Book Review | Overfished Ocean Strategy: Powering Up Innovation for a Resource-Deprived World

Book Review: Overfished

We all know the proverb about teaching someone to fish, but if there are no fish left, knowing how to catch them won’t do you any good. And that’s the position businesses are in today. Resources are being depleted at an alarming rate and the cost of raw materials is rising dramatically. As a result, scholar and entrepreneur Nadya Zhexembayeva says, businesses need to make resource scarcity—the overfished ocean—their primary strategic consideration, not just a concern for their “green” division.

Overfished Ocean Strategyoffers five essential principles for innovating in this new reality. Zhexembayeva shows how businesses can find new opportunities in what were once considered useless by-products, discover resource-conserving efficiencies up and down their value chain, transfer their expertise from physical products to services, and develop ways to rapidly try out and refine these new business models. She fills the book with examples of companies that are already successfully navigating the overfished ocean, from established corporations such as BMW, Microsoft, and Puma to newcomers such as Lush, FLOOW2, and Sourcemap.
The linear, throwaway economy of today—in which we extract resources at one end, create products, and throw them away at the other—is rapidly coming to an end. In every industry, creative minds are learning how to make money by taking this line and turning it into a circle. Nadya Zhexembayeva shows how you can join them and avoid being left high and dry.

Overfished Ocean Strategy: Powering Up Innovation for a Resource-Deprived World
Nadya Zhexembayeva
Hardcover: 208 pages
ISBN-10: 1609949641

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When is a trust not a trust for tax purposes? When it is a “sham”

((Trust & Estate Planning Practice Group))

By Timothy W. Clarke

Trust bubble

A trust is an obligation binding the trustee to deal with property for the benefit of one or more beneficiaries. A trust is formed when the settlor conveys property to a trustee to be held and used for the benefit of the beneficiary — or a settlor indicates an intention to hold property for the benefit of the beneficiary by words or conduct.

The terms of a trust are frequently governed by a written declaration or deed conveying the property and describing the obligations imposed on the trustee. In such circumstances there is little question as to the trust’s existence. But in cases involving aggressive tax plans, the tax authorities occasionally challenge the existence of a trust because it is a “sham”.

A sham is an act or document which is intended by the parties to give the appearance to others of creating legal rights and obligations that are different from the true legal rights and obligations. If a sham exists, the authorities will assess tax based on those true legal rights and obligations. This typically means that the settlor will be assessed rather than the beneficiaries or the trust because the trust is void ab initio.

A finding of sham requires a common intent by the settlor and trustee to deceive third parties or reckless indifference by the trustee as to whether the true legal relationship is captured by the documents. Without commonality or deceit there is no sham. The mental element does not require criminal intent or fraud. It is sufficient that the parties intend to give a false impression about the true legal rights and obligations. But because a sham requires dishonesty — which may have serious implications to a professional trustee — there is a strong presumption against such finding. And if the matter proceeds to court, the burden of proof is always on the person alleging sham.

A transaction cannot be genuine for one purpose and a sham for another although it is possible for one part of a trust declaration to be a sham while the rest is not. And once properly settled, a trust cannot subsequently become a sham.

Tax motivation, artificiality or an absence of commerciality is irrelevant. A transaction is not a sham merely because it was motivated by a desire to reduce tax or because it is artificial or would not have been undertaken by parties dealing at arm’s length in a commercial fashion. It is essential that the parties intend to disguise the true legal relationship whether the transaction is motivated by extraneous circumstances or not.

Whether a trust is a sham frequently turns on the presence or absence of control over the trust property by the settlor. Tax authorities occasionally argue that because the trustee has undertaken a carefully planned series of step transactions, the trustee has no discretion or control over the property and therefore there is no trust or the trustee is a mere agent of the settlor. But the jurisprudence indicates that a trustee is not obliged to say no to any particular transaction just to demonstrate his independence. Complying with the settlor’s or the beneficiaries’ wishes does not necessarily result in a sham.

It is sufficient that he conduct his own independent analysis and act in the best interests of the beneficiaries. In such circumstances it will be important for the settlor to appoint an experienced or professional trustee, that the trustee obtain his own legal, tax and accounting advice and that he exercise his own judgment and record the reason why he has decided to accede to those wishes.

It would not be surprising that a trustee would undertake every transaction suggested by the settlor or requested by beneficiary because a trust exists for the benefit of the beneficiaries. Although trustees occasionally undertake transactions on their own initiative, this usually would be the case only in trusts involving infant, handicapped, incapacitated or spendthrift beneficiaries.

It is important that the relationship between trustee and beneficiary be harmonious. A lack of harmony may be a reason for a trustee to resign or be dismissed. The approach a trustee should adopt will depend upon the nature of the request, the interests of the other beneficiaries and all of the surrounding circumstances. If he is to exercise his powers in good faith, a trustee must be willing to reject the request if he thinks it is not in the best interests of the beneficiaries because it involves, for example, a risky investment or an ill-conceived tax plan.

But if a trustee concludes that the request is reasonable having regard to all of the circumstances and is in the best interests of the beneficiary, he should not refuse it simply to demonstrate his independence. Indeed such a refusal could be a breach of trust if the request was truly in the best interests of the beneficiaries. Rejection would be an exception rather than the rule. One would expect there has not been a single refusal in the majority of trusts involving adult beneficiaries having full capacity.

To guard against an allegation or finding of sham, the settlor should carefully select an arm’s length, experienced professional trustee and should never refer to the trust property as “my property” or include it in a list of his assets.

The trust property should be transferred to and be registered or otherwise recorded in the trustee’s name. The trustee should make it clear to the settlor that although he may consider his or the beneficiaries’ wishes, he now controls the trust property and will only undertake a transaction that he considers to be in the best interests of the beneficiaries.

The trustee should keep separate bank accounts and books and records (including trustee resolutions) and ensure that all necessary tax returns are filed. And finally, the trustee should be well-versed on the particulars of the trust declaration and should consult it and his professional advisors before undertaking any transaction.

Timothy W. Clarke
GGI member firm
Moodys Gartner Tax Law LLP
Tax, Law Firm, Fiduciary & Estate Planning
Calgary, Edmonton, Canada
Timothy W. Clarke


UK Property – Firm Foundations

((Real Estate Practice Group))
By Paul Simmons

Real Estate Firm Foundation

Does UK property still present a path to robust returns for investors in 2015? Can the UK property growth seen in recent years be sustained?

Property still features strongly in the UK pension and investment portfolios of business owners, but there’s one word upon which this sector’s growth hangs – stability.

The UK Government has displayed a pro-business stance, which is likely to bring more of the same – a consistent tax regime and no change for the sake of change.

There are a number of factors that have driven the UK property market forward in the past few years, particularly in London. In recent years, London has been the UK number one property market for buyers from around the world.

This is because the UK is financially-secure, it’s an island so there’s a lower risk of terrorism compared to some other cities, the shopping is great and the infrastructure, such as hospitals is also good.

These are strong incentives for international buyers looking for suitable locations to base their families.

It’s important not to be complacent as the market can change at any time. At the GGI conference coming up in the US, we expect to hear that New York is poised to take over as the number one property market for foreign investors, because they perceive it to be a lower terrorism risk than London.

While UK business owners often save for the future by purchasing commercial property, sometimes arranged through their pension, they also focus on buy to let property, and with record low mortgage deals entering the UK market, property is becoming ever popular.

Experts in London are now forecasting a 20% rise in local property prices over the next five years. However, the rest of the UK is also predicted to move forward.

Not all money in UK property market is from Russia and the oil states, a surprising amount of business also comes from the EU. What investors need to be aware of is that this growth is reliant on the perception of stability. Not only did activity grind to a halt prior to the UK General Election this year, but there may be a similar affect over the EU referendum that is due to be held in the UK by the end of 2017.

Paul Simmons
GGI member firm
Haines Watts
Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning
Over 60 offices around the UK
Paul Simmons


A glance at inheritance regulations under Islamic Shari’a law

((Private Equity and International Wealth Management Practice Group))
By Mohammed Aweidah and Prof. Robert Anthony

Compass Sand

At our PG Meeting in Cape Town, South Africa, in October 2014, we developed the project “Case study of a lucky life”, which ran throughout 2014 and attracted contributions from numerous volunteer GGI members.

During this open panel discussion, Mohammed Aweidah from Al Zarooni Tureva, Dubai, offered us an interesting presentation of the principle of inheritance under Shari’a law. This PG meeting was filmed and a video created, “Focus on Shari’a law rules”, which can be viewed on our Channel

In the meantime, Mohammed provides an overview of this interesting topic.

“Shari’a law is the provisions and rules for Muslims to establishing a fair life. Its source is the holy book, the Quran, and the interpretations by the prophet Mohammed (peace be upon him). Its objective is to regulate the various worldly and spiritual aspects of life and aims at a society ruled by justice and equity.

Among the most complex Islamic provisions are the inheritance laws. It works on the basis of identifying heirs or those having right to the legacy of the dead. The rules aim to invalidate the ones set by pre-Islamic Arabs when they were restricting inheritance to men with the exclusion of women and children. Islam considers such traditions to be unfair and tyrannical. It has set for each entitled person their portion from the legacy by allocating balanced proportions that ensure fair distribution of the legacy so as to prevent any potential disputes which usually take place after the death of the legatee. According to Islamic law, the legatee has no right to prevent any heirs from getting their portion, while other systems do not impose such rules.

Islam takes a middle position among communist socialism, capitalism and other systems that call for personal freedom of ownership. The communist system totally denies the idea of inheritance considering it unfair and contrary to the principles of justice. Conversely, in some capitalistic and similar economic systems, the legatee is absolutely free to dispose of their money as they wish and may deprive all relatives and bequeath their estate to friend or a stranger.

Inheritance has economic and psychological objectives that should help to strengthen family ties and tighten the bond between members. Islamic inheritance law brings many goals to the family and community, most importantly:

1. It helps to strengthen the family bonds. For such purpose, Islamic law states that money should be distributed in an equitable manner.
2. The inheritance law helps to balance economic distribution and division of fortune owned by an individual among a group of individuals in a manner that fights poverty and covers the needs of the beneficiaries.
3. Inheritance law encourages individuals to be more productive. In this case, each individual knows that the people closest to him shall benefit, unlike anyone who lives in a society that does not believe in inheritance law. In such a system, the individual has no excuse to save and work hard as long as he knows that the state will confiscate their money after death.
4. The equitable distribution of inheritance among relatives of the dead makes them feel equal, exorcises the spirit of hatred and helps achieve legal and moral justice in its best forms.

Among the controversial issues is the fact that women inherit half of the inheritance allocated to men in Islam. I would like to point out that such rule is in line with the traditions in Eastern and Islamic communities for the following reasons:

1. Whereas men are responsible for providing the expenses of their wives and children such as housing, education and so on, as well as the marriage costs, all such expenses are covered solely by the male’s wealth. Men’s money is likely to decrease whereas women’s money is likely to increase because women are not required to spend for binding affairs.
2. Unlike men, who are responsible for affording the expenses of their family, some of their relatives and others for whom they may be responsible, women are not charged with affording the expenses of anybody.
3. Under the Islamic law, women find themselves in no need of money because their portion of inheritance plus their dowry remain without any decrease.

However, there are cases where women have inheritance rights equal to those of men, and in other cases where women get inheritance more than the man. For example, if a man dies leaving one wife, two daughters, a mother and one brother. The wife gets one-eighth, the two daughters get two thirds, the mother gets one-sixth and the brother gets the remaining portion, In this case the wife’s portion is three times the portion of the brother, the daughter’s portion is eight times the portion of the brother, and the mother’s portion is four times the portion of the brother.

Shari’a law is a constitution adopted by many Islamic states. In addition, an in-depth review and understanding of the Islamic inheritance law shows that it is quite modern and forward looking.”

Mohammed Aweidah
GGI member firm
Al Zarooni Tureva, Auditors, Accountants, Advisors
Auditing & Accounting, Tax, Advisory
Duabai, UAE
Mohammed Aweidah

Prof. Robert Anthony
GGI member firm
Anthony & Cie
Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning
Valbonne, Sophia Antipolis, France
Prof. Robert Anthony

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Memery Bank – Collective Consultation

By Merrill April, Sarah Martin & Lara Shillito

Collective Consultation

The European Court of Justice (ECJ) has ruled in favour of the UK Government in the landmark USDAW and another v WW Realisation 1 Ltd (in liquidation) and others (C-80/14) (the Woolworths case), ruling that the obligation to collectively consult is triggered where an employer proposes 20 or more redundancy dismissals within 90 days ‘at one establishment’, not across the entire business. It further held that an ‘establishment’ is the entity to which the workers made redundant are assigned to carry out their duties (for example, an office, construction site, shop). On 13 May the ECJ reaffirmed this decision in Lyttle and others v Bluebird UK Bidco 2 Limited (the Bluebird case) and held that a single retail store is capable of being an ‘establishment’.

Under s.188(1) TULRCA employers are obliged to inform and collectively consult with employees where they propose to dismiss 20 or more employees for redundancy within 90 days ‘at one establishment’. Failure to inform and consult may result in up to 90 days’ pay being awarded to each affected employee as a protective award.

The Woolworths case…

The Woolworths case came out of the redundancies of over 28,000 employees following the insolvent administrations of the Woolworths and Ethel Austin retail chains. The Union of Shop, Distributive and Allied Workers (USDAW) tried to obtain protective awards for the employees in relation to the employer’s failure, they claimed, to properly inform and consult with employee representatives. The Employment Tribunal held that around 4,400 employees were not entitled to protective awards as they worked in outlets (‘establishments’) with less than 20 employees and therefore did not have a right to be collectively consulted.

The USDAW appealed, arguing that the existing UK law did not correctly apply EU law; that the words ‘at one establishment’ should be disregarded for the purposes of a collective redundancy involving 20 or more employees. The EAT agreed and held that collective consultation obligations arose regardless of whether 20 or more affected employees were employed at the same or different locations of one employer.

In light of the employer’s insolvency, the Secretary of State was in line to foot the bill for the payment of protective awards to all the relevant workers in Woolworths. Unsurprisingly, it appealed the EAT decision and the Court of Appeal referred various questions regarding the obligation to collectively consult to the ECJ.

What the ECJ held in the Woolworths case…

The ECJ has confirmed that there is no requirement under EU law for an employer to take account of the number of proposed dismissals across all of its establishments (such as sites, offices and shops) when determining whether the threshold number for collective redundancy consultation has been reached. In other words, the establishment test is still relevant.

In previous cases the ECJ has held that ‘establishment’ must be interpreted as the unit to which the workers made redundant are assigned to carry out their duties” i.e. an individual workplace as opposed to the entire business. An establishment may consist of a distinct entity, having a certain degree of permanence and stability, which is assigned to perform one or more given tasks and which has a workforce, technical means and a certain organisational structure allowing for the accomplishment of those tasks. However, it is not essential for the unit to have legal, economic, financial, administrative or technological autonomy, or a management that can independently effect collective redundancies.

What does this mean for employers?

The ECJ’s decision in Woolworths leads the way for the Court of Appeal to overturn the decision of the EAT and for UK domestic law to return to the pre Woolworths case position; that it may be possible to treat individual sites or premises as individual establishments (or local employment units) for the purpose of determining whether the obligation to collectively consult has been triggered. Although the ECJ has not said that each store should be a single establishment, the ECJ’s later decision in the Bluebird case as referred to above suggests this would be permissible.

This will be good news for businesses with multiple sites as it will lead to less costly and time consuming redundancy exercises as employers will only have to collectively consult where 20 or more staff at one establishment are to be made redundant within a period of 90 days. By way of a couple of practical examples….

Group A has 4 shops in London, Bristol, Manchester and Leeds. It proposes to make 35 redundancies nationwide within a 90 day period.

Shop location Number of employees in each shop Number of employees to be made redundant in each shop Is collective consultation required?
London 44 21 Yes
Bristol 12 7 No*
Manchester 32 19 No*
Leeds 8 4 No*

*Provided each shop/site can be considered an ‘establishment’ (e.g. a distinct entity with a certain degree of permanence and stability and which is assigned to perform one or more given task, with a workforce/organisational structure to carry out those tasks).

In this scenario the Group also has a Manchester pop-up shop with 4 employees open from May – July only. The pop-up shop works in conjunction with the permanent Manchester shop. Although this shop has only just opened Group A decides to make all of the staff redundant. This pop-up shop is unlikely to satisfy the permanence and stability tests to be considered an ‘establishment’. As such the employees should be considered part of the permanent Manchester shop and the proposed redundancies will tip the Manchester shop into the collective consultation regime.

Group B has 15 office sites nationwide. 10 of these sites are large with over 100 employees at each site and 5 of these sites are small with less than 50 employees at each site. Each site is distinct from the other and staff are employed and organised according to their particular office. Group B makes 2,000 redundancies nationwide across each of its sites. More than 20 employees will be made redundant at each of the 10 large sites, and less than 20 employees will be made redundant at each of the 5 small sites. The redundancies will occur within a 90 day period.

At the 10 large sites collective consultation obligations will be triggered whereas at the 5 small sites it is arguable they will not. However, the Company is concerned that employees being made redundant from the smaller sites may question why they are being treated differently to those being made redundant from the large sites.

There is nothing to prevent an employer electing a representative/representatives for collective consultation purposes for each of the sites across the business, including those where fewer than 20 employees face redundancy. This may be the necessary approach for employers who do not want to fall foul of procedural failings where there are questions over whether factually particular work sites can be considered as ‘establishments’ in their own right. Also it may be appropriate from an employee relations perspective to ensure that the workforce is (and feels) fully informed and engaged in a large change programme and to consult across all sites, regardless of the number of proposed redundancies at each.

Each individual case turns on its own facts and therefore employers should seek advice before making redundancies of over 20 employees.

Memery Authors

GGI member firm
Memery Crystal LLP
Law Firm
London, UK
Merrill April
Sarah Martin
Lara Shillito


Why American Economic Sanctions Matter to Non-U.S. Banks

By Stephen R. Larson

Money Shred

The United States relies on its economic sanctions programs to achieve its diplomatic and political goals around the world. This reliance matters to non-U.S. banks because the sanctions are typically designed to be far-reaching, may be aggressively enforced, and increasingly look to the financial sector as a highly-effective and efficient way to exert economic pressure.

A few recent examples show the serious effect a violation of U.S. sanctions can have on a non-U.S. bank. Earlier this year, Commerzbank AG, a major German bank, paid almost $260 million to settle apparent violations of sanctions programs aimed toward Iran, Sudan, Cuba and Burma (Myanmar), among others. In 2014, the French bank BNP Paribas paid a record penalty of $8.9 billion for violations of the Iran, Sudan and Cuba sanctions programs.

U.S. sanctions programs begin with an executive order issued by the President, acting on statutory authority granted under the International Emergency Economic Powers Act (IEEPA). That Act allows the President to declare an emergency and exercise emergency powers “to deal with any unusual and extraordinary threat … to the national security, foreign policy, or economy of the United States.” The Presidential order may also cite the United Nations Participation Act of 1945 as authority if the U.N. Security Council has also imposed sanctions against the target country or its nationals. Presidential executive orders then delegate the authority to adopt specific rules and regulations to carry out a sanctions program to the Department of the Treasury, which acts through its Office of Foreign Assets Control (OFAC).

Structurally, economic sanctions take one of two possible forms. The first of these is a “blocking” sanction. Blocking sanctions originated with the Trading with the Enemy Act adopted shortly after World War I, and are designed to deprive targeted countries or individuals of the benefits of assets within the U.S. or that come within American control. A typical blocking provision says that any property in which a targeted person or entity has an interest is “…blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.”

Sanctions may also be structured as simple trade restrictions prohibiting specific commercial conduct, rather than applying to all assets in which a targeted country or individual has an interest. Of course, a comprehensive sanctions program will often contain both types of sanctions. The U.S. may continue to increase its reliance on the use of trade restrictions, however, because these restrictions can provide more flexibility in fashioning a sanctions program, such as the current Russia-related sanctions that apply only to the Russian finance, defense, and energy sectors, and prohibit only specific kinds of transactions even within those sectors.

U.S. sanctions programs apply not only to individuals and companies located in the United States, but can also reach non-U.S. persons. The prohibitions generally apply to any non-U.S person who acts within the United States, provides services from the United States, causes a violation by a U.S. person, or re-exports or transfers U.S. origin goods or services in violation of the sanctions program. BNP Paribas and Commerzbank, for example, violated U.S. sanctions by making loans to Iran, Sudan and Cuba because the loans were denominated in U.S. dollars and had to be processed through correspondent banks in the United States. Similarly, Clearstream Banking S.A., a Luxembourg bank, was recently deemed to have “exported custody and related services” from the United States when it acted on behalf of the Central Bank of Iran with respect to $2.8 billion in securities held in a custodial account in a U.S. securities depository.

A non-U.S. bank may find it difficult to completely avoid the jurisdiction of U.S. economic sanctions programs. The Bank for International Settlements, headquartered in Switzerland, estimates that approximately 84 percent of international transaction settlements occur in U.S. dollars. In addition, the number of countries subject to U.S. sanctions is large, with some form of economic sanctions in effect with respect to almost 20 countries, plus sanctions relating to narcotics traffickers, terrorists, the rough diamond trade and others. The list maintained by OFAC of designated entities or individuals related to those primary targets is currently 960 pages long. As a result, virtually all non-U.S. banks need to be sensitive to some degree to the restrictions imposed by U.S. economic sanctions regimes.

If a non-U.S. bank does inadvertently violate a U.S. economic sanctions program, the way it handles the violation can be critical. The Treasury Department has wide discretion when imposing penalties or deciding whether any penalty is warranted. It publishes a matrix of factors that will either aggravate or mitigate responsibility, including whether the violating party reports the transaction itself, whether it had taken reasonable steps to prevent the violation, and whether it took any steps to disguise the violation or prevent its discovery.

The economic sanctions imposed by the United States have always had a strong practical emphasis on financial assets. Bank deposits or money transfers in the hands of financial intermediaries are simply the most likely form of foreign asset to be found in the United States. Sanctions regulations concerning Iran and Russia, for example, have provisions focused specifically on the financial sector, including provisions allowing some kinds of financing while prohibiting others. That practical emphasis on the financial sector can be expected to continue to expand and to become more explicit.

Steve Larson is a former U.S. Department of Treasury Acting General Counsel and Counselor to the General Counsel. In these positions he oversaw economic sanctions regimes under the Office of Foreign Assets Control as well as other legal functions.

Stephen R. Larson
GGI member firm
Christian & Barton, L.L.P.
Law Firm
Richmond (VA), USA
Stephen R. Larson

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Are your clients missing out on the advantages of a Limited Liability Partnership as an international trading vehicle?

By Sonal Shah

International Trading

The need to consider effective structures to meet business requirements in an ever changing economic environment means we are constantly faced with creating opportunities for international traders wishing to use a UK entity in a potentially UK tax free environment. As such, we note an ever increasing use of a UK Limited Liability Partnership, or LLP.

The UK LLP is a form of separate legal business entity that is registered with the UK Registrar of Companies (also known as “Companies House”). It operates in a similar way to a UK limited company. However the significant differences from a UK limited company are as follows:

• An LLP has members, not shareholders or directors. It must have at least 2 members who would also be the designated members with statutory responsibility for certain tasks.

• An LLP is see-through for tax purposes in that the members are directly taxed on any trading income derived from the LLP.

• A well drafted and thought through partnership agreement should be in place.

The UK LLP has the following similar characteristics to those of a UK limited company:

• Electronic formation can take as little as 24 hours

• Formation costs are very minimal

• No minimum capital requirement

• No UK nationality or UK residence requirements for the members; members can be non resident

• Disclosure and filing requirements are similar to those of UK limited companies

So what makes the UK LLP attractive to international traders? Broadly speaking, the LLP pays no tax on its trading profits. Instead the members of the LLP are taxed on their share of the profits according to the tax laws of their country of residence. The members will not be subject to the UK tax if:

• All trade takes place outside of the UK

• All members of the LLP are non-resident – no restriction on the jurisdiction in which the members reside. Can be anywhere

• The UK LLP is not controlled and managed in the UK

• The UK LLP does not have a UK office or agency

• The UK LLP does not own any UK property

Furthermore, members of the LLP can be individuals, corporate and/or nominee members. It is also possible to have a combination of corporate and non corporate members. This offers several interesting tax planning opportunities.

The UK LLP therefore offers significant tax planning opportunities without falling foul of BEPS (Base Erosion and Profit Shifting) issues.

For further information, contact:

Sonal Shah

GGI member firm
Lawrence Grant, Chartered Accountants
Auditing & Accounting, Tax, Advisory, Fiduciary & Estate Planning
London, UK
Sonal Shah

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Bitcoin’s travels to Russia

by Armen Danielyan


Bitcoin became the most popular currency among numerous cryptocurrencies and has delocalised very quickly. Today, bitcoin is not only a unit used in monetary transactions of a closed user group, but is perceived by many as an alternative to existing money. Limited cryptocurrency issuance along with a constantly expanding implementation area contributes to its high yield, secured by exchange rate increases. For example, in May, 2010, one pizza was bought for 10,000 bitcoins, while one bitcoin will now buy around 30 pizzas.

Of course, such yield and high exchange rate volatility make cryptocurrency attractive for stock gamblers. The bitcoin market is full of different start-up projects, as a result of which the currency has penetrated Russia, albeit still as an ineligible foreigner.

According to the National Agency of Financial Research, today only one in five Russians have heard of bitcoin while only one in twenty really knows what it is.

By Russian law, the only legal currency in the country is Russian rouble and exclusive rights for issuing money belong to the Bank of Russia, so cryptocurrencies are seen as money substitutes. At the same time, bizarre prohibitive measures such as attempts to block web-sources that promote cryptocurrency deals are mostly ineffective because of lack of national cryptocurrency market regulation.

It is worth mentioning that a question of regulation has always been one of the main problems for cryptocurrency development. In spite of the fact that virtual currencies appeared while the internet was still establishing itself, there is yet to be government regulation for the effective mechanisms of this market.

In June 2015, financial authorities of the China, Japan and the USA started forming regulatory rules for virtual currencies’ circulation in order to prevent their usage for illegal activities and terrorist financing. This was the first important step towards the creation of international statutory cryptocurrency market regulation.

According to FATF, the main methods of governmental regulation will be obligatory user identification and transactions limits. In fact, bitcoin circulation must be controlled in a way that prevents money laundering and terrorist financing so that money input and withdrawal from the virtual currency market is controlled. Today, European countries are already considering the possibility of controlling huge bitcoin deals through banks.

Problems faced by Russian lawmakers in the sphere of cryptocurrencies are similar to other countries introducing virtual money. For example, VAT imposition, potential possibility of virtual currency usage for illegal money laundering and terrorist financing, high flat money risks, inability of tracing and inconvertibility of deals.

The above factors were among the reasons for Ministry of Finance and Federal Financial Monitoring Service repeatedly disputing the ban on bitcoin circulation in Russia.

A critical need to define and adopt cryptocurrency market legislation in Russia as part of Russian financial system is now a hotter topic than ever before. Arguably, FATF rules may prompt Russian authorities to create rules and regulations for market.

In our opinion, the virtual currencies market should be regulated just the same as every other country financial system element. Consequently, regulators should define the capital requirement and liquidity ratios of cryptocompanies and their subsidiaries, as well as introducing strict licensing and authorising procedures and applying reporting and mechanisms of prudential supervision.

Still indisputable is the fact that, regulated or not, the future welcomes bitcoins or some other cryptocurrencies because of obvious advantages: operational efficiency, low cost of transactions, vast geographic footprint and great perspectives for serving commodity flows.

Armen Danielyan

GGI member firm
Delovoy Profil
Auditing & Accounting, Tax, Advisory, Corporate Finance
Moscow, Russia
Armen Danielyan

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Principles of Trade Secret Protection in California

By Robert Bleicher

Trade Secrets

Trade secrets, as businesses and their advisors know, are often a company’s most valuable intellectual property assets. Protecting those assets, and avoiding claims that a company improperly used a competitor’s trade secrets when hiring a new employee or participating in a collaborative business venture, should be very high on the checklist of best management practices.

In the United States, trade secret protection is mostly a matter of state law, which can vary among the 50 states. Fortunately, 48 of the 50 states have enacted some version of the Uniform Trade Secrets Act (Massachusetts and New York have not), which provides a reasonable degree of uniformity across the United States regarding the foundational definition of a trade secret. In California, home to the world’s seventh largest economy (according to Bloomberg) and all manner of trade secrets in industries as diverse as technology, food and beverage, agriculture, entertainment, industrial manufacturing and services, finance, and professional services, the Uniform Trade Secrets Act is found in its Civil Code section 3426, et seq.

To qualify as a trade secret under section 3426.1 of California’s Civil Code, the owner of the trade secret must establish two distinct and co-equal components: First, the trade secret must derive actual or potential independent economic value from not being generally known to the public or to other persons who can obtain economic value from the use or disclosure of the claimed secret. Second, the entity claiming that its intellectual asset is a trade secret must establish that it undertook “reasonable efforts under the circumstances” to maintain the secrecy of the trade secret. Without proof of both, the asset is not a trade secret. The following addresses a few of the basic principles needed to qualify an intellectual property asset as a trade secret under California law.

What is a Trade Secret?

Perhaps the easiest starting point in identifying a company’s trade secrets is to distinguish them from intellectual property that is not a trade secret. Patents, copyrights, and trademarks are all protected intellectual property and all are publicly disclosed. Even though the patent, copyright, or trademark has been publicly disclosed, its owner nonetheless retains exclusive rights over that asset, which it can then leverage typically through a sale or license, or simply exclusive use. In contrast, once a trade secret is disclosed without efforts to maintain its secrecy, the owner loses its exclusive right over that asset—because it is no longer secret.

Further, assets that seemingly could be trade secrets often are not. For example, a process or work that is capable of reverse engineering is not a trade secret. Nor is information that is generally known in an industry a trade secret. Information that is observable, or presented without the expectation of confidentiality at a conference or over the Internet, for example, also is not a trade secret.

That leaves a broad category of intellectual property that courts in California have found to be trade secrets. Trade secrets can include manufacturing processes; product designs and specifications; customer lists; source code; future product development plans, business or marketing plans; pricing information; profitability, cost, and revenue information; and any information that took the company a long time or substantial effort to develop—even if the compilation came from public data. The baseline test is whether the intellectual property asset has value to the company because it is secret.

What are Reasonable Efforts to Maintain Secrecy?

The second prong of the trade secret analysis frequently is one of the most vigorously disputed issues in claims involving trade secret protection. The reason, not surprisingly, is that what constitutes “reasonable efforts” to maintain secrecy is highly case-specific. Rarely, if ever, are oral admonitions to maintain confidentiality considered to be “reasonable efforts” to protect secrecy. Rather, appropriate documentation and provable practices are keys to establishing that “reasonable efforts” have been taken. As a starting point in the “reasonable efforts” inquiry, courts will therefore look for the existence of employment agreements, employee confidentiality agreements, company manuals, non-disclosure agreements, material transfer agreements, etc., that clearly state the recipient’s obligation to keep secret a company’s trade secrets.

Generally, courts in California also will not give effect to sweeping assertions that all of the company’s business knowledge and processes are trade secrets. Instead, courts will normally require some degree of trade secret identification so that employees and third parties have an idea of what information the business actually considers “secret.” So, employee manuals, employment agreements, confidentiality agreements, and non-disclosure agreements should expressly state, for example, that specific manufacturing processes, customer lists, source codes, pricing information, certain financial data, etc. are the company’s trade secrets and must be kept confidential.

Courts will always examine how widely the company allows the dispersal of its trade secrets, not only outside the business but also within the company itself. Trade secret lawsuits usually explore whether access to trade secrets inside the company is limited to those who “need to know.” A common inquiry is whether the trade secret is generally accessible in the business’s electronic storage structure or is it encrypted, password protected, or otherwise insulated from wide access within the business. Also, a frequent issue is how the company monitors the use and dissemination of confidential information in its employees’ business and personal devices and social media—does it have a use/non-use policy? (If not, it should.) Although seemingly self-evident but frequently overlooked, does the company mark the materials and information it wants to keep secret as “confidential”? Trade secret lawsuits have been lost where information shared both internally and with third parties was not marked “confidential.”

Just as importantly, a business should not simply obtain a signed confidentiality agreement from an employee or third party and then file it away. Instead, the flow and evolution of confidential information should be monitored, and agreements should be updated as circumstances evolve.

In addition, having a sound process of ensuring that employees do not leave a company with trade secrets is essential. Documenting exit interviews, securing electronic devices and storage systems, and promptly terminating access to confidential information are part of the “reasonable efforts” assessment. Similarly, a thorough on-boarding process for new employees that documents efforts to prevent the migration of a competitor’s trade secrets to the employee’s new company will materially reduce the chances of a successful trade secret misappropriation claim by the former employer.

Finally, in the ideal world, no employee would orally disclose a company’s trade secrets, but that world does not exist. Sound confidentiality documentation and practices, and follow-up emails mails after a company learns of a possible oral trade secret disclosure, will go a long way in establishing that the business undertook reasonable efforts under the circumstances to protect its trade secrets.


Do all these steps matter? Yes. They are fundamental to the successful maintenance of trade secret rights or to the defense against trade secret misappropriation claims. Equally, a well-protected trade secret can materially enhance a business’s value; poor trade secret protection practices can have the opposite effect. Understanding a company’s trade secrets and how best to protect them are key to securing the protections afforded by the law and maximizing the value of this core intellectual property.

Robert Bleicher

GGI member firm
Carr McClellan PC
Law Firm
Burlingame (CA), USA
Robert Bleicher


GGI member firm Prager Metis CPAs, LLC Welcomes Jay Goldberg as New Partner

Noted High-Net-Worth & Family Office Expert to Join the Firm’s Private Wealth Group


Prager Metis CPAs, LLC, a leading accounting and advisory firm, welcomes Jay Goldberg as its newest partner. Goldberg joins Prager Metis as Partner in Charge of High-Net-Worth Individuals and Family Office Tax Services. He will be based out of Prager Metis’ Eastside office in New York City.

“Bringing Jay on board is essential for our plans to expand our resources and further strengthen our reputation as the “go-to” expert in private wealth and family office tax services,” says Glenn Friedman, Co-Managing Partner. “With his extensive background in family office and high-net-worth individuals, Jay has a unique expertise that few possess. He is a perfect addition for us as his expertise nicely complements our existing family office and individual tax services.”

In his new role, Mr. Goldberg will be responsible for the firm’s management and operations pertaining to high-net-worth individuals and family offices. He has over 25 years of experience advising individuals and companies in the entertainment, financial, legal, medical, and real estate industries, in addition to working closely with high-net-worth individuals and family offices.

“Prager Metis has a level of expertise, a growing reputation, and international presence that is unique to an accounting firm of its size,” says Goldberg. “They provide the depth and scale that I’m looking to provide for my clients. I’m very excited to join the Prager Metis team.”

GGI member firm
Prager Metis International LLC
Auditing & Accounting, Tax, Advisory, Corporate Finance, Ficuciary & Estate Planning
Basking Ridge (NJ), Long Island (NY), Los Angeles (CA), New York (NY), White Plains (NY), USA
Jay Goldberg

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