The importance of fiduciary arrangements in Colombia
Latin America has been a natural recipient of the legal developments that take place in continental Europe. Outside this tradition, however, one of the fields of law that has seen a considerable amount of evolvement is in fiduciary arrangements. In this article we seek to provide information on this instrument seen frequently in countries such as Colombia and to briefly describe the reasons behind its success.
Fiduciary arrangements in Latin America are the product of adaptation by these countries of the Anglo Saxon trust instrument. In Colombia, the fiduciary arrangement mechanism has evolved considerably in that, whereas the trust has been particularly used in inheritance planning and asset distribution arrangements, the fiduciary arrangement has been a structuring and implementation mechanism for all kinds of complex and large-scale transactions.
What does it consist of?
Under a commercial fiduciary agreement, a person, called the settlor or grantor, transfers their ownership of certain assets for them to be managed by another person, called the fiduciary. In Colombia, fiduciaries are entities (fiduciary companies) that are regulated and supervised in a similar way to credit institutions. The fiduciary acquires the obligation to manage the assets in accordance with the purpose stipulated by the settlor, which will benefit one or more beneficiaries, who, depending on the purpose, can be the same person as the settlor.
In Colombia, although the fiduciary is responsible for managing the contributed assets, those assets do not become the fiduciary’s property, but rather remain separate from the assets of the settlor, the fiduciary and the beneficiary; and by being separate they are afforded special protection, whereby they cannot, in principle, be touched by the creditors of any of those parties. These separate assets only back the obligations acquired to fulfill the respective purpose stipulated in the fiduciary agreement.
What are the benefits?
There are several elements that provide security to the participants in a fiduciary arrangement. One is that the assets are separate property, which can only be used for the fulfillment of the purpose of the arrangement, and the other is that the fiduciary manager is a qualified professional subject to zealous oversight by the state which requires a high initial capital and suitable risk management systems to be in place.
What are the figures for the fiduciary business in Colombia?
To give a better idea of the use of this mechanism, in 2012 the assets managed by fiduciary companies accounted for 37% of Colombia’s GDP and in 2013 there were approximately 19,000 fiduciary arrangements.
In what type of business transactions are fiduciary arrangements often found?
In Colombia, commercial fiduciary arrangement are commonly used in the performance of real estate projects and infrastructure projects, in providing security for company acquisitions, in managing production projects, in cash management at companies and in transactions on the securities market.
How important are they in Latin America as a whole?
Fiduciary arrangements can be found in the legal systems of at least 18 countries in Latin America, although not all have evolved to the same degree. They have greater importance in Mexico, Panama and Colombia.
Outside Latin America, use of the fiduciary arrangement continues to grow, such that in 2007 France enacted the Law on Fiduciary Arrangements, showing that even some continental European countries welcome the benefits of this mechanism which has traditionally been foreign to them.
Garrigues Latin America Practice
