- The recent judgment in Dalemont v Senatorov and Others  JRC 044A, in which a Jersey Foundation was found to have committed contempt of court for failing to comply with disclosure orders, contained stark and critical observations regarding the administration of the Jersey Foundation. The court commented that in circumstances, where a Jersey Foundation had been organised in such way as to be unable to comply with an order of the Royal Court, "...it appears to us that one result of the way in which the affairs of the Second Defendant [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 purpose".
- Foundations are a relatively new legal concept in Jersey having been introduced by the Foundations (Jersey) Law 2009. Dalemont is the first occasion upon which they have been subject to judicial scrutiny so before turning to the implications of the decision it is appropriate to introduce Foundations in greater detail.
- A Jersey Foundation has its own legal personality, is able to hold assets, contract with third parties and can sue and be sued in its own name. A Foundation is able to perform the functions of an incorporated body, except it cannot directly acquire, hold or dispose of immovable property in Jersey nor can it engage in commercial trading, unless incidental to its objects. Where the objects of a Foundation are to benefit a person or class of persons, the Beneficiaries have no interest in the assets of the Foundation and are not owed a fiduciary duty by the Foundation, the Council or the Guardian. However, if a Beneficiary becomes entitled to a benefit, and that benefit is not provided, the Beneficiary may seek redress from the Courts of Jersey. Except as required by the Law, the Charter or the Regulations, a Foundation is not obliged to provide anyone, including a Beneficiary, with any information regarding the Foundation.
- Jersey Foundations are incorporated upon the instruction of a Founder, but are not owned by the Founder or any other party. There are no shareholders and any rights of the Founder are prescribed in the Charter and Regulations. The Charter is public and contains only basic information. The Regulations are private and will normally identify the beneficiaries and detail how the assets are to be administered, including the establishment of the Council of the Foundation. The Council is responsible for the administration of the Foundation's assets and can consist of one or more Council Members, who may be an individual or a body corporate and must include a Qualified Member. A Qualified Member must be registered under the Financial Services (Jersey) Law 1998 and authorised to conduct financial services business of this nature. The Guardian has a supervisory role ensuring that the Council administer the Foundation appropriately.
- There are important points of contrast with Jersey trusts and companies. Professional trustees and company directors are all regulated meaning, inter alia, that the professional administration of trusts and companies is solely in the hands of those considered fit and proper by the regulator. Those acting in such a capacity are bound by law to comply with the regulatory regime and ensure good corporate governance. The Council of a Jersey Foundation is only required to have one Qualified Member; other members can be unregulated individuals or corporate bodies who are not resident or incorporated in this jurisdiction. The law allows for the regulations of a Foundation to be drafted in such a way that a Foundation can be largely administered by other Council Members leaving the Qualified Member at best marginalised and at worst supine. The Foundation consequently finds itself in a position where it is, in essence, unregulated.
- This was the situation in Dalemont. The regulations permitted two unregulated Council Members to take the majority of decisions, including giving away Powers of Attorney over companies held indirectly by the Foundation, without consulting the Qualified Member. Moreover both other Council Members, and the Guardian, were corporate bodies controlled by appointed nominees of the sole beneficiary of the Foundation. The other Council Members were also administered by Cypriot corporate service providers – an industry that is itself unregulated.
- When considering the proposition that the Qualified Member of the Council was unable to compel its fellow Council Members, not resident in Jersey, to disclose information not held on the Island the Court opined: " .....We do think that if the result of the Foundations Law and the charter and regulations adopted in this case is as the Second Defendant [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"
- Historically the Foundation is a civil law concept native to jurisdictions without a recognisable concept of equity. They were used to hold property for religious purposes in Medieval Europe and countries like Austria, Germany and Liechtenstein have had Stiftungs, and, in the Netherlands, Stichtings, for centuries.
- The modern incarnation, that sought to transform a concept created for charitable or religious purposes into a private entity, dates from 1926 with the introduction of the Liechtenstein trust, the Liechtenstein Anstalt and the Stiftung – the Liechtenstein Foundation. The second major development, which prompted both Jersey and Guernsey to consider Foundations in greater depth, came in 1995 when Panama introduced private foundations, a development that was mirrored in St. Kitts (2003), the Bahamas and Nevis(2004) and Anguilla, Antigua, and Malta(2006).
- The objective, broadly speaking, behind the introduction of Jersey Foundations was to merge the attractive features of companies and trusts to supplement the structuring opportunities available to clients considering Jersey as a jurisdiction for private wealth management. For many potential clients trusts are an unfamiliar concept; Foundations provide an alternative while offering an additional competitive advantage to Jersey as the only financial centre "whitelisted" by the OECD to offer them. However a commitment to compliance with international regulatory standards, particularly regarding AML and CFT, is a cornerstone of the Island's "white listed" reputation. The indication from Dalemont is that Foundations, in their current form, have the potential to undermine the integrity of the financial sector.
- Dalemont has exposed a lacuna in the law, as described in the judgment: "....the consequence of the Foundations Law and the regulations which have been adopted in this particular case is that a foundation can be established with a council where the qualified member is in a minority, and where in practice the qualified member does not have any information regarding the Foundation's assets liabilities or business". It is important to note that all 158 foundations so far established in Jersey are not necessarily structured identically and that their administration rests entirely on their individual regulations. However, in light of Dalemont service providers would be prudent to review their current arrangements in detail and, if concerned, seek legal advice.
- The implications of Dalemont are concerning. As alluded to by the Court (see opening paragraph), the Foundations Law in its current guise appears to offer a window of opportunity to those who would seek to abuse the Island's financial services. The legislation will likely require revision, particularly regarding the powers, duties and accountability of Qualified Members whose responsibility it is to ensure that Foundations, and their underlying structures, are administered in compliance with regulatory standards. A constructive suggestion would be to provide that all significant decisions (a concept that would require adequate definition) have the consent of the Qualified Member, who should also be required to hold an increased level of information and documentation pertaining not just to its immediate holdings, but also any underlying assets. The court described the paralysis of Helios Investments Foundation as unacceptable, yet it was permitted by law. Avoiding repetition of these circumstances, as well as potential reputational damage to Jersey's finance industry, merits the urgent attention of both legislators and service providers.
Originally published April 2012
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