By Chanyaporn Chanjaroen and Low De Wei
with assistance from Patrick Winters
Georgian billionaire Bidzina Ivanishvili’s US$800 million ($1.3 billion) lawsuit against a trust firm owned by Credit Suisse is set to become a test case for the global industry handling billions in assets for wealthy families.
A win for Ivanishvili against Credit Suisse Trust (Singapore) may force a major rethink of how and when trust operators flag unusual transactions or other shady practices.
“People in the industry, not only from Singapore but all over the world, are watching the case to see what will be determined as the standard or duty of care that trustees owe to the beneficiaries,” said Tang Hang Wu, a law professor at Singapore Management University (SMU) who specialises in areas including trusts and wealth management.
Strategies under review
The focus may prompt international banks, who oversee trust firms that cater to their millionaire clients, to examine their strategies. On the second day of the trial in Singapore, Credit Suisse announced the sale of its global trust business, a move it said was part of a regular review. Others such as Barclays and Rothschild & Co have offloaded their trust businesses in recent years, while the likes of UBS Group and JPMorgan Chase offer them as part of their wealth management services.
In the case of Credit Suisse, the Singapore trust entity was briefly part of the Swiss bank’s wealth management business from 2012 to 2013. Its auditing, as well as legal and compliance functions, worked with line managers in Zurich they reported to, according to Dominik Birri, the former head of the bank’s trust business in Singapore, who testified during the trial, which is scheduled to last three weeks.
Clifford Ng, a partner at Zhong Lun Law Firm in Hong Kong, said conflicts can arise when “trustee services are subsidised by other parts of the banks’ business”. Trustees would be less likely to pull assets from the private bank even if investments are not performing or ill-advised, he said.
Bidzina Ivanishvili was prime minister for 13 months in 2012-13. (Image: Getty)The bitter dispute, in this case, dates to 2004, when Ivanishvili, a former prime minister of Georgia who made his fortune in post-Soviet Russia, chose Credit Suisse to park about US$1.1b (NZ$1.83b) of his wealth. That same year, a Frenchman named Patrice Lescaudron, who spoke Russian but had no banking experience, joined the bank. Within two years, he was handling the biggest clients in the region, including Ivanishvili.
But when the private banker ran into losses on behalf of his clients a few years later, he admitted he panicked and began to fake signatures on trade orders and run duplicate statements as he bought time to try to make up the losses. His ruse was not exposed until 2015 when a massive wrong-way bet triggered more than US$120m worth of margin calls for Ivanishvili.
Ivanishvili’s lawyers argued during the trial that the trustee that controls the accounts should safeguard and monitor the assets, and should have intervened, especially, they say, when red flags about Lescaudron’s behaviour were raised as early as 2006.
“Had the trustee investigated the unauthorised payments and conducted a proper review of the trust, as it was required to do by the law and its own policies, it would have realised that trust assets were being misappropriated and/or being invested by persons without any authority to do so,” said Cavinder Bull, Ivanishvili’s lead lawyer at the trial.
Lawyers for CS Trust countered that, by contract, the trustee was supposed only to administer the trust structure and not to monitor any outgoing funds. Ivanishvili and his adviser George Bachiashvili, who both testified last week, should have been held responsible for investment decisions made on their behalf, the lawyers said.
Executives of the Singapore subsidiary reported to line managers at Credit Suisse's world headquarters in Zurich. (Image: Getty)Trusts have been around for centuries under English common law and offer a means of managing assets across generations. Their numbers are hard to quantify, though there is growing pressure within the European Union to make registration a requirement.
A growing drive for global transparency and a crackdown by the EU on money laundering mean registrations should substantially rise, according to the Society of Trust and Estate Practitioners, a London-based professional body with 21,000 members in 96 countries.
In Singapore at least, the industry has boomed as the country becomes a magnet for family fortunes. There are 64 licensed trust companies in the city-state, according to the financial regulator’s data, which doesn’t include the amount of money they manage.
Limits of responsibility
SMU’s Tang said the current case exposes the disagreement over the limits of responsibility within a trust deed. Some argue that even though the trustees are not bound to intervene in the decisions of trust-owned companies, if they learn something is seriously wrong, they must do something, the law professor said.
“In other words, in the face of actual knowledge of wrongdoing, the trustees must interfere.”
At the trial last Monday, when Birri, the former Singapore trust head, was asked by the judge whether he should have intervened to stop Lescaudron’s unauthorised payments since 2006, he said, “No, we were not policing that. The only thing we could do is escalate and escalate to compliance, business risk, line management, to the bank.”
Birri said he didn’t contact Ivanishvili despite years of seeing unauthorised payments made by Lescaudron out of the trust because he believed the billionaire wanted to be contacted only by his relationship manager directly, and it was “not uncommon” to encounter unauthorised payments in the 1500 trust structures he oversaw at the company.
It remains to be seen what, if anything, the trust will end up costing Credit Suisse in damages. A verdict on the case is expected in Singapore in the first quarter of next year.
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