Financial services expert Max Ganado shares his views on a number of concerns recently raised about fiduciary services

 

What procedure applies when a company accepts providing fiduciary services? Is it just filling in a form? And what sort of scrutiny or due diligence process applies?

Acting as a fiduciary means you are lending your name to a client for him to obtain privacy in his affairs. Privacy is not secrecy and it is not illegitimate but, of course, can be abused.

You only do that when you have verified who the client is and obtained all the necessary information about him and his affairs, references and other information.

You also ask him to sign agreements and declarations which record what is happening and lay out how you should deal with the shares you have agreed to hold.

Sometimes, this is for purely administrative purposes, such as to make up two shareholders in a company as required by our company law, while, at other times, the fiduciary can hold a larger number of shares and even a controlling interest. Each situation provokes its own issues and level of information.

The law requires the collection of different levels of information based on holdings and who the person is. If it’s a politically exposed person there is a massive amount you require. If it’s a licensed or authorised or listed entity it’s very low as information is already publicly available. If it is a controlling interest it is high, and if it’s a small holding it is low. But to think it’s just filling in a form demonstrates a very low understanding of our law.

What kind of auditing is carried out to prevent criminal organisations from infiltrating this system once the services are being offered?

The service is to hold the shares, not to run the company, so you must be careful what to expect.

The fiduciary holds the shares and administers on instructions. Of course, he has to be satisfied that the instructions on voting, transferring or pledging the shares are legitimate in the context of the situation but a fiduciary is not a director of a company running the business.

If he suspects something wrong is happening then he must report the matter and this happens regularly. It does not mean wrong things are actually happening but this is an early warning system, which helps avoid crime. This is a part of the legal infrastructure, which works consistently with others to prevent crime but it is not the only one.

Is it true that firms offering such services simply read audited accounts once a year and just go through them?

It depends on the context. In shipping companies we have a totally different situation from regulated and non-regulated trading companies so this statement cannot be supported.

Is it true that corporate service providers (CSPs) have mushroomed over the past few years and are handling as many as 300 to 400 clients each?

Possibly. If you consider that in the majority of cases a fiduciary company only passively holds shares – plus the relative information according to law – then your surprise at the high number of engagements based on assuming management of the company affairs will appear overstated. A company may have 10 shareholders and nothing may happen throughout the years, as it will simply be the top holding company in a group.

How are they meant to keep track of what a company does if they have so many companies to look after?

It is rare that a fiduciary would have to keep track of the company activities in detail as there are the directors for that.

Of course, fiduciary companies offering director services are carrying out a different service and the issues there are completely different. This is a very detailed issue to address with such superficiality but basic distinctions need to be made.

The critical contribution of fiduciary companies is that they are holders of inside information which can be retrieved when something goes wrong. When people act as shareholders in their own name this added facility is not available. It is wrong to turn on fiduciary companies that do their work diligently and quietly support our national system in defending itself when something goes wrong.

Without them, the authorities would be much weaker in their fight against crime.