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.2

      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 Tournier3 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 law4. 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 Schmidt5, 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 Corporation6, 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.7

      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 Douglas8 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,9 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.10

      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,11 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,12 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 Mattei13 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.14 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 Rahman15 interpretation of the sham concept which was threatening to overwhelm offshore trusts. The correct interpretation, as demonstrated in Re Abacus,16 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),17 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.18

      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