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Round 2: transparency V Right to Confidentiality

In Round 2 of our series of 3 articles on Jersey’s approach to the concept of transparency in respect of beneficial ownership information, we discuss the instances in which Jersey keeps matters confidential out of respect for the legitimacy of arrangements such as discretionary trusts.

The Build Up

New wealth. Flexibility.  Professionally qualified and well-regulated trustees providing sophisticated levels of protection for beneficiaries.  Tax neutrality.  Global wealth preservation.  No registration required.  Internationally renowned legal and regulatory system.  These are just a few of the reasons which are used to promote Jersey’s trusts industry as an attractive, safe and reputable one.

Beneficiaries have a legitimate right to confidentiality. Trusts are confidential but frequently (and pejoratively) described as “secret”.  A key feature of the trust as a legal device is the separation of legal and beneficial title – the trustee is the legal owner of the trust assets rather than the beneficiary.  Whilst trusts that are managed by a professional trust company will be subject to regulations and anti-money laundering legislation requiring trust beneficiaries to provide details of their identities to the trust company, such information is kept confidential without court order or other legal compulsion.

Principles of transparency and confidentiality often conflict when third parties unconnected to the trust or related company seek disclosure from the court of beneficial ownership information through disclosure applications.

The Royal Court of Jersey plays a balancing role in ensuring that Jersey remains a well-regulated and attractive jurisdiction for business and personal wealth management whilst simultaneously ensuring that trusts and company structures are not misused for instance to unlawfully hide assets from judgment creditors or to defraud persons. The Court has a key role to play in ensuring that those with a legitimate interest can obtain information from trustees, which would normally be confidential. Where underlying beneficiaries form part of a trust structure one effect of such court orders for disclosure is to support Jersey’s international obligations to ensure the transparency of beneficial ownership information when it is appropriate to do so.

The Highlights

Privacy and anonymity orders

As a starting point, the Jersey courts are clear that justice should be done in public. However, the courts also attach great importance to the confidentiality of private trusts.  Not only is this standpoint driven by a respect for the interests of trust beneficiaries but also the Jersey trusts’ and fiduciary services industry as a whole.  Persons’ private financial affairs should be kept private.

In order to reconcile public justice and confidentiality, the court may sit in private in non-contentious trust proceedings (such as an application to vary the terms of a Jersey trust or an application for direction regarding how the trustee may or should act in connection with any matter concerning the administration of a trust). Not only does this protect beneficiaries and trust information in the main, but a confidentiality embargo is attached to any documents that are disclosed in the proceedings; a party that discloses any of this material or exposes the nature of the material in breach of the privacy order is in contempt of court.

The courts will sit in public when dealing with hostile trust proceedings and non-administrative actions. It is the administration of trusts, which is kept private.

Confidentiality and privacy is particularly important in the context of trusts. It is much too simplistic to be dismissive of the emphasis given to confidentiality by the trusts industry.  There are very good reasons that the wealth and property holdings of individuals should not be made public not least the real risk of harm being done to individuals through kidnap.  In some areas of the world this is a real and significant threat.  Frequently, the wealth of individuals is not common knowledge even in the areas where they live.  Further, their wealth can be unknown elsewhere.

As a means of making as much information public as possible where a court has heard a matter in private, very frequently there will be a public judgment but with parties’ anonymised as necessary to protect their privacy.

Private individuals can use trusts to arrange their family affairs and for international investment purposes. The practice of the Jersey courts to maintain the privacy and anonymity of trust beneficiaries in appropriate cases illustrates its respect for avoiding intruding upon private respectable financial affairs.  It largely mirrors the English courts’ approach in this regard.

The key task of the court is to balance the interest of those connected with the trust in confidentiality and disclosure in appropriate cases to others who are strangers to the trust.

Disclosure Orders, hurdles and protection in the trusts and companies context

In appropriate cases the court can order disclosure of documents and information from a third party such as a trustee or a company. These are called Third-party Disclosure Orders or Norwich Pharmacal / Bankers Trust type orders named after old English cases.  Disclosure is typically granted in order to enable the plaintiff to identify the proper defendant or to obtain the information necessary to plead a claim (e.g. fraud).  It is also an effective tool for asset tracing pre-trial and identifying further assets for the purposes of judgment enforcement after trial.  In particular, if there is a suspicion that assets have wrongly been placed into a trust structure in such a way so as to place them beyond the reach of a non-beneficiary to a trust, Norwich Pharmacal relief can be sought in respect of such hidden assets.

In an offshore context, such applications are likely to be made against a trust company or a corporate service provider. An applicant for disclosure must show:

  • A wrong has been carried out against the victim or at least arguably carried out;
  • The applicant intends to assert legal rights against the wrongdoer;
  • There is a need for the court’s intervention to enable the applicant to decide whether to act or commence proceedings in respect of the wrongdoing;
  • The respondent is more than a ‘mere witness’ of the wrongdoing – there needs to be reasonable grounds for supposing or a reasonable suspicion that the respondent was mixed up in that wrongdoing;
  • Without disclosure of the information sought, the applicant will be unable to protect itself from the wrongdoing;
  • It is in the interests of justice to order the respondent to make disclosure; and
  • The application for such relief is not deemed to be disproportionate, unnecessary or amounting to a fishing expedition.

The outcome of such an application can of course potentially lead to the discovery of the identity of an entirely innocent beneficiary or beneficiaries of a trust or an innocent beneficial owner of a company (and associated information). This is an aspect which will always be under consideration during an application for disclosure and forms part of the balancing exercise conducted by the court.

The Analysis

Requests before disclosure, ordered by the court, are protective of innocent beneficiaries of discretionary trusts. Specifically, through the instances identified in this article, Jersey continues to maintain respect for the law of confidence, the legitimacy of legal structures and international obligations towards transparency.

Protecting rights to confidentiality is an attractive feature of Jersey’s fiduciary services industry. It is also important to ensure that those that have suffered harm are able to obtain disclosure.  It will be interested to see how the Jersey courts will strike a balance between these two objectives over the next 5 to 10 years.

By Amita Chohan, Pupil Barrister