For many wealthy individuals and their families, the issue of privacy and security often permeate their lives. When such individuals or families reside or travel in countries where crime, and in particular, kidnapping, is rife, the need to consider kidnap provisions in modern trust deeds increases. But just how should trustees react to a ransom demand, and what steps, if any, can they take to minimise risk to both themselves and the kidnap victim before and after the trust deed is signed?
Kidnapping is a booming industry. It is estimated that over 8,000 kidnappings occur annually worldwide with no signs of slowing. With so much wealth tied up in private trusts, it seems inevitable that some trustees will be called upon by frantic family members to assist with the release of loved ones. There are, however, many issues of risk for trustees to consider.
Is there a power to act?
A ransom demand does not fall neatly into a power to appoint, pay, apply or advance funds out of a trust. A payment of ransom is also unlikely to be classified as a trust expense, and it would be most unusual to find such a power in a standard trust deed. Therefore, if there is any risk that a beneficiary might be kidnapped, it is wise to include a specific power or purpose in the trust deed to allow the trustees (or their designate) to pay the ransom out of the trust fund. It is also vital to anticipate situations where power holders are incommunicado or become incapacitated.
Trustees or other power holders may also wish to consider obtaining an indemnity from the adult beneficiaries before a ransom payment, although there are some inherent limitations to their effectiveness. A settlor may also consider using a purpose trust, such as a STAR Trust, and include the payment of ransom as one of the purposes of the trust. This would help avoid any technical objections regarding the validity of the exercise of power to pay a ransom if such a power is specifically authorised by the trust deed.
Payment of a ransom – is it legal?
Trustees (or the relevant power holder) must carefully consider whether the payment of a ransom is lawful as a matter of the law governing the trust and in the place of administration/residence of the trustee, and possibly the jurisdiction where the kidnapping has taken place and the jurisdiction where the ransom payment will be made. Furthermore, kidnappers could be defined as “terrorists” under the laws of certain jurisdictions. This is often overlooked, and trustees must be mindful to review their local anti-terrorism legislation. For example, in the Cayman Islands “terrorism” is defined in the Terrorism Law (2009 Revision) as:
“the use or threat of action where…[the use or threat of action] is designed to influence the government or to intimidate the public or a section of the public; and the use or threat is made for the purpose of advancing a political, religious, or ideological cause…”
So it seems much depends on who is doing the kidnapping. For example, if a beneficiary is kidnapped by the Colombian Marxist group FARC, it seems probable that any payment to FARC in satisfaction of a ransom demand could be an offence under the Terrorism Law (2009 Revision). This creates several dilemmas: should the trustees first explore whether the kidnappers have a political, religious or ideological cause before they pay the ransom?; how would they go about confirming this and how deep should they dig?; and, what if they get it wrong? Trustees must be mindful of the fact that the consequences of supporting terrorists are very serious in the Cayman Islands. Due to the potential unlawfulness, no waiver or indemnity from the beneficiaries could offer any protection to the trustees. If, however, the kidnappers do not have any political or ideological cause, the ransom payment could still breach some other domestic criminal code, such as section 134(1) of the Proceeds of Crime Law 2008, which makes it a criminal offence if a person:
“enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person”.
All of this would, of course, have to be checked before any ransom payment is made under extreme pressure. Trustees would be wise to inform the family of the necessity for these checks at an early stage.
Trustees or kidnap committee?
The power to pay a ransom can be vested in a trustee, kidnap committee or other power holder, such as a protector or enforcer. For example, certain powers can be reserved to a settlor or other persons as a matter of Cayman Islands law. It is a matter of negotiation between the prospective trustee and the settlor/client as to whom should retain this power. From the trustee’s perspective, they would be better off to avoid the responsibility for several reasons. It is unlikely that a trustee residing in the Cayman Islands will have first-hand knowledge of the circumstances of the kidnapping, nor would they have the necessary skills to liaise with security experts and law enforcement agencies in the country where the kidnapping has occurred. Most crucially, however, is that a trustee can avoid pressure, potential liability, and criticism if the power is vested in a third party. In other words, if the power to pay a ransom demand is removed from the trustee, so is the burden — and the risk.
Trustees will be concerned to review carefully their exoneration language before they consider making any ransom payment. If possible, specific exoneration language should be included in the trust deed to ensure the trustees are fully protected under such circumstances. Even if such provisions are not present in the trust deed, the trustees could try to seek indemnities from the adult beneficiaries prior to making any such payment, although such beneficiaries could later argue that they were under duress.
What about kidnap insurance?
It may be possible to obtain kidnap insurance if a reasonable kidnap risk exists. Several specialist insurance companies offer kidnap policies, and payment of the premium may be justified as a trustee expense. Alternatively, the settlor/client could arrange for cover independently.
Court directions – Is there time?
Trustees faced with a situation where the ransom payment could expose them to serious liability may wish to seek the directions of the Court prior to any action. Directions from the Grand Court, if followed closely, will exonerate trustees for their actions. Although it may be impractical in most cases, if the trustees do have the luxury of time, then going to the Court for directions is an excellent way to significantly reduce the risk of being in breach of trust. Such a hearing would likely be expedited and kept discreet by conducting the hearing in judge’s chambers.
Trustees who are alive to the possibility of kidnapping should raise the topic with the settlor at an early stage and map out an action plan. Wherever possible, specific powers or purposes should be drafted into the trust deed to permit the payment of ransom by some person or group of persons, and trustees must be aware of the risks of inheriting this power.
For a more detailed article on this topic, please the March 2010 edition of The STEP Journal.
This publication is intended only to provide a summary of the subject mattered covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.