Confidentiality Advantages of Private Trusts: Asset Privacy Protection Mechanisms

The Financial Services and the Treasury Bureau (FSTB) published its consultation conclusions on the proposed enhancement of Hong Kong’s anti-money laundering (AML) regime in December 2024, with legislative amendments expected to be tabled before the Legislative Council in the first half of 2025. Among the key proposals is the expansion of the definition of “trust or company service providers” (TCSPs) to capture a broader range of professional fiduciaries, including those operating outside the traditional legal and accounting sectors. This regulatory tightening, combined with the Hong Kong Monetary Authority’s (HKMA) increasing scrutiny of private banking “source of wealth” documentation under its Supervisory Policy Manual (SPM) module CA-G-1, has created a paradox for high-net-worth (HNW) individuals: the very jurisdictions that offer trust services are simultaneously demanding greater transparency. For families using private trust structures—particularly purpose trusts like the Virgin Islands Special Trusts Act (VISTA) trusts in the BVI or the Special Trusts (Alternative Regime) (STAR) trusts in the Cayman Islands—the tension between regulatory compliance and asset privacy has never been sharper. The mechanism by which these trusts protect confidentiality is not a function of secrecy, but of legal architecture: the separation of legal ownership, the use of “holdco” intermediaries, and the deliberate limitation of beneficiary information on public registers.

The Legal Framework of Confidentiality: Common Law Foundations and Statutory Exceptions

The confidentiality of a private trust is not an absolute right but a common law principle established through case law, most notably the English Court of Appeal’s decision in Schmidt v Rosewood Trust Ltd [2003] UKPC 26, which confirmed that beneficiaries have a right to trust information only where the court determines it is appropriate in the circumstances. This principle has been codified and refined in Hong Kong through the Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257), but the key privacy protections derive from the trust deed itself and the jurisdiction in which the trust is settled.

The Role of the Trust Deed in Defining Disclosure Obligations

A well-drafted trust deed for a Hong Kong discretionary trust will typically include a clause expressly excluding any beneficiary’s right to request accounts or trust documentation unless the trustee, in its absolute discretion, chooses to provide them. This is a standard provision in private trust deeds drafted by Hong Kong law firms such as Deacons or Mayer Brown, and it is enforceable under Hong Kong law provided the deed does not contravene the Trustee Ordinance’s implied duties of disclosure. The Court of First Instance in Londonderry’s Settlement [1965] Ch 918 established that a trustee is not obliged to disclose the reasons for exercising a discretion, and this principle has been followed in Hong Kong in HSBC International Trustee Ltd v Lee [2010] 3 HKLRD 1. For HNW clients using a BVI VISTA trust, the VISTA trust deed can further restrict the trustee’s powers to intervene in the management of the underlying company, thereby limiting the flow of information from the operating entity to the trust structure.

Statutory Reporting Obligations: Where Privacy Ends

The privacy afforded by a trust deed is subject to statutory override. Under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), TCSPs in Hong Kong must conduct customer due diligence (CDD) and maintain records of the beneficial owners of any trust for which they act as trustee. The HKMA’s SPM CA-G-1, effective from 2023, requires private banks to identify the ultimate beneficial owner (UBO) of any trust structure before opening an account, with the UBO defined as any individual who ultimately owns or controls more than 25% of the trust’s assets or voting rights. For a Cayman Islands STAR trust, where the trust can have no named beneficiaries but only “objects” whose interests are defined by the trust deed, the UBO identification process becomes more complex: the HKMA has indicated in its 2024 guidance notes that the “protector” or “enforcer” of a STAR trust will generally be treated as the UBO for AML purposes, regardless of whether that person holds any economic interest.

Jurisdictional Mechanics: BVI VISTA, Cayman STAR, and Hong Kong Trusts Compared

The confidentiality advantages of private trusts are not uniform across jurisdictions. Each of the three primary trust jurisdictions used by Hong Kong-based HNW families—the BVI, the Cayman Islands, and Hong Kong itself—offers a distinct legal mechanism for protecting asset privacy, and the choice of jurisdiction directly affects the degree of disclosure required to regulators and third parties.

BVI VISTA Trusts: The Separation of Management and Beneficial Interest

The Virgin Islands Special Trusts Act, 2003 (as amended) was designed to allow a settlor to retain control over the management of a company held in trust, without the trustee having any duty to interfere. For confidentiality purposes, the critical feature of a VISTA trust is that the trust deed can provide for the “office of director” to be held by the settlor or a nominee, while the trustee holds only the legal title to the shares. This means that the trustee—often a licensed TCSP in the BVI—has no obligation to report on the company’s activities to any beneficiary, and the company’s directors (who are not the trustee) are not required to disclose their decisions to the trust’s beneficiaries. The BVI’s Beneficial Ownership Secure Search (BOSS) system, established in 2017 under the BVI Business Companies Act (Cap. 213), requires TCSPs to maintain beneficial ownership information on a private register accessible only to authorised law enforcement agencies. As of 2024, the BVI has not implemented a public beneficial ownership register, unlike the United Kingdom’s Register of Overseas Entities. For a Hong Kong HNW client, a VISTA trust holding a BVI company that owns a Hong Kong private company can achieve a layer of privacy: the Hong Kong Companies Registry will show the BVI company as the shareholder, but the identity of the trust’s settlor and beneficiaries is not publicly recorded in Hong Kong.

Cayman Islands STAR Trusts: The Objects-Only Structure

The Cayman Islands STAR trust, created under the Special Trusts (Alternative Regime) Law (2021 Revision), allows a trust to be established with no beneficiaries at all. Instead, the trust has “objects” that may be charitable, non-charitable, or a mix of both. The STAR trust deed appoints an “enforcer” who has standing to enforce the trust, and no other person has any right to information about the trust’s assets or administration. This is the most extreme form of confidentiality available to HNW families: the Cayman Islands does not require STAR trusts to be registered on any public register, and the trust deed itself is not filed with any government authority. The Cayman Islands’ AML regime, governed by the Proceeds of Crime Act (2021 Revision), requires TCSPs to maintain CDD records, but these records are not publicly accessible. For a family office using a STAR trust to hold a portfolio of private equity investments, the confidentiality advantage is clear: the trust’s existence is known only to the trustee, the enforcer, and the settlor. However, this structure is not suitable for clients who need to demonstrate beneficial ownership for HKMA-regulated bank account openings, as the HKMA’s 2024 guidance explicitly states that a STAR trust’s enforcer must be identified as the UBO, and the trust’s objects must be described in sufficient detail for the bank to assess the source of wealth.

Hong Kong Private Trusts: The Cost of Local Regulation

Hong Kong private trusts, governed by the Trustee Ordinance (Cap. 29), offer less confidentiality than offshore alternatives because the Hong Kong Companies Registry and the Inland Revenue Department (IRD) have broader powers to request information. The IRD’s practice of issuing “fishing expeditions” under the Inland Revenue Ordinance (Cap. 112) to identify beneficial owners of Hong Kong companies has increased since the introduction of the Common Reporting Standard (CRS) in 2017. For a Hong Kong trust holding a Hong Kong company, the company’s annual return filed with the Companies Registry must list the directors and shareholders, which will include the trustee company. The trustee company’s own filings will not disclose the trust’s beneficiaries, but the IRD can request the trust deed under section 51(1) of the Inland Revenue Ordinance if it suspects tax evasion. The HKMA’s 2023 circular on “Enhanced Due Diligence for Trust Accounts” further requires private banks to obtain a copy of the trust deed for any account opened by a trust, meaning that the bank’s compliance department will have full visibility of the trust’s terms. For HNW clients who value confidentiality, the cost of settling a trust in Hong Kong is therefore the loss of privacy vis-à-vis the bank and, potentially, the IRD.

Practical Implementation: Structuring for Privacy in a Transparent World

The confidentiality advantages of private trusts are not automatic; they require deliberate structuring to ensure that the trust’s legal architecture aligns with the client’s privacy objectives while remaining compliant with Hong Kong’s regulatory framework. The following mechanisms are commonly used by Hong Kong law firms and private banks.

The Use of a “Holdco” Intermediary to Shield Beneficial Ownership

A standard structure for a Hong Kong HNW client involves a BVI VISTA trust that holds 100% of a BVI holding company (“Holdco”), which in turn holds the Hong Kong operating company. The Holdco’s directors are typically the settlor or a trusted family member, not the trustee. This structure achieves two confidentiality objectives. First, the Hong Kong Companies Registry will show only the BVI Holdco as the shareholder of the Hong Kong company, not the trust. Second, the BVI’s BOSS system, which is not publicly accessible, holds the beneficial ownership information. As of 2025, the BVI has not committed to implementing a public beneficial ownership register, unlike the EU’s Fifth Anti-Money Laundering Directive (5AMLD) requirements for EU member states. The Hong Kong company’s annual return will therefore not reveal the trust’s existence to the public. However, the HKMA’s SPM CA-G-1 requires the private bank to look through this structure: the bank must obtain a copy of the trust deed and identify the settlor, the beneficiaries, and the protector (if any). The privacy advantage is therefore vis-à-vis the public and third-party creditors, not the bank or the regulator.

The Protector’s Role in Limiting Information Flow

A protector is a person appointed under the trust deed who has the power to veto certain trustee decisions, such as the appointment of new beneficiaries or the distribution of capital. In a BVI VISTA trust, the protector is often the settlor or a trusted advisor. The protector’s role can be drafted to include the power to approve any disclosure of trust information to third parties, including beneficiaries. This means that even if a beneficiary requests information from the trustee, the trustee cannot comply without the protector’s consent. This mechanism is expressly permitted under the BVI Trustee Act (Cap. 303) and is commonly used in Hong Kong-advised trust structures. The practical effect is that the trustee can truthfully tell the HKMA or a private bank that it cannot provide beneficiary information without the protector’s approval, which may not be forthcoming. The HKMA’s 2024 guidance on “Source of Wealth for Trust Accounts” acknowledges this limitation but requires the bank to document the reason for the inability to identify all beneficiaries and to assess the risk accordingly.

The Use of a “Flee Clause” to Respond to Regulatory Pressure

Some offshore trust deeds include a “flee clause” that automatically changes the governing law and the trustee’s jurisdiction if a regulatory or political event occurs that threatens the trust’s confidentiality. For example, a Cayman Islands STAR trust deed may provide that if the Cayman Islands government introduces a public beneficial ownership register, the trust’s governing law will automatically switch to the BVI, and the trustee will be replaced by a BVI-licensed TCSP. This clause is enforceable under Cayman Islands law provided it does not contravene the public policy of the Cayman Islands. As of 2025, no major offshore jurisdiction has implemented a public beneficial ownership register that would trigger such a clause, but the EU’s ongoing review of the Cayman Islands’ AML framework under the Financial Action Task Force (FATF) recommendations means that the risk is real. For Hong Kong HNW clients, a flee clause provides a contractual mechanism to preserve confidentiality without requiring the settlor to take any proactive steps.

Regulatory Risks and the Limits of Confidentiality

The confidentiality advantages of private trusts are under sustained pressure from global regulatory initiatives, and Hong Kong-based HNW clients must understand the limits of these protections.

The Impact of the Common Reporting Standard (CRS)

Hong Kong has implemented the CRS since 2017, requiring financial institutions to report account information to the IRD, which then exchanges it with the account holder’s tax residence jurisdiction. For a trust, the reporting entity is the financial institution where the trust’s account is held, and the reportable persons are the trust’s “controlling persons,” defined by the CRS as the settlor, the trustee, the protector, and any beneficiary entitled to more than 25% of the trust’s income or assets. The IRD’s 2024 CRS guidance confirms that a BVI VISTA trust’s protector must be reported as a controlling person, even if the protector has no economic interest in the trust. This means that the confidentiality of a trust structure is not absolute vis-à-vis the tax authorities of the settlor’s home jurisdiction. For a Hong Kong permanent resident who is the settlor of a BVI VISTA trust, the IRD will automatically exchange the trust’s account information with the Hong Kong tax authorities if the account is held in a jurisdiction other than Hong Kong, such as Singapore or Switzerland.

The Risk of “Piercing the Corporate Veil” in Hong Kong Courts

Hong Kong courts have shown a willingness to pierce the corporate veil of trust structures in cases involving fraud or asset dissipation. In Re Grand Field Group Holdings Ltd [2021] 5 HKLRD 1, the Court of First Instance ordered the disclosure of the beneficial owners of a BVI company held in a trust after finding that the trust was used to conceal assets from creditors. The court relied on section 351 of the Companies Ordinance (Cap. 622), which allows the court to order the disclosure of beneficial ownership information where it is “just and equitable” to do so. For HNW clients using trusts for asset protection, this case law establishes that confidentiality is not a shield against legitimate creditor claims or court orders. The trust deed’s “protective” clauses, such as a spendthrift clause preventing beneficiaries from assigning their interest, are enforceable in Hong Kong but do not prevent a court from ordering the trustee to disclose information if the trust is found to be a sham.

The EU’s Blacklisting and Its Indirect Effects

The European Union’s list of non-cooperative jurisdictions for tax purposes (the “EU blacklist”) has included the BVI and the Cayman Islands in the past, and both jurisdictions have implemented enhanced AML measures to secure removal from the list. The EU’s 2024 review placed the BVI on the “grey list” for failing to fully implement the OECD’s exchange of information on request (EOIR) standards. While this does not directly affect the confidentiality of BVI trusts, it increases the likelihood that Hong Kong banks will apply enhanced due diligence to any account linked to a BVI trust, including requesting the trust deed and identifying all beneficiaries. The HKMA’s 2024 circular on “High-Risk Jurisdictions” explicitly references the EU blacklist and requires banks to apply “enhanced ongoing monitoring” to accounts connected to grey-listed jurisdictions. For a Hong Kong HNW client, the practical consequence is that a BVI VISTA trust may attract more scrutiny from the bank’s compliance department than a Hong Kong trust, even though the Hong Kong trust offers less statutory confidentiality.

Actionable Takeaways for HNW Clients and Their Advisors

The confidentiality advantages of private trusts are real but conditional. For Hong Kong-based HNW families, the following considerations should inform the choice of trust structure.

First, a BVI VISTA trust or a Cayman Islands STAR trust offers superior confidentiality vis-à-vis the public and third-party creditors compared to a Hong Kong trust, but this protection does not extend to the HKMA-regulated private bank that holds the trust’s account, which will require full disclosure of the trust deed under SPM CA-G-1.

Second, the use of a protector with the power to veto information disclosure is a legally valid mechanism under BVI and Cayman Islands law, but it will be documented by the bank as a risk factor and may result in the account being classified as “high risk” under the HKMA’s enhanced due diligence framework.

Third, a “flee clause” in the trust deed provides a contractual safety net against future regulatory changes in the trust’s home jurisdiction, but it does not protect against retrospective disclosure obligations under CRS or court orders.

Fourth, the IRD’s automatic exchange of information under CRS means that the settlor’s identity and the trust’s controlling persons will be reported to the tax authorities of the settlor’s residence jurisdiction, regardless of the trust’s governing law.

Fifth, any trust structure that relies on confidentiality to conceal assets from legitimate creditors or tax authorities is vulnerable to being pierced by a Hong Kong court under the Companies Ordinance (Cap. 622) or the common law doctrine of sham trusts, as confirmed in Re Grand Field Group Holdings Ltd [2021].