the vocabulary of esoteric experts), have become, with the passage of the General Banking Law (which replaced the General Banking Act) and the Securities Regulation Code, common mantras uttered on both sides of the debating table as well as in meetings of technical working groups. 

 The quandary of the Philippine trust industry is reflected in the microcosm of the issues regarding the unit trust investment fund, or UITF.  Really, the trust industry is between a rock and a hard place.  On the one hand, there is this thought that the UITF ought to be regulated by the SEC also.  On the other, the current regulator the BSP, which is batting for sole supervisory and regulatory authority, nevertheless admits to be continually revisiting its regulations to ensure that proper investor protection measures are observed.  For instance, BSP is currently looking at the client suitability and risk disclosure aspects of the UITF, and certification of UITF marketing personnel.  Either way, the trust industry faces what the Chinese are said to wish for their enemies,  namely, “interesting times.”

 Finally, on account of the first two trends, the conscious effort of trust entities to make themselves more competitive and, by necessity, give the rest a harder time to survive.  And Darwin’s law appears operative.  The shrinking roster of institutional members of the TOAP attests to the inexorable operation of the attrition law. Gone are the names of then giants “Far East Bank and Trust Company” and “Equitable PCIBank” or even of lesser beings like “International Exchange Bank”.

 So, quo vadis, trust industry?  Clifford submits that “increasing signs indicate that it is an industry that will go from strength to strength, in a direction that is sophisticated and accountable.”  De Vera for her part is bent on selling to her constituency a new mission and vision.  Central to that mission-vision statement is the fact of trust department’s being fiduciaries.  More on that in subsequent columns.