The issue of confidentiality in offshore financial centres is high on the agenda in the financial press. Whether it is banking secrecy or the disclosure requirements governing the establishment of offshore companies and trusts, legislation seeking to obtain information is at odds with the long established common law duty of confidentiality.
There are entirely legitimate reasons for confidentiality when establishing BVI and Cayman Trusts structures, as well as disclosure requirements related to the establishment of BVI and Cayman companies and trust structures together. Trust beneficiaries also have certain rights to obtain information.
Both the BVI and Cayman have well-developed companies law and responsive legislation which results in a great number of incorporations in both jurisdictions each year.
The British Virgin Islands is one of the largest centres for business company formations with in excess of 900,000 companies being incorporated since the enactment of the International Business Companies Act in 1984.
The flexibility available with a BVI company has made it one of the most popular vehicles involving complex private wealth structuring and succession planning; structured finance and securitisation; IPOs and listings on stock exchanges; and joint ventures.
The Business Companies Act, which replaced the International Business Companies Act in 2007, provides that the register of members, register of directors and all minutes and resolutions by the company are kept only with the registered agent under confidential due diligence and do not appear on the public record. In particular, shareholder information (registrar of shareholders) must be kept on file with the registered agent, where it is confidential and accessible only by the members of the company. Details of the company beneficial owners, directors and shareholders are not publicly available – the only documents held on public record are the memorandum and articles of association, and normally they do not contain any indication as to the actual shareholders, directors or the beneficial owners of the company. Company management (nominee) services can be used if the owner of an offshore international business company wishes to maintain reasonable secrecy as regards his real controlling position over the particular offshore company; a nominee would effectively shield the beneficial owner of the offshore company from public scrutiny and an obvious relation to the given company. Similarly, the services of a nominee shareholder can be used to reach the desired level of confidentiality.
The Business Companies Act requires the company to keep records that are sufficient to show and explain the company's transactions and will, at any time, enable the financial position of the company to be determined with reasonable accuracy. These records are not public documents.
The Cayman Islands has recently enacted the Companies (Amendment) Law 2011 which enhanced the Companies Law (2010 Revision) enabling, among other things, Cayman Islands companies to hold treasury shares and improve the merger and consolidations regime within the structure.
With respect to confidentiality protection, the legitimate interests of clients are safeguarded. The Registrar is able to release only the name, type of company, the date of registration, the address of its registered office, and the status of the company. Therefore, as with BVI companies, shareholders' and directors' information is not available for public inspection.
Except where assistance to law enforcement agencies to combat illicit activity is mandated or authorised, disclosure of information by government officials, professional agents, attorneys and accountants and their employees is prohibited.
Trust law in both the BVI and Cayman is based on principles drawn from English trust law. General principles of equity apply in both jurisdictions, as supplemented by local legislation.
The Trustee Act in the BVI was originally based upon the English Trustee Act 1925 but has been supplemented by the Trustee (Amendment) Acts 1993 and 2003. Similarly, the Cayman Islands Trust Law 1967 is based upon the English Trustee Act 1925 with the Trust Law (2009 Revision) being the main source of legislation.
Pursuant to the revised Trustee Act and Trust Law, deeds creating trusts or other deeds executed by trustees, settlors and beneficiaries under powers and discretions contained in the trust deed do not have to be filed or registered publicly. There is a common law duty of confidentiality with the trust deed being treated as a private document. The trustee is under a duty to keep trust information confidential and has wide discretion with respect to confidentiality. Further, the fiduciary responsibilities of trustees impose obligations of confidentiality.
In many jurisdictions the duty of confidentiality has been codified. In Cayman and BVI the relevant legislation is the Cayman Islands' Confidential Relationships (Preservation) Law and the BVI Banks and Trust Companies Act 1990 (Amended 1995).
Despite the extensive confidentiality code in offshore jurisdictions such as Cayman and BVI increasingly there is a desire form law enforcement agencies to pierce the veil of confidentiality. In particular, anti-money laundering legislation and financial regulation impose an obligation on trustees to report suspicious activity. Such initiatives are designed to counteract international crime and impose criminal sanctions on trustees who do not adhere to the legislation. In addition, many international finance centres have responded to G-20 criticism by signing up to tax information exchange agreements in order to meet the internationally agreed tax standard.
Clearly, it is vitally important for the reputation of a trustee and international finance centres to demonstrate that they meet the highest possible professional standards when advising clients and discharging their duties.
Both Cayman and the BVI offer well-regulated and sophisticated company and trust legislation. This together with common law principles makes both jurisdictions popular when selecting a jurisdiction for asset structuring. The company legislation, together with trust principles of confidentiality, enables the establishment of trust structures which protect and maintain private wealth.