Morven McMillan and Lucy Diggle discuss the balance that must be struck by trust professionals and the courts in the increasing drive towards fiscal transparency and the fight against international crime.
For a myriad of reasons, clients, whether private individuals or corporate entities, expect financial information and documentation to be kept confidential by the professional people, government bodies and regulatory agencies through whose hands that information passes in the normal course of business. Those reasons include commercial sensitivity, industry standards or a personal desire for privacy and are no different in the field of trusts business.
However, in the increasing drive towards fiscal transparency and the fight against international crime, there is a balance to be struck by trust professionals and the courts alike between meeting expectations of confidentiality and the realities of the world in which we all operate.
The trusts industry in the Cayman Islands is no different. Whilst most people who undertake business here will co-operate willingly in the disclosure of information to ensure they are fully compliant with their legal, fiscal and regulatory obligations, there have, historically, been well publicised occasions on which some have sought to take advantage of a "darker side of the picture [where] the trust has often served as a means of evading the law…". This recently led the Honourable Anthony Smellie QC, Chief Justice of the Cayman Islands, to conclude that "this 'dark' side has on occasion dominated the way in which offshore trusts are perceived and described."
What then are the requirements of confidentiality in the Cayman Islands and how do they fit with the increasing drive towards greater fiscal and financial transparency?
Confidentiality in the Cayman Islands
Like many other jurisdictions, a trustee owes a common law duty of confidence to its beneficiaries. The Chief Justice of the Cayman Islands recently described it thus:
"Duties of confidentiality, as part and parcel of duties of loyalty and good faith, are necessary incidents of a fiduciary relationship, a relationship established by duties which come from the wellspring of equity; from the obligations, policed by the courts of equity, to hold identified property for the benefit of others. These obligations, forming part of the moral code which governs fiduciaries, are the hallmarks of personal relationships of 'trust and confidence', underpinned by the solemn obligation of the professional or entrusted person to respect the privacy of those whose interests he must protect."
This common law duty of confidence is supplemented and given statutory force by the Confidential Relationships (Preservation) Law (2009 Revision) (CRPL).
Enacted in 1976 and most recently consolidated by the 2009 Revision, the statute "has at its heart the principle of the maintenance of confidentiality of an individual's financial affairs", while at the same time making provision for exceptions consistent with fiscal transparency obligations and the fight against international crime.
The CRPL applies to all confidential information relating to business of a professional nature arising in or brought into the Islands. It also applies to all persons who obtain possession of such confidential information at any time thereafter, regardless of whether they are inside or outside the Islands (section 3(1)). This extra-territorial effect is of particular importance to those in the trusts business who may be responsible for the administration of a Cayman Islands trust outside the Cayman Islands.
By section 2 of the CRPL, confidential information "includes information concerning any property which the recipient thereof is not, otherwise than in the normal course of business, authorized by the principal to divulge". The register of shareholders of a company, details regarding assets forming part of a trust fund and customer information held by a bank have all been held to fall within this definition.
The definition of ‘property’ is also of particular relevance to trust professionals. It includes "every present, contingent and future interest or claim direct or indirect, legal or equitable, positive or negative, in any money, money's worth, realty or personalty, movable or immovable, rights and securities thereover and all documents and things evidencing or relating thereto". As such, any beneficiary's interest under a trust and all trust related documentation would, on the face of it, fall within the provisions of the CRPL.
The application of the CRPL is, however, subject to a number of exceptions, including permitting disclosure of otherwise confidential information to the Tax Information Authority under a Tax Information Exchange Agreement, a response to the increasing drive towards greater fiscal transparency. It remains to be seen whether the Cayman Islands' Government's recent request to the United Kingdom to join the European Convention on Mutual Administrative Assistance in Tax Matters, following the pre-G8 'Open for Growth' meeting with UK Prime Minister David Cameron on 15 June 2013, will lead to further revision to the CRPL.
Divulgence of confidential information contrary to the CRPL is, at least for the time being, a criminal offence (section 5). This provision has, however, attracted considerable criticism internationally and, following Phase 2 of the Peer Review by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, legislative changes, including abolition of this provision and the introduction of a Data Protection Bill are under discussion here.
Lawful Disclosure of Confidential Information
Another popular misconception is that the CRPL is a 'secrecy statute' protecting those who are reluctant to comply with their disclosure obligations. In fact, the CRPL has been described as the "gateway for the release of confidential information". Section 4 provides that whenever a person intends or is required to disclose confidential information in evidence, or in connection with, any proceedings being tried, inquired into or determined by any court or tribunal or other authority (inside or outside the Cayman Islands), that person must first make an application for directions pursuant to section 4.
Whether the court will direct disclosure will depend upon the circumstances of each case. The court has discretion to order disclosure or not and has power to impose appropriate conditions. In the exercise of its discretion, the court will conduct a balancing exercise weighing up the competing interests involved.
Section 4(6) sets out the matters which the court is required to consider. These include whether any such order would operate as a denial of the rights of any person in the enforcement of a just claim. Other considerations may include, for example, issues of public policy and whether the proceedings give rise to issues of international and judicial comity. As the Chief Justice put it in Re Ansbacher (Cayman) Ltd  CILR 269:
"Disclosure will be allowed where it is appropriate to ensure that justice is done in disputes between persons and where the enforcement of the criminal law and the administration of justice – whether here or overseas – requires that disclosure be allowed."
This does depend upon the purpose for which disclosure is sought and from whom. In Re H  CILR 237, the trustee of a Cayman trust applied to the Grand Court for directions on whether to disclose certain confidential information pursuant to a Grand Jury subpoena issued in the United States. The Grand Jury investigation related to alleged breaches of the bankruptcy code by the settlor of the trust in his alleged failure to disclose as his property certain assets held in trust in the Cayman Islands. The validity of the trust was at that time subject to ongoing proceedings before the Cayman Court. The Chief Justice concluded that whilst the question as to the validity of the trust remained undecided:
"…it would be contrary to public policy and an unwarranted negation of the applicant's duty of confidentiality owed as trustee, to direct that he should give into evidence confidential information in criminal proceedings which, as a matter of Cayman law, may yet come to be regarded as misconceived."
While the courts will direct disclosure in appropriate circumstances, it will not sanction a "fishing expedition". The starting position is that information falling within the definition of confidential information will be protected. If there is a legitimate reason for disclosure which is permissible within the confines of the CRPL, then the court will direct disclosure. As the Chief Justice noted in Re Ansbacher (Cayman) Ltd  CILR 214:
"The law is not premised upon any presumption of wrongdoing…this court must stand ready…to reject any request for disclosure which may proceed upon a presumption that the mere fact of doing business with a Cayman financial institution points to some reproachable objective such as tax evasion"
Section 3(2) sets out a number of exceptions for which the provisions of the CRPL has no application. These exceptions broadly cover those circumstances in which disclosure is appropriate in order to comply with financial transparency obligations and the ongoing fight against international crime. They include the seeking, divulging or obtaining of confidential information by or to:
(1) The Financial Secretary, Cayman Islands Monetary Authority or such other person as the Cayman Islands' Governor in Cabinet may authorise, such as a request made pursuant to a Tax Information Exchange Agreement;
(2) A constable of the rank of Inspector or above investigating a crime committed in the Cayman Islands or, on the authority of the Governor, a crime committed abroad which would also amount to a crime in the Cayman Islands. This could include suspected money laundering relating to drug trafficking offences committed outside of the Islands; and
(3) Any professional person acting in the normal course of business or with the express or implied consent of the relevant "principal".
The identity of the trustee's "principal" for the purposes of the CRPL will depend upon the origin of the confidential information. Regardless of the identity of the principal, however, the court has held that in light of a trustee's fiduciary obligations to its beneficiaries, it should make an application for directions as to disclosure pursuant to section 48 of the Trusts Law (2011 Revision) even where the principal has consented to such disclosure.
The steps taken in the Cayman Islands to support and adopt global tax and transparency initiatives are now being recognised internationally, most recently by the UK Prime Minster, David Cameron, when he declared to the House of Commons that:
"I do not think it is fair any longer to refer to any of the overseas territories or Crown dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems …The Crown dependencies and overseas territories…have taken the necessary action and should get the backing for it."
The message is clear and bears repeating - "those who might seek to exploit the "dark side" of the trust concept will soon discover that they are unwelcome here."
 Austin W Scott & William F Fratcher, The Law of Trusts
 Keynote Address, Mourant Ozannes' International Trusts & Private Client Conference, 5 October 2012, paragraph 22
 See for example Heerema v Heerema [1985-86] JLR 293
 'A New World of Trust Litigation: a Cayman Perspective', Jersey & Guernsey Law Review, February 2012
 See note 2 above, paragraph 32
 UJB Financial Corporation v Chilmark Offshore Capital Fund Limited [1992-93] CILR 53
 In the matter of H  CILR 237
 In the matter of Ansbacher (Cayman) Limited  CILR 214
 The Chief Justice in Re Ansbacher (Cayman) Ltd  CILR 269
 See for example UJB Financial Corporation v Chilmark offshore Capital Fund Limited [1992-93] CILR 53
 See section 3(2) for the complete list of exceptions
 See for example In the Matter of Merrill Lynch Bank and Trust Company (Cayman) Limited  CILR, Note 33 and In the matter of H  CILR 237.
 Hansard, 9 September 2013, Column 700
 See note 2, paragraph 38
Morven McMillan Partner. She was admitted as a solicitor in England in 1996 and is admitted to practice in the Cayman Islands and in the BVI. Top-ranked in Chambers Global 2013, where she is described as "the best in the business", Morven is a member of STEP and is a co-editor of International Trust Disputes (OUP).
Lucy Diggle Senior Counsel
Mourant Ozannes British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Jersey and London.