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For whom trusts are made and broken
[Confidentiality of Trusts]

(Article published in the
April 02, 2001 issue of TODAY, Business Section)

When Kissa Ocampo took the witness stand at the impeachment court last 22 December 2000 and told the nation that in her presence, in fact one foot away from her, the former president and now plain citizen, Joseph Ejercito Estrada, signed in the opening documents of an investment management account as "Jose Velarde", many were aghast.

Some were shocked to learn that the highest official of the land charged with the duty to execute the law in fact broke it by illegally using a fictitious name. Others, however, could not take the thought that a senior vice president and trust officer of one of the most respected trust departments in the country could in fact be telling on a client, the President, no less.

Subsequent revelations of the contents of the now famous "second envelope", later convinced the first group that Estrada’s betrayal of the public trust was not out of character. The second group, however, is still unable to understand that trusts are not as confidential as they thought. This article is addressed to this second group. Due to space constraints, this discussion will deal only with trusts in the regular trust books and not trusts booked with a bank’s foreign currency deposit unit.]

The legal basis of the belief that trusts are confidential, whether managed by financial institutions or by individuals, is the fact that trusts, as such, need not be filed or recorded with any public office.

Trusts, except express trusts concerning an immovable or any interest therein, may be established orally and therefore may be proved by parol or oral evidence (Art. 1443, Civil Code). In theory, therefore, a trust can be known, only and exclusively, by the trustor, who sets up the trust, the trustee who manages the trust, and the beneficiary for whom the trust is established.

[Theory, however, immediately yields to practical reality.] Certain features of various types of trusts require that they be made public. For instance, if a trust is created under a will, then it must necessarily be made public when the will undergoes the court process, called probate, to prove that the document is really the decedent’s last will. No will can have the effect of transferring property, whether personal or real (or immovable) unless it is proved and allowed in accordance with the Rules of Court (Art. 838, Civil Code; Sec. 1, Rule 75, Rules of Court).

Another example: if a trust involves real property, then in order to ensure that third persons respect the trust, the document establishing it should be annotated at the title of the real property (Art. 709, Civil Code). It then becomes accessible to the whole world, a lawyerly expression for anyone who may be interested in the property (Art. 710, Civil Code).

These exceptions notwithstanding, however, confidentiality of trusts is ordinarily the rule.

Confidentiality of trusts managed by institutions supervised by the Bangko Sentral ng Pilipinas is, in addition, upheld by Section 55.1(b) of the new General Banking Law of 2000. Subsection 55.1(b) prohibits a director, officer, employee, or agent of any bank from disclosing to any unauthorized person, without order of a court of competent jurisdiction, "any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity." [Most trusts in the Philippines are managed by financial institutions and are protected from unwelcome eyes by this provision of the statute.]

[Prior to the General Banking Law of 2000, a well-recognized qualification of the confidentiality of trusts is the requirement that a trust must first and foremost be a legal trust. Section 62 of the old General Banking Act prohibits the acceptance of "any trust which it would be unlawful for any individual to make, accept or execute" and limits the obligation of a trust company to comply with the terms of the trust to legal trusts and to its lawful terms. Section 62 of the old law, for unknown reasons, was not reproduced in the new law. Nevertheless, there is no doubt that the principle still applies.]

In matters trust and non-trust, the Civil Code prohibits contracts which are "contrary to law, morals, good customs, public order or public policy" (Sec. 1306, Civil Code). [This supports Section X401 of the Manual of Regulations for Banks (as well as its counterpart, Section 4401Q of the Manual of Regulations for Non-Bank Financial Institutions) stating that " a bank authorized to engage in trust and fiduciary business is under no obligation, either legal or moral, to accept any such business being offered nor has it the right to accept if the same is contrary to law, rules, regulations, public order and public policy".]

The trust [therefore] that is protected by Subsection 55.1(b) of the General Banking Law is necessarily one that is not contrary to law, rules, regulations, public order and public policy. In addition to extending its protection only to legal trusts, Section 55.1(b) uses the qualifying adjective "private" to modify the phrase "individuals, corporations, or any other private entity". This effectively excludes from its protective cover public funds and funds of public officials which are illegally acquired regardless of whether the accounts are in their own names, or in the names of their nominees or transferees.

Public funds are, of course, are not considered confidential because their use and expenditures, by definition, are matters of public concern. Similarly, funds illegally acquired by public officials belong to the State whose right to recover is constitutionally recognized (Article XI, Sec. 15, Const.).

[This qualifying adjective, "private", is the statutory basis for Kissa Ocampo’s disclosure to the impeachment court of Erap’s investment management account. It was indubitably proven by Erap’s letter dated 04 February 2000 (which was marked as Exhibit "XXX" during her 22 December 2000 testimony) that the funds that went to Erap’s investment management account came from his combo savings/current account which had as revealed at the opening of the "second envelope" a balance of Php 572,263,773.67 at the end of 1999.

This balance was not reported by Erap in his Statement of Assets and Liabilities for 1999 and, and the monies that were deposited in the combo account, were patently disproportionate to his lawful income for that year. Source from funds suffering from the taint of having been illegally gotten, the funds in the investment management account were clearly not "private" and does not protected by Subsection 55.1(b) of the General Banking Law.

Aside from yielding to the requirements that the trust be legal and that the funds be private,] Subsection 55.1(b) also gives in to an "order of a court of competent jurisdiction". Examples are orders of the court that can mandate a disclosure of trust funds are those issued in cases (a) where two people sue each other over the ownership of a trust fund, or (b) where funds are part of a decedent’s estate that is under probate or intestate proceedings, or (c) where the court seizes an account to satisfy its money judgment or, even prior to final judgment, to ensure that the funds are immobilized and made available should to satisfy a future judgment.

[A more recent example of an "order of a court of competent jurisdiction" is the impeachment court’s subpoena duces tecum issued on 06 December 2000 to Equitable PCI Bank’s custodian of all records related to the Jose Velarde combo account. The ledger of the combo account, shows that it was the no-book withdrawal of Php 500,000,000 made on 04 February 2000 that went to the investment management account opened with the Bank’s trust department. The investment management account, therefore, had an traceable connection to the combo account. Since the trust officer is the custodian of all records of any investment management account being managed by the trust department, the impeachment court’s demand for the production of "all records" related to the Jose Velarde combo account necessarily demanded the disclosure of the investment management account, in the trust department.

Finally, Subsection 55.1(b) limits its prohibition against those to those made to "an unauthorized person".] The law does not specify who the authorized persons can be but it is easy to say who they are. For instance, a beneficiary of a trust account is a person authorized under the law on trust to require information on an account. In fact, they are required to be given reports by Section X425 of the Manual of Regulations for Banks (and its counterpart Sec. 4425Q in the Manual of Regulations for Non-Bank Financial Institutions). Also authorized persons are the proper officers of the Bangko Sentral ng Pilipinas who are charged with the duty of examining the trust account, or, as in the case of the anti-money laundering circulars such as Circular 251 issued in July 2000, Bangko Sentral officials tasked to receive information on suspicious transactions.

The Commissioner of Internal Revenue is also an authorized person to whom disclosures may be made. [Under Section 5(A) of the National Internal Revenue Code of 1997] he is empowered to examine any book, paper, record, or other data which may be relevant or material to his inquiry in ascertaining the correctness of any return, or in making a return wherein none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance. Unless a trust is not obliged to pay any internal revenue tax at all and is, in addition, not duty-bound to file a return or report, the Commissioner is authorized to look into its books.

[As a consequence of these concessions to legality, private ownership, court order, and legal authorization, the confidentiality of trusts engendered by Subsection 55.1(b) of the General Banking Law of 2000 pales in comparison with the confidentiality of deposits guaranteed by R.A. No. 1405. Section 2 of R.A. No. 1405 unequivocably declares bank deposits as "of an absolutely confidential nature" and proceeds to shield them from "being examined, inquired or looked into by any person, government official, bureau or office" except under very limited circumstances. The prohibition on the bank officers and employees comes only as a supportive provision in Section 3.

In the case of trusts, the prohibition to disclose imposed by Section 55.1 (b) is the only affirmation in the law of their confidentiality. A faint reference it is true, is made in the trust regulations about confidentiality of trusts (Section X401 of the Manual of Regulations for Banks, and its counterpart, Section 4401Q in the Manual of Regulations for Non-Bank Financial Institutions) but, then, confidentiality is stated more as a corollary general principle rather than a principal mandate.]

All told, however, the confidentiality of a trust legally constituted for a legitimate purpose is reasonably assured by Subsection 55.1(b) of the General Banking Law of 2000. [What the Kissa Ocampo testimony demonstrates, and correctly so, is that confidentiality cannot be invoked to hide a violation of the law. Transparency, in the long run, is the greater value than secrecy.

The principles of trust were nurtured in the courts of equity where the voice of conscience triumphed over the formalism of law. The confidentiality that is fruit of law cannot be allowed to protect whose who silence that voice.] Confidentiality cannot be invoked to hide a violation of the law.