Karel’s Legal Blog

Identity of ultimate beneficiary must be known

According to the Order on Sound Operational Management (the Order)(‘Regeling integere bedrijfsvoering Wet toezicht trustkantoren’) pursuant to the ASTO, a trust office shall know the identity of the ultimate beneficial owner (‘UBO’) of an object company and keep the evidence used to determine who qualifies as the ultimate beneficial owner and from which the identity of the ultimate beneficial owner has been established, available (Article 12 (1) of the Order).

The trust office shall keep a client acceptance file for every object company, for every sale of a legal entity, and for each trust for which the trust office acts as trustee. A client acceptance file shall contain at least the following documents: (a) the written contracts between the trust office and the object company and other contracts that the trust office has concluded on the services provided by the trust office covered by the client acceptance file, and (b) a list of the services provided by the trust office covered by the client acceptance file and the information listed in, a.o., Article 12 of the Order. The trust office shall keep the client acceptance files available for the Dutch Central Bank (Article 18 of the Order).

Effective 1 August 2008, the Dutch Identification (Financial Services) Act (‘Wet identificatie bij financiële dienstverlening’: WID) and the Disclosure of Unusual Transactions (Financial Services) Act (‘Wet melding ongebruikelijke transacties’: MOT) have been replaced by one single act: the Money Laundering and Terrorist Financing Prevention Act.

The Dutch Money Laundering and Terrorist Financing Prevention Act (MTPA) (‘Wet ter voorkoming van witwassen en financieren van terrorisme’) requires not only the client (referred to as the ultimate beneficial owner) but also their representatives to be identified before any service is provided. The MPTA not only applies to trust offices, but to other financial services providers as well, including civil law notaries, attorneys and tax advisers.

With respect to trust offices, this means that anyone who acts on behalf of a client must be identified, including so-called ‘outside directors’ (directors of the object company who are not linked to the trust office). Representatives are usually identified on the strength of a copy of their passport or other valid proof of identity. Identification under the MPTA must be recorded by the trust office.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Policy rule on integrity testing

The integrity of those having a certain interest in, or control over, a trust office (such as managers, supervisory directors and persons who determine or help determine policy) will be tested and their antecedents investigated (Article 3 of the Dutch Act on the Supervision of Trust Offices; ‘ASTO’). The test is set out in detail in the Policy Rule on Integrity Testing, which contains rules regarding the testing of the integrity of persons who (co-)determine, or are to be appointed to (co-)determine, the policy of supervised institutions, and of holders and prospective holders of qualifying holdings in supervised institutions (the so-called Policy Rule)(‘Beleidsregel Betrouwbaarheidstoetsing’). The current Policy Rule is in force since 28 January 2005.

According to Article 1 (1) of the Policy Rule, ‘integrity’ shall mean, for the purposes of, amongst other things, the ASTO, the “refrainment from one or more actions that, in the opinion of the DCB, are incompatible with a person fulfilling the function of (co-)determining policy or holding a qualifying holding”.

Further, in Article 1 (2) of the Policy Rules it is stated:

“The actions referred to shall include actions that give evidence of the person concerned not possessing qualities such as truthfulness, a sense of responsibility, law-abidingness, openness, sincerity, prudence, punctuality, honesty, discretion, and uprightness.”

Following Article 2 (1), the assessment of integrity shall take place by “testing, on the basis of intentions, actions and antecedents (collectively referred to as ‘Antecedents’), whether the person concerned gives or has given evidence of such actions that, in the opinion of the DCB, his or her integrity is not, or is no longer, beyond doubt”. ‘Antecedents’ should be understood to include financial and criminal history.

If the Dutch Central Bank has concluded that the integrity of a person is not, or is no longer, beyond doubt, and if no direct consequences arise from the ASTO itself, the DCB may exercise the powers assigned to it pursuant to the ASTO (Article 4 of the Policy Rule). This includes, for example, giving an order that such person shall no longer be allowed to determine or co-determine the trust office’s policy.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Regulatory framework aims at sound operational management

Section 10 (1) of the Dutch Act on the Supervision of Trust Offices (the ‘ASTO’) states that rules may be issued for trust offices, pursuant to an order in council, i.e. a governmental decree, with the intention of ensuring sound operational management. Such rules were issued in the Order on Sound Operational Management Relating to The ASTO (‘Regeling integere bedrijfsvoering Wet toezicht trustkantoren’; the ‘Order’). The Order is in effect from 1st March 2004.

According to Article 2 (c) of the Order, sound operational management means:

“the management of the organization of the trust office and the structure of the processes, of and relating to the trust office, such that integrity risks are controlled.”

Article 2 (d) of the Order contains a definition of aforementioned integrity risks:

“integrity risk: the risk of damaging the reputation of the trust office or the financial markets in general as a result of inadequate compliance with obligations under private law, administrative law, tax law or criminal law.”

The definition of this term relates to compliance with statutory obligations, creating a specific and auditable standard. The damage to the reputation of a trust office or the financial markets in general as a result of inadequate compliance with these obligations is not restricted to actions or omissions by the trust office itself. The definition also covers the conduct of employees of the trust office, object companies and third parties which could damage this reputation.

Further, the Order defines an ‘incident’ as:

“an event that poses a serious danger to the sound operational management of the trust office, including an action or omission by: the managers or supervisory directors of the trust office; other persons who determine or co-determine the policy of the trust office; persons who have a qualifying holding in the trust office; an employee of the trust office; a third party; or an object company” (Article 2 (f) of the Order).

A trust office shall immediately notify the DCB of an incident, if the incident, for instance, has been or will be reported to the judicial authorities and/or if in view of the seriousness, scope and other circumstances of the incident, it can reasonably be assumed that the DCB should be informed because of its supervisory role (Article 11 (3) under a. and e. of the Order).

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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Curacao is again ranked #1

According to the 2008 Global Custodian Hedge Fund Administration Survey, Curacao (Dutch Caribbean) is the # 1 location for hedge fund administration services. Curacao outperformed Singapore, Dublin, Toronto, Hong Kong, Luxembourg, Amsterdam and the Cayman Islands, to name just a few.

Curacao is known for its excellent legal and tax infrastructure, high quality of services and reliability. For further info on hedge funds and Curacao’s professional environment: click here.

Karel Frielink
Curacao-based Attorney (lawyer) / Partner

Filed under: Securities by Karel.Frielink
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The Dutch Central Bank is the supervisor

The Dutch Act on the Supervision of Trust Offices (‘ASTO’) (‘Wet toezicht trustkantoren’) entered into force on the 1st of March 2004. According to the legislative history, the Explanatory Notes to the Act, the aim of the ASTO is to promote the integrity of the financial system by regulating the trust industry. The Explanatory Notes (Par.3.3) continue:

“The main subject of this bill is the integrity of the trust office and the relational integrity, the integrity of clients of the trust office, in the sense that the buyer (as the ultimate beneficial owner) of the services must be known to the trust office.”

The Dutch Central Bank (the ‘DCB’) shall be entitled to revoke a license granted to a trust office if, for instance, the DCB obtains information, which, had it had been known at the time of granting the license, would have meant that the license would not have been granted (Article 6 (f), ASTO). The DCB shall grant a license, unless, for instance, based on the intentions or antecedents of the persons mentioned hereafter, the DCB is of the opinion that the trustworthiness of any of (i) the managers or supervisory directors of the trust office; or (ii) those persons who determine or co-determine the policy of the trust office; or (iii) those persons who have a qualifying holding in the trust office, is not beyond doubt (Article 4 (a), ASTO).

If a change occurs in the aforementioned antecedents, the trust office shall notify the DCB immediately in writing (Article 5 (3), ASTO). If this provision is not met, the DCB shall be entitled to order a trust office or the competent bodies to follow a certain course of action with respect to the matters in question. The trust office or the competent bodies to which the instruction is given shall be obliged to follow those orders within a period to be stipulated by the DCB (Article 11 (1) of the ASTO).

If the expertise and trustworthiness of (a) the managers and supervisory directors of the trust office; (b) the persons who determine or co-determine the policy of the trust office; or (c) the persons who have a qualifying holding in the trust office, insofar as they determine or co-determine policy under a formal or actual control structure, are no longer beyond doubt, then the DCB shall be entitled to order that these persons shall no longer be allowed to determine or co-determine the trust office’s policy (Article 11 (2) ASTO). This means that it is not necessary to immediately revoke the license of the trust office. In certain circumstances, revoking the license could be excessive. This however, according to the Explanatory Notes, does not affect the ability to revoke the license without prior order, if the circumstances so dictate.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: legal by Karel.Frielink
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was wrongly disqualified

On 20 August 2008, Churandy Martina won the silver medal in the 200 metres at the Olympics behind Usain Bolt in 19.82 seconds, the first time he had run sub-20s. He was the first medal winner for the Netherlands Antilles after Jan Boersma won silver in sailing at the 1988 Summer Olympics in Seoul.

But Churandy Martina later was disqualified after the U.S. team protest that he had run out of his lane. However, the Netherlands Antilles has appealed to the Court of Arbitration for Sport (CAS) in Lausanne to restore Churandy Martina as the second-place finisher in the men’s 200 meters, according to the Netherlands Antilles Olympic Committee website (NAOC): “The rules state quite clearly that the written protest should have been entered within 30 minutes after the official result announcement. The alleged protest form quite clearly stated that it was entered after this timeframe. Other evidence even showed that in the past the IAAF quite clearly didn’t approve other similar cases.” The NAOC requested the CAS to invalidate the procedure followed by the IAAF Jury of appeal and to annul the disqualification of Churandy Martina, mainly for formal reasons. USA Track and Field and the United States Olympic Committee have both requested to participate in this arbitration procedure.

Karel Frielink

Filed under: Uncategorized by Karel.Frielink
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The legal effects doctrine: an exception to the lex loci delicti rule

Under Dutch Caribbean rules of private international law, a claim arising from an unlawful act is governed, in the absence of a choice of jurisdiction by the parties, by the law of the country were the unlawful act was committed (lex loci delicti). However, this rule may possibly not apply if the tortfeasor and the injured party are both residing in a country other than that where the unlawful act was committed and if the legal effects occur entirely in the other country. This is the so-called legal effects doctrine. In such cases the question of whether the act committed was unlawful, but also other elements such as the causal link between the act and the injury, (extent of the) damages, circle of liability etc. may possibly also be governed by the legal effects doctrine.

This is evidenced by judgments of the Dutch Supreme Court, e.g. Supreme Court dd November 19, 1993 (COVA case). In its decision the Supreme Court confirmed that the principal rule on conflicts in the field of international torts is that the applicable law is the law of the place where the wrongful act took place, the lex loci delicti. The place of the wrongful act may, however, be fortuitous or unascertainable. As a result, according to the Supreme Court, exceptions to the lex loci delicti rule such as the legal effects doctrine may, perhaps apply.

However, the Supreme Court also held that this exception should only be applied restrictively. The Supreme Court held that an exception to the lex loci delicti rule may only be made if all legal consequences of the wrongful act fall within the legal sphere of a country other than where the act took place. Furthermore, it held that this is only the case when both parties, the tortfeasor and the injured party, are domiciled in that country. It should also be noted, that the legal effects doctrine does not preclude account being taken of so-called mandatory or priority rules such as traffic and safety rules existing at the place of the unlawful act, or of other comparable rules intended to protect persons or things (i.e. property).

Finally, depending on the pertinent facts and circumstances of a particular case, other exceptions to the lex loci delicti may possibly be permitted. For instance, if the unlawful act is closely connected with another legal relationship, e.g. a contract, between the tortfeasor and the injured party, then it may possibly be argued that the law applying to that other legal relationship must also govern the obligation arising from the unlawful act.

Karel Frielink / Ursus van Bemmelen
Dutch Antilles Attorneys / Lawyers

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No obligation to file for bankruptcy

There is no statutory obligation in the Netherlands Antilles for managing directors of a company to file for the bankruptcy of the company. Managing directors are therefore not responsible to the creditors for damages sustained by them as a result of any ‘late’ filing for bankruptcy. There is no such obligation for shareholders of a company either. A liquidator of a company shall, however, file for bankruptcy if he finds that the liabilities are likely to exceed the assets, unless all known creditors agree in writing that the liquidation be continued on a voluntary basis (Article 2:29(3) Netherlands Antilles Civil Code).

However, creditors of the company may hold a director liable on the basis of tort if he entered into a transaction on behalf of the company while he knew, or should reasonably have known, that the company would not be able to fulfil the obligations arising from that transaction and the company would not have sufficient assets for the creditor to take recourse against. If the shareholder (or another person) is actually in control of the company and the managing director is more or less forced to carry out his instructions to enter into said transaction, the shareholder (or other person) could be held liable as the de facto managing director.

One may also be held liable for fraudulently disposing of the company’s assets or disguising profits or losses prior to or during bankruptcy proceedings. If the bankruptcy trustee proves that improper management (during the three years prior to the commencement of bankruptcy) was a major cause of the bankruptcy of the company, the managing directors (and in addition the policy makers) can be held jointly and severally liable for the total remaining debt, i.e. the debt after the liquidation of all other assets.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: Corporate by Karel.Frielink
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Liability for thin-capitalization?

In terms of ‘piercing the corporate veil’, thin or inadequate capitalization usually means capitalization that is not in proportion to the nature of the risks the business of the corporation necessarily entails; in other words it is based on likely economic needs rather than legal requirements.

Shareholders of a company in the Netherlands Antilles are under an obligation to pay to the company what is due with respect to the shares, i.e. the shareholder’s capital contribution, and such contribution may not be withdrawn without due process. This is the only financial obligation of a shareholder towards the company, unless the shareholder agreed to a particular arrangement for capitalization. Thin capitalization as such gives no rise for shareholder liability. The shareholder is not under a statutory duty to provide the company with any additional funds it may need. If, on the other hand, the shareholder misleads a third person regarding the financial status of the corporation so that the third person believes that the corporation has more capital than it actually has, then the shareholder could be held personally liable for his own behavior.

Shareholders can be held liable if inadequate capitalization is related to pervasive fraud, the abuse of corporate personality, or any other form of tort. Inadequate capitalization by itself does not lead to shareholders being liable for the debts of the company. Generally speaking, a shareholder’s sole liability is to pay the share capital.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: Corporate by Karel.Frielink
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Policy maker can be held liable

As a general rule a corporation in the Netherlands Antilles is a legal entity distinct from its shareholders. In terms of liability for mismanagement the law focuses on the managing directors as well as other persons who actually “act as managers” (a.k.a. policy makers or de facto managing directors).

Most legal commentators take the view that instructions from a parent company to a subsidiary do not, as such, constitute “management” in the above sense. However, statutory language is ambiguous and there is no Netherlands Antilles case law on this issue. Those who “act as managers” run (part of) the company as if they are the managers. They are, so to speak, in direct control, mainly through instructions given to the managing directors and more or less enforcing the execution thereof. In these cases one could say that the managing directors act as puppets, manipulated by the controlling shareholder.

Corporate shareholders can, generally speaking, be held liable for subsidiary obligations, e.g., when the subsidiary is being operated in an unfair manner (profits accumulate in the parent and losses in the subsidiary), or when the subsidiary is consistently represented as being part of the parent, or when the parent and the subsidiary are essentially operating the same integrated business, and the subsidiary is undercapitalized. In other words: a corporate shareholder can be held liable if it uses a subsidiary such that rights of third parties are abused. The examples given show that only in case of wrongdoing (tort) can the shareholders be held personally liable.

Karel Frielink
Attorney (Lawyer) / Partner

Filed under: Corporate by Karel.Frielink
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