Legal

Spotting The Signs: Fraudulent Trustees Post-Pandemic

Amy Harvey, 19 November 2021

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This guest piece examines what defines trustee mismanagement, such as making investments outside the trust's remit, and the actions that can be taken if a trust is being abused.

It is difficult to establish the full extent of the fallout from COVID-19 on the global economy, but the magnitude of the recession caused by the pandemic is unprecedented. Past economic downturns have shown that those negatively affected by portfolio losses will scrutinise the actions of those managing their assets. Recessions often uncover and serve as a catalyst for fraud and litigation. Amy Harvey, counsel at London law firm Peters & Peters, which has a substantial financial crimes unit, explores the impact of fraud for beneficiaries of trusts holding significant assets and those acting as trustees. Harvey says, "put simply, trustees will need to protect themselves from allegations of mismanagement and beneficiaries will need to keep a close eye out for misconduct and act if it is suspected. We welcome guest contributions, where the usual editorial disclaimers apply. Send feedback to tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com.

Trustee protection strategies
As fiduciaries, trustees are guided by the responsibilities and obligations imposed upon them under the relevant law and/or contract or trust instrument but, in essence, they are duty-bound to act in the best interests of the beneficiaries.

There is limited precedent to advise trustees as to what this now means in the context of the pandemic and whether new duties can be said to have arisen as a result but, in any litigation, courts are more likely to focus on the adequacy of the trustee’s management and administrative processes, as opposed to eventual portfolio results. Therefore, a trustee should be proactive and diligent and ensure that they evaluate and record whether their current processes remain appropriate.

Trustees would therefore be particularly advised to analyse and identify any new actual or potential risks to assets under management and explore potential methods to minimise any negative impact - one obvious identifiable risk that professional trustees are likely to face is ensuring that employees and assets being managed remotely are properly and carefully supervised.

The importance of proper and regular communication is also fundamental. Trustees have a duty to keep beneficiaries reasonably informed regarding the trust and its administration, even if the future is unclear. Frequent communication in troubled times could help mitigate worry and avoid litigation.

Throughout all of this, they should also properly document their due diligence; review expenses; and take professional advice; and consider what judicial tools may be available to (i) seek directions from the court (i) protect from potential beneficiary attack and/or (iii) amend the trust instrument in order to deal with a changing economy.

Tips for concerned beneficiaries
In times of economic turmoil and stressful change, individuals often make poor decisions. Bad actors may also seek to profit from unique opportunities to commit fraud arising as a result of the pandemic. The “new normal” of remote working also increases the incidence of risk and information management issues. So, what to do if you are a concerned beneficiary faced with an undiligent trustee? What does trust mismanagement mean, how can you establish whether a trust is being mismanaged and what can you do about it?

There are a number of ways in which a trustee could mismanage a trust, whether through negligence or fraud (or both). This could involve making investments outside the powers of investment or investment profile for the trust; failing to exercise reasonable skill and care when making investments; making decisions based on personal interests; failing to take reasonable steps to protect the trust fund; distributing trust assets to non-beneficiaries; using trust funds for a trustee’s personal advantage (even if only “borrowed”); and reaping other financial benefits from trust assets.

If a trustee is attempting to hide actions, delaying providing information or providing vague answers to questions can all be warning signs that a trust is being mismanaged.  

Trustees have a duty to keep beneficiaries reasonably informed and beneficiaries can demand financial information showing how the trust fund is being managed. If not forthcoming, they can apply to the court for an order compelling a trustee to produce information.

Once in receipt of information, a beneficiary can assess whether mismanagement has occurred. If the trust affairs are complicated or it isn’t clear whether full information has been provided, it will probably be prudent to engage a forensic accountant to assist with this exercise.

How to proceed
Once mismanagement has been identified, there will be various options and remedies open to the beneficiaries, depending on the nature of the misconduct. Potential proceedings could be brought to make good losses (if a trustee has failed to exercise care and skill or made unauthorised investments); to recover trusts funds which were wrongly distributed to non-beneficiaries or misappropriated; or against a trustee who has wrongfully profited from their position.

Action can also be taken to remove a trustee from office (although that power may already exist under the trust instrument), as well as against third parties who may have dishonestly assisted a trustee in their breach of fiduciary duty or who have knowingly received trust property to which they were not entitled.

In cases of extreme concern, for example where there are fears that trust assets may have been dissipated and could be further dissipated, it may be necessary to take urgent legal steps (such as obtaining freezing orders) without any notice to the trustee and before entering into substantive correspondence which could “tip off” the bad trustee.

Beneficiaries should always seek advice at an early stage and keep proper records of all their communications with the trustee. Following this guidance is likely to lead to a more successful outcome for the beneficiary from both a recovery aspect and legal costs position. In less serious cases, early advice and management of the situation could also make it possible to maintain a working relationship with their trustee in future.

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