Using the Trust Management Mechanism as a Way to Prevent Conflicts of Interest in the Public Service: the Experience of Canada, Chile and Albania

Gorokhova Svetlana Sergeevna PhD in Law Associate Professor, Department of International and Public Law, Financial University under the Government of the Russian Federation 109456, Russia, Moskovskaya oblast', g. Moscow, ul. 4-I veshnyakovskii proezd, 4, kab. 414 Swettalana@yandex.ru Other publications by this author

An overwhelming number of countries in the modern world impose prohibitions or strict restrictions on the ownership of securities by government employees and their participation in commercial activities.

At the same time, the most common form of preventing conflicts of interest in the public service is the complete alienation of conflict-prone assets, and a number of states, for example, Albania, establishes and prohibits their sale to persons affiliated with public servants.

The legislation of most States does not establish trust management of such property as an alternative to the alienation of securities and shares in commercial companies. At the same time, the states that have rules governing the possibility of transferring distressed assets to trust management, instead of their complete alienation, include the Russian Federation, the USA, Canada, Chile, Albania, and some others. Some countries are in the process of discussing similar legislative initiatives, for example, Mexico.^[1]

The most developed, from the point of view of the legal regulation of the institution of trust management of the property of civil servants, is the legal regulation in the United States, where, in addition to legislating the very possibility of placing their assets in a trust (as an alternative to sale), there are detailed administrative regulations for the actions of employees, including, among other things, developed forms of forms of documents for each stage of the procedure. By the way, it should be noted that for Russian legislation, detailed regulation of the actions of civil servants in the situation with the transfer of property to trust management also seems very reasonable, since the current reference to the norms of civil legislation obviously does not satisfy the necessary regulatory need, which leads to significant difficulties in law enforcement. However, we have already written about the legal regulation of special types of trust management in relation to the settlement of conflicts of interest in the United States,^[2] therefore, in this paper I would like to touch on the experience of other states, namely Canada, Chile and Albania.

Canada, as already noted, belongs to a small range of countries that use specific forms of trust management in order to prevent a conflict of private and public interests of persons holding public office.

The federal conflict of interest regime in Canada is currently governed primarily by the Conflict of Interest Act,^[3] which applies to government officials such as ministers, and parliamentary conflict of interest codes passed by the Senate and House of Commons to regulate the conduct of their members. An integral part of the regime are two independent conflict of interest observers, namely the Commissioner for Conflict of Interest and Ethics and the Ethics Officer of the Senate.

In accordance with Canadian legislation governing conflict of interest and ethics, a blind trust is a financial agreement in which the trustee or blind trustee is authorized to manage the assets of the trust without any involvement of the beneficiary of the trust and cannot provide the beneficiary with any information about the daily activities of the trust.

According to the law, Cabinet ministers are not allowed to own or trade "securities, stocks, commodities and futures" or "conduct business through a partnership or individual entrepreneur" unless these assets are in a blind trust.

The trustees must act in a detached manner and independently of the founder of the blind trust, and must also be approved by the Commissioner for Conflict of Interest. They cannot consult with the Minister whose assets they manage, but provide an annual report on the income from the trust to the Commissioner for Conflicts and to the Minister himself to allow them to pay income taxes.

An interesting feature of the model under consideration is that Cabinet ministers have the right to reimburse their expenses for the establishment and maintenance of a trust at the expense of taxpayers. Most of the States using the institute under study, including the Russian Federation, do not provide such an opportunity.

In accordance with Canadian law, a public servant is obliged to lose each of his controlled assets within 120 days from the date of his appointment by performing one of the following actions:

selling it in a transaction to persons not affiliated with it; or,

placing it in a blind trust.

The conditions of a blind trust, at the same time, should provide that:

assets to be transferred to trust management are registered in the name of the trustee;

a government employee has no authority to manage or control trust assets;

the trustee should not request or accept any instructions or advice from the trustee regarding asset management;

the assets transferred to the trust must be listed in the list attached to the contract;

the term of validity of any trust lasts as long as the civil servant who established the trust continues to hold his position or until the assets of the trust are exhausted;

the trustee does not provide information about the trust, including its composition, to the holder of public office, except for periodic reports on the total value of the trust;

the trustee should be independent of the public official, and the Commissioner for Conflicts and Ethics should be sure of this.

As a trustee in Canada , you can act as:

state trustee;

a public company qualified to perform the duties of a trustee;

a person who can perform the duties of a trustee in the course of his normal work.^[3]

Canadian law, as well as American law, stipulates that general investment instructions can be included in a blind trust contract, but only with the prior approval of the Commissioner (Commissioner for Conflict of Interest and Ethics).^[4] The instructions may provide proportions for investing in various risk categories, but they cannot be industry-specific. 

When the listed legal requirements are met, the employee is obliged to provide either documents confirming the sale of assets, or a copy of the contract or other document establishing a trust in respect of any controlled asset.

It is specifically stipulated that, subject to approval by the Commissioner for Conflict of Interest and Ethics, a civil servant is not obliged to alienate controlled assets provided as collateral to a credit institution.

A civil servant who is not a Minister of the Crown, a Minister of State or a Parliamentary Secretary is not obliged to dispose of controlled assets if, in the opinion of the Commissioner, the assets have such a minimal value that they do not pose any risk of conflict of interest in connection with official duties and duties of a civil servant.

In this case (as well as in the practice of the United States), we see a differentiated approach to assets depending on their value and liquidity, which, we believe, should be introduced into domestic legislation, since at the moment nothing like this is provided for in the anti-corruption legislation of Russia, although it is obvious that low-value and illiquid assets should be transferred in trust management is impractical.^[5] 

As a conclusion, with regard to the Canadian version of the blind trust, we can conclude that it is sufficiently similar to the American one, except for a few features. The most significant, of course, can be considered the fact that the State of Canada compensates its employees for the costs of creating and maintaining blind trusts. The second distinguishing feature is that the trustee has no unconditional obligation to change the composition of the original assets invested in the trust, although he has the right to do so.

There is a legislative regulation of the institution of transfer of asset management of civil servants and other public persons to third parties and in Chile.^[6]

As in most States, in Chile, in order to comply with the principle of good faith, authorities and individual officials are required to submit declarations of their financial interests and property. This obligation has been enshrined in the Constitution of the Republic of Chile since 2010 after the inclusion in article 8 of the new third and fourth sub-paragraphs stipulating that: "The President of the Republic, State ministers, deputies and senators, as well as other authorities and officials specified in the Constitutional Organic Law, must publicly declare their interests and property".^[7] Law No. 20.880 "On Honesty in Public Service and Prevention of Conflicts of Interest",^[8] defines the cases and conditions under which these persons delegate to third parties the management of property and responsibilities related to a possible conflict of interest in the performance of their public functions.

Law No. 20.880 "On Honesty in Public Service and prevention of Conflicts of Interest" distinguishes two categories of such subjects:

those that are under the control of the Comptroller General of the Republic (General Accounting Office); and

 those that have internal control systems.

The former are mentioned in article 4 of Law No. 20.880:

1. The President of the Republic, State Ministers, Deputy secretaries, quartermasters, governors, regional ministerial secretaries, senior heads of services, ambassadors, ministers-advisers and consuls.

2. Advisers to the State Defense Council, the Transparency Council, the Council of Supreme Public Administration, the National Human Rights Council and the National Television Council.

3. Members of Expert or technical groups.

4. Mayors, councillors and regional councillors.

5. General and senior officers of the armed forces and equivalent hierarchical levels of law enforcement and public security forces.

6. Local defenders of the Office of the Ombudsman for Criminal Cases.

7. Directors of state-owned joint-stock companies, as well as directors and managers of state-owned enterprises, the National Television of Chile, the National Mining Company, the State Railways Company, the National Media Corporation, and, the State Bank of Chile.

8. Heads of corporations and foundations that provide services or have contracts with the leadership of the Republic, as well as directors, secretaries, heads of foundations, corporations or associations regulated by the Ministry of Internal Affairs.

9. Employees performing direct control functions.

10. Other officials and personnel of enterprises under the contract, who are managers and other representatives of public administration up to the third hierarchical level of the relevant enterprise.

11. Persons working in the state administration under an employment contract, if they regularly receive remuneration equal to or exceeding the average monthly remuneration received annually by an official working at the third hierarchical level, including appropriate allowances.

12. Rectors and members of the boards of directors of state universities.

Within the second category, Law No. 20.880 "On Honesty in Public Service and Prevention of Conflicts of Interest"^[8] provides for entities (declaring their income and having the obligation to alienate conflict-prone property, including through the transfer of its management to third parties) belonging to other (non-executive) branches of government and bodies self-government:

other deputies and senators; national and regional prosecutors and their deputies; members of the management structures of the central political parties; the Comptroller General of the Republic, Deputy Comptroller General and regional Controllers.

It should be noted that, unlike the American^[2] and Canadian models, Chilean Law No. 20.880 "On Honesty in Public Service and Prevention of Conflicts of Interest", providing for the need to transfer securities to third parties, decided to equate this category not to a trust agreement, but to a mandate agreement, which, as well as The trust is regulated by the Civil Code of Chile (article 2116 and subsequent articles). The name that the law has chosen for this construction is "a special mandate for managing a portfolio of securities."

A special mandate for managing a securities portfolio is defined by law as "an official contract, according to which an entity instructs one or more authorized persons to liquidate securities that include its assets, invest proceeds from liquidation in a portfolio of assets and manage proceeds from such liquidation."^[9]

The law also defines the circumstances under which the securities portfolio management mandate should be applied: government employees and other (previously listed) officials own public offering securities, or debt obligations, provided that their total value exceeds 25,000 Development Units (UF), an accounting monetary unit introduced back in 1967 year, which varies depending on inflation and is used to evaluate funds and index payments in Chile. At the moment, the rate of UF to the Chilean peso is 1: 33.519.30.^[10] The ratio of UF to the US dollar is 1:31.04.^[11] That is, we are talking about the allowable value of shares of Chilean employees in 837,982,500 Chilean pesos, or 776,000 US dollars. As you can see, assets must have a sufficiently high valuation before the question arises of their alienation, in one way or another.    

A mandate should be drawn up for all such securities and shares, as an alternative – it is necessary to sell those securities and shares that exceed this limit. In both cases, this must be done within ninety calendar days after taking office and, if necessary, within the same period from the date of updating the relevant income declaration.

Regarding the content of the mandate, Chilean Law stipulates that the act establishing the mandate must contain at least the following items:

individualization of the founder (authorized) and the manager;

a detailed list of securities that make up part of the property of the commissioner, in respect of which the mandate is being formed, as well as the current value of such securities;

general management instructions concerning the liquidation plan, risks and diversification of investments. However, these instructions cannot relate to investments in any particular area or company, but should only be of a general nature.

Within five working days from the date of issuance of the public act on the creation of the mandate, the employee must submit a certified copy to the Securities and Insurance Administration or the Management of Banks and Financial Institutions (depending on the subordination) and the controller.

Information about the public act of the mandate must be posted on the electronic website of the body in which the employee performs his functions.

As already noted, one or more mandate holders can be appointed, and they can only be the following legal entities:

a) brokerage companies, securities brokers, investment fund managers under the control of the Securities and Insurance Administration;

b) banking companies authorized to operate in Chile; and

c) entities authorized to manage assets of third parties registered abroad. These bodies should appoint a representative in Chile with broad powers of representation.

Legal entities whose managers or administrators, managers or managers have family ties with an official, their spouse, civil cohabitant or relatives up to the third degree of consanguinity and the second degree of legal kinship cannot be appointed as proxies. In the act on the establishment of the mandate, the parties must make an affidavit (affidavit) (affidavit (statement of fact), given under oath, that is, an oath. For atheists or those who do not want to swear, as a rule, an alternative confirmation procedure (affirmation) is provided, essentially the same, but without sacralization), which states that they (the parties) are not related by kinship or dependent relationships that prevent the actual conclusion of the contract.

In case of loss of independent status, the founder of the mandate must inform the relevant department about this.

The Law "On Honesty in Public Service and Prevention of Conflicts of Interest"^[8] also notes that the creation of this special mandate is not the alienation of property that serves as an object of this right for tax purposes, therefore, for these purposes, the agent must provide a sworn statement to the tax service in a timely manner with the information necessary to determine the source income taxes related to a person's income.

The General Directorate of Securities and Insurance and the General Directorate of Banks and Financial Institutions of Chile separately maintain a special register of mandate managers, in which legal entities authorized to perform the functions of proxies must be registered. Such registers are publicly available and posted on the electronic website of the relevant institutions.

The law contains a number of provisions that do not allow an employee to know how securities are invested, and, moreover, to give instructions on them (articles 31, 35 and 39). Only on an annual basis, the mandate holder must report to the founder, but it must be a written report on the general condition of the managed property, accompanied by a general profit and loss report (article 38). For tax purposes, it is provided that the founder must promptly provide the Internal Revenue Service with an affidavit with information necessary to determine the origin of taxes corresponding to income, and this information is the sole responsibility of the founder (article 36).

The relationship between the founder of the mandate and the mandate holder, of course, is compensatory. The amount of remuneration is determined by the contract, and all expenses incurred by the mandate holder in the performance of his functions are reimbursed from the funds that he manages under the contract.

A specific feature of Chilean legislation is the norms that establish a list of assets of officials that are not subject to transfer to third parties, and must be alienated upon taking office. At the same time, what each person should alienate depends on his position (Table 1).

Table 1. Property subject to mandatory alienation upon taking office in accordance with the legislation of the Republic of Chile

As you can see, in the case of the Chilean regulation on the transfer of valuable assets from the management of a civil servant to a trustee, there are also many similarities with the previously considered national systems of the USA and Canada, but there are also a number of differences. Firstly, there is a clear cost criterion (and a fairly high one) for evaluating assets when making a decision on the need to transfer them to trust management. Secondly, Chilean legislation draws attention to a wider range of obligated subjects, including, among others, rectors of state universities. Thirdly, and this is perhaps the most remarkable, the Law "On Honesty in Public Service and Prevention of Conflicts of Interest" contains a list of property in respect of which a mandatory alienation requirement is established, for example, if an employee owns a share in a campaign providing goods or services to the state or its institutions.

Another State that should be mentioned in the context of the legal regulation of trust management as a tool for preventing conflicts of interest in public service is Albania.

Thus, in accordance with the Law "On the Prevention of Conflicts of Interest in the Exercise of Public Functions",^[12] for persons performing these very public functions, the so-called "passive ownership of shares or part of capital" is provided, which means a state in which the owner reserves the right to use the civil fruits of property, but not performs no management and disposal actions with respect to this property. Whereas, all actions for management, ownership, making any changes, etc., are carried out by the trustee, on the basis of an agreement concluded between them, which establishes criteria for access to income from property, as well as the rights and obligations of the parties. Also, as in the previously discussed variations on the topic of trust management, in the Albanian scheme, a rule is established for the trustee - not to exchange any opinions or any information with the owner of the property, and not to depend on him when performing actions on property management. As in all previously considered cases, the trustee should act only in the best interests of preserving and increasing the property entrusted to him, and with the same motivation as the actions that the owner himself could perform. The parties in each case reserve the right to terminate the agreement.

Albanian legislation provides for a time period in which the "active" ownership of shares and shares in campaigns should be replaced by a "passive" one - 60 days or earlier, from the moment of taking office, or from the moment of receiving assets (for example, inheritance). Within 15 days from the date of transfer of the property to the trust management, the person is obliged to notify the relevant competent authorities. In case of violation of the requirements of the legislation, the person is liable, up to resignation.

The analyzed law, as well as the Russian counterpart, establishes that the rights and obligations of the parties related to the "passive ownership of property" are regulated by the Civil Code of Albania.^[13] In addition, apparently, in view of the similarity of some aspects of the development of the institute of professional managers (legal entities) of securities and assets, Albanian legislation, as well as Russian, provides for individuals as a trustee, but, as noted earlier, insists on their independence from the principal.

In this case, the law, as well as the Russian one, does not contain rules on mandatory rotation of initially transferred assets, which brings it even closer to our version of regulation,^[14] but, nevertheless, unlike the Russian model, prescribes for the asset trustee the need to act independently, without consulting the founder.

That is, you can talk about a median version of the approach of regulating this method of preventing conflicts of interest (not a blind trust, but not a simple trust management without restrictions), probably more adapted to the realities of life in Albania.

Summarizing, we note that, although the institution of trust management of the property of civil servants and other public persons as a tool for preventing conflicts of interest can be observed in the legislation of a number of countries, nevertheless, most states prefer a more radical way of countering corruption associated with the mandatory alienation of conflict–prone property and the establishment of bans on certain types of activities.

Thus, in a number of States, there are specific restrictions on the activities of public officials in the private sector. In some States, for example, in Armenia, Bulgaria and Burkina Faso, there is an absolute ban on such activities, and in other States - in Austria and France, public officials can receive income from private activities with a special permit or up to a certain level.

In some countries, bans or restrictions on the activities of public officials in the private sector also apply after they leave office, and in many of them this period is from three to five years. In China, such a restriction is valid for three years, and if we are talking about a junior public position, this period is reduced to two years.^[15]

This list can be continued, however, in any case, we note that even in those countries where, as an alternative to the ban on the possession of distressed assets, their transfer to trust management is provided, this is always only an alternative to alienation, which is quite clear.

So, what is common to the legislation of all the countries considered in this study is that each of these states strives, by virtue of its capabilities, to free the actions of the trustee as much as possible from the influence of the founder of the trust management on him, that is, to ensure the independence of the former from the latter on the management of the entrusted property. However, as the researchers note, even in the most advanced and strict variants, it is hardly possible to avoid the interaction of stakeholders completely.^[16]

Nevertheless, it should be noted that, at least formally, all regulations relating to this issue establish a rule according to which the trustee should not be affiliated with the principal through any channels. We believe that this is something that can be easily applied in Russian legislation.

Another point that is present in the legislation of, for example, Chile, and which can be adopted by the legislation of the Russian Federation, is the restriction on the value of securities held by government employees that are subject to alienation or transfer to trust management. We believe that such an approach will significantly increase the degree of reasonableness of the requirements for the transfer of securities to trust management, compared with the requirement without restrictions and any specifics.

In addition, the issue that can be discussed is the issue of reimbursement of the costs of a civil servant for the conclusion and maintenance of a trust service agreement by the state. This practice is present in the legislation of Canada. However, we believe that the best option for Russia will still be to establish criteria for the price and profitability of assets that should be transferred, eliminating this need for owners of low-value and low-yield assets, so that owners of really valuable and profitable resources independently bear the burden of servicing trust management, if they are unwilling to finally part with existing assets.

An important element of ensuring the effectiveness of the trust management of the employee's assets transferred to the trust management is the rotation of the initial assets. We believe this is an essential aspect in achieving anti-corruption goals, because only when an employee does not know about the shares of which he is the owner, he will not be able to use his official position in the personal interests associated with these assets. Of course, such a provision would increase the anti-corruption effectiveness of Russian legal regulations, but, in this case, it is obvious that Russian legislation should clearly limit the subject composition of professional participants in the securities market. Recall that at the moment there is some uncertainty about who can be a trustee in Russia in this situation.

Attention should also be paid to restrictions on certain assets for employees of Chile. For example, with respect to the shares of companies participating in public procurement of the republic, a mandatory procedure for their alienation from ownership is provided, without alternatives. Probably, it would be necessary to provide similar restrictions for Russian employees.

A characteristic feature, first of all, of the Anglo-Saxon national variations of asset trust management of employees, is that the state, represented by its competent authorities, gets acquainted with the identity of the trustee and the contents of the trust agreement (approving or disapproving them) before, and not after its conclusion. What seems to be very important, from the point of view of the usefulness of the efforts made to transfer the property to trust management. We believe that such a scheme would be quite appropriate in Russian reality, since at the very beginning it would prevent cases of transfer of property into trust management to persons affiliated with the founder.

The postulation of legal responsibility for non-compliance with the norms on the independence of the parties in the trust management agreement in most of the cases considered is carried out through confirmation of the absence of certain links in the contract. This is a very reasonable solution that can be applied in domestic practice, since such a clause of the contract will no longer allow the parties to refer to ignorance of the relevant requirements. But, again, of course, such demands must first be stopped.

Another point that draws attention to itself in the legislation of Chile is that in extreme detail (in some cases with the names of campaigns and structures), all entities that are subject to the obligation to alienate or transfer assets to trust management are listed. It should be noted that representatives of natural monopolies, as well as mass media campaigns, and even the leadership of state universities are named as subjects. In our opinion, in the Russian legislation, clarifying the list of subjects to which the relevant requirements apply would also not be superfluous, and would prevent possible discrepancies in interpretation.