Secrecy law revamp well received by industry

The revamp of Cayman’s 40-year-old “secrecy law’, which removes the criminal liability for disclosing confidential information, is an essential step in positioning Cayman as a modern transparent cooperative partner on the international stage. For the parts of the financial sector which rely on privacy, the changes have been well received, provided they can make their clients appreciate that the floodgates aren’t about to be opened and their confidential information will still be completely respected.

The government announced in May its intention to replace the Confidential Relationships (Preservation) Law (CRPL), originally passed back in the 1970s when Cayman’s financial sector was just getting started, with the Confidential Information Disclosure Bill, however this was a move which had certainly been brewing for some time.

Industry figures have long discussed the need to remove CRPL from the statute books if Cayman was to continue its global acceptance and avoid any further OECD blacklists. Back in the day, the law was used by firms here as a marketing tool more than anything else – to show Cayman was that bit more confidential than the next jurisdiction, with criminal penalties in place for disclosure. The fact is that there hadn’t ever been any prosecutions under the legislation and lawyers agree, the law was more relevant to another time.

“It was, perhaps, a hammer being used to crack a nut and had never been used to prosecute anyone,” said Andrew Miller, partner at Walkers and head of the firm’s Global Trusts Group. “The confidential relationships law harks back to a previous era of the offshore world and has probably served its purpose.”

He went on to say that in the private trusts arena, privacy is almost always a priority for obvious and perfectly legitimate reasons. “Even under common law, professionals have always had a duty of confidentiality regarding their clients’ affairs, which is only right and proper.”

“Although some people may think that the repeal of the CRPL is a reaction to the Panama Papers and beneficial ownership registers, the proposal has been under consideration for more than five years,” said Martin Livingston of Maples and Calder.

“When introduced in the mid-1970s, one of the functions of the CRPL was to reinforce the common law duties of confidentiality owed by professionals by criminalising unauthorised disclosures. It was important at that time to give foreign customers an assurance that their confidential information would not be any less protected in the Cayman Islands. What is not so commonly known is that the main purpose of the CRPL was to codify the key exceptions to the duties of confidentiality; i.e. to clarify when it was acceptable to disclose information.”

These exceptions include the situation where a Cayman professional may be subpoenaed by a foreign court to give evidence in criminal proceedings, in which case the individual would apply to the court for directions on how to proceed. Other exceptions included police matters, or where professionals acted under the normal course of business with the consent of the principal.

The law also provided gateways for providing relevant information to police forces overseas where a serious crime is being investigated or prosecuted. While not ever used, the potential criminal penalties were stiff, with imprisonment of two years and a fine of $5,000, which could be doubled if a reward were involved.

“As the common law duties are now well understood and entrenched in business relationships, and as the Cayman Islands are now at the forefront of international transparency and cooperation, it is only fitting to remove the criminal sanctions,” Maples’ Livingston continued.

“In essence, the Disclosure of Confidential Information Bill continues to recognise when it is lawful to disclose otherwise confidential information, and includes the ability to seek Court directions if required to disclose confidential information in proceedings where otherwise unable to rely on an exception, whilst at the same time removing criminal sanctions for disclosure. In addition, the Cayman Islands is expected to have a new Data Protection Law introduced at the same time, which will regulate the processing of data and further underpin the principles arising from the duties of confidentiality and the right to privacy. As a consequence, there will be no grounds for distinction in this area between the Cayman Islands and any onshore jurisdiction; e.g. any EU member state.”

Practically speaking, the biggest issue for the industry is dealing with any possible fallout from misleading headlines in news reports and misunderstandings among clients over the extent of the changes.

“The important thing for all of us that deal with clients in the outside world is to make sure they understand the message that, really, all the changes do is strike an appropriate balance between confidentiality and providing information in appropriately limited circumstances,” Miller said. “Clients need to appreciate that the changes should not be understood as any indication whatsoever that Cayman will no longer respect the confidentiality of client information.”

Richard Addlestone, partner at Solomon Harris law firm, said now that Cayman law has been aligned with common law principles of confidentiality, effectively decriminalising breaches of confidence, the general position under common law is that if information is given where a duty of confidence applies, that information cannot normally be disclosed without the information provider’s consent. While the CRPL did allow for disclosure with consent, a breach of CRPL was deemed a criminal offence, whereas a breach of duty of confidentiality under common law is only a civil wrong.

He went on to say that in the context of investment funds, some independent directors that have been less than forthcoming about the number of appointments they hold, have anecdotally argued that the CRPL is a reasons for not disclosing this to investors or others.

“This change in the law would certainly do away with that argument, which was always a weak one,” Addlestone said. “It is not uncommon for a fund to require by contract that a director be required to keep the fact of the appointment confidential. It is entirely appropriate that contractual and/or tortious remedies rather than criminal sanctions should govern breaches of confidentiality and this change of law does achieve that.”

While the so-called jumbo directors (those with large numbers of board appointments that they prefer to keep secret) are well known to the industry in Cayman, other firms take a much more open approach, without necessarily disclosing.

Scott Lennon, Managing Director of 19 Degrees North Fund Services, said that, as a fiduciary firm located in Cayman, “we want to be at the forefront of best practice, which includes being open and transparent with existing and potential clients. We do not believe that the CRPL applies to our business and we are happy to have an open discussion on our client base” he said, noting that underlying clients would not be disclosed unless required to do so by a regulatory agency.

“We have not had any clients request that our appointments remain confidential,” he said, adding that for SEC registered investment managers, the underlying managed funds and directors are disclosed in the firm’s ADV, so using the CRPL is a moot point.

Banking is another segment of the financial services industry in which confidentiality plays an extremely important role. In a statement, Butterfield Bank said it welcomed the proposed changes to laws governing disclosure of confidential information in Cayman.

Highlighting the removal of the ambiguity around the obligations of foreign companies with Cayman Islands operations to furnish information to their home country regulators (or through those regulators to foreign authorities) when requested to do so, Butterfield’s CEO Michael Collins said, “The proposed legislation will bring Cayman’s confidentiality laws in line with those of other common law jurisdictions, and will enhance the country’s reputation as a progressive, cooperative and transparent international financial centre.”

 

via CNS Business 

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