On 21 March 2012 the Royal Court of Jersey delivered the judgment of Dalemont v Senatorov [2012] and this is the first time that a Jersey foundation has been subject to judicial scrutiny. In this case the particular Jersey foundation (the “Foundation”) was held to be in contempt of court for failing to comply with an order for disclosure and the Royal Court criticised both the constitution of the Foundation and also the Foundations (Jersey) Law 2009.

Background

In this case the Plaintiff had obtained judgments in a foreign court and brought proceedings in Jersey seeking to (a) enforce those judgments against the first defendant and (b) pierce the corporate veil of the Foundation (being the second defendant) to access its assets which included shares in the fourth defendant, being a property holding vehicle. The plaintiff requested a wide disclosure order against the defendants requiring them to disclose details of their assets. The Foundation failed to comply with the disclosure order within the time frame specified by the Royal Court with the consequence that the Foundation was held to be in contempt of court because it did not hold the required information to be disclosed.

A representative of the Jersey qualified member of the Foundation’s council (the “Council”) informed the Royal Court that, whilst enquiries were made as to what the businesses of the Foundation’s underlying companies were so the qualified member could be sure they were not involved in sensitive activities for anti-money laundering purposes, the Foundation’s regulations did not require it to hold the information requested.

In this particular instance, the Foundation had three council members, one being the required Jersey regulated member and two being corporate unregulated members. The guardian was also a corporate entity and, together with the two corporate unregulated members, and the underlying companies, was administered by a Cypriot corporate service provider.

Furthermore, the regulations of the Foundation required the Council to make decisions by majority, but did require the consent of the Jersey qualified member in certain circumstances, namely to accept endowments, apply the Foundation’s assets and make payments or other distributions to beneficiaries. In all other cases the Council could make decisions without the Jersey qualified member.

Whilst it may have been the case that the Foundation was intended only to be a holding vehicle and it was not intended to actively participate in the administration of the underlying structure, the arrangement of the Foundation’s constitution meant the Jersey qualified member of the Council accepted a position where it, potentially, had a lack of control both of the Foundation’s activities and its underlying companies, with no means of compelling its fellow, and foreign resident, council members and underlying companies to comply with its requests for information.

Royal Court’s Comments

The Royal Court held this situation to be unsatisfactory saying: “It appears to us that one result of the way in which the affairs of the [the Foundation] have been structured is that it is in fact very difficult to prevent the underlying structures from being used for money laundering or indeed any other criminal purposes.

The Royal Court continued: “…..if the result of the Foundations Law and the charter and regulations adopted in this case is as the [the Foundation] contends, then the relevant authorities might want to revisit with a degree of urgency the structure of the Foundations Law and the requirements that are imposed on qualified members, because the current position seems to be quite unacceptable. We are inclined to assume that both the Jersey Financial Services Commission and the Attorney General would also find the current position to be unacceptable because the service of statutory notices by either of those entities would be no more successful in ensuring the relevant information was produced than an order of this court, and for the purposes of mutual legal assistance and law enforcement, it would seem that that too would be a strange result.”

Comment

The Royal Court has suggested that the Foundations Law is at fault, but is it?

Article 36 of the Foundations Law requires a foundation to keep at its business address in Jersey (being the address of the Jersey qualified member) “records sufficient to show and explain its transactions” and “records that disclose, with reasonable accuracy, its financial position”. Adhering to these statutory obligations, combined with the requirements of Jersey’s anti-money laundering regime, should be sufficient to ensure the Jersey qualified person has sufficient information on the activities of the Foundation, and its underlying entities.

Furthermore, whilst the Foundations Law does provide for multiple council members resident anywhere in the world, which may result in the Jersey regulated entity either losing control of or not having sufficient control of the Foundation and its underlying assets, the trust laws of Jersey (and of many major other international finance centres) allow for the possibility of multiple trustees (wherever resident and whether an individual or corporate body) which may result in a trust structure being established where a particular trustee finds itself in the minority of a simple majority decision and therefore not have control of the underlying assets. What is more the companies laws of Jersey (and elsewhere), allow for non-resident multiple directors where a professional director may be outvoted and not have control of the company’s activities. The latter would be relevant to private trust companies for example.

Therefore, other laws of Jersey, and of other major international finance centres, allow a structure to be established in the same way as the Foundations Law. We would, therefore, suggest that it is not the Foundations Law at fault, but rather the structure in this particular case. Clearly not all foundations, trusts or companies have the same structure. In this case, whilst the constitutional regulations of the Foundation attempted to address some issues of control, the Foundation’s regulations did not necessary address the practical issues of control, particularly in respect of information. Consequently this led to the Royal Court to say: “…how…decisions would practically be taken, and how there could be any control exercised to ensure they were referred to the Council members at all given the lack of information [the Jersey qualified member] had, would seem open to question.”

Since the inception of the Foundations Law, Collas Crill has maintained to its institutional clients that best advice must be for it alone to be the sole member of a Jersey foundation council, and to consider carefully what positive powers a founder may possess, or otherwise risk losing control of the foundation and, with it, possibly any knowledge of the structure’s activities.

However, depending on circumstances, it is not always possible to follow best advice and in such circumstances it is essential that Jersey regulated service providers providing trust company business ensure that, whatever type of structure they administer, the constitutional documents are prepared so as to provide the Jersey regulated entity with control over the structures they administer and to practically ensure that it has access to all the information which it is required to hold by law or regulation. Consequently the emphasis should not, as the Royal Court suggests, be upon legislators to urgently redraft the Foundations Law, the trusts law or otherwise, but should be upon the drafting of the constitutional documents to ensure that the regulated entities have appropriate control of the structure and access to required information to be able to show and explain the foundation’s transactions and disclose, with reasonable accuracy, the foundation’s financial position.