A new service is now available for clients of the Cook Islands international financial services industry after the passing on Monday of the Foundations Act 2012. Foundations are the first new service available from the industry since the 2008 addition of Cook Islands Limited Liability Companies. Parliament requested an in-camera session with Financial Services Development Authority chief executive officer Jenner Davis in order to better understand foundations and how they can benefit the Cook Islands. Cook Islands News conducted its own Q&A with Jenner Davis.
Why add foundations when the Cook Islands has had great success with trusts?
As finance minister Mark Brown has stated, the Cook Islands needs to diversify its service offerings in order to attract clients from new markets. Some of the trust companies are competing within their own companies for business and more and more of them are focused on Asian clients. Foundations were identified as a key service to offer to that market.
What is a foundation?
There is no set definition of a foundation but there are common features among foundations which highlight how it operates. Foundations are distinct legal entities to which the founder transfers assets. They are often used for estate planning purposes or charitable purposes.
How do you form a foundation?
To form a Cook Islands foundation, the founder must work through a licensed trustee company. The founder endows the foundation with assets which are administered on contractual principles, similar to a company. The registered office, name and address of council members, and the foundation’s objects are placed with the registrar at the Financial Supervisory Commission.
How does it work once formed?
Foundations are managed by a council of members. A foundation can hold assets, enter into agreements with third parties, and can sue or be sued in its own name. The founder can retain some control over the foundation’s assets through reserving certain powers under the foundation’s rules.
How is a foundation different from a trust?
A trust is a relationship whereas a foundation is a distinct legal entity. There are similarities in the functions they serve for high net worth families and companies but foundations allow for greater controls by the founder which is comforting to clients. Trusts are derived from the common law which is the basis of law in the Cook Islands. This means that much of the law we rely upon is not necessarily detailed in specific statutes but rather it comes from the precedents of hundreds of years of case law. Foundations, on the other hand, are a civil law concept and more easily understood in the new markets we are pursuing, such as China, which is a civil law country.
How does Cook Islands foundations law differ from others with foundations?
We determined that the Isle of Man law and the proposed Guernsey law were best suited for what the Cook Islands needs so our act was modeled after those laws. However, we have included comprehensive provisions dealing with the termination and dissolution of foundations as well as providing for the migration of existing foundations from other countries to the Cook Islands. We also included some of the asset protection features long considered an advantage in our International Trusts Act.
Will foundations help the Cook Islands goal of diversifying its client base?
Yes. Civil law country clients will more easily recognise a foundation and be more comfortable establishing one. The work FSDA has done in China has yielded interest in both trusts and foundations and now we can service both sides of this market. Europeans also form foundations so this opens up a new market that will further diversify our client base. US clients have shown interest in this new legislation and business from that market will be a bonus as trusts will continue to be the mainstay for our US clients.
This is the first of several new or amended legislation FSDA is driving. Next up is Captive Insurance followed by a new International Companies Act. We will also be improving our LLC Act and International Trusts Act. About this time next year, we hope to have passed a new Mutual Funds Act and Segregated Companies Act. The more services we can offer, the more we appeal to a broader client base and draw in an increased mix of individual and corporate clients. We will be a stronger contributor to the overall economy here as we offer more services. We don’t expect to surpass tourism anytime soon, but we’d like to be a closer second than we are currently.