Georgian billionaire Bidzina Ivanishvili's $800 million 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, a former prime minister of Georgia who made his fortune in post-Soviet Russia, 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 who specializes in trusts and wealth management.
The focus may prompt international banks, who oversee trust firms that cater to their millionaire clients, to examine their strategies. Credit Suisse announced on the second day of the trial the sale of its global trust business, a move it said was part of a regular review. Other banks including
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 to whom they reported, according to testimony from Dominik Birri, the former head of the bank's trust business in Singapore, during the ongoing three-week trial in the city-state.
The wirehouse fabricated the terms of its recruiting bonus loan and client churning allegations against Anil Bhandari, he said in his first interview on the case.
Clifford Ng, a partner at Zhong Lun Law Firm in Hong Kong, said conflicts can arise when "trustee services are subsidized 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, Ng said.
Dispute
The bitter dispute in this case dates to 2004 when Ivanishvili chose Credit Suisse to park about $1.1 billion of his fortune. That same year, a Frenchman named Patrice Lescaudron who spoke Russian but had no banking experience at the time 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 and make up the losses. His ruse was not exposed until 2015, when a massive wrong-way bet triggered more than $120 million worth of margin calls for Ivanishvili.
Ivanishvili's lawyers argued during the trial that the trustee which controls the accounts should safeguard and monitor the assets, and should have intervened, especially when red flags about Lescaudron's behavior were raised as early 2006.
"Had the trustee investigated the unauthorized 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 realized that trust assets were being misappropriated and/or being invested by persons without any authority to do so," Cavinder Bull, Ivanishvili's lead lawyer, said at the trial.
Lawyers for CS Trust countered that, by contract, the trustee was supposed to only administer the trust structure and not to monitor any outgoing funds. Ivanishvili and his advisor George Bachiashvili, who both
No policing
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 European Union on money laundering means registrations should substantially rise, according to the
The Securities and Exchange Commission charged several investment advisors with combined penalties of $1 million for violating the Investment Advisors Act's Custody Rule.
In Singapore, the industry has boomed as the Asian city-state becomes a magnet for family fortunes. There are 64 licensed trust companies in Singapore, according to the financial regulator's
SMU's Tang said the current case exposes 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, Tang said. "In other words, in the face of actual knowledge of wrongdoing, the trustees must interfere."
At the trial on Monday, when Birri, the former Singapore trust head, was asked by the trial judge whether he should have intervened to stop Lescaudron's unauthorized 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," he testified.
Birri said he didn't contact Ivanishvili, despite years of seeing unauthorized payments made by Lescaudron out of the trust, because he believed the billionaire only wanted to be contacted by his relationship manager directly. He said it was "not uncommon" to encounter unauthorized payments in the 1,500 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.
