Article of the Month - Great
Reading
WORLD
OFFSHORE CONVENTION - PUERTO RICO-
October
26, 2006
OFFSHORE
TRUSTS AND CONFIDENTIALITY -
IS
CONFIDENTIALITY INCONSISTENT WITH CREATING WEALTH?
I have been asked to discuss with you the topic ‘Offshore Trusts
and Confidentiality’ which, at first blush appears to be somewhat
disparate topics. Yet, although offshore trusts and confidentiality are
both important, independent offshore financial products, there are important
points at which they interface.
My subtopic, ‘Is Confidentiality Inconsistent with Creating Wealth?’ will
no doubt appear to be a curious and even outlandish proposition
to those familiar with the offshore sector, a sector which has defined
itself in keeping with strict confidentiality norms.
As I pondered on the proposition, that confidentiality is inconsistent
with creating wealth, I could not help but feel somewhat indignant that
we, in this region, are even contemplating this question. It is therefore
pertinent for me to say something about the philosophical undertones
of this topic, and indeed the very way in which we now wish to describe
or market the offshore sector.
To my mind, the question speaks to a certain defeatist acceptance of
what has been a concerted effort by our detractors to negative perfectly
acceptable, well established legal principles and concepts which the
offshore financial sector utilizes, concepts such as confidentiality.
No doubt we are all aware of the attempts at ‘blacklisting’ the
offshore sector, in particular, the OECD initiative and especially the
accusations of money laundering. The first point of objection is my point
of view that confidentiality has been largely used as a scapegoat,
to promote the idea that it encourages money laundering, tax evaders
etc.
I have always maintained that the entire dialogue (or was it a monologue)
on the offshore sector and money laundering was really somewhat of a
legal farce, an attempt to cloak what is the real issue, the loss of
dollars and cents, monies being filtered off from rich, developed countries,
to relatively poor, politically insignificant developing countries. Particularly
significant is the loss of potential tax revenue.
Notably, it was not easy to attack the offshore sector by simply using
arguments centred on tax since, if anything, legal principles both in
relation to domestic revenue law and international law, actually favoured
the offshore position that an investor is free to invest his or her money
offshore for tax mitigation purposes. The relevant principles at play
include the Westminster principle on the legality of tax avoidance
as opposed to tax evasion (the latter alone traditionally being illegal)
and the principle of international law that no country enforces the fiscal
law of another. It should also be observed that onshore countries themselves
rely on these very same legal principles in all other areas of law. Indeed,
it would be difficult to fault offshore legal principles and concepts
in themselves, whether it be the trust, conflict of laws, confidentiality
etc. Hence, the introduction of a red herring.
We may add to this conundrum the fact that there are no clear rules of
international law as to who should have the jurisdiction to tax what
is in essence, transnational investment. In fact, I believe that this
is one of the areas for which we should be lobbying.
Consequently, the blacklisting related initiatives were not significantly
about money laundering. To date, no one has been able to demonstrate
that the offshore sector is plagued with more money laundering or illegal
activity than other so called respectable financial sectors. Indeed,
the opposite may be true, when we think of the recent financial debacles
in the US, London, Italy and Russia.
The
result of linking confidentiality so intimately to money laundering etc.
has been that confidentiality in the offshore sector has acquired
a bad name, a negative image. In fact, the concept has been vilified.
Confidentiality Protected in Other Fields of Endeavour
Curiously though, on examination of the jurisprudence, confidentiality
remains a viable and much respected principle in other areas of commercial
endeavour not associated with offshore investment. For example, the
United States and Canada have fought hard and long to protect the principle
of financial confidentialiy in terms of trade secrets, arguing precisely
that it is essential for business, in order to sustain
wealth.
Further,
I have unearthed several cases outside of the offshore arena, where the
US has argued vociferously against disclosure in commercial endeavours,
arguing that there was a ‘strong and vital interest’ in protecting
confidentiality.
Similarly,
in employment and commercial law, we learn about duties of trust and
confidence. More broadly, we accept without question the notion of confidentiality
in fiduciary relationships generally. This is considered a founding
principle of the common law, recognized in tort law, contract law,
company law, employment law etc, essential for maintaining those protected
relationships. In many cases these relationships are concerned with commerce
and business. Thus, confidentiality in other quarters is a legitimate
and much protected principle precisely because of its value to business
and wealth creation and sustenance. How is it then that it is detrimental
to business once that business is in the offshore sector?
To
my mind, I identify a certain hypocrisy in the debate. And I believe
that it is important for us in the offshore sector not just to lobby
in an apologetic way, begging for life-lines by promising to toe the
line, but to engage seriously in the debate about legal principle. We
must challenge these assumptions and deliberate attempts to illegalize
and denigrate what are indeed, perfectly legitimate principles of law
and policies based on these legal concepts.
In
fact, I believe that the more we question offshore confidentiality and
other offshore financial products because of this new found insecurity
about the correctness of our legal position, the more we come to the
table with this apologist approach, that is when confidentiality and
everything else in the offshore sector will be bad for business. If we
treat our preciously constructed financial products and concepts as somehow
unsavoury, then clearly investors will get that message and begin to
feel uncomfortable about investing with us. You, the business people
among you, know far better than I, the need for a certain climate before
people will put their money into investments.
So,
yes, by all means, let us be aware that confidentiality can sometimes
be abused but let us be confident that this of itself does not make confidentiality
an abusive or illegal concept.
We also need to address the supposition that confidentiality itself
is bad, that it must be eliminated, simply because it can be used for
abuse. This is a peculiar way of looking at legal concepts or indeed,
any kind of system.
For example, we have heard of huge financial scandals in the onshore
world, such as Enron and BCCI, where accountants and financial brokers
etc. have abused their fiduciary duties and committed huge crimes, but
I have never heard anyone suggest that we should do away with the
accountancy profession or the financial principles upon which it is based,
or the stock market or anything of that nature! No, we have merely accepted
that in every financial endeavour and structure there will be weaknesses
and what we simply need to do is to have checks and balances and avenues
for redress. Indeed, offshore law contains such legislative checks and
balances. Yet, once there is the mere suggestion (and it is often simply
a suggestion) that confidentiality leads to some type of abuse, then
we begin to question the very legitimacy of confidentiality as a legal
principle.
What we have done therefore is to allow those who wish to destroy
the offshore sector for reasons of self interest to define us.
COPYCATS – SUPPORT AND LEGITIMISE OFFSHORE POLICIES AND
PRODUCTS
And so, while we have begun to doubt ourselves and the financial products
that we have created for economic sustainability, products which are
based on sound business and legal principles, those who criticize us
are busy emulating us, putting in place the very financial products that
they have criticized, including the very principles of confidentiality.
We see this in several US states such as in Atlanta, in Delaware
for example. What better argument do we need for accepting that confidentiality,
offshore trusts and IBCs are not only legitimate and lawful, but
that they are great for business and wealth creation!
In truth, I welcome these- what I have termed ‘onshore-offshore’ sectors
in Atlanta and elsewhere, for while they are our business competitors,
they help to legitimise the offshore sector and encourage its more innovative
concepts and products into the mainstream of commerce. This can only
aid in wealth creation as it creates a certain comfort level.
CONFIDENTIALITY IS A LONG STANDING AND WELL RESPECTED PRINCIPLE
I
therefore argue for the legitimacy of financial confidentiality as a
legal principle. Indeed, the legitimacy of the several legal and financial
products which the offshore sector has created. It is no accident that
the banking sector, for example, has long operated on the understanding
of the value of the confidentiality ethic. This is supported by the common
law, in the Tournier case and
other common law norms.
In
the case of trusts, trustees have a well established duty under orthodox
trust law, to keep the affairs of the trust confidential. Amazingly,
the OECD even sought to attack this duty, although it applies equally
to every single onshore trust.
INVESTORS WANT AND DESIRE CONFIDENTIALITY
Further, the proposition that confidentiality is bad for wealth creation
seems curious from another point of view, since it can be demonstrated
that the viability of offshore financial products, including trusts,
depends to a large extent on this characteristic confidentiality ethic.
Offshore trusts have been able to secure assets and maintain their
integrity, even where onshore legislation specifically targets such
trusts. Certain unclear principles related to the confidentiality of
the trust in general have also been tested and clarified largely
as a result of offshore structures and challenges.
Despite the positives in relation to offshore trusts and confidentiality,
it is also true that, at the same time, the erosion of confidentiality
and the persistent aggression which it faces, pose threats to offshore
trusts.
Offshore Confidentiality
Let us examine this offshore legal concept of confidentiality more carefully.
Clearly, it is somewhat different to its common law neighbour. It is
what I call a hybrid concept. It encompasses strict and extremely broad-based
statutory duties of confidentiality, sometimes with criminal penalties
attached, in all aspects of business. Indeed, it is a good example
of the efficiency and dynamism of offshore law .
Confidentiality in offshore jurisdictions is valued in of itself and
many investors choose offshore jurisdictions specifically for added
confidentiality norms. As such, it is appropriately described as a
financial or legal product in the offshore sector.
Confidentiality as an offshore law product, has been responsible for
creating significant and sustaining opportunities in the offshore sector.
On the other hand, it is the concept which has perhaps antagonised onshore
actors the most. We have already mentioned that confidentiality has acquired
something of a bad name for itself due to linkages, often erroneous,
to money laundering, fraud and tax evasion. Powerful onshore nations,
such as the US, have campaigned, somewhat effectively, to whittle away
the confidentiality norms in offshore states.
Today, therefore, stricter anti-money laundering laws and increasing
tax reporting and other information requirements have undermined the
strong confidentiality laws in place in offshore jurisdictions. Yet,
confidentiality is still a valuable, legitimate principle and product,
justifiable in commerce. Investors who have clean hands have nothing
to fear, as reasonable suspicion underlines the several laws put into
place which can thwart confidentiality. To such investors, confidentiality
and the legal principles now attached to it will in no way hinder
investment and ultimately wealth creation.
Limits to Confidentiality
Notably, a distinction should be made about the kinds of pressures which
will result in disclosure. Where, for example, there is prima facie
evidence of fraud or money laundering, confidentiality will and must
succumb to the greater interest in disclosure and law enforcement.
In contrast, offshore jurisdictions have resisted attempts to automatically
defeat confidentiality where routine reporting or disclosure relating
to fiscal matters is involved. This approach is supported by the well
established rule of international law that no country enforces the
fiscal laws of another.
Such resistance is enhanced because of offshore structures and arrangements
which seek to ensure that onshore states do not have jurisdiction over
offshore entities and actors. Consequently, for confidentiality to be
effective and aid in wealth creation, it must work in tandem with jurisdiction
strategies.
Offshore trustees, for example, fall outside such jurisdiction and cannot
be forced to disclose matters relating to offshore investment,
whatever laws exist onshore for such disclosure. While some offshore
states have succumbed to onshore pressures and signed tax information
Agreements, the status quo in relation to confidentiality in such matters
largely remains. This ensures that the opportunities which exist in relation
to confidentiality endure.
Enhanced Confidentiality Norms
Further, while offshore Legislatures have been attempting to erode confidentiality
because of fears of hiding tax advantages, money laundering and even
terrorist activity, in other areas of offshore law, confidentiality
has assumed a greater status. The best example is perhaps the development
in relation to information on the offshore trust. The offshore trust,
like its other offshore law counterparts, is protected by the confidentiality
laws of the offshore jurisdiction. Questions have arisen however, as
to the right of beneficiaries to the trust to glean information about
the trust. The traditional view, although inconsistent, was that the
law required beneficiaries to have information about accounts or to
be informed about the existence of the trust since the trustee is ultimately
accountable to the beneficiaries. However, in a landmark Privy Council
judgment, Rosewood Trust Ltd v Schmidt ,
the court found that there was no legal principle which required beneficiaries
or any other party to have information on the trust. Rather, this was
a question to be left to the discretion of the court.
This is significant for investment opportunities as it underscores the
confidentiality ethic created under statute law in offshore jurisdictions.
In some cases, settlors wish to specifically prevent beneficiaries or
third parties from either learning of the existence of the trust or having
more detailed information. So this confidentiality is why they have chosen
the offshore product for business. Examples include spendthrift trusts
which attempt to preserve assets and trusts established to preclude forced
heirs in civil law jurisdictions.
Constitutional Protections
Fundamental norms on confidentiality may exist outside of the common
law under human rights law, under the rubric of the right to privacy.
In fact, it is arguable that our constitutions can be stretched to
include a viable notion of financial privacy in certain circumstances.
The underlining of confidentiality norms with constitutional protections
such as the right to privacy or the privilege against self-incrimination
enhances considerably the value of confidentiality as an offshore financial
product. Whilst constitutional privacy protections were not successfully
protected by the court in The Bahamas in one case which challenged the
financial reporting requirements in that jurisdiction. In Re Financial
Clearing Corporation ,
this was not because it failed to be identified but rather because it
succumbed to greater interests of law enforcement.
However, other successes have been scored for confidentiality. The European
Court on Human Rights, for example, has found that documents and financial
records, even those wanted for tax purposes are protected by privacy,
and that governments must, at least, act in accordance with the principle of proportionality,
that is, taking the route least invasive of individual human rights.
Further, as echoed in our courts, governments must act reasonably,
and only as is necessary in a free and democratic society.
Automatic demands for information unrelated to some reasonable cause,
where fishing expeditions etc. are involved, are therefore unacceptable.
In most offshore jurisdictions the issue has not been tested directly
in the courts. However, in the Commonwealth Caribbean, cases such as Bethel v
Douglas and
the like reveal that similar considerations are at play. Similarly, in
Australia and other parts of the Commonwealth progressive courts sensitive
to commercial concerns have located privacy interests in financial confidentiality.
The clothing of financial confidentiality with a human rights ethos gives
the concept added legitimacy as well as better security in a practical
sense. This can only add to and not subtract from financial objectives
such as investment and wealth protection.
The Offshore Trust
Let us now examine more closely the financial vehicle of the offshore
trust which derives so many benefits from confidentiality under offshore
law. Perhaps the trust can be described as the most interesting and
important offshore vehicle and the one with enormous potential for
investors. Like offshore confidentiality, the offshore trust is a statutory
creature and is related to, but different from its well- known common
law cousin. It has deviated significantly from the more orthodox and
allows certain functions, such as self-settling and spendthrift functions.
The offshore trust is versatile, providing opportunities in probate,
particularly cross border, facilitating tax mitigation, creditor protection,
making company matters more efficient and far-reaching and even protecting
trustees against negligence suits.
Revolutionary Character
The revolutionary character of offshore trusts law is manifested both
in the type of trusts offered and in the functions permitted under offshore
law. Offshore law allows a host of things that a traditional trust cannot
do, or do effectively. Most importantly, given the commercial objectives
of offshore law, offshore trusts are more closely aligned to business
and companies than their onshore counterparts. The latest offshore trust
creation, the VISTA trust, demonstrates
well the intricate relationship between the offshore trust and the company
in offshore financial centres, and in so doing, underlines the kinds
of business opportunities that exist. The VISTA trust allows traditional
obligations of trustees with respect to the use of shares in investment,
to be exercised by directors of underlying companies. In so doing, it
insulates such trustees from bludgeoning common law liabilities which
may accrue from risky commercial ventures.
It is not surprising that these innovative trusts should invite challenge
from onshore jurisdictions. A first line of defence is the protection
offered by the concept of offshore confidentiality as the strict confidentiality
laws and policies of offshore jurisdictions extend to trusts. We have
already seen that the offshore trust is further protected by special
principles which attach to trusts as enunciated in the Schmidt case
and because of confidence duties attached to trustees.
We should note too that one of the reasons that the offshore trust is
such an attractive vehicle for wealth creation and business is because
of its inherent makeup, that is, a three tiered structure. In this complex
structure, there is a trustee, a settlor and a beneficiary. More
importantly, the trustee holds the assets on behalf of a beneficiary. Where,
as is often the case, the offshore trust is created with an underlying
company or utilizes a confidential bank account, a triple level of security
is created for investors.
Because of the extent to which the offshore trust is used in offshore
finance for a wide variety of functions such as, for example, tax mitigation,
by extension these confidentiality protections are able to be applied
to a great variety of usages.
Another remarkable advancement of the offshore trust is its ability
to cater to the needs of investors from civil law jurisdictions unfamiliar
with the trust. Offshore legislation permit such investors to establish
trusts, granting them capacity, and make provision for the recognition
of the offshore trust. This latter feature is in fact compatible with
the Hague Convention on Trusts, further
underlining the legitimacy of offshore products. Most importantly for
such investors, they are able to avoid onerous succession rules which
force them to leave assets for heirs (forced heirship regimes). This
would be impossible under ordinary trust law.
Other important features of the offshore trust include:
(1)- the ability to abolish perpetuity and accumulation rules or extend
them; thereby allowing the creation of dynasty trusts, trusts which can
continue for longer or even indefinite periods and fulfilling longer-term
investment objectives;
(2) - creating purpose trusts and thus abolishing rules that a trust
must have an identifiable beneficiary This rule against trusts
without identifiable beneficiaries is without real justification in a
modern commercial environment. Offshore trusts make it possible for the
commercial objectives of the trust to be realised adequately;
(3) - making it more difficult for onshore creditors to reach trust assets;
and
(4) - defeating the Saunders v Vautiers rule whereby beneficiaries
can come together to conclude the trust, and thereby frustrate trust
objectives, particularly where these are business objectives. In this
latter objective, confidentiality is again helpful.
Further
insulation for the trust comes from the conflict of law rules found under
offshore laws, which preclude enforcement of hostile onshore judgments,
provide for exclusive jurisdiction over offshore entities, facilitate
offshore law as the proper law. Some of these bold laws have already
been tested successfully in the courts. For example, in Green v Jernigan, a
Canadian court upheld an exclusive jurisdiction law clause used in the
formation of an offshore trust in Nevis.
Since many of the offshore conflict of law rules mirror that of the Hague
Convention on Trusts, like minded cases such as Casani v Mattei aid
us in proving the legitimacy and viability of these new legal principles.
In this important case, an Italian court upheld a trust which attempted
to avoid forced heirship laws, declaring it not against public policy,
and also proclaimed that the trust was recognisable under Italian law
(civil law).
Developments on Sham Trusts
Offshore trust provisions which allow greater roles for settlors have
sometimes run afoul of the law under the sham rule, despite offshore
legislation which sought to prevent sham attacks. However,
more recent developments illustrate that the sham doctrine is not as
great a danger as previously thought. These important decisions have
revised the harsh Rahman interpretation
of the sham concept which was threatening to overwhelm offshore trusts.
The correct interpretation, as demonstrated in Re Abacus, is
that for a trust to be declared a sham, mere evidence of settlor influence
is not sufficient. Rather, there must have been a common intention on
the part of both the trustees and the settlor to create a sham. Further,
the court found nothing odd about trustees succumbing easily to settlor
demands for benefits under the trust since the trustee should be seeking
to preserve a harmonious relationship. Thus, the notion of the unilateral
sham is now severely undermined, if not totally discredited.
Here, we should distinguish between the more aggressive unilateral US
approach, which in fact, has sometimes treated offshore confidentiality
as one indicator of a sham (Anderson), and the UK approach which
is based on purer rules of the sham doctrine, untainted by considerations
of the purpose and effects of the offshore sector.
It is clear therefore, that these trust mutants and the resulting legal
principles offer significant new opportunities for investors.
When we juxtapose the principles surrounding confidentiality and in particular,
the Schmidt rule outlined above, these opportunities are enhanced.
Reservations on Confidentiality
Notwithstanding the many advantages of confidentiality which attach to
offshore trusts and advance the commercial objectives of offshore finance,
there is another side to the equation.
There is no doubt that the strong confidentiality ethic of offshore jurisdictions
has engendered much suspicion and hostility onshore, resulting
in greater regulation of the offshore centre. More onerous tax reporting
requirements, for example, can be traced back to confidentiality obstacles.
Yet, we have seen that confidentiality is a concept which is not to be
feared in of itself. Rather, it is its capacity to hide the flow of revenue
from onshore to offshore jurisdictions. It is because of this loss of
income that the confidentiality principle, a legitimate principle in
of itself, has been challenged so vociferously.
The question remains therefore, were we to dismantle the confidentiality
structures and policies of offshore jurisdictions, would onshore countries
be more accepting of the aim and objectives of offshore centres. I do
not believe so, as the threats of competition from offshore centres would
remain. Nonetheless, the more onshore regulators suspect that there is
something to hide, the more they will attempt to go after it. My view
on this is why is it our duty to make it easier for such regulators?
We have just as much right to protect our investment goals as they do
and can.
In fact, it is very telling that the infamous line of bank cases which
were fought on confidentiality issues in which certain offshore banks
were being threatened with contempt actions by US courts for refusing
to disclose information on offshore clients (in accordance with offshore
law), was
framed within the context of comity, i.e. which state had the ‘greater
interest’ in protecting confidentiality or dismantling it. The
political and economic dimensions of this legal battle contextualised
within principles of private international law, was very evident and
even commented upon by other onshore states, such as Canada and the UK.
They saw it as a question of might over right (vulnerable offshore states).
In one case, the UK court protested that such an approach merely resulted
in a solution or win going to the ‘highest bidder’. The US
courts made no apologies, stating that this confidentiality debate was
about revenue, especially tax revenue ‘ the lifeblood of their
economy’. In every single case going before the US courts, although
they claimed to balance conflicting interests between offshore and onshore
in the name of comity, the interests of the US prevailed. This, despite
the fact that the offshore sector is the sole or most important revenue
earner in the offshore jurisdictions concerned and tax is but one aspect
of the US economy.
At the end of the day, the key issue is about ‘balance’.
We can respect the requests of onshore jurisdictions for more disclosure
where activities such as money laundering etc. are suspected, as this
is a morally accepted neutral rationale for disclosure. Where, however,
disclosure has as its aim only the facilitation of revenue creation in
onshore jurisdictions at the expense of offshore jurisdictions, then
it is more suspect and ethically illegitimate. This is all the more so
when we consider that the mores, practices and very legal principles
created and developed by offshore jurisdictions have now been adopted
in certain onshore jurisdictions which make no apology for this phenomenon.
In conclusion, I reiterate that in the final analysis, there is no greater
testimony to the legitimacy, efficiency and viability of offshore precepts,
including confidentiality, than the ‘borrowing’ from hostile
neighbours –‘ if we can’t beat them, then we must join
them’.
Professor Rose-Marie Belle Antoine
Deputy Dean and Professor of Labour Law and Offshore
Law
University of the West Indies
LLB (UWI); LLM (Cambridge); DPHIL (Oxon)
rantoine@uwichill.edu.bb
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