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Fraudulent Transfer

Fraudulent Transfer (aka Fraudulent Conveyance) is a civil issue not a criminal issue. It particularly arises when a debtor is insolvent (does not have enough assets to cover his/her debts). The action is generally brought by creditors or by bankruptcy trustees.

Making oneself insolvent, typically involves a debtor who donates his assets, usually to an “insider”, and leaves him/herself with nothing to pay debts. In a successful suit, the plaintiff is entitled to recover the property transferred or its value from the person who has received a gift of the debtor’s assets.

Cook Islands Statute of Limitations

In the Cook Islands there is a one-year statute of limitations on fraudulent transfer (or two years from the cause of action – the reason why the lawsuit was filed).

This is what that means:

  1. Once the statute of limitations runs out, the Cook Islands courts will dismiss any lawsuits claiming fraudulent transfer of assets.
  2. So, once a lawsuit runs its course in the defendant’s home jurisdiction then the person goes through bankruptcy, the statute of limitations clock will have run out which will bar the suit in the Cook Islands.
  3. It gets even better. Even if the lawsuit is filed in the Cook Islands before the statute of limitations, the plaintiff (the one suing) will have to prove that the sole reason the trust was established was to fraudulently transfer assets from that particular creditor (not just any creditor, but the creditor filing the lawsuit). Most notably, the plaintiff will need to prove his case beyond the shadow of a reasonable doubt. The burden of proof in most civil lawsuits is by a preponderance of the evidence (51% to 49%). However, in this instance it requires a 95-97% proof of the facts. This is nearly impossible to do in actual practice with respect to asset protection trusts. This is because the defendant can simply let the other side know that the trust was established to diversify investments, to place funds in a safer jurisdiction, to hold assets for future distribution to children or a plethora of other reasons.
  4. Moreover, if one has an existing living trust that holds assets, that trust may generally be amended and turned into a Cook Islands trust. It will be the same trust with different wording. Thus, the assets that were held therein for the previous one to two years will have already passed the statute of limitations test and are protected from a fraudulent transfer challenge in Cook Islands courts.

Caymen Islands Fraudulent Disposition Act of 1989

Prior to the Fraudulent Disposition Act of 1989, the Caymen Islands and most other British colonized financial centers fell under the Statute of Elizabeth which did not offer strong protection against creditor claims. The new law greatly increased asset protection by requiring it to be proven that the trust was created solely with the intent to defraud that creditor. Without proving intent to escape a debt from the creditor, the trust is not subject to the creditor’s claim.

What this means is that a Caymen Islands Trust settled would not be subject to future creditor’s claims.