Carey Olsen's Russell Clark, who has been closely involved with introducing Guernsey's foundations legislation, talks about the resistance to the proposed law, why it's innovative and what happens next.

Why has it taken so long for Guernsey to introduce foundations?

RC: At the end of 2004, the Economic Development Unit of the States of Guernsey's Commerce and Employment

Department set up a Trust Law Revision Working Party, which led eventually to the Trusts (Guernsey) Law 2007. As part of that working party, which was chaired by Advocate Rupert Evans, we consulted on introducing foundations into Guernsey law. There was overwhelming support for the idea. We reported back to Commerce and Employment and that department reported to the States of Deliberation in December 2006, recommending the introduction of foundations into Guernsey law and requesting draft legislation to be prepared.

In 2007, our focus was modifying the trust law, then 2008 saw a major shake-up of Guernsey's company legislation. Jersey introduced its foundations law in 2009 and, largely as a result of observations made on Jersey's legislation, the Guernsey draftsmen took time consulting not only with fiduciary practitioners but also civilian lawyers to craft something quite different to the foundations legislation in other common-law jurisdictions. We also had to consider and address any concerns raised as to whether the introduction of foundations into Guernsey law was something the jurisdiction should be contemplating.

Why was there resistance to a foundations law in Guernsey?

RC: Trust administration has been a major part of our economy for the past 60 years. There was some concern that introducing foundations into our law was denigrating the value of trusts or otherwise diluting the message that Guernsey is a centre for trust administration. However, there is little that you can do with one that you cannot do with the other. For some clients in parts of the world and for some advisors, the very concept of a trust and the idea of different property rights, legal and equitable, in the same asset, is very difficult to understand.

Many of those jurisdictions that Guernsey businesses are targeting do not have, as part of their domestic law, this notion of different property rights in the same asset. Others questioned whether the Island's reputation may be tarnished by introducing into our domestic law a juridical entity that for some is tainted by association with some of the jurisdictions that have historically provided them. Justifiably, people wanted to distance themselves from any vehicle that might be associated with banking secrecy or tax evasion.

Ultimately, there was recognition that foundations per se were not flawed but rather there were systemic problems in some of the jurisdictions that historically offered foundation solutions. Guernsey has a hard-won reputation for being well regulated, transparent and cooperative. It has one of the strictest anti-money laundering regimes anywhere in the world and Guernsey complies with the international standards of cooperation and transparency. It has a wide range of tax information exchange agreements, all of which go towards discouraging the illegitimate use of Guernsey foundations.

The Commerce and Employment department actually recognised that there may well be reputational advantages in introducing foundations into Guernsey law. Foundations are widely understood in continental Europe and other civil-law jurisdictions in a way that trusts are not. Many European critics of Guernsey as a jurisdiction regard the trust with some suspicion. They also struggle to understand how a trust can exist if it is not registered anywhere. Guernsey foundations will be registered, with certain information in respect of that registration available to the public.

When will the Guernsey foundation law be introduced?

RC: The States of Deliberation, Guernsey's parliament, approved the Projet de Loi, the Foundations (Guernsey) Law 2012, on 25 July 2012. It is envisaged the law will receive the sanction of Her Majesty in Council later this year and come into effect either in the last quarter of 2012 or the first quarter of 2013.

Surely anyone who wants a foundation has gone elsewhere. Isn't Guernsey a bit late to the foundations party?

RC: Guernsey thought about introducing foundations legislation because of client demand. Clients and their advisors wanted to have a foundation solution rather than a trust solution to the clients' particular needs. However, they did not want to feel compelled to go the jurisdictions that were then offering foundations. The reputation for Guernsey as a jurisdiction, its service providers, professional support and judicial infrastructure remains an attraction.

There are comparable jurisdictions that have brought in foundations but the Guernsey law is different. When Jersey introduced its foundations law in 2009, the sponsoring government department said it wanted to provide a wealth management product that could legitimately meet the needs of clients who wanted to retain more direction or power over their assets than the trustees of discretionary trusts would normally permit settlors. In Guernsey, the aim was to create an alternative legislation, one that would be more familiar to those from a civil-law background – unlike the Jersey foundation, which could give the founder more control than might be possible in a trust, particularly given the reserve power trust provisions that are available. Jersey law has also dispensed with the need for dedication of assets to create a foundation.

What makes Guernsey's foundations law innovative?

RC: What Guernsey has tried to do is create something that looks and feels more like a traditional civil-law foundation, which, where appropriate, incorporates some of the legislative defences that are available in respect of trusts. So, for example, there is a similar provision protecting Guernsey law foundations from foreign rules of forced heirship and foreign court orders. One innovation is in the classification of beneficiaries of a foundation as either being 'enfranchised' or 'disenfranchised'. The Guernsey law will allow a foundation's constitution to provide for either.

Enfranchised beneficiaries will have rights to certain information regarding the foundation, including accounting information, whereas disenfranchised beneficiaries are not entitled to any information at all. Where there are disenfranchised beneficiaries then the foundation is required to have a guardian, who has a positive duty both to the founder and also the beneficiaries to enforce the constitution. The law also allows for the constitution to specify how a beneficiary from one class can become a beneficiary of the other. So, for example, it will be possible for disenfranchised beneficiaries to become entitled to information upon their attaining a certain age or, for example, having demonstrated an ability to provide for their own family.

What do you think will happen when Guernsey's foundations law comes into force?

RC: I do not anticipate a sudden wave of new instructions to create foundations, nor do I believe that we will overtake the more well-established jurisdictions that offer foundations in terms of numbers of foundations.

At the time of writing, Jersey has 176 foundations on its register. Around a third of its foundations have been established for philanthropic purposes, a third to hold 'orphan' structures and a third for more traditional private-wealth management and estate-planning purposes. I anticipate Guernsey will have a similar experience.

We do anticipate there being a number of foundations that have been established in other jurisdictions that will look to migrate to Guernsey. The draft law includes a detailed mechanism to allow for foundations to migrate both in and out of the jurisdiction in the same way that a company may. There are already a number of foundations that have been established elsewhere which are administered in Guernsey, so there are already a number of administrators who are familiar with the way in which foundations operate.

The Guernsey Financial Services Commission is ensuring that those who administer trusts have appropriate differences training, but at their core both foundations and trusts involve professionals administering assets put into their care by others for a specific purpose or to provide for others, and do so with care, skill and integrity. It all comes down to administration, which is something that Guernsey service providers have been excelling at for decades.

Originally published in The Step Journal, November 2012

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