Trustees must keep abreast of developments in cross-border confidentiality disclosure requirements, say Robert Shepherd and Matthew Guthrie
Unlike a certain member of the coalition cabinet who was recently found to be disposing of confidential documents on a daily basis in a park bin, a good trustee will be kept awake at night worrying about how to comply with their confidentiality obligations and how much confidential information they may be requested to disclose in different offshore financial centres.
The limits on when a trustee should, or may be allowed to, disclose confidential information are seldom given sufficient thought when a trust is established. When the issue arises it is often resolved through either an application to court or by the trustee obtaining suitable indemnities from the beneficiaries. However, better advice at the outset may succeed in avoiding such problems.
There are a number of key occasions when a trustee will need to consider whether to disclose confidential information, and if so how best to protect both themself and the object of the disclosure request.
This can happen on receipt of a request for information from the tax authority of a jurisdiction in which the settlor or a beneficiary is resident for tax purposes, or when information is needed to be provided to a tax authority in a jurisdiction in which part of the trust fund is situated or to third parties entitled to such information for anti-money laundering purposes.
The precise confidentiality obligations of a trustee depend on the jurisdiction, if any, in which the trustee is regulated, the governing law of the trust and the terms of the trust instrument itself.
For example, in Guernsey a licensed trust company is required to comply with the Code of Practice – Trust Service Providers and to “maintain confidentiality except where disclosure of information is required or permitted by an applicable law or by guidance by the Guernsey Financial Services Commission, or authorised by the person(s) to whom the duty of confidentiality is owed”. In the Cayman Islands a trustee would need to have regard to the obligations imposed by the Confidential Relations (Preservation) Law.
When to open up
The terms of a trust instrument may also impose specific confidentiality obligations on a trustee. If so, a good trusts draughtsman may well include details of the circumstances in which the trustee is permitted to disclose confidential information.
If no such carve-out is included the trustee may struggle to obtain professional services in certain jurisdictions where service providers will need information on the beneficiaries to comply with anti-money laundering requirements.
A trustee will sometimes wish to disclose confidential information about beneficiaries to tax authorities to benefit from more favourable tax treatment. For example, if a trust with investments in the US does not comply with the provisions of the Foreign Account Tax Compliance Act when they become effective, the trust could face a higher rate of withholding tax.
In a drive to increase tax revenues, many jurisdictions are seeking to maximise the information they can collect about offshore structures established by individuals resident in their jurisdiction – see, for example, recent bilateral agreements between the UK and Liechtenstein and between Germany and Switzerland.
Some jurisdictions have even sought to impose extraterritorial tax obligations on trustees. For example, new French legislation makes trustees, whether resident in France or not, jointly liable with settlors or beneficiaries for the French wealth tax due on the trust assets. Furthermore, if the trustee does not comply with the French reporting requirements in relation to the trust, this can give rise to a penalty of up to 5 per cent of the trust fund, assessable on the settlor or beneficiaries.
The reporting obligation may run headlong into confidentiality provisions in the trust instrument, in which case failure to report will be to the detriment of the settlor and the beneficiaries. This would be particularly problematic if only one of the beneficiaries were to be resident in France or the settlor was resident in France but not a beneficiary.
Finally, it should be remembered that, although a trustee may have stringent confidentiality obligations, these may be circumvented by the tax authority in which the trust is resident. While the rule in Government of India v Taylor (1955) that State A will not enforce the tax revenue judgment of State B remains good, the number of tax information exchange agreements (TIEAs) executed between states in the past decade potentially offers a way around the rule.
State A may have to satisfy the tax authority in State B that it has exhausted all of its enquiries in State A and that it has sufficiently identified its taxpayer as someone whose affairs are dealt with by the tax authorities of State B. However, once those conditions are complied with, State B is obliged to make a request of its own taxpayer, who is perhaps a trustee, and require the trustee to disclose all information it has in relation to State A’s reluctant taxpayer. It is unclear how many TIEA requests have been made in recent years, but it is yet another tool in the armoury of thirsty government tax collectors.
Under the Guernsey’s law on trusts a trustee is required to act as a bon père de famille. This requires having regard to the developing and varied regimes on disclosure of confidential information as well as disposing of confidential documents in a more prudent fashion than Oliver Letwin.
Robert Shepherd is Guernsey managing partner and Matthew Guthrie is an associate at Mourant Ozannes