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Asset protection: threats and solutions for Russian private clients. Ilya Aleshchev, Partner, Alimirzoev & Trofimov law firm, Moscow. What Dangers are for a Typical Russian Private Client?. Lives Globally. Key risk areas: Matrimonial disputes Inheritance Creditors Political risks .

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asset protection threats and solutions for russian private clients

Asset protection: threats and solutions for Russian private clients

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

slide2

What Dangers are for a Typical Russian Private Client?

Lives Globally

  • Key risk areas:
  • Matrimonial disputes
  • Inheritance
  • Creditors
  • Political risks

Can be a PEP

Family abroad

Foreign bank accounts

Cyprus/BVI

structured

Owns a

business

slide4

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 NorilskyNikel dispute

slide5

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

slide9

Typical Weak Points

  • There is very often no will or only Russian law will
  • Successionrarelyconsideredinbusiness 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 assets

slide10

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 rarely

slide11

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 control

slide12

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.

slide14

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:GlebFetisov, 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 MrFetisov 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
    • SevernuyKuzbass – thin capitalization rules
  • Standards for Directors’ liability grow stricter
      • Supreme Arbitrazh Court Plenum Ruling #62
      • Pre-bankruptcy rules – statute amended in 2013
      • KirovskyZavod (Doroga) case – Director’s duties
  • Interested transaction rules reform would cover wider scope of affiliates, including informal ones
        • Statutory criteria for affiliates are debated
slide16

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 andRUR 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 officer

slide17

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 assets

slide18

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 courts

slide20

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 airports
slide21

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 of
slide22

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

thank you for attention
ThankYou For Attention!

Ilya Aleshchev

Alimirzoev & Trofimov law firm, Moscow

i_aleschev@atlawyers.com